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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File No. 0-25251
CENTRAL BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-3447594
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
399 HIGHLAND AVENUE, SOMERVILLE, MASSACHUSETTS 02144
- ---------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 628-4000
--------------
Securities registered under Section 12(b) of the Act: None
----
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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(Title of Class)
STOCK PURCHASE RIGHTS
---------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $25.5 million based on the closing sales price of
the registrant's common stock as reported on the Nasdaq National MarketSM on
June 21, 2002 ($30.00 per share). Solely for purposes of this calculation,
directors, executive officers and greater than 5% stockholders are treated as
affiliates.
As of June 21, 2002, there were issued and outstanding 1,632,789 shares of
the registrant's common stock, par value $1.00 per share (of which 781,028
shares were deemed held by affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference into Part III
of this Form 10-K.
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CENTRAL BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business........................................................... 3
Item 2. Properties.........................................................19
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................20
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ..........................................21
Item 6. Selected Financial Data............................................22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........28
Item 8. Financial Statements and Supplementary Data........................29
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure......................................54
PART III
Item 10. Directors and Executive Officers of the Registrant.................54
Item 11. Executive Compensation.............................................54
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...............................54
Item 13. Certain Relationships and Related Transactions.....................55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...55
PART I
ITEM 1. BUSINESS
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NOTE ON FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS DISCUSSION AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K, 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.
GENERAL
THE COMPANY. Central Bancorp, Inc. (the "Company"), a Massachusetts
corporation, was organized by Central Co-operative Bank (the "Bank") on
September 30, 1998, to acquire all of the capital stock of the Bank as part of
its reorganization into the holding company form of ownership, which was
completed on January 8, 1999. As the successor to the Bank, the Company's common
stock, par value $1.00 per share (the "Common Stock"), became registered under
the Securities Exchange Act of 1934. The Company is a registered bank holding
company subject to regulation and examination by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company has no
significant assets other than the common stock of the Bank, a loan to the Bank's
Employee Stock Ownership Plan ("ESOP") and various other liquid assets in which
it invests in the ordinary course of business. For that reason, substantially
all of the discussion in this Annual Report on Form 10-K relates to the
operations of the Bank and its subsidiaries.
THE BANK. Central Co-operative Bank ("Central" or the "Bank") was organized
as a Massachusetts chartered co-operative bank in 1915 and converted from mutual
to stock form in 1986. The primary business of the Bank is to generate funds in
the form of deposits and use the funds to make mortgage loans for the
construction, purchase and refinancing of residential properties, and to make
loans on commercial real estate in its market area. In addition, the Bank makes
a limited amount of consumer loans including home improvement and secured and
unsecured personal loans, and commercial and industrial loans. The Bank also
maintains an investment portfolio of various types of debt securities, including
mortgage-backed securities, and a limited amount of equity securities. In fiscal
2002, the Bank began to offer investment services (including annuities) to its
customers through a third party broker-dealer and its insurance affiliate.
The Bank is headquartered in Somerville, Massachusetts and its operations
are conducted through eight full-service office facilities located in
Somerville, Arlington, Burlington, Chestnut Hill, Malden, Melrose and Woburn,
Massachusetts as well as over the Internet. Each branch office also has a
24-hour automated teller machine ("ATM"). The Bank is a member of the Federal
Home Loan Bank ("FHLB") of Boston and its deposits are insured to applicable
limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC").
All Massachusetts chartered co-operative banks are required to be members
of the Share Insurance Fund. The Share Insurance Fund maintains a deposit
insurance fund which insures all deposits in member banks which are not covered
by federal insurance, which in the case of the Bank are its deposits in excess
of $100,000 per insured account. In past years, a premium of 1/24 of 1% of
insured deposits has been assessed annually on member banks such as the Bank for
this deposit insurance. However, no premium has been assessed in recent years.
3
The Company's and Bank's main office is located at 399 Highland Avenue,
Somerville, Massachusetts 02144 and their telephone number is (617) 628-4000.
The Bank also maintains a website at www.centralbk.com.
The operations of the Bank and savings institutions are generally
influenced by overall economic conditions, the related monetary and fiscal
policies of the federal government, and the regulatory policies of financial
institution regulatory authorities, including the Massachusetts Commissioner of
Banks (the "Commissioner"), the Federal Reserve Board and the FDIC.
MARKET AREA
All of the Bank's offices are located in the northwestern suburbs of
Boston, which are its principal market area for deposits. The majority of the
properties securing the Bank's loans are located in Middlesex County. The Bank's
market area consists of established suburban areas and includes portions of the
Route 128 high-technology corridor.
COMPETITION
The Bank's competition for savings deposits has historically come from
other co-operative banks, savings banks, savings and loan associations and
commercial banks located in Massachusetts generally, and in the Boston
metropolitan area, specifically. With the advent of interstate banking the Bank
also faces competition from out-of-state banking organizations. In the past,
during times of high interest rates, the Bank has also experienced additional
significant competition for investors' funds from short-term money market funds
and other corporate and government securities. The Bank has faced continuing
competition from other financial intermediaries for deposits.
The Bank competes for deposits principally by offering depositors a wide
variety of savings programs, convenient branch locations, 24-hour automated
teller machines, Internet banking, preauthorized payment and withdrawal systems,
tax-deferred retirement programs, and other miscellaneous services such as money
orders, travelers' checks and safe deposit boxes. The Bank does not rely upon
any individual, group or entity for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, co-operative banks and savings banks, savings and
loan associations, commercial banks, insurance companies and other institutional
lenders. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. The competition for loans
encountered by the Bank, as well as the types of institutions with which the
Bank competes, varies from time to time depending upon certain factors including
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, volatility in the mortgage
markets and other factors which are not readily predictable.
Bank regulation is undergoing significant change with an increased number
of bank mergers and acquisitions, changes in the products and services banks can
offer, and involvement in non-banking activities by bank holding companies.
Recent legislation and regulations have expanded the activities in which
depository institutions may engage and reduced or eliminated some of the
competitive advantages which thrift institutions formerly held over commercial
banks, such as interest rate differentials which permitted thrift institutions
to offer a higher rate of interest to attract deposits. The ability of the Bank
to successfully compete will depend upon how successfully it can respond to the
rapidly evolving competitive, regulatory, technological and demographic
developments affecting its operations.
4
LENDING ACTIVITIES
The Bank offers residential mortgage and home equity loans, commercial real
estate loans, construction loans, commercial and industrial loans, personal,
home improvement, and various other types of consumer loans. For the year ended
March 31, 2002, the Bank originated loans totaling $157.9 million, including
$53.3 million of purchased loans. Of the total loans originated during fiscal
2002, $113.1 million, or 71.6%, were residential mortgage loans and $33.3
million, or 21.1%, were commercial mortgage loans. No loans were sold during
fiscal 2002, 2001 and 2000 in the secondary market; however, the Bank may sell a
portion of its residential mortgage loan originations in the future. The sale of
loans in the secondary market allows the Bank to continue to make loans during
periods when savings flows decline or funds are not otherwise available for
lending purposes and to manage interest rate risk. The Bank's net loan portfolio
increased by $25.7 million, or 7.5%, to $368.4 million at March 31, 2002 from
$342.7 million at March 31, 2001. The increase occurred, despite the continuing
high level of loan refinancing activity due to an increase in originations of
commercial real estate loans and construction loans, and the purchase of
residential mortgage loans.
LOAN PORTFOLIO COMPOSITION. The following table summarizes the composition
of the Bank's loan portfolio by type of loan and the percentage each type
represents of the total loan portfolio at the dates indicated.
At March 31,
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ---------------- ----------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ----- -------- ----- --------- ----- --------- ----- --------- -----
(Dollars in thousands)
Mortgage loans:
Residential....................... $246,045 66.2% $248,459 71.9% $243,570 76.1% $212,659 75.9% $207,909 73.8%
Commercial........................ 87,013 23.4 69,949 20.2 54,228 16.9 48,756 17.4 52,491 18.6
Construction...................... 20,998 5.6 9,152 2.6 9,765 3.1 5,269 1.9 8,256 2.9
Second mortgage and home equity... 9,154 2.5 10,977 3.2 7,403 2.3 7,462 2.7 8,369 3.0
-------- ----- -------- ----- -------- ----- -------- ----- --------- -----
Total mortgage loans............ 363,210 97.7 338,537 97.9 314,966 98.4 274,146 97.8 277,025 98.3
-------- ----- -------- ----- -------- ----- -------- ----- --------- -----
Other loans:
Commercial and industrial......... 6,901 1.9 4,979 1.4 3,349 1.1 4,391 1.6 2,530 0.9
Consumer.......................... 1,596 0.4 2,277 0.7 1,698 0.5 1,809 0.6 2,169 0.8
-------- ----- -------- ----- -------- ----- -------- ----- --------- -----
Total other loans............... 8,497 2.3 7,256 2.1 5,047 1.6 6,200 2.2 4,699 1.7
-------- ----- -------- ----- -------- ----- -------- ----- --------- -----
Total loans..................... 371,707 100.0% 345,793 100.0% 320,013 100.0% 280,346 100.0% 281,724 100.0%
===== ===== ===== ===== =====
Less:
Allowance for loan losses......... 3,292 3,106 2,993 2,913 2,886
-------- -------- -------- -------- --------
Loans, net...................... $368,415 $342,687 $317,020 $277,433 $278,838
======== ======== ======== ======== ========
5
LOAN PORTFOLIO SENSITIVITY. The following table sets forth certain maturity
information as of March 31, 2002 regarding the dollar amount of commercial and
industrial loans as well as construction loans in the Bank's portfolio,
including scheduled repayments of principal, based on contractual terms to
maturity. Demand loans, loans having no schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less.
DUE AFTER
DUE WITHIN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(IN THOUSANDS)
Construction loans ............... $19,157 $ 1,464 $ 377 $20,998
Commercial and industrial loans... 5,472 867 562 6,901
------- ------- ------- -------
Total ....................... $24,629 $ 2,331 $ 939 $27,899
======= ======= ======= =======
Of construction loans and commercial and industrial loans maturing more
than one year after March 31, 2002, $2.3 million have fixed rates and $1.0
million, have floating or variable rates.
RESIDENTIAL LENDING. The Bank's residential mortgage loans at March 31,
2002 totaled $246.0 million, or 66.2%, of the total loan portfolio. Fixed-rate
residential mortgages totaled $142.2 million, or 57.8%, of the residential loan
portfolio and adjustable rate loans totaled $103.8 million, or 42.2%, of the
residential loan portfolio.
The Bank's adjustable-rate residential mortgage loans have a maximum term
of 30 years, and allow for periodic interest rate adjustments. The Bank prices
the initial rate competitively but generally avoids initial deep discounts from
contracted indices and margins. The Bank has adopted the U.S. Treasury
Securities Index, adjusted to a constant maturity of one to five years, as its
primary index. The margin at which adjustable-rate loans are generally set is
2.875 percentage points over the stated index. Interest rate adjustments on
adjustable mortgage loans are capped at two percentage points per adjustment and
six percentage points over the life of the loan.
Residential loans may be granted as construction loans or permanent loans
on residential properties. Construction loans on owner occupied residential
properties may convert to residential loans at fixed or adjustable rates upon
completion of construction. Loans secured by one- to four-family residential
properties are typically written in amounts up to 80% of appraised value. The
Bank generally requires private mortgage insurance for loans in excess of 80% of
appraised value. The maximum loan-to-value ratio on owner occupied residential
properties is 95%. The maximum loan-to-value ratio on non-owner occupied
residential properties is 80%.
COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING. The Bank originates
permanent and construction loans on commercial real estate. Commercial real
estate loans are typically secured by income-producing properties such as
apartment buildings, office buildings, industrial buildings and various retail
properties and are written with either fixed or adjustable interest rates.
Commercial real estate loans with fixed interest rates have terms generally
ranging from one to five years. As of March 31, 2002, commercial real estate
loans totaled $87.0 million and constituted 23.4% of the total loan portfolio.
Commercial real estate loans may be made for up to 80% of the appraised
value of the property up to $5.0 million, the Bank's "house lending limit" for
an individual borrower. Commercial real estate loans currently offered by the
Bank have terms of one to 20 years. Title insurance, fire, casualty insurance
and flood insurance are required in amounts sufficient to protect the Bank's
interest, where applicable. In some cases, commercial real estate loans were
granted in participation with other lenders.
The Bank's construction loans totaled $21.0 million, or 5.6%, of the Bank's
loan portfolio at March 31, 2002. Construction loans are short-term in nature
and have maturities ranging from six months to two years. The Bank grants loans
to construct residential and commercial real estate, as well as land development
for individual residential lots. Currently, construction loans are made for up
to 80% of the projected value of the completed property, based on independent
appraisals. Funds are disbursed based on a schedule of completed work presented
to the Bank and confirmed by physical inspection of the property by a
construction consultant and only after receipt of title updates.
6
The Bank also originates loans for the construction of single-family homes
for resale by professional builders. The Bank also lends to individuals for
construction of one- to four-family homes which they intend to occupy. Borrowers
are required to have a firm contract with a qualified builder or developer or to
have demonstrated prior home building experience. Construction loans are
normally made for a term of not more than eighteen months and based on a
completed value of not more than 80%, as determined by an independent certified
and licensed appraiser.
The growth in commercial real estate loans and construction loans in fiscal
2002, which aggregated $28.9 million, or 36.5%, is attributable to the addition
of experienced commercial lenders and expansion of the credit administration
function during the past year.
SECOND MORTGAGES AND HOME EQUITY LINES OF CREDIT. The Bank offers home
equity lines of credit that are secured by the borrower's equity in their
primary residence and may take the form of a first or second mortgage. Equity
loans are made in amounts up to 80% of the appraised value less any first
mortgage. Payment of interest is required monthly and the rate is adjusted
monthly based on changes in the Prime Rate, as quoted in the Wall Street
Journal. Loans are not contingent upon proceeds being used for home improvement.
The Bank's home equity loans outstanding, and amortizing second mortgages
totaled $9.2 million, or 2.5%, of the Bank's loan portfolio at March 31, 2002.
COMMERCIAL AND INDUSTRIAL, CONSUMER AND OTHER LOANS. The Bank's commercial
and industrial, consumer and other loans totaled $8.5 million, or 2.3%, of the
total loan portfolio on March 31, 2002. The Bank's commercial and industrial
portfolio consists primarily of time, demand and line-of-credit loans to a
variety of local small businesses generally done on a secured basis. The Bank
engages in consumer lending primarily as an accommodation to existing customers.
RISKS OF COMMERCIAL REAL ESTATE, CONSTRUCTION AND COMMERCIAL AND INDUSTRIAL
LENDING. Commercial real estate, construction and commercial and industrial
lending entail significant additional risks compared to residential mortgage
lending. The repayment of loans secured by income-producing properties is
typically dependent on the successful operation of the properties and thus may
be subject to a greater extent to adverse conditions in the local real estate
market or in the economy generally. Construction loans involve additional risks,
because of the uncertainties inherent in estimating construction costs, delays
arising from labor problems, material shortages, and other unpredictable
contingencies, which make it relatively difficult to evaluate accurately the
total loan funds required to complete a project, and related loan-to-value
ratios. Commercial and industrial loans are generally not secured by real estate
and may involve greater risks than other types of lending. Because payments on
such loans are often dependent on the successful operation of the business
involved, repayment of such loans may be subject to a greater extent to adverse
conditions in the economy. For more information see " -- Non-Performing Assets."
ORIGINATION FEES AND OTHER FEES. The Bank currently collects origination
fees on some of the real estate loan products offered. Fees to cover the cost of
appraisals, credit reports, and other direct costs are also collected. Loan
origination fees collected vary in proportion to the level of lending activity
as well as competitive and economic conditions.
The Bank imposes late charges on all loans with the exception of equity
lines of credit and loans secured by deposits. The Bank also collects prepayment
premiums and partial release fees on commercial real estate and construction
loans where such items are negotiated as part of the loan agreement.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a number of
sources. Residential real estate loans are attributable to walk-in customers,
existing customers, real estate brokers, third party originators and builders.
Commercial real estate loans are originated by the Bank's team of five
commercial loan officers. Consumer loans result from walk-in customers and
depositors.
Each loan originated by the Bank is underwritten by lending personnel of
the Bank or qualified independent contract underwriters. Individual lending
officers, a committee of loan officers and the Bank's Security Committee have
the authority to approve loans up to various limits. Applications are received
in each of the offices
7
of the Bank. Independent certified and licensed appraisers are used to appraise
the property intended to secure real estate loans. The Bank's underwriting
criteria are designed to minimize the risks of each loan. There are detailed
guidelines concerning the types of loans that may be made, the nature of the
collateral, the information that must be obtained concerning the loan applicant
and follow-up inspections of collateral after the loan is made.
NON-PERFORMING ASSETS. The Bank notifies a borrower of a delinquency when
any payment becomes 15 days past due. Repeated contacts are made if the loan
remains delinquent for 30 days or more. The Bank will consider working out a
payment schedule with a borrower to clear a delinquency, if necessary. If,
however, a borrower is unwilling or unable to resolve such a default after 60
days, the Bank will generally proceed to foreclose and liquidate the property to
satisfy the debt.
Loans on which the accrual of interest has been discontinued are designated
as non-accrual loans. Accrual of interest on loans and amortization of net
deferred loan fees or costs are discontinued either when reasonable doubt exists
as to the full and timely collection of interest or principal, or when a loan
becomes contractually past due 90 days with respect to interest or principal.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current period interest income. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectable as to both principal and interest.
The Bank has instituted additional procedures to closely monitor loans and
bring potential problems to management's attention early in the collection
process. The Bank prepares a monthly watch list of potential problem loans
including currently performing loans. The Senior Loan Officer reviews
delinquencies with the Security Committee of the Board of Directors at least
monthly. Due to the high priority given to monitoring asset quality, Senior
Management is involved in the early detection and resolution of problem loans.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
AT MARCH 31,
----------------------------------------------
2002 2001 2000 1999 1998
-------- -------- ------ ------ ------
(DOLLARS IN THOUSANDS)
Loans accounted for on a non-accrual basis,
non-performing loans ................... $ -- $ -- $ 235 $ 419 $ 357
Restructured loans ........................ -- -- -- -- --
Real estate acquired by foreclosure ....... -- -- -- -- --
-------- -------- ------ ------ ------
Non-performing assets .................. $ -- $ -- $ 235 $ 419 $ 357
======== ======== ====== ====== ======
Impaired loans, accruing .................. $ -- $ -- $ -- $ -- $1,306
Non-performing loans to total loans........ 0.00% 0.00% 0.07% 0.15% 0.13%
Non-performing assets to total assets...... 0.00% 0.00% 0.06% 0.12% 0.09%
At March 31, 2002, there were no loans where known information about
possible credit problems of borrowers caused management to have serious doubts
as to the ability of such borrowers to comply with present loan repayment terms.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level which management considers adequate to provide for potential losses based
on an evaluation of known and inherent risks in the portfolio. Such evaluation
for each of the periods reported includes identification of adverse situations
which may affect the ability of certain borrowers to repay, a review of overall
portfolio size, quality, composition and an assessment of existing and
anticipated economic conditions. Regular reviews of the loan portfolio are
performed to identify loans for which specific allowance allocations are
considered prudent. Specific allocations are made based on the risk
classification assigned to individual loans. Additionally, general risk
allocations are determined by
8
formula whereby the loan portfolio is stratified by loan type and by risk rating
category. Loss factors are then applied to each strata based on various
considerations including historical loss experience, delinquency trends, current
economic conditions, industry standards and regulatory guidelines. While
management uses available information in establishing the allowance for loan
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Additions to the allowance are charged to earnings and realized
losses, net of recoveries, are charged to the allowance.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgment of information available to them at their examination date.
The following table presents activity in the allowance for loan losses
during the years indicated.
YEARS ENDED MARCH 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year ............ $ 3,106 $ 2,993 $ 2,913 $ 2,886 $ 2,900
--------- --------- --------- --------- ---------
Charge-offs:
Residential mortgage .................. -- -- -- (88) --
Commercial mortgage ................... -- -- -- -- (83)
Other loans ........................... (4) (4) (9) (11) (14)
--------- --------- --------- --------- ---------
Total charge-offs ................... (4) (4) (9) (99) (97)
--------- --------- --------- --------- ---------
Recoveries:
Residential mortgage .................. 80 60 9 78 16
Commercial mortgage ................... 103 48 36 36 46
Other loans ........................... 7 9 44 12 21
--------- --------- --------- --------- ---------
Total recoveries .................... 190 117 89 126 83
--------- --------- --------- --------- ---------
Net recoveries (charge-offs) ............ 186 113 80 27 (14)
Provision ............................... -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at end of year .................. $ 3,292 $ 3,106 $ 2,993 $ 2,913 $ 2,886
========= ========= ========= ========= =========
Average loans outstanding during
the year .............................. $ 335,271 $ 341,732 $ 300,089 $ 287,513 $ 250,329
Ratio of net charge-offs to average
loans.................................. na na na na 0.01%
Total loans outstanding at end of year... $ 371,707 $ 345,793 $ 320,013 $ 280,346 $ 281,724
Ratio of allowance for loan
losses to loans at end of year......... 0.89% 0.90% 0.94% 1.04% 1.02%
9
The allowance for loan losses is available for offsetting credit losses in
connection with any loan, but is internally allocated among loan categories as
part of the process for evaluating the adequacy of the allowance for loan
losses. The following table presents the allocation of the Bank's allowance for
loan losses, by type of loan, at the dates indicated.
AT MARCH 31,
-------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
% OF % OF % OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential mortgage..... $ 636 66.2% $1,637 71.9% $1,333 76.1%
Commercial mortgage...... 1,956 23.4 1,058 20.2 1,202 16.9
Construction............. 462 5.6 169 2.6 198 3.1
Second mortgage and
home equity............ 98 2.5 163 3.2 178 2.3
------ ----- ------ ----- ------ -----
Total mortgage loans... 3,152 97.7 3,027 97.9 2,911 98.4
Other loans................ 140 2.3 79 2.1 82 1.6
------ ----- ------ ----- ------ -----
Total.................. $3,292 100.0% $3,106 100.0% $2,993 100.0%
====== ===== ====== ===== ====== =====
AT MARCH 31,
----------------------------------------
1999 1998
------------------- -------------------
% OF % OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential mortgage...... $1,120 75.9% $1,104 73.8%
Commercial mortgage....... 1,556 17.4 1,578 18.6
Construction.............. 92 1.9 105 2.9
Second mortgage and
home equity............. 58 2.7 48 3.0
------ ----- ------ -----
Total mortgage loans.... 2,826 97.8 2,835 98.3
Other loans................. 87 2.2 51 1.7
------ ----- ------ -----
Total................... $2,913 100.0% $2,886 100.0%
====== ===== ====== =====
INVESTMENT ACTIVITIES
The primary objectives of the investment portfolio are to achieve a
competitive rate of return over a reasonable period of time and to provide
liquidity. As a Massachusetts-chartered bank, the Bank is authorized to invest
in various obligations of federal and state governmental agencies, corporate
bonds and other obligations and, within certain limits, marketable equity
securities. The Bank's investment in marketable equity securities is generally
limited to large, well known corporations whose shares are actively traded. The
size of the Bank's holdings in an individual company's stock is also limited by
policy. A portion of the Bank's investment portfolio consists of mortgage-backed
securities which represent interests in pools of residential mortgages. Such
securities include securities issued and guaranteed by the Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"),
and the Government National Mortgage Association ("GNMA") as well as
collateralized mortgage obligations ("CMOs") issued primarily by FNMA and FHLMC.
The Bank's investment policy requires that corporate debt securities be
rated as "investment grade" at the time of purchase. Subsequent to March 31,
2002, a corporate bond in the investment portfolio was downgraded in credit
rating below investment grade. This bond had a carrying value of $370,000 at
year end (74% of par value) and $343,000 at May 31, 2002.
10
Investments are classified as either held to maturity, available for sale
or trading. Investments classified as trading securities are reported at fair
value with unrealized gains and losses included in earnings. Investments
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity.
Securities held to maturity are carried at amortized cost. At March 31, 2002,
all of the Bank's marketable investments were classified as available for sale.
The following table sets forth a summary of the Bank's investment
securities, as well as the percentage such investments comprise of the Bank's
total assets, at the dates indicated.
AT MARCH 31,
---------------------------
2002 2001 2000
------- ------- -------
(DOLLARS IN THOUSANDS)
U. S. Government and agency
obligations ......................... $13,996 $19,051 $22,953
Corporate bonds ....................... 38,568 5,245 2,037
Mortgage-backed securities ............ 18,340 19,314 23,308
Marketable equity securities .......... 2,980 5,778 5,216
------- ------- -------
Total investment securities ....... $73,884 $49,388 $53,514
======= ======= =======
Percentage of total assets......... 15.8% 11.0% 13.1%
==== ==== ====
At March 31, 2002, the Bank owned securities issued by several companies
having a book value that exceeded 10% of the Company's stockholders' equity.
Such securities consisted primarily of debt obligations. The following table
summarizes the aggregate book and market value of the Bank's holdings of each
issuer.
ISSUER BOOK VALUE MARKET VALUE
------ ---------- ------------
(DOLLARS IN THOUSANDS)
AT&T $ 5,318.5 $ 5,123.6
Ford Motor Credit 5,108.0 4,982.0
GMAC 5,092.3 5,067.4
Boeing Capital Corp. 5,043.7 4,958.4
Hewlett Packard 5,005.7 4,916.1
DaimlerChrysler 4,630.2 4,594.4
The following table sets forth the scheduled maturities, amortized cost,
market values and average yields for the Bank's debt securities at March 31,
2002.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
---------------- ----------------- ----------------- -------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
U.S. government and agency
securities................ $ -- -- % $ 1,999 5.50% $11,996 5.81% $ -- -- %
Corporate bonds.............. -- -- 39,012 6.15 -- -- -- --
Mortgage-backed securities... 259 6.70 1,521 6.85 1,281 7.76 15,316 6.92
----- ------- ------- --------
Total..................... $ 259 6.70 $42,532 6.14 $13,277 6.00 $15,316 6.92
===== ======= ======= ========
TOTAL INVESTMENT PORTFOLIO
--------------------------
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
---- ----- -----
(DOLLARS IN THOUSANDS)
U.S. government and agency
securities................ $13,995 $13,996 5.77%
Corporate bonds.............. 39,012 38,568 6.15
Mortgage-backed securities... 18,377 18,340 6.97
------- -------
Total..................... $71,384 $70,904 6.29
======= =======
11
SAVINGS ACTIVITIES, BORROWINGS AND OTHER SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments, loan sales, borrowings and from other operations. The
availability of funds is influenced by the general level of interest rates and
other market conditions. Scheduled loan repayments are a relatively stable
source of funds while deposit inflows and outflows vary widely and are
influenced by prevailing interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in deposits or
deposit inflows at less than projected levels and may be used on a longer term
basis to support expanded lending activities.
DEPOSITS. Consumer deposits are attracted principally from within the
Bank's market area through the offering of a broad selection of deposit
instruments including demand deposit accounts, NOW and Preferred NOW accounts,
money market deposit accounts, regular savings accounts, term deposit accounts
and retirement savings plans. The Bank does not actively solicit or advertise
for deposits outside of its market area or solicit brokered deposits. The Bank
attracts deposits through its branch office network, automated teller machines
and by paying rates competitive with other Massachusetts financial institutions.
During fiscal 2002, management sought to increase its core deposit base
i.e., noncertificate accounts, in order to partially fund the Bank's increased
lending activity. To assist in that effort, the Bank developed and began to
offer its Community Package Account, consisting of a group of deposit accounts
and an ATM/debit card with no monthly fees.
DEPOSIT ACCOUNTS. The following table shows the distribution of the Bank's
deposit accounts at the dates indicated and the weighted average rate paid for
each category of account for the years indicated.
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------
2002 2001 2000
------------------------- -------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE % OF RATE AVERAGE % OF RATE AVERAGE % OF RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Demand deposit accounts............. $ 24,535 9.0% --% $ 20,382 7.5% --% $ 18,742 7.3% --%
NOW accounts........................ 36,177 13.2 1.12 32,312 12.0 1.29 30,885 12.0 1.19
Regular, club and 90-day
notice accounts................... 67,322 24.7 1.32 62,018 22.9 2.03 61,424 23.8 2.05
Money market deposit accounts....... 16,869 6.2 1.75 17,200 6.4 2.22 21,417 8.3 2.22
Term deposit certificates........... 127,906 46.9 5.13 138,223 51.2 5.81 125,068 48.6 5.16
--------- ----- --------- ----- -------- -----
Total deposits.................. $ 272,809 100.0% 2.98% $ 270,135 100.0% 3.73% $257,536 100.0% 3.32%
========= ===== ========= ===== ======== =====
12
TIME DEPOSITS IN EXCESS OF $100,000. The following table indicates the
amount of the Bank's time deposits of $100,000 or more by time remaining until
maturity as of March 31, 2002 (in thousands).
Maturity Period:
Three months or less.................................. $ 10,680
Three through six months.............................. 6,824
Six through twelve months............................. 6,947
Over twelve months.................................... 2,782
---------
Total........................................... $ 27,233
=========
BORROWINGS. From time to time the Bank borrows funds from the FHLB of
Boston. All advances from the FHLB of Boston are secured by a blanket lien on
residential first mortgage loans, certain investment securities and all the
Bank's stock in the FHLB of Boston. At March 31, 2002, the Bank had advances
outstanding from the FHLB of Boston of $164.0 million. Funds from these advances
were used to fund the Bank's growth in loans and investments. Additional sources
of funds include The Co-operative Central Bank Reserve Fund and the Federal
Reserve System.
The following table sets forth certain information regarding borrowings
from the FHLB of Boston at the dates and for the periods indicated.
AT OR FOR THE
YEARS ENDED MARCH 31,
------------------------------------------------
2002 2001 2000
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period......................... $ 164,000 $ 121,000 $111,000
Weighted average rate at end of period....................... 4.39% 5.84% 5.66%
Maximum amount of borrowings outstanding
at any month end........................................... $ 164,000 $ 121,000 $113,000
Approximate average amounts outstanding...................... $ 124,680 $ 111,980 $ 80,907
Approximate weighted average rate during the year............ 5.41% 6.18% 5.56%
SUBSIDIARY ACTIVITIES
In July 1999, the Bank established Central Preferred Capital Corporation
("CPCC"), a Massachusetts corporation which has elected to be taxed as a real
estate investment trust ("REIT") for federal and Massachusetts tax purposes.
CPCC holds mortgage loans which were previously originated by the Bank.
In April 1998, the Bank established Central Securities Corporation, a
Massachusetts corporation, as a wholly owned subsidiary of the Bank for the
purpose of engaging exclusively in buying, selling and holding, on its own
behalf, securities that may be held directly by the Bank. This subsidiary
corporation holds U.S. Treasury notes, Government agency obligations, corporate
bonds and mortgage-backed securities and qualifies under Section 38B of Chapter
63 of the Massachusetts General Laws as a Massachusetts security corporation.
13
REGULATION AND SUPERVISION
REGULATION AND SUPERVISION OF THE COMPANY
GENERAL. The Company is a bank holding company subject to regulation by the
Federal Reserve Board under the Bank Holding Company Act of 1956 (the "BHCA").
As a result, the activities of the Company are subject to certain limitations,
which are described below. In addition, as a bank holding company, the Company
is required to file annual and quarterly reports with the Federal Reserve Board
and to furnish such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Company is also subject to regular examination
by the Federal Reserve Board.
ACTIVITIES. With certain exceptions, the BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking. The activities of the Company are subject to these legal and regulatory
limitations under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power to order a
holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
Effective with the enactment of the Gramm-Leach-Bliley Act (the "G-L-B
Act") on November 12, 1999, bank holding companies whose financial institution
subsidiaries are well capitalized and well managed and have satisfactory
Community Reinvestment Act ("CRA") records can elect to become "financial
holding companies" which are permitted to engage in a broader range of financial
activities than are permitted to bank holding companies. Financial holding
companies are authorized to engage in, directly or indirectly, financial
activities. A financial activity is an activity that is: (i) financial in
nature; (ii) incidental to an activity that is financial in nature; or (iii)
complementary to a financial activity and that does not pose a safety and
soundness risk. The G-L-B Act includes a list of activities that are deemed to
be financial in nature. Other activities also may be decided by the Federal
Reserve Board to be financial in nature or incidental thereto if they meet
specified criteria. A financial holding company that intends to engage in a new
activity or to acquire a company to engage in such an activity is required to
give prior notice to the Federal Reserve Board. If the activity is not either
specified in the G-L-B Act as being a financial activity or one that the Federal
Reserve Board has determined by rule or regulation to be financial in nature,
the prior approval of the Federal Reserve Board is required.
ACQUISITIONS. Under the BHCA, a bank holding company must obtain the prior
approval of the Federal Reserve Board before (1) acquiring direct or indirect
ownership or control of any voting shares of any bank or bank holding company
if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company. Satisfactory
financial condition, particularly with regard to capital adequacy, and
satisfactory CRA ratings generally are prerequisites to obtaining federal
regulatory approval to make acquisitions.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA, "control" is defined as ownership of more than 25% of any class of voting
securities of the Company or the Bank, the ability to control the election of a
majority of the directors, or the exercise of a controlling influence over
management or policies of the Company or the Bank. In addition, the Change in
Bank Control Act and the related regulations of the Federal Reserve Board
require any person or persons acting in concert (except for companies required
to make application under the BHCA), to file a written notice with the Federal
Reserve Board before such person or persons may acquire control of the Company
or the Bank. The Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting securities or to
direct the management or policies of a bank holding company or an insured bank.
14
Under Massachusetts banking law, prior approval of the Massachusetts
Division of Banks is also required before any person may acquire control of a
Massachusetts bank or bank holding company. Massachusetts law generally
prohibits a bank holding company from acquiring control of an additional bank if
the bank to be acquired has been in existence for less than three years or, if
after such acquisition, the bank holding company would control more than 30% of
the FDIC-insured deposits in the Commonwealth of Massachusetts.
CAPITAL REQUIREMENTS. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "Regulation and Supervision of
the Bank -- Capital Requirements."
DIVIDENDS. The Federal Reserve Board has the power to prohibit dividends by
bank holding companies if their actions constitute unsafe or unsound practices.
The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a bank
holding company experiencing serious financial problems to borrow funds to pay
dividends. Under the prompt corrective action regulations adopted by the Federal
Reserve Board pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), the Federal Reserve Board may prohibit a bank holding
company from paying any dividends if the holding company's bank subsidiary is
classified as "undercapitalized." See "Regulation and Supervision of the Bank --
Prompt Corrective Regulatory Action."
STOCK REPURCHASES. As a bank holding company, the Company is required to
give the Federal Reserve Board prior written notice of any purchase or
redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for
all such purchases or redemptions during the preceding 12 months, is equal to
10% or more of the Company's consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, Federal Reserve Board order, directive, or
any condition imposed by, or written agreement with, the Federal Reserve Board.
This requirement does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination ratings at their
last examination and are not the subject of any unresolved supervisory issues.
REGULATION AND SUPERVISION OF THE BANK
GENERAL. The Bank is subject to extensive regulation by the Commissioner
and the FDIC. The lending activities and other investments of the Bank must
comply with various regulatory requirements. The Commissioner and FDIC
periodically examine the Bank for compliance with these requirements. The Bank
must file reports with the Commissioner and the FDIC describing its activities
and financial condition. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System are required to maintain a minimum
leverage capital requirement consisting of a ratio of Tier 1 capital to total
assets of 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and in general a strong banking organization, rated composite 1 under
the Uniform Financial Institutions Rating System (the CAMELS rating system)
established by the Federal Financial Institutions Examination Council. For all
but the most highly rated institutions meeting the conditions set forth above,
the minimum leverage capital ratio is 3% plus an additional "cushion" amount of
at least 100 to 200 basis points with a minimum leverage capital requirement of
not less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain mortgage and non-mortgage servicing assets, purchased credit
card relationships and qualifying supervisory goodwill) minus identified losses,
disallowed deferred tax assets and investments in financial subsidiaries and
certain non-financial equity investments.
15
In addition to the leverage ratio (the ratio of Tier 1 capital to total
assets), state-chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8% of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and preferred stock with a
maturity of over 20 years, certain other capital instruments and up to 45% of
pretax net unrealized holding gains on equity securities. The includable amount
of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying
total capital is further reduced by the amount of the bank's investments in
banking and finance subsidiaries that are not consolidated for regulatory
capital purposes, reciprocal cross-holdings of capital securities issued by
other banks, most intangible assets and certain other deductions. Under the FDIC
risk-weighting system, all of a bank's balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items are assigned to one of
four broad risk weight categories from 0% to 100%, based on the risks inherent
in the type of assets or item. The aggregate dollar amount of each category is
multiplied by the risk weight assigned to that category. The sum of these
weighted values equals the bank's risk-weighted assets.
At March 31, 2002, the Bank's ratio of Tier 1 capital to average assets was
7.61%, its ratio of Tier 1 capital to risk-weighted assets was 11.28% and its
ratio of total risk-based capital to risk-weighted assets was 12.35%.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. The Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would
limit the Bank's bad debt deduction or create federal tax liabilities.
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC for
insurance of its deposits by the BIF based on a percentage of its insured
deposits. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for BIF-insured institutions at a rate determined by the
FDIC to be necessary to maintain the designated reserve ratio of the BIF at
1.25% of estimated insured deposits or at a higher percentage of insured
deposits that the FDIC determines to be justified for that year by circumstances
raising a significant risk of substantial future losses to the BIF. In the event
the BIF should fail to meet the statutory reserve ratio, the FDIC would be
required to set semi-annual assessments for BIF members that are sufficient to
increase the reserve ratio to 1.25% within one year or in accordance with such
other schedule that the FDIC adopts by regulation to restore the reserve ratio
in not more than 15 years.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the fourth month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.
The FDIC has adopted an assessment schedule for BIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings have been reduced to zero and institutions in the
worst risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. At March 31, 2002, the Bank is considered well capitalized. In
addition, FDIC-insured institutions are required to pay
16
assessments to the FDIC to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to finance takeovers of insolvent thrifts. Until December 31, 1999,
BIF-insured institutions were required to pay FICO assessments at one-fifth the
rate at which Savings Association Insurance Fund ("SAIF") members were assessed.
After December 31, 1999, both BIF and SAIF members have been assessed at the
same rate for FICO payments.
The FDIC has announced that the BIF reserve ratio had fallen below 1.25% as
of March 31, 2002. The FDIC has further indicated that in the event the BIF
reserve ratio is expected to remain below the designated reserve ratio when the
FDIC establishes the assessment rate for the first half of 2003 this fall, it
will require BIF-insured banks to begin paying a premium for deposit insurance.
All Massachusetts chartered co-operative banks are required to be members
of the Share Insurance Fund. The Share Insurance Fund maintains a deposit
insurance fund which insures all deposits in member banks which are not covered
by federal insurance, which in the case of the Bank are its deposits in excess
of $100,000 per insured account. In past years, a premium of 1/24 of 1% of
insured deposits has been assessed annually on member banks such as the Bank for
this deposit insurance. However, no premium has been assessed in recent years.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators for measuring the
capital adequacy of an insured depository institution. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
provisions. If an institution's ratio of tangible capital to total assets falls
below the "critical capital level" established by the appropriate federal
banking regulator, the institution will be subject to conservatorship or
receivership within specified time periods.
Under the implementing regulations, the federal banking regulators
generally measure an institution's capital adequacy on the basis of its total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). The following table shows the capital ratios required
for the various prompt corrective action categories.
17
ADEQUATELY SIGNIFICANTLY
WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
---------------- ----------- ---------------- ----------------
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
A "critically undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangible assets other than qualifying supervisory
goodwill and certain purchased mortgage servicing rights. The FDIC may
reclassify a well capitalized depository institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.
LOANS TO EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS. Loans to
directors, executive officers and principal stockholders of a state non-member
bank like the Bank must be made on substantially the same terms as those
prevailing for comparable transactions with persons who are not executive
officers, directors, principal stockholders or employees of the Bank unless the
loan is made pursuant to a compensation or benefit plan that is widely available
to employees and does not favor insiders. Loans to any executive officer,
director and principal stockholder together with all other outstanding loans to
such person and affiliated interests generally may not exceed 15% of the bank's
unimpaired capital and surplus and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Loans to directors,
executive officers and principal stockholders, and their respective affiliates,
in excess of the greater of $25,000 or 5% of capital and surplus (up to
$500,000) must be approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting. State
non-member banks are prohibited from paying the overdrafts of any of their
executive officers or directors unless payment is made pursuant to a written,
pre-authorized interest-bearing extension of credit plan that specifies a method
of repayment or transfer of funds from another account at the bank. Loans to
executive officers may not be made on terms more favorable than those afforded
other borrowers and are restricted as to type, amount and terms of credit. In
addition, Section 106 of the BHCA prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
TRANSACTIONS WITH AFFILIATES. A state non-member bank or its subsidiaries
may not engage in "covered transactions" with any one affiliate in an amount
greater than 10% of such bank's capital stock and surplus, and for all such
transactions with all affiliates a state non-member bank is limited to an amount
equal to 20% of capital stock and surplus. All such transactions must also be on
terms substantially the same, or at least as favorable, to the bank or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. An affiliate of a state non-member bank is
any company or entity which controls or is under common control with the state
non-member bank and, for purposes of the aggregate limit on transactions with
affiliates, any subsidiary that would be deemed a financial subsidiary of a
national bank. In a holding company context, the parent holding company of a
state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the state non-member
bank. The BHCA further prohibits a depository institution from extending credit
to or offering any other services, or fixing or varying the consideration for
such extension of credit or service, on the
18
condition that the customer obtain some additional service from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain limited exceptions.
MASSACHUSETTS STATE LAW. As a Massachusetts-chartered co-operative bank,
the Bank is subject to the applicable provisions of Massachusetts law and the
regulations of the Commissioner adopted thereunder. The Bank derives its lending
and investment powers from these laws, and is subject to periodic examination
and reporting requirements by and of the Commissioner. In addition, the Bank is
required to make periodic reports to the Co-operative Central Bank. In 1990,
legislation was enacted permitting banks nationwide to enter the Bank's market
area and compete for deposits and loan originations. The approval of the
Massachusetts Commissioner of Banks is required prior to any merger or
consolidation, or the establishment or relocation of any office facility.
EMPLOYEES
At March 31, 2002, the Bank employed 84 full-time and 36 part-time
employees. The Bank's employees are not represented by any collective bargaining
agreement. Management of the Bank considers its relations with its employees to
be good.
ITEM 2. PROPERTIES
- -------------------
The Bank owns all its offices, except the Burlington and Malden branch
offices, and the loan and operations centers located in Somerville. Net book
value includes the cost of land, buildings and improvements as well as leasehold
improvements, net of depreciation and/or amortization. At March 31, 2002, all of
the Bank's offices were in reasonable condition and met the business needs of
the Bank. The following table sets forth the location of the Bank's offices, as
well as certain information relating to these offices as of March 31, 2002
(dollars in thousands):
NET BOOK
YEAR VALUE AT
OFFICE LOCATION OPENED MARCH 31, 2002
--------------- ------ --------------
MAIN OFFICE
399 Highland Avenue
Somerville, MA........................ 1974 $ 248
BRANCH OFFICES:
175 Broadway
Arlington, MA......................... 1982 119
85 Wilmington Road
Burlington, MA........................ 1978(a) 4
1192 Boylston Street
Chestnut Hill (Newton), MA............ 1954 144
137 Pleasant Street
Malden, MA............................ 1975(b) 28
846 Main Street
Melrose, MA........................... 1994 170
275 Main Street
Woburn, MA............................ 1980 465
19
NET BOOK
YEAR VALUE AT
OFFICE LOCATION OPENED MARCH 31, 2002
--------------- ------ --------------
198 Lexington Street
Woburn, MA............................ 1974 $ 170
Operations Center
17 Inner Belt Road
Somerville, MA........................ 1994 (c) 25
Loan Center
401 Highland Avenue................... 2002(d) 2
Somerville, MA
(a) The lease for the Burlington branch expires in 2007 with no renewal option.
(b) The lease for the Malden branch expires in 2005 with an option to extend
the lease for one ten-year term.
(c) The lease for the operations center expires in 2004 with no renewal option.
(d) The lease for the loan center expires in 2006 with an option to extend for
one three-year term.
At March 31, 2002, the net book value of the Bank's premises and equipment
was $1.8 million.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank 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 or any
subsidiary.
The Bank has been named as defendant in a civil suit filed March 28, 2002
in Middlesex Superior Court under the caption Yi v. Central Bank in which it is
alleged, inter alia, that the Bank committed an unfair or deceptive trade
practice by failing to pay surplus foreclosure proceeds to a junior lien holder
in 1994. Plaintiff seeks damages of $160,000 plus interest of approximately
$150,000 and has applied for a multiple damage award under Chapter 93A of the
Massachusetts General Laws which provides for up to treble damages if a
violation is found to be willful or knowing. The Bank believes that it has
meritorious defenses to all such claims and intends to vigorously defend against
them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------
The Company's common stock is traded over-the-counter on the Nasdaq
National MarketSM under the symbol "CEBK." At March 31, 2002, there were
1,632,789 shares of the common stock outstanding and approximately 260 holders
of record. The foregoing number of holders does not reflect the number of
persons or entities who held the stock in nominee or "street name" through
various brokerage firms. In October 1996, the Company established a quarterly
cash dividend policy and made its first dividend distribution on November 15,
1996; it has paid cash dividends on a quarterly basis since initiating the
dividend program.
The following tables list the high and low prices for the Common Stock
during each quarter of fiscal 2002 and fiscal 2001 as reported by the Nasdaq
National MarketSM, and the amounts and payable dates of the cash dividends paid
during each quarter of fiscal 2002 and fiscal 2001. The stock quotations
constitute interdealer prices without retail markups, markdowns or commissions,
and may not necessarily represent actual transactions.
COMMON STOCK PRICES CASH DIVIDENDS (PAYABLE DATES)
Fiscal 2002 High Low Fiscal 2002 Amount
- ----------------------------------------------- ------------------------
6/30/01 $ 26.00 $ 17.50 5/18/01 $ 0.10
9/30/01 27.75 21.50 8/17/01 0.10
12/31/01 26.99 21.00 11/16/01 0.10
3/31/02 29.75 25.00 2/15/02 0.10
Fiscal 2001 High Low Fiscal 2001 Amount
- ----------------------------------------------- ------------------------
6/30/00 $ 17.000 $ 14.250 5/19/00 $ 0.10
9/30/00 20.063 14.625 8/18/00 0.10
12/31/00 18.250 15.500 11/17/00 0.10
3/31/01 19.625 16.750 2/15/01 0.10
21
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
AT OR FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
Total assets .................................. $ 468,219 $ 449,337 $ 409,557 $ 364,696 $ 375,233
Total loans ................................... 371,707 345,793 320,013 280,346 281,724
Investments:
Available for sale ........................ 73,884 49,388 68,316 68,881 73,027
Held to maturity .......................... -- -- -- -- 4,000
Deposits ...................................... 261,907 287,167 258,339 266,463 276,364
Borrowings .................................... 164,000 121,000 111,000 57,000 59,000
Total stockholders' equity .................... 38,954 38,212 37,397 38,742 36,786
Shares outstanding ............................ 1,633 1,684 1,810 1,967 1,965
STATEMENTS OF OPERATIONS
Net interest and dividend income .............. $ 14,413 $ 13,914 $ 13,375 $ 11,947 $ 11,698
Provision for loan losses ..................... -- -- -- -- --
Net gain (loss) from sale and write-down of
investment securities ..................... (150) 680 1,013 580 1,051
Other non-interest income ..................... 838 608 656 788 763
Total non-interest expenses ................... 10,465 10,330 9,345 8,773 8,471
Income before cumulative effect of
accounting change ......................... 2,860 3,109 3,567 2,682 3,047
Net income .................................... 2,860 3,109 3,333 2,682 3,047
Earnings per common share after cumulative
effect of accounting change - diluted ..... 1.72 1.81 1.77 1.38 1.56
SELECTED RATIOS
Interest rate spread .......................... 2.85% 2.80% 3.11% 2.97% 3.11%
Net yield on interest-earning assets .......... 3.36 3.38 3.64 3.29 3.45
Equity-to-assets .............................. 8.32 8.50 9.13 10.62 9.80
Return on average assets before cumulative
effect of change in accounting principle... 0.65 0.74 0.94 0.72 0.88
Return on average stockholders' equity
before cumulative effect of change in
accounting principle ...................... 7.62 8.11 9.49 7.12 8.64
Dividend payout ratio ......................... 23.39 22.42 20.67 23.45 20.64
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
GENERAL
The operations of the Bank are generally influenced by overall economic
conditions, the related monetary and fiscal policies of the federal government
and the regulatory policies of financial institution regulatory authorities,
including the Banking Commissioner, the Federal Reserve Board and the FDIC.
The Bank monitors its exposure to earnings fluctuations resulting from
market interest rate changes. Historically the Bank's earnings have been
vulnerable to changing interest rates due to differences in the terms to
maturity or repricing of its assets and liabilities. For example, in a rising
interest rate environment, the Bank's net interest income and net income could
be negatively affected as interest-sensitive liabilities (deposits and
borrowings) could adjust more quickly to rising interest rates than the Bank's
interest-sensitive assets (loans and investments).
The following is a discussion and analysis of the Bank's results of
operations for the last three fiscal years and its financial condition at the
end of fiscal years 2002 and 2001. Management's discussion and analysis of
financial condition and results of operations should be read in conjunction with
the consolidated financial statements and accompanying notes.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of the Bank's financial condition and
results of operations are based on the consolidated financial statements which
are prepared in accordance with accounting principles generally accepted in the
United States. The preparation of such financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to the allowance for loan losses. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis in making judgments about the carrying values of assets that are not
readily apparent from other sources. Actual results could differ from the amount
derived from management's estimates and assumptions under different assumptions
or conditions.
Management believes the allowance for loan losses policy is a critical
accounting policy that required the most significant estimates and assumptions
used in the preparation of the consolidated financial statements. The allowance
for loan losses is based on management's evaluation of the level of the
allowance required in relation to the estimated loss exposure in the loan
portfolio. Management believes the allowance for loan losses is a significant
estimate and therefore regularly evaluates it for adequacy by taking into
consideration factors such as prior loan loss experience, the character and size
of the loan portfolio, business and economic conditions and management's
estimation of future losses. The use of different estimates or assumptions could
produce different provisions for loan losses. Refer to the discussion of
Allowance for Loan Losses in the Business Section and Notes 1 and 4 to
Consolidated Financial Statements for a detailed description of management's
estimation process and methodology related to the allowance for loan losses.
RESULTS OF OPERATIONS
The Bank reported net income of $2.9 million or $1.72 per diluted share for
fiscal 2002, as compared to $3.1 million, or $1.81 per diluted share for fiscal
2001 and $3.3 million or $1.77 per diluted share after the cumulative effect of
a change in accounting principle for fiscal 2000.
The Bank's earnings decrease for fiscal 2002 compared with fiscal 2001 was
primarily due to write-downs of $642 thousand in certain equity securities which
had experienced a decline in fair value judged to be other than temporary,
partially offset by higher net interest income. The Bank's earnings decrease for
fiscal 2001 compared
23
with fiscal 2000 was primarily the result of an increase in operating expenses
and a decrease in the net gain on sale of investment securities, partially
offset by higher net interest income. The increase in salaries and benefits in
2001 was impacted by a one-time expenditure relating to the settlement of a
severance claim. The Bank was able to increase net interest and dividend income
during the period despite a fiercely competitive market for loans. The increase
in the cost of deposits in fiscal 2001 resulted from management's decision to
aggressively price deposits which caused the overall cost of funds to increase.
INTEREST RATE SPREAD. The Bank's operating results are significantly
affected by its net interest spread, which is the difference between the yield
on loans and investments and the interest cost of deposits and borrowings. The
interest spread is affected by economic conditions and market factors that
influence interest rates, loan demand and deposit flows.
The following table presents average balances, interest income and expense
and yields earned or rates paid on all interest-earning assets and
interest-bearing liabilities for the years indicated.
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- -------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans................. $327,806 $23,799 7.26% $334,513 $25,613 7.66% $293,126 $21,806 7.44%
Other loans.................... 7,465 438 5.87 7,219 716 9.92 6,963 599 8.60
-------- ------- -------- ------- -------- -------
Total loans................ 335,271 24,237 7.23 341,732 26,329 7.70 300,089 22,405 7.47
Short-term investments......... 22,076 866 3.92 7,457 487 6.53 8,197 421 5.14
Investment securities.......... 71,427 4,170 5.84 62,998 4,101 6.51 59,243 3,598 6.07
-------- ------- -------- ------- -------- -------
Total investments.......... 93,503 5,036 5.39 70,455 4,588 6.51 67,440 4,019 5.96
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................... 428,774 29,273 6.83 412,187 30,917 7.50 367,529 26,424 7.19
------- ------- -------
Allowance for loan losses ....... (3,234) (3,042) (2,946)
Non-interest-earning assets...... 14,951 13,676 14,109
-------- -------- --------
Total assets.............. $440,491 $422,821 $378,692
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Deposits....................... $248,274 8,119 3.27 $249,753 10,087 4.04 $238,794 8,553 3.58
Advances from FHLB of Boston... 124,680 6,741 5.41 111,980 6,916 6.18 80,907 4,496 5.56
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ 372,954 14,860 3.98 361,733 17,003 4.70 319,701 13,049 4.08
------- ------- -------
Non-interest-bearing deposits.... 24,535 20,382 18,742
Other liabilities................ 4,481 2,383 2,658
-------- -------- --------
Total liabilities......... 401,970 384,498 341,101
Stockholders' equity............. 38,521 38,323 37,591
-------- -------- --------
Total liabilities and
stockholders' equity..... $440,491 $422,821 $378,692
======== ======== ========
Net interest and dividend
income......................... $14,413 $13,914 $13,375
======= ======= =======
Interest rate spread............. 2.85% 2.80% 3.11%
==== ==== ====
Net yield on interest-earning
assets ........................ 3.36% 3.38% 3.64%
==== ==== ====
24
RATE/VOLUME ANALYSIS. The effect on net interest income of changes in
interest rates and changes in the amounts of interest-earning assets and
interest-bearing liabilities is shown in the following table. Information is
provided on changes for the fiscal years indicated attributable to changes in
interest rates and changes in volume. Changes due to combined changes in
interest rates and volume are allocated between changes in rate and changes in
volume proportionally to the change due to volume and the change due to rate.
2002 VS. 2001 2001 VS. 2000
----------------------------- -----------------------------
CHANGES DUE TO CHANGES DUE TO
INCREASE (DECREASE) IN: INCREASE (DECREASE) IN:
----------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
Interest income:
Mortgage loans....................... $ (503) $(1,311) $ (1,814) $ 3,148 $ 659 $ 3,807
Other .............................. 24 (302) (278) 23 94 117
------- ------- -------- ------- ------- -------
Total income from loans.......... (479) (1,613) (2,092) 3,171 753 3,924
------- ------- -------- ------- ------- -------
Short-term investments............... 639 (260) 379 (41) 107 66
Investment securities................ 516 (447) 69 250 253 503
------- ------- -------- ------- ------- -------
Total income from investments.... 1,155 (707) 448 209 360 569
------- ------- -------- ------- ------- -------
Total interest and dividend
income ........................ 676 (2,320) (1,644) 3,380 1,113 4,493
------- ------- -------- ------- ------- -------
Interest expense:
Deposits............................. (60) (1,908) (1,968) 435 1,099 1,534
Advances from FHLB of Boston......... 738 (913) (175) 1,875 545 2,420
------- ------- -------- ------- ------- -------
Total interest expense........... 678 (2,821) (2,143) 2,310 1,644 3,954
------- ------- -------- ------- ------- -------
Net interest and dividend income....... $ (2) $ 501 $ 499 $ 1,070 $ (531) $ 539
======= ======= ======== ======= ======= =======
INTEREST AND DIVIDEND INCOME. The Bank experienced a $1.6 million overall
decrease in interest and dividend income for the year ended March 31, 2002
compared to fiscal 2001. Interest income on loans decreased by $2.1 million to
$24.2 million due to a $6.5 million decrease in average loan balances and a 47
basis point decline in the average rate earned. During fiscal year 2002, the
Bank originated and purchased new loans amounting to $157.9 million, including
$84.0 million during the fourth quarter of the year. With declining interest
rates, management had decided to slow down the origination of fixed-rate
residential loans during the first half of the year. During the second half of
the year, the Bank priced its residential loans more competitively which
increased origination volume. The Bank has continued to emphasize commercial
lending in order to diversify the loan portfolio and improve overall portfolio
yield. Additionally, interest and dividend income on investments increased by
$448 thousand in fiscal 2002 due primarily to an $23.0 million increase in
average total balances of investments partially offset by a 112 basis point
decrease in the rate earned on investments. The overall total average balance of
interest-earning assets increased by $16.6 million from fiscal 2001 to fiscal
2002, and the average yield on all interest-earning assets decreased by 67 basis
points between the two fiscal years.
The Bank experienced a $4.5 million overall increase in interest and
dividend income for the year ended March 31, 2001 compared to fiscal 2000.
Interest income on loans increased by $3.9 million to $26.3 million due to a
$41.6 million increase in average loan balances. Total loans increased by $25.8
million from March 31, 2000 to March 31, 2001 and the yield on these loans
increased by 23 basis points. The Bank originated new loans amounting to $82.6
million. The increase in the loan portfolio reflects a management decision to
increase loan originations in a favorable interest rate environment. As rates
declined during the calendar year, management decided to slow down residential
lending but continued its emphasis on commercial lending in order to diversify
the loan portfolio and improve overall portfolio yield. Additionally, interest
and dividend income on investments increased by $569 thousand due primarily to
an $3.0 million increase in average total balances of investments and a 58 basis
point increase in the rate earned on investments during fiscal 2001. The overall
total average balance of interest-earning assets increased by $44.7 million from
fiscal 2000 to fiscal 2001, and the average yield on all interest-earning assets
increased by 31 basis points between the two fiscal years.
INTEREST EXPENSE. For fiscal 2002, interest expense on deposits decreased
by $2.0 million from $10.1 million in fiscal 2001 to $8.1 million in fiscal
2002. The decrease can be attributed primarily to a 77 basis point reduction in
the cost of deposits in fiscal 2002 reflecting the series of reductions in
interest rates initiated by the
25
Federal Reserve Board beginning in January 2001 and the repricing of nearly 70%
of certificates of deposit outstanding at March 31, 2001 in fiscal 2002.
Interest expense on borrowings decreased $175 thousand as the average balance of
borrowings rose to $124.7 million during fiscal 2002 from $112.0 million during
fiscal 2001, which was more than offset by a decrease of 77 basis points in the
rate paid on these borrowings to 5.41% in fiscal 2002 from 6.18% in fiscal 2001.
There was an overall increase in the average balance of interest-bearing
liabilities of $11.2 million during fiscal 2002 compared to fiscal 2001.
For fiscal 2001, interest expense on deposits increased by $1.5 million
from $8.6 million in fiscal 2000 to $10.1 million in fiscal 2001. The increase
can be attributed primarily to an increase of 46 basis points in the interest
rate paid on deposits from 3.58% during fiscal 2000 to 4.04% in fiscal 2001,
plus an increase in the average total balance of interest-bearing deposits to
$249.8 million during fiscal 2001 from $238.8 million in the prior period.
Interest expense on borrowings also increased as the average balance of
borrowings rose to $112.0 million during fiscal 2001 from $80.9 million during
fiscal 2000, in addition to an increase of 62 basis points in the rate paid on
these borrowings to 6.18% in fiscal 2001 from 5.56% in fiscal 2000. Both factors
combined to cause a $2.4 million increase in interest expense on borrowings
during fiscal 2001. There was an overall increase in the average balance of
interest-bearing liabilities of $42.0 million during fiscal 2001 compared to
fiscal 2000.
PROVISION FOR LOAN LOSSES. Due to the high level of asset quality, as
measured by low delinquency rates and the absence of non-performing assets
during the past two years, the Bank made no provision for loan losses during
fiscal 2002, 2001 and 2000. At March 31, 2002, 2001 and 2000, non-performing
assets totaled $0, $0, and $235 thousand, representing 0%, 0% and 0.06% of total
assets, respectively.
NON-INTEREST INCOME. Total non-interest income for fiscal 2002 was $688
thousand, compared to $1.3 million during fiscal 2001. The primary reason for
the $600 thousand decline in fiscal 2002 was the write-down of $642 thousand in
certain equity securities which had experienced a decline in fair value judged
to be other than temporary and a decrease in gains on the sale of securities.
Partially offsetting this decrease was an increase in deposit service charges
attributable to an increase in core deposit accounts and, for the first time,
brokerage income from the Bank's new offering of investment products through a
third party.
Total non-interest income for fiscal 2001 was $1.3 million, compared to
$1.7 million during fiscal 2000. The primary reason for the $381 thousand
decline was a decrease in gains from the sale of investment securities from $1.0
million in fiscal 2000 to $680 thousand in fiscal 2001.
NON-INTEREST EXPENSES. Non-interest expenses increased $135 thousand during
fiscal 2002, as compared to the year ended March 31, 2001. Such increase is
primarily due to increases in professional fees of $292 thousand and data
processing service fees of $119 thousand, partially offset by decreases in other
expenses of $289 thousand and occupancy and equipment expenses of $68 thousand.
Salaries and employee benefits, the largest component of non-interest expenses,
increased by $81 thousand, or 1.5%, during fiscal 2002.
The increase in professional fees of $292 thousand in fiscal 2002 compared
to fiscal 2001 was primarily due to increased legal and consulting costs. The
increase in data processing service fees was due to the change, in November
2000, to a new data processing system more suitable to the Bank's needs. The
decrease in other expenses of $289 thousand was due to a reduction in
advertising expense of $303 thousand as the Bank curtailed its regular promotion
of certificates of deposits.
Salaries and employee benefits expense increased approximately $80 thousand
during fiscal 2002 despite a $175 thousand increase in ESOP expense due to the
initial application of the fair value method of accounting for the allocation of
ESOP shares to employees. Prior to fiscal 2002, compensation expense was
recognized as shares were allocated to ESOP participants' accounts based on the
cost of such shares to the ESOP. In future periods, compensation expense
relating to the ESOP may be significantly affected by the market value of the
Company's common stock.
Non-interest expenses increased $985 thousand during the year ended March
31, 2001, as compared to the year ended March 31, 2000. This increase is
primarily attributable to increase in salaries and benefits of $554 thousand,
which included a one-time expenditure relating to the settlement of a severance
claim, an increase in data processing service fees of $313 thousand due to a
change in computer processing systems and an increase in other
26
expenses of $204 thousand. The primary reason for the increase in other expenses
was $291 thousand in higher expenditures for promotions, advertising and
marketing. These increases were partially offset by a reduction in professional
fees during fiscal 2001 of $118 thousand due to consulting fees incurred during
fiscal 2000 relating to a tax planning strategy implemented during fiscal 2000.
INCOME TAXES. The effective rates of income tax expense for the years ended
March 31, 2002, 2001 and 2000 were 38.3%, 36.2% and 37.4%, respectively. The
change among years is primarily due to variations in the Bank's state taxes.
Such variations reflect differences in the utilization of the Bank's REIT
subsidiary.
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535 thousand plus interest and penalties with respect to its
tax years ended March 31, 2000 and 2001. The Bank is aware that the DOR has sent
similar notices to numerous other financial institutions in Massachusetts that
reported a deduction for dividends received from a REIT during this period.
Assessed amounts ultimately paid, if any, would be deductible expenses for
federal income tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Bank intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
FINANCIAL CONDITION
Total assets at March 31, 2002 amounted to $468.2 million, an increase of
$18.9 million from $449.3 million at March 31, 2001. Total assets at March 31,
2001 amounted to $449.3 million, an increase of $39.7 million from $409.6
million at March 31, 2000. During fiscal 2002, increases in the Bank's borrowed
funds and the liquidation of short-term investments were used to fund the
increase in loans and investments and the decrease in deposits.
Net loans increased $25.7 million to $368.4 million at March 31, 2002 from
$342.7 million at March 31, 2001. At March 31, 2002, mortgage loans were $363.2
million, a $24.7 million increase from March 31, 2001. The increase in mortgage
loans was primarily attributable to increases in commercial real estate and
construction loans which increased $17.1 million and $11.8 million,
respectively. The growth in commercial real estate loans and construction loans
is attributable to the addition of experienced commercial lenders and expansion
of the credit administration function during the past year. During the year
ended March 31, 2002, the Bank originated and purchased loans totaling $157.9
million. Total loans originated and purchased during the year ended March 31,
2001, amounted to $82.6 million.
Total deposits at March 31, 2002 were $261.9 million, a $25.3 million
decrease from $287.2 million one year earlier. This decrease is attributable to
a decline in certificates of deposit of $42.7 million, partially offset by an
increase in core deposits of $17.4 million. The significant decrease in
certificates of deposits reflects management's decision to be less aggressive in
its pricing of such deposits in 2002.
Advances from the FHLB of Boston increased to $164.0 million at March 31,
2002 from $121.0 million at March 31, 2001. The Bank increased its borrowings
from the FHLB of Boston in fiscal 2002 to partially fund loan growth and the
reduction in certificates of deposit.
Stockholders' equity increased to $39.0 million at March 31, 2002 from
$38.2 million at March 31, 2001 due to $2.7 million in comprehensive income,
$492 thousand in proceeds from option exercises and $305 thousand in
amortization in unearned ESOP compensation. The increases in these equity
accounts were partially offset by $1.9 million in treasury stock purchases and
$669 thousand in dividends paid.
27
LIQUIDITY
The Bank's principal sources of liquidity are customer deposits,
amortization and repayments of loan and mortgage-backed security principal, FHLB
of Boston advances and maturities of various other investments. These various
sources of liquidity, as well as the Bank's ability to sell residential mortgage
loans in the secondary market, are used to fund deposit withdrawals, loan
originations and investments.
Deposits have been a relatively stable source of funds for the Bank despite
increasing competition in recent years. During fiscal 2002, deposit balances
decreased by $25.3 million to $261.9 million from $287.2 million at March 31,
2001. The mix of deposits changed significantly during fiscal 2002 with term
deposit certificates decreasing $42.7 million while core deposit accounts
increased $17.4 million. This shift occurred due to the Bank's emphasis of its
core deposit products and less aggressive pricing of term deposits.
The Bank is a member of the FHLB of Boston and has the ability to borrow
from the FHLB of Boston for any sound business purpose for which the Bank has
legal authority, subject to such regulations and limitations as may be
prescribed. At March 31, 2002 and 2001, the Bank had outstanding FHLB of Boston
advances of $164.0 million and $121.0 million, respectively. The deposits and
FHLB advances were used to fund the Bank's lending and investing activities
during the year. The FHLB of Boston advances are secured by a blanket lien on
residential first mortgage loans, U.S. Government and agency securities and all
stock in the FHLB of Boston.
As a member of The Co-operative Central Bank, the Bank also has the right
to borrow from that organization for short-term cash needs, by pledging certain
assets. The Bank also may obtain funds from the Federal Reserve Bank of Boston
by pledging certain of the Bank's notes and drafts. The Bank has not exercised
these rights.
At March 31, 2002, outstanding commitments to originate mortgage loans
totaled $25.1 million, and commitments for unadvanced funds on home equity,
commercial and construction loans totaled $17.2 million. Currently, the Bank is
not selling mortgage loans in the secondary market. Management believes that the
Bank has adequate sources of liquidity to fund these commitments.
CAPITAL RESOURCES
The Company and the Bank are required to maintain minimum capital ratios
pursuant to federal banking regulations. The first standard establishes a
risk-adjusted ratio relating capital to different categories of balance sheet
assets and off-balance sheet obligations. Two categories of capital are defined:
Tier 1 or core capital (stockholders' equity) and Tier 2 or supplementary
capital. Total capital is the sum of both Tier 1 and Tier 2 capital. According
to the standards, Tier 1 capital must represent at least 50% of qualifying total
capital. At March 31, 2002, the minimum total risk-based capital ratio required
was 8.00%. The Company's and the Bank's risk-based total capital ratios at March
31, 2002 were 13.06% and 12.35%, respectively.
To complement the risk-based standards, the FDIC adopted a leverage ratio
(stockholders' equity divided by total average assets) of 3% for the most highly
rated banks and 4%-5% for all others. The leverage ratio is to be used in tandem
with the risk-based capital ratios as the minimum standards for banks. The
Company's and the Bank's leverage ratios were 8.09% and 7.61%, respectively, at
March 31, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Bank'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 Bank 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 Bank's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities.
28
The main objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and preserve capital, while adjusting the Bank's 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 Bank 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 actual 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 cash flows and management's
assumptions is compared to net interest income projections based on an immediate
shift of 300 basis points upward and 200 basis points downward (150 basis points
for 2002 due to the current low interest rate environment). 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:
MARCH 31,
-------------------
2002 2001
-------- --------
300 basis point increase in rates.................... (12.9)% (3.6)%
200 basis point decrease in rates (2001 only)........ (10.3)%
150 basis point decrease in rates (2002 only)........ 0.5%
For each one percentage point change in net interest income in the 2002
projections, the effect on net income would be $115 thousand assuming a 36% tax
rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Page
Consolidated Balance Sheets................................................ 30
Consolidated Statements of Income.......................................... 31
Consolidated Statement of Changes in Stockholders' Equity.................. 32
Consolidated Statement of Cash Flows....................................... 34
Notes to Consolidated Financial Statements................................. 35
Independent Auditors' Report............................................... 53
29
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars In Thousands)
MARCH 31,
----------------------
2002 2001
---- ----
ASSETS
Cash and due from banks $ 5,109 $ 5,351
Short-term investments 2,455 35,718
--------- ---------
Cash and cash equivalents 7,564 41,069
--------- ---------
Investment securities available for sale
(amortized cost of $74,935 in 2002 and
$50,136 in 2001) (note 2) 73,884 49,388
Stock in Federal Home Loan Bank of Boston, at
cost (notes 2 and 7) 8,300 6,150
The Co-operative Central Bank Reserve Fund (note 2) 1,576 1,576
--------- ---------
Total investments 83,760 57,114
--------- ---------
Loans (notes 3) 371,707 345,793
Less allowance for loan losses (note 4) 3,292 3,106
--------- ---------
Net loans 368,415 342,687
--------- ---------
Accrued interest receivable 2,530 2,426
Banking premises and equipment, net (note 5) 1,836 2,018
Deferred tax asset, net (note 8) 1,289 801
Goodwill, net (note 1) 2,232 2,520
Other assets 593 702
--------- ---------
Total assets $ 468,219 $ 449,337
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) $ 261,907 $ 287,167
Federal Home Loan Bank advances (notes 2 and 7) 164,000 121,000
Advance payments by borrowers for taxes and insurance 1,111 1,220
Accrued expenses and other liabilities 2,247 1,738
--------- ---------
Total liabilities 429,265 411,125
--------- ---------
Commitments and contingencies (notes 8, 9 and 12)
Stockholders' equity (note 10):
Preferred stock $1.00 par value, authorized
5,000,000 shares; none issued -- --
Common stock $1.00 par value, authorized 15,000,000
shares; 1,999,588 shares issued at March 31,
2002 and 1,970,000 shares issued at March 31, 2001 2,000 1,970
Additional paid-in capital 11,934 11,190
Retained income 33,141 30,950
Treasury stock (366,799 shares at March 31, 2002
and 285,836 shares at March 31, 2001), at cost (7,189) (5,230)
Accumulated other comprehensive (loss) income (626) (431)
Unearned compensation - ESOP (note 11) (306) (237)
--------- ---------
Total stockholders' equity 38,954 38,212
--------- ---------
Total liabilities and stockholders' equity $ 468,219 $ 449,337
========= =========
See accompanying notes to consolidated financial statements.
30
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31,
---------------------------------------------
2002 2001 2000
---------------------------------------------
Interest and dividend income:
Mortgage loans $ 23,799 $ 25,613 $ 21,806
Other loans 438 716 599
Short-term investments 866 487 421
Investments 4,170 4,101 3,598
--------------------------------------------
Total interest and dividend income 29,273 30,917 26,424
--------------------------------------------
Interest expense:
Deposits 8,119 10,087 8,553
Federal Home Loan Bank advances 6,741 6,916 4,496
--------------------------------------------
Total interest expense 14,860 17,003 13,049
--------------------------------------------
Net interest and dividend income 14,413 13,914 13,375
Provision for loan losses (note 4) -- -- --
--------------------------------------------
Net interest and dividend income after
provision for loan losses 14,413 13,914 13,375
--------------------------------------------
Non-interest income:
Deposit service charges 482 428 414
Net gain (loss) from sale and write-down
of investment securities (note 2) (150) 680 1,013
Brokerage income 100 -- --
Other income 256 180 242
--------------------------------------------
Total non-interest income 688 1,288 1,669
--------------------------------------------
Non-interest expenses:
Salaries and employee benefits (note 11) 5,652 5,571 5,017
Occupancy and equipment (note 5) 1,124 1,192 1,167
Data processing service fees 966 847 534
Professional fees 1,049 757 875
Goodwill amortization 288 288 288
Other expenses 1,385 1,675 1,464
--------------------------------------------
Total non-interest expenses 10,464 10,330 9,345
--------------------------------------------
Income before income taxes 4,637 4,872 5,699
Provision for income taxes (note 8) 1,777 1,763 2,132
--------------------------------------------
Income before cumulative effect of change in
accounting principle 2,860 3,109 3,567
Cumulative effect of change in accounting principle,
net of taxes (note 1) -- -- (234)
---------------------------------------------
Net income $ 2,860 $ 3,109 $ 3,333
============================================
Earnings per common share (note 1):
Before cumulative effect of change in accounting
principle-basic $ 1.73 $ 1.81 $ 1.90
============================================
Before cumulative effect of change in accounting
principle - diluted $ 1.72 $ 1.81 $ 1.89
============================================
After cumulative effect of change in accounting
principle-basic $ 1.73 $ 1.81 $ 1.77
============================================
After cumulative effect of change in accounting
principle - diluted $ 1.72 $ 1.81 $ 1.77
============================================
Weighted average common shares outstanding 1,650 1,717 1,882
============================================
Weighted average common shares outstanding-diluted 1,665 1,719 1,885
============================================
See accompanying notes to consolidated financial statements.
31
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Per Share Data)
ACCUMULATED
ADDITIONAL OTHER UNEARNED TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE COMPENSATION STOCKHOLDERS'
STOCK CAPITAL INCOME STOCK (LOSS) INCOME ESOP EQUITY
----- ------- ------ ----- ------------- ---- ------
Balance at March 31, 1999 $1,967 $11,171 $25,894 $ -- $ 327 $(617) $38,742
Net income -- -- 3,333 -- -- -- 3,333
Other comprehensive income, net of tax:
Unrealized (loss) on securities, net of
reclassification adjustment -- -- -- -- (1,152) -- (1,152)
-------
Comprehensive income 2,181
-------
Proceeds from exercise of stock options 3 19 -- -- -- -- 22
Purchase of treasury stock -- -- -- (3,043) -- -- (3,043)
Dividends paid ($0.36 per share) -- -- (689) -- -- -- (689)
Amortization of unearned compensation -ESOP -- -- -- -- -- 184 184
--------------------------------------------------------------------------------
Balance at March 31, 2000 1,970 11,190 28,538 (3,043) (825) (433) 37,397
Net income -- -- 3,109 -- -- -- 3,109
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- -- 394 -- 394
-------
Comprehensive income 3,503
-------
Purchase of treasury stock -- -- -- (2,187) -- -- (2,187)
Dividends paid ($0.40 per share) -- -- (697) -- -- -- (697)
Amortization of unearned compensation -ESOP -- -- -- -- -- 196 196
-------------------------------------------------------------------------------
Balance at March 31, 2001 1,970 11,190 30,950 (5,230) (431) (237) 38,212
Net income -- -- 2,860 -- -- -- 2,860
Other comprehensive income, net of tax:
Unrealized (loss) on securities, net of
reclassification adjustment -- -- -- -- (195) -- (195)
-------
Comprehensive income 2,665
-------
Purchase of shares by ESOP (note 11) -- -- -- -- -- (199) (199)
Purchase of treasury stock -- -- -- (1,924) -- -- (1,924)
Dividends paid ($0.40 per share) -- -- (669) -- -- -- (669)
Proceeds from exercise of stock options 30 462 -- -- -- -- 492
Amortization of unearned compensation -ESOP -- 175 -- -- -- 130 305
Other equity transactions -- 107 -- (35) -- -- 72
-------------------------------------------------------------------------------
Balance at March 31, 2002 $2,000 $11,934 $33,141 $(7,189) $ (626) $(306) $38,954
===============================================================================
32
The Bank's other comprehensive income (loss) and related tax effect for the
years ended March 31 are as follows:
2002
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
in thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding losses during period $ (451) $ (163) $ (288)
Less reclassification adjustment for net losses
included in net income 150 57 93
----------------------------------------------
Other comprehensive loss $ (301) $ (106) $ (195)
==============================================
2001
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
In thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding gains during period $ 1,188 $ 360 $ 828
Less reclassification adjustment for net gains
included in net income (680) (246) (434)
----------------------------------------------
Other comprehensive income $ 508 $ 114 $ 394
==============================================
2000
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
in thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding losses during period $ (815) $ (297) $ (518)
Less reclassification adjustment for net gains
included in net income (1,013) (379) (634)
----------------------------------------------
Other comprehensive loss $(1,828) $ (679) $(1,152)
===================================================
See accompanying notes to consolidated financial statements.
33
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31,
-----------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 2,860 $ 3,109 $ 3,333
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 372 438 462
Amortization of premiums and discounts 176 86 132
Amortization of goodwill 288 288 288
Decrease (increase) in deferred tax assets (380) 270 (327)
Amortization of unearned compensation - ESOP 305 196 184
Net (gain) loss from sale and write-down of investment securities 150 (680) (1,013)
Cumulative effect of change in accounting principle -- -- 234
(Increase) decrease in accrued interest receivable (104) (390) (422)
(Increase) decrease in other assets 109 (507) 59
Increase (decrease) in advance payments by borrowers for taxes and insurance (109) 167 (336)
Increase (decrease) in accrued interest payable
(23) 66 251
Increase (decrease) in accrued expenses and other liabilities 532 (96) 415
-----------------------------------
Net cash provided by operating activities 4,176 2,947 3,260
-----------------------------------
Cash flows from investing activities:
Principal collected on loans 132,138 56,949 68,641
Loan originations and purchases (157,866) (82,616) (108,363)
Principal payments on mortgage-backed securities 7,246 4,069 9,420
Purchase of investment securities (61,256) (6,170) (21,716)
Proceeds from sales of investment securities 2,885 3,955 6,159
Maturities and redemptions of investment securities 26,000 4,000 2,500
Net (increase) decrease in short-term investments 33,263 (19,727) 2,137
Purchase of stock in FHLB of Boston (2,150) (350) (2,450)
Purchase of banking premises and equipment, net (190) (238) (130)
-----------------------------------
Net cash used by investing activities (19,930) (40,128) (43,802)
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (25,260) 28,828 (8,124)
Proceeds from FHLB advances 68,000 152,000 124,000
Repayments of FHLB advances (25,000) (142,000) (70,000)
Proceeds from exercise of stock options 492 -- 22
Purchase of treasury stock (1,924) (2,187) (3,043)
Payments of dividends (669) (697) (689)
Purchase of stock by ESOP (199) -- --
Other equity transactions 72 -- --
-----------------------------------
Net cash provided by financing activities 15,512 35,944 42,166
-----------------------------------
Net increase (decrease) in cash and due from banks (242) (1,237) 1,624
Cash and due from banks at beginning of year 5,351 6,588 4,964
-----------------------------------
Cash and due from banks at end of year $ 5,109 $ 5,351 $ 6,588
===================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,883 $ 16,937 $ 12,798
Income taxes 1,715 1,850 2,094
See accompanying notes to consolidated financial statements.
34
CENTRAL BANCORP, INC AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, and its
wholly-owned subsidiary, Central Co-operative Bank (the "Bank").
The Bank was organized as a Massachusetts chartered co-operative bank in
1915 and converted from mutual to stock form in 1986. The primary business of
the Bank is to generate funds in the form of deposits and use the funds to make
mortgage loans for the construction, purchase and refinancing of residential
properties, and to make loans on commercial real estate in its market area. The
Bank is subject to competition from other financial institutions. The Company is
subject to the regulations of, and periodic examinations by, the Federal Reserve
Bank ("FRB"). The Bank is also subject to the regulations of, and periodic
examination by, the Federal Deposit Insurance Corporation ("FDIC") and the
Massachusetts Division of Banks. The Bank's deposits are insured by the Bank
Insurance Fund of the FDIC for deposits up to $100,000 and the Share Insurance
Fund ("SIF") for deposits in excess of $100,000.
The Company conducts its business through one operating segment, the Bank.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. All significant intercompany balances and transactions have been
eliminated in consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the year. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change relate
to the determination of the allowance for loan losses.
Certain prior year amounts have been reclassified to conform to the current
year's presentation. The following is a summary of the more significant
accounting policies adopted by the Bank.
Cash and Due from Banks
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserves are calculated based upon deposit levels and
amounted to approximately $2,735, 000 at March 31, 2002.
Investments
Investments are classified as either held to maturity, available for sale
or trading. Investments classified as trading securities are reported at fair
value, with unrealized gains and losses included in earnings. Investments
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as other comprehensive income (loss) within
stockholders' equity. Securities that the Bank has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
amortized cost.
Gains and losses on sales of securities are recognized when realized with
the cost basis of investments sold determined on a specific-identification
basis. Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted to interest income over the actual or expected lives of
the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment
is judged to be other than temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the write-down
is included in the results of operations.
Loans
Loans are reported at the principal amount outstanding, adjusted by
unamortized discounts, premiums, and net deferred loan origination costs and
fees. Loans classified as held for sale are stated at the lower of aggregate
cost or market value. Market value is estimated based on outstanding investor
commitments or, in the absence of cash commitments, current investor yield
requirements. Net unrealized losses, if any, are provided for in a valuation
allowance by charges to operations. No loans were classified as held for sale at
March 31, 2002 and 2001.
35
Loans on which the accrual of interest has been discontinued are designated
as non-accrual loans. Accrual of interest on loans and amortization of net
deferred loan fees or costs are discontinued either when reasonable doubt exists
as to the full and timely collection of interest or principal, or when a loan
becomes contractually past due 90 days with respect to interest or principal.
The accrual on some loans, however, may continue even though they are more than
90 days past due if management deems it appropriate, provided that the loans are
well secured and in the process of collection, When a loan is placed on
non-accrual status, all interest previously accrued but not collected is
reversed against current period interest income. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest. The Bank records
interest income on non-accrual and impaired loans on the cash basis of
accounting.
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest-rate yield and are amortized into interest
income over the loan term using the level-yield method.
Loans are classified as impaired when it is probable that the Bank will not
be able to collect all amounts due in accordance with the contractual terms of
the loan agreement. Impaired loans, except those loans that are accounted for at
fair value or at lower of cost or fair value, are accounted for at the present
value of the expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient in the case of collateral dependent
loans, the lower of the fair value of the collateral or the recorded amount of
the loan. Management considers the payment status, net worth and earnings
potential of the borrower, and the value and cash flow of the collateral as
factors to determine if a loan will be paid in accordance with its contractual
terms. Management does not set any minimum delay of payments as a factor in
reviewing for impaired classification. Impaired loans are charged off when
management believes that the collectibility of the loan's principal is remote.
Management considers non-accrual loans, except for smaller balance, homogeneous
residential mortgage loans, to be impaired.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level determined to be
adequate by management to absorb future charge-offs of loans deemed
uncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off, and reduced by
charge-offs on loans.
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The allowance for loan losses is evaluated
on a regular basis by management and is based upon management's systematic
periodic review of the collectibility of the loans. Primary considerations in
this evaluation are prior loan loss experience, the character and size of the
loan portfolio, business and economic conditions and management's estimation of
future losses. The Bank evaluates specific loan status reports on certain
commercial and commercial real estate loans rated "substandard" or worse.
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. The remaining
commercial and commercial real estate loans are provided for as part of pools of
similar loans based on a combination of historical loss experience and
qualitative adjustments. Smaller balance, homogeneous loans, including
residential real estate loans and consumer loans, are evaluated as a group by
applying estimated charge off and recovery percentages, based on historical
experience and certain qualitative factors, to the current outstanding balance
in each category. Based on these analyses, the resulting allowance is deemed
adequate to absorb all probable credit losses in the portfolio
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 a
changes in economic conditions and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.
Changes in estimates are provided currently in earnings.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Bank's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Bank's deferred tax asset is reviewed periodically and
adjustments to such asset are recognized as deferred income tax expense or
benefit based on management's judgments relating to the realizability of such
asset.
36
Banking Premises and Equipment
Banking premises and equipment are stated at cost, less allowances for
depreciation and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets or terms of
the leases, if shorter.
Goodwill
Through March 31, 2002, goodwill arising from acquisitions was amortized on
a straight-line basis over 15 years. As discussed below under the caption
"Recent Accounting Pronouncements", amortization of goodwill is generally no
longer permitted in fiscal years beginning after December 15, 2001.
Pension Benefits
The Bank provides pension benefits for its employees in a multi-employer
pension plan through membership in the Co-operative Banks Employees Retirement
Association. Pension costs are funded as they are accrued and are accounted for
on a defined contribution plan basis.
Stock-Based Compensation
The Company follows the intrinsic value method set forth in APB Opinion No.
25 "Accounting for Stock Issued to Employees" (APB No. 25) under which there is
generally no charge to earnings for stock option grants. Companies that elect to
use this method are required to disclose the pro forma effect of using the fair
value method of accounting for stock-based compensation that is encouraged by
SFAS No. 123. (See Note 11).
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Unallocated ESOP shares are not considered
outstanding in computing basic EPS. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
stock options, were exercised or converted into common stock.
Recent Accounting Pronouncements
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Accounting for Costs of a Start-Up Entity.
SOP 98-5 requires organizational costs, which were being amortized, to be
expensed and accounted for as a cumulative effect of a change in accounting
principle. On April 1, 1999, the Bank expensed unamortized organizational costs
relating to the formation of the bank holding company resulting in a charge to
earnings, net of taxes, of $234,000 or $0.13 per share ($0.12 per share assuming
dilution).
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 141, "Business Combinations" which is effective for transactions initiated
after June 30, 2001. Under SFAS No. 141, all business combinations must be
accounted for using the purchase method of accounting; use of the
pooling-of-interests method is no longer permitted. In addition, this Statement
requires that certain intangible assets acquired in a business combination be
recognized apart from goodwill.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which is effective for fiscal years beginning after December
15, 2001. Under prior accounting standards, goodwill resulting from a business
combination was amortized against income over its estimated life. After the
effective date of SFAS No. 142, goodwill will generally no longer be amortized
as an expense but instead will be reviewed and tested for impairment using a
fair value methodology prescribed in this Statement. Goodwill will be tested for
impairment at least annually or more frequently as a result of an event or
change in circumstances (e.g. recurring operating losses by the acquired entity)
that would indicate an impairment adjustment may be necessary. Based on its
assessment of the current economic environment, management does not anticipate
an impairment adjustment to the goodwill reflected in the accompanying
consolidated balance sheet upon adoption of SFAS No. 142. The effect of adopting
SFAS No. 141 and No. 142 will be that the Company will cease amortizing the
goodwill balance of $2.2 million which will have the effect of eliminating
goodwill amortization of $288,000 in fiscal 2003.
37
NOTE 2. INVESTMENTS (Dollars in Thousands)
The amortized cost and fair value of investments securities available for
sale are summarized as follows:
MARCH 31, 2002
----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and agency obligations $ 13,995 $ 73 $ (72) $ 13,996
Corporate bonds 39,012 231 (675) 38,568
Mortgage-backed securities 18,377 168 (205) 18,340
-------- -------- -------- --------
Total debt securities 71,384 472 (952) 70,904
Marketable equity securities 3,551 17 (588) 2,980
-------- -------- -------- --------
Total $ 74,935 $ 489 $ (1,540) $ 73,884
======== ======== ======== ========
MARCH 31, 2001
----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and agency obligations $18,970 $ 88 $ (7) $19,051
Corporate bonds 4,984 261 -- 5,245
Mortgage-backed securities 19,623 152 (461) 19,314
------- ------- ------- -------
Total debt securities 43,577 501 (468) 43,610
Marketable equity securities 6,559 605 (1,386) 5,778
------- ------- ------- -------
Total $50,136 $ 1,106 $(1,854) $49,388
======= ======= ======= =======
The maturity distribution (based on contractual maturities) and annual
yields of debt securities at March 31, 2002 are as follows:
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---------- --------- ----------
Due within one year $ 259 $ 262 6.62 %
Due after one year but within five years 42,532 42,196 6.54
Due after five years but within ten years 13,277 13,287 7.50
Due after ten years 15,316 15,159 6.99
------- -------
$71,384 $70,904 6.99
======= =======
Mortgage-backed securities are shown at their contractual maturity dates
but actual maturities may differ as borrowers have the right to prepay
obligations without incurring prepayment penalties.
38
Proceeds from sales of investment securities and related gains and losses
for the years ended March 31, 2002, 2001, and 2000 (all classified as available
for sale) were as follows:
2002 2001 2000
---- ---- ----
Proceeds from sales $ 2,885 $ 3,955 $ 6,159
Gross gains 546 694 1,013
Gross losses 54 14 --
During the year ended March 31, 2002, the Bank recognized write-downs in
certain equity securities totaling $642 as a result of declines in the fair
value of such securities judged to be other than temporary. These write-downs
are not included in the preceding table.
A mortgage-backed security pool with an amortized cost of $3,747 and fair
value of $3,686 at March 31, 2002, was pledged to provide collateral for
customers and for the Bank's employee tax withholdings that are to be remitted
to the federal government in excess of the $100 of withholdings insured by the
FDIC. In addition, investment securities carried at $5,783 were pledged under a
blanket lien to partially secure the Bank's advances from the Federal Home Loan
Bank of Boston ("FHLB of Boston").
As a member of the FHLB of Boston, the Bank is required to invest in stock
of the FHLB of Boston in an amount equal to 1% of its outstanding home loans or
1/20th of its outstanding advances from the FHLB of Boston, whichever is higher.
If such stock is redeemed, the Bank will receive from the FHLB of Boston an
amount equal to the par value of the stock.
The Co-operative Central Bank Reserve Fund (the "Fund") was established for
liquidity purposes and consists of deposits required of all insured co-operative
banks in Massachusetts. The Fund is used by The Co-operative Central Bank to
advance funds to member banks or to make other investments.
NOTE 3. LOANS (In Thousands)
Loans as of March 31, 2002 and 2001 are summarized below:
2002 2001
--------- ---------
Real estate loans:
Residential real estate $ 246,045 $ 248,459
Commercial real estate 87,013 69,949
Construction 20,998 9,152
Second mortgage and home equity lines of credit 9,154 10,977
--------- ---------
Total real estate loans 363,210 338,537
--------- ---------
Commercial loans 6,901 4,979
Consumer loans 1,596 2,277
--------- ---------
Total loans 371,707 345,793
Less: allowance for loan losses (3,292) (3,106)
--------- ---------
Total loans, net $ 368,415 $ 342,687
========= =========
At March 31, 2002 and 2001, net deferred loan (fees) and costs of ($692)
and $160, respectively, were reflected as an adjustment to the appropriate loan
categories.
The Bank has no non-accrual loans at March 31, 2002 and 2001. During the
years ended March 31, 2002 2001 and 2000, there were no impaired loans. The Bank
follows the same policy for recognition of income on impaired loans as it does
for all other loans.
Mortgage loans serviced by the Bank for others amounted to $2,616 and
$4,288 at March 31, 2002 and 2001, respectively.
The Bank's lending activities are conducted principally in communities in
the suburban Boston area. The Bank grants mortgage loans on residential
property, commercial real estate, construction of residential homes, second
mortgages, home equity and other loans. Substantially all loans granted by the
Bank are secured by real estate collateral. The ability and willingness of
residential mortgage borrowers to honor their repayment
39
commitments are generally impacted by the level of overall economic activity
within the borrowers' geographic areas and real estate values. The ability and
willingness of commercial real estate and construction loan borrowers to honor
their repayment commitments are generally impacted by the health of the real
estate market in the borrowers' geographic area and the general economy.
The following summarizes the activity with respect to loans made to
directors and officers and their related interests for the years ended March 31:
2002 2001
----- -----
Balance at beginning of year $ 580 $ 243
New loans 434 444
New officers with loans outstanding 66 158
Repayment of principal (215) (265)
----- -----
Balance at end of year $ 865 $ 580
===== =====
Loans included above were made in the Bank's ordinary course of business,
on substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
unrelated persons. All loans included above are performing in accordance with
the terms of the respective loan.
NOTE 4. ALLOWANCE FOR LOAN LOSSES (In Thousands)
A summary of changes in the allowance for loan losses follows:
YEARS ENDED MARCH 31,
-----------------------------
2002 2001 2000
------- ------- -------
Balance at beginning of year $ 3,106 $ 2,993 $ 2,913
Provision charged to expense -- -- --
Amounts charged-off (4) (4) (9)
Recoveries on accounts previously charged-off 190 117 89
------- ------- -------
Balance at end of year $ 3,292 $ 3,106 $ 2,993
======= ======= =======
NOTE 5. BANKING PREMISES AND EQUIPMENT (In Thousands)
A summary of cost, accumulated depreciation and amortization of banking
premises and equipment at March 31 follows:
ESTIMATED
2002 2001 USEFUL LIVES
------- ------- ------------
Land $ 589 $ 589
Buildings and improvements 2,339 2,304 15.50 years
Furniture and fixtures 5,744 5,596 5.00 years
Leasehold improvements 482 475 7.75 years
------- -------
9,154 8,964
Less accumulated depreciation and amortization (7,318) (6,946)
------- -------
Total $ 1,836 $ 2,018
======= =======
Depreciation and amortization for the years ended March 31, 2002, 2001 and
2000 amounted to $372, $438 and $462, respectively, and is included in occupancy
and equipment expense in the accompanying consolidated statements of income.
40
A summary of minimum rentals of banking premises for future periods under
non-cancelable operating leases follows:
YEARS ENDING MARCH 31,
2003 $ 118
2004 118
2005 73
2006 65
2007 49
Thereafter 18
Certain leases contain renewal options the potential impact of which is not
included above. Rental expense for the years ended March 31, 2002, 2001 and 2000
was $133, $125 and $123, respectively, and is included in occupancy and
equipment expense in the accompanying consolidated statements of income.
NOTE 6. DEPOSITS (Dollars in Thousands)
Deposits at March 31 are summarized as follows:
2002 2001
-------- --------
Demand deposit accounts $ 25,370 $ 22,438
NOW accounts 36,277 33,373
Regular, Club and 90 day notice accounts 72,944 64,011
Money market deposit accounts 17,997 15,327
-------- --------
Total non certificate accounts 152,588 135,149
-------- --------
Term deposit certificates
Certificates of $100 and above 27,233 34,644
Certificates less than $100 82,086 117,374
-------- --------
Total term deposit certificates 109,319 152,018
-------- --------
$261,907 $287,167
======== ========
Contractual maturities of term deposit certificates with weighted
average interest rates at March 31, 2002 are as follows:
AMOUNT RATE
------ ----
Within 1 year $ 92,381 4.21%
Over 1 to 3 years 15,016 4.24
Over 3 years 1,922 4.62
--------
$109,319 4.37
========
41
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands)
A summary of the maturity distribution of FHLB of Boston advances (based on
final maturity dates) with weighted average interest rates at March 31 follows:
2002 2001
------------------- -------------------
AMOUNT RATE AMOUNT RATE
--------- -------- --------- --------
Within 1 year $ 58,600 2.61% $ 25,000 6.46%
Over 1 to 5 years 21,400 4.83 12,000 6.48
Over 5 to 10 years 82,000 5.52 82,000 5.52
Over 10 years 2,000 5.49 2,000 4.49
-------- --------
$164,000 4.39 $121,000 5.84
======== ========
At March 31, 2002, advances totaling $84,000 were callable prior to the
scheduled maturity of the advances. The Bank is subject to a substantial penalty
upon prepayment of FHLB of Boston advances.
The FHLB of Boston is authorized to make advances to its members subject to
such regulations and limitations as the Federal Home Loan Bank Board may
prescribe. The advances are secured by FHLB of Boston stock and a blanket lien
on certain qualified collateral, defined principally as 90% of the fair value of
U.S. Government and federal agency obligations and 75% of the carrying value of
first mortgage loans on owner-occupied residential property. The Bank's unused
borrowing capacity with the FHLB of Boston was approximately $21,000 and $80,200
at March 31, 2002 and 2001, respectively.
NOTE 8. INCOME TAXES (Dollars in Thousands)
The components of the provision for income taxes for the years indicted are
as follows:
YEARS ENDED MARCH 31,
----------------------------
2002 2001 2000
------- ------- -------
Current
Federal $ 1,930 $ 1,555 $ 1,745
State 229 52 44
------- ------- -------
Total current provision 2,159 1,607 1,789
Deferred (prepaid) (382) 156 343
------- ------- -------
$ 1,777 $ 1,763 $ 2,132
======= ======= =======
The provision for income taxes for the periods presented is different from
the amounts computed by applying the statutory Federal income tax rate to income
before income taxes. The differences between expected tax rates and effective
tax rates are as follows:
YEARS ENDED MARCH 31,
-------------------------
2002 2001 2000
------ ------- -------
Statutory Federal tax rate 34.0% 34.0% 34.0%
Items affecting Federal income tax rate:
Dividends received deduction (0.4) (0.6) (0.4)
Goodwill amortization 2.1 2.0 1.8
State income taxes, net of Federal benefit 2.6 1.2 1.6
Other -- (0.4) 0.4
----- ---- ----
Effective tax rate 38.3% 36.2% 37.4%
===== ==== ====
42
The components of gross deferred tax assets and gross deferred tax
liabilities that have been recognized as of March 31 are as follows:
2002 2001
------ ------
Deferred tax assets:
Allowance for loan losses $ 549 $ 548
Deferred loan origination fees 53 74
Depreciation 298 265
Post-employee retirement benefit accrual 241 227
Unrealized loss on securities 425 319
Write-down of investment securities 218 --
Other 59 74
------ ------
Gross deferred tax asset 1,843 1,507
------ ------
Deferred tax liabilities:
Accrued dividend receivable 30 47
Deferred loan origination fees 285 437
Deferred income 239 222
------ ------
Gross deferred tax liability 554 706
------ ------
Net deferred tax asset $1,289 $ 801
====== ======
Based on the Bank's historical and current pretax earnings, management
believes it is more likely than not that the Bank will realize the net deferred
tax asset existing at March 31, 2002. Further, management believes the existing
net deductible temporary differences will reverse during periods in which the
Bank generates net taxable income. At March 31, 2002, recoverable income taxes,
plus estimated taxes for fiscal 2003, exceed the amount of the net deferred tax
asset. There can be no assurance, however, that the Bank will generate any
earnings or any specific level of continuing earnings.
The unrecaptured base year tax bad debt reserves will not be subject to
recapture as long as the Bank continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be subject
to provision of present law that requires recapture in the case of certain
excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is
approximately $1,300.
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535 plus interest and penalties with respect to its tax years
ended March 31, 2000 and 2001. The Bank is aware that the DOR has sent similar
notices to numerous other financial institutions in Massachusetts that reported
a deduction for dividends received from a REIT during this period. Assessed
amounts ultimately paid, if any, would be deductible expenses for federal income
tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Bank intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (In Thousands)
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include unused lines of credit, unadvanced portions
of commercial and construction loans, and commitments to originate loans. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets.
43
The amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to its financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Financial instruments with off-balance sheet risks as of March 31, included
the following:
2002 2001
------- -------
Unused lines of credit $11,035 $11,012
Unadvanced portions of construction loans 4,574 4,427
Unadvanced portions of commercial loans 1,574 5,651
Commitments to originate commercial mortgage loans 13,674 14,189
Commitments to originate residential mortgage loans 11,468 2,900
Commitments to originate loans, unused lines of credit and unadvanced
portions of commercial and construction loans are agreements to lend to a
customer, provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower.
NOTE 10. STOCKHOLDERS' EQUITY (Dollars in Thousands, except per share amount)
The Company and the Bank may not declare or pay cash dividends on their
stock if the effect thereof would cause capital to be reduced below regulatory
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
In October 1991, the Bank adopted a Shareholder Rights Plan. The plan
entitles each shareholder to purchase the Company's stock at a discount price in
the event any person or group of persons exceeds predetermined ownership
limitations of the Company's outstanding common stock and, in certain
circumstances, engages in specific activities deemed adverse to the interests of
the Company's shareholders. This plan was due to expire in October 2001 but was
renewed by the Board of Directors during fiscal 2002 and is now scheduled to
expire in October 2011. .
Beginning in April 1999, the Board of Directors authorized a series of four
separate 5% stock repurchase programs under which the Company has acquired
365,294 shares of its stock at an average cost of $19.56 per share. The fourth
repurchase program was completed in March 2002.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulations that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. The minimum core (leverage) capital ratio
required for banks with the highest overall rating from bank regulatory agencies
is 3.00% and is 4.00%-5.00% for all others. The Bank must also have a minimum
total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital,
consisting of common stockholders' equity). As of March 31, 2002, the Bank met
all capital adequacy requirements to which it is subject.
44
The most recent notification from the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Bank must maintain minimum risk-weighted
capital, Tier 1 capital and tangible capital ratios as set forth in the table.
There are no conditions or events, since that notification, that management
believes would cause a change in the Bank's categorization. No deduction was
taken from capital for interest-rate risk. The Company's and the Bank's Tier
1/leverage, Tier 1 risk-based and total risk-based capital ratios together with
related regulatory minimum requirements are summarized below:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
As of March 31, 2002:
COMPANY (CONSOLIDATED)
Total capital $ 40,303 13.06% $ 24,694 =>8.00% N/A N/A
Tier 1 capital 37,011 11.99 12,347 =>4.00 N/A N/A
Tier 1 leverage capital 37,011 8.09 18,304 =>4.00 N/A N/A
BANK
Total capital 38,134 12.35 24,700 =>8.00% $ 30,875 =>10.00%
Tier 1 capital 34,842 11.28 12,350 =>4.00 18,525 =>6.00
Tier 1 leverage capital 34,842 7.61 18,304 =>4.00 22,880 =>5.00
As of March 31, 2001:
COMPANY (CONSOLIDATED)
Total capital 38,448 13.60 22,612 =>8.00% N/A N/A
Tier 1 capital 35,342 12.50 11,306 =>4.00 N/A N/A
Tier 1 leverage capital 35,342 8.06 17,539 =>4.00 N/A N/A
BANK
Total capital 36,362 12.83 22,665 =>8.00% 28,331 =>10.00%
Tier 1 capital 33,256 11.74 11,332 =>4.00 16,999 =>6.00
Tier 1 leverage capital 33,256 7.75 17,156 =>4.00 21,445 =>5.00
NOTE 11. EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data)
PENSION AND SAVINGS PLANS
As a participating employer in the Co-operative Banks Employees' Retirement
Association ("CBERA"), a multi-employer plan, the Bank has in effect a
noncontributory defined benefit plan ("Pension Plan") and a defined contribution
plan ("Savings Plan") covering substantially all eligible employees.
Benefits under the Pension Plan are determined at the rate of 1% and 1.5%,
respectively, of certain elements of final average pay times years of credited
service and are generally provided at age 65 based on years of service and the
average of the participants' three highest consecutive years of compensation
from the Bank. Employee contributions are made to a Savings Plan which qualifies
under section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank
matches 50% of an eligible deferral contribution on the first 5% of the deferral
amount subject to the maximum allowable under federal regulations. Pension
benefits and employer contributions to the Savings Plan become vested over six
years.
Expenses for the Pension Plan and the Savings Plan were $289, $269 and $237
for the years ended March 31, 2002, 2001 and 2000, respectively. Forfeitures are
used to reduce expenses of the plans.
45
EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal 1991, the Bank established an Employee Stock Ownership Plan
("ESOP") that is authorized to purchase shares of outstanding common stock of
the Company from time to time in the open market or in negotiated transactions.
The ESOP is a tax-qualified defined contribution plan established for the
exclusive benefit of the Bank's employees.
During fiscal 2002, the Company's Board of Directors authorized the ESOP to
acquire up to an additional 5% of outstanding shares of Company stock. Such
purchases are to be funded by loans from the Company. During fiscal 2002, 7,222
shares were purchased under such authorization at a purchase price of $199.
The ESOP is repaying its loans to the Bank and the Company with funds from
the Bank's contributions to the plan and earnings from the ESOP's assets.
Repayments of $129, $196 and $184 were made during fiscal 2002, 2001 and 2000,
respectively.
Prior to fiscal 2002, compensation expense was recognized as the shares
were allocated to ESOP participants based upon the cost of the shares to the
ESOP. Beginning in fiscal 2002, compensation expense was recognized as the
shares were allocated to participants based upon the fair value of the shares at
the time they were allocated. Consequently, changes in market value of the
Company's stock have an effect on the Company's results of operations but have
no effect on stockholders' equity. ESOP expense for fiscal 2002, 2001 and 2000
amounted to $305, $130 and $130, respectively.
STOCK OPTION PLAN
The Company has adopted two qualified Stock Option Plans for the benefit of
officers and other employees under which an aggregate of 281,500 shares had been
reserved for issuance. One of these plans terminated in 1997.
Stock option activity is as follows for the years indicated:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -------------
Balance March 31, 1999 28,000 $ 16.250
Granted 32,499 20.250
Exercised (3,000) 16.250
-------
Balance March 31, 2000 57,499 18.511
Granted 32,501 16.625
-------
Balance March 31, 2001 90,000 17.830
Forfeited (799) 16.625
Exercised (29,588) 16.617
-------
Balance March 31, 2002 59,613 18.448
=======
The exercise price of an option will not be less than the fair market value
of the common stock on the date of grant of the option. At March 31, 2002,
33,299 shares were reserved for issuance under the remaining plan.
All stock options are fully vested and exercisable at the time of grant.
The range of exercise prices and weighted average remaining contractual life of
outstanding stock options at March 31, 2002 are as follows:
EXERCISE NUMBER REMAINING
PRICE OUTSTANDING LIFE
----- ----------- ----
$16.625 29,638 8.7 years
20.250 29,975 7.7 years
------
59,613
======
46
The Company follows the intrinsic value method in accounting for stock
options and, accordingly, no compensation expense has been recognized in the
financial statements. Had the Company determined compensation expense based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and EPS would have been reduced to the pro forma amounts
indicated below. No options were granted during fiscal 2002 and forfeitures
during the year were insignificant. Consequently, no material difference in net
income occurred in fiscal 2002 as a result of the Company's use of the intrinsic
value method rather than the fair value method of accounting for stock-based
compensation.
2001 2000
---- ----
NET INCOME:
Income before cumulative effect of change in accounting principle, as reported $ 3,109 $ 3,567
Cumulative effect of change in accounting principle, as reported -- (234)
Net income after cumulative effect of change in accounting principle, as reported 3,109 3,333
Pro forma income before cumulative effect of change in accounting principle 2,934 3,308
Cumulative effect of change in accounting principle -- (234)
Pro forma net income after cumulative effect of change in accounting principle 2,934 3,074
EARNINGS PER COMMON SHARE:
Before cumulative effect of change in accounting principle, as reported 1.81 1.90
Before cumulative effect of change in accounting principle, pro forma 1.71 1.76
Before cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.89
Before cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.75
After cumulative effect of change in accounting principle, as reported 1.81 1.77
After cumulative effect of change in accounting principle, pro forma 1.71 1.63
After cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.77
After cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.63
The per share weighted average fair value of stock options granted during
2001 and 2000 was $5.39 and $7.98, respectively, on the date of grant. These
fair values were determined using the Black Scholes option pricing model with
the following weighted average assumptions:
2001 2000
---------- -----------
Expected dividend yield 2.00 % 2.00 %
Risk-free interest rate 5.20 6.00
Expected volatility 31.00 39.00
Expected life in years 6.00 6.00
47
OTHER POST-RETIREMENT BENEFITS
The Bank maintains a post-retirement medical insurance plan and life
insurance plan for certain individuals. The following tables summarize the
funded status and the actuarial benefit obligations of these plans for fiscal
2002 and 2001.
2002 2001
----------------------------------
LIFE MEDICAL LIFE MEDICAL
---- ------- ---- -------
Actuarial present value of benefits obligation:
Retirees $(220) $(614) $(222) $(413)
Fully eligible participants (12) (132) (44) (307)
Other plan participants -- -- -- --
----- ----- ----- -----
Total $(232) $(746) $(266) $(720)
===== ===== ===== =====
Change in projected benefit obligation:
Accumulated benefit obligations at prior
year-end $(266) $(720) $(233) $(680)
Service cost less expense component -- -- --
Interest cost (16) (51) (19) (51)
Actuarial gain (loss) 45 (12) (7) 2
Assumptions (5) (13) (8) (29)
Benefits paid 10 50 1 38
----- ----- ----- -----
Accumulated benefit obligations at
year-end $(232) $(746) $(266) $(720)
===== ===== ===== =====
Change in plan assets:
Fair value of plan assets at prior year-end $ -- $ -- $ -- $ --
Actual return on plan assets -- -- -- --
Employer contribution 10 50 1 38
Benefits paid end expenses (10) (50) (1) (38)
----- ----- ----- -----
Fair value of plan assets at current
year-end $ -- $ -- $ -- $ --
===== ===== ===== =====
Funded $(232) $(746) $(266) $(720)
Unrecognized net obligation 95 273 103 297
Unrecognized prior year service -- -- -- --
Unrecognized net (loss) gain (82) 102 (48) 80
----- ----- ----- -----
$(219) $(371) $(211) $(343)
===== ===== ===== =====
Reconciliation of (accrual) prepaid:
(Accrued) prepaid pension cost at beginning of year $(211) $(343) $(186) $(305)
Minus net periodic cost (18) (78) (26) (76)
Plus employee contributions 10 50 1 38
----- ----- ----- -----
(Accrued) prepaid cost at end of year $(219) $(371) $(211) $(343)
===== ===== ===== =====
Benefit obligation weighted average assumption as
of fiscal year-end:
Discount rate 7.00% 7.00% 7.25% 7.25%
Expected return on plan assets 7.00% 7.00% 7.25% 7.25%
Rate of compensation increase -- -- -- --
1 PERCENTAGE POINT INCREASE
-----------------------------------------
2002 2001
---- ----
Impact of 1% change in health care trend rates:
Effect on total service and interest cost components N/A $ (4) N/A $ (5)
Effect on the post retirement benefit obligations N/A 55 N/A 63
Components of net periodic benefit obligations:
Service cost $ -- $ -- $ -- $ --
Interest cost 16 51 19 51
Expected return on plan assets -- -- -- --
Amortization of prior service cost 9 25 9 25
Recognized actuarial (gain) loss (6) 2 (1) --
------- ------- ------- ------
Net periodic benefit cost for fiscal year
ending $ 19 $ 78 $ 27 $ 76
======= ======= ======= ======
Periodic benefit cost weighted average assumptions:
Discount rate 7.25% 7.25% 7.75% 7.25%
Expected return on plan assets 7.25% 7.25% 7.75% 7.25%
Rate of compensation increase -- -- -- --
48
For measurement purposes, a 6.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the fiscal year ended March
31, 2001. The rate was assumed to decrease to 5.5% for the fiscal year ending
March 31, 2002 and remain at that level thereafter.
NOTE 12. LEGAL PROCEEDINGS
The Bank 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 or any
subsidiary.
The Bank has been named as defendant in a civil suit filed March 28, 2002
in Middlesex Superior Court under the caption Yi v. Central Bank in which it is
alleged, inter alia, that the Bank committed an unfair or deceptive trade
practice by failing to pay surplus foreclosure proceeds to a junior lien holder
in 1994. Plaintiff seeks damages of $160,000 plus interest of approximately
$150,000 and has applied for a multiple damage award under Chapter 93A of the
Massachusetts General Laws which provides for up to treble damages if a
violation is found to be willful or knowing. The Bank believes that it has
meritorious defenses to all such claims and intends to vigorously defend against
them.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands)
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the intangible value inherent
in deposit relationships (i.e. core deposits) and banking premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair values and
have not been considered in any of the estimates. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair values of its financial instruments:
CASH AND DUE FROM BANKS
The carrying values reported in the balance sheet for cash and due from
banks approximate their fair value because of the short maturity of these
instruments.
SHORT-TERM INVESTMENTS
The carrying values reported in the balance sheet for short-term
investments approximate fair value because of the short maturity of these
investments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair values presented for investment and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS
The fair values of loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
ACCRUED INTEREST RECEIVABLE
The carrying value reported in the balance sheet for accrued interest
receivable approximates its fair value because of the short maturity of these
accounts.
STOCK IN FHLB OF BOSTON
The carrying amount reported in the balance sheet for FHLB stock
approximates its fair value. If redeemed, the Bank will receive an amount equal
to the par value of the stock.
49
THE CO-OPERATIVE CENTRAL BANK RESERVE FUND
The carrying amount reported in the balance sheet for the Co-operative
Central Bank Reserve Fund approximates its fair value.
DEPOSITS
The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair
values for term deposit certificates are estimated using a discounted cash flow
technique that applies interest rates currently being offered on certificates to
a schedule of aggregated monthly maturities on time deposits with similar
remaining maturities.
ADVANCES FROM FHLB OF BOSTON
Fair values of advances from FHLB of Boston are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated monthly maturities on FHLB
advances.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE AND ACCRUED INTEREST
PAYABLE
The carrying values reported in the balance sheet for advance payments by
borrowers for taxes and insurance and accrued interest payable approximate their
fair value because of the short maturity of these accounts.
OFF-BALANCE SHEET INSTRUMENTS
The Bank's commitments for unused lines of credit and unadvanced portions
of loans are at floating rates, which approximate current market rates, and,
therefore, no fair value adjustment has been made.
The estimated carrying amounts and fair values of the Bank's financial
instruments are as follows:
MARCH 31, 2002 MARCH 31, 2001
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
ASSETS
Cash and due from banks $ 5,109 $ 5,109 $ 5,351 $ 5,351
Short-term investments 2,455 2,455 35,718 35,718
Investment securities 73,884 73,884 49,388 49,388
Net loans 368,415 367,893 342,687 350,028
Accrued interest receivable 2,530 2,530 2,426 2,426
Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300 6,150 6,150
The Co-operative Central Bank Reserve Fund 1,576 1,576 1,576 1,576
LIABILITIES
Deposits $261,907 $262,810 $287,167 $288,297
Advances from Federal Home Loan Bank of Boston 164,000 183,826 121,000 119,965
Advance payments by borrowers for taxes and insurance 1,111 1,111 1,220 1,220
Accrued interest payable 618 618 608 608
50
NOTE 14. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands)
The following are the condensed financial statements for Central Bancorp,
Inc. (the "Parent Company") only:
MARCH 31,
-----------------
BALANCE SHEETS 2002 2001
- ----------------------------------------------------------------
ASSETS
Cash deposit in subsidiary bank $ 1,970 $ 2,153
Investment in subsidiary 36,785 36,129
ESOP loan 199 --
------- -------
Total assets $38,954 $38,282
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued taxes and other liabilities $ -- $ 70
Total stockholders' equity 38,954 38,212
------- -------
Total liabilities and stockholders' equity $38,954 $38,282
======= =======
YEARS ENDED MARCH 31,
-------------------------------
STATEMENTS OF INCOME 2002 2001 2000
- ---------------------------------------------------------------------------------------
Dividend from subsidiary $ 2,500 $ 4,000 $ 3,012
Non-interest expenses 466 266 331
------- ------- -------
Income before income taxes 2,034 3,734 2,681
Income tax benefit (154) (87) (109)
------- ------- -------
Income before cumulative effect of change in
accounting principle 2,188 3,821 2,790
Cumulative effect of change in accounting principle -- -- (234)
------- ------- -------
Income before equity in undistributed net income
of subsidiary 2,188 3,821 2,556
Equity in undistributed net income of subsidiary 672 (712) 777
------- ------- -------
Net income $ 2,860 $ 3,109 $ 3,333
======= ======= =======
YEARS ENDED MARCH 31,
-------------------------------
STATEMENTS OF CASH FLOWS 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,860 $ 3,109 $ 3,333
Adjustment to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiary (672) 712 (777)
Decrease (increase) in other assets -- 100 (100)
Increase (decrease) in accrued taxes and other liabilities (71) 70 (15)
Cumulative effect of change in accounting principle -- -- 234
------- ------- -------
Net cash provided by operating activities 2,117 3,991 2,675
------- ------- -------
Cash flows from investing activities:
ESOP loan (199) -- --
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 492 -- 22
Purchase of treasury stock (1,924) (2,187) (3,043)
Cash dividends paid (669) (697) (689)
------- ------- -------
Net cash used by financing activities (2,101) (2,884) (3,710)
------- ------- -------
Net increase (decrease) in cash in subsidiary bank (183) 1,107 (1,035)
Cash in subsidiary bank at beginning of year 2,153 1,046 2,081
------- ------- -------
Cash in subsidiary bank at end of year $ 1,970 $ 2,153 $ 1,046
======= ======= =======
51
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (Unaudited) (In Thousands, Except Per
Share Data)
The following tables summarize the operating results on a quarterly basis
for the years ended March 31, 2002 and 2001.
2002
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Interest and dividend income....................... $ 7,599 $ 7,180 $ 7,052 $ 7,442
Interest expense................................... 4,364 3,820 3,344 3,332
-----------------------------------------------------
Net interest and dividend income.............. 3,235 3,360 3,708 4,110
Non-interest income................................ 409 337 244 (302)
Non-interest expenses.............................. 2,811 2,806 2,467 2,380
-----------------------------------------------------
Income before income taxes.................... 833 891 1,485 1,428
Income tax......................................... 303 327 536 611
-----------------------------------------------------
Net income.................................... $ 530 $ 564 $ 949 $ 817
=====================================================
Earnings per common share-- basic.................. $ 0.32 $ 0.34 $ 0.57 $ 0.50
=====================================================
Earnings per common share-- diluted................ $ 0.32 $ 0.34 $ 0.57 $ 0.50
=====================================================
2001
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Interest and dividend income....................... $ 7,230 $ 7,759 $ 8,122 $ 7,805
Interest expense................................... 3,793 4,297 4,472 4,440
-----------------------------------------------------
Net interest and dividend income.............. 3,437 3,462 3,650 3,365
Non-interest income................................ 338 354 444 152
Non-interest expenses.............................. 2,576 2,440 2,685 2,629
-----------------------------------------------------
Income before income taxes.................... 1,199 1,376 1,409 888
Income tax......................................... 434 499 509 321
-----------------------------------------------------
Net income.................................... $ 765 $ 877 $ 900 $ 567
=====================================================
Earnings per common share-- basic.................. $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
Earnings per common share-- diluted................ $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
During the quarter ended March 31, 2002, the Bank recognized write-downs of
$457 for certain marketable equity securities which had experienced a decline in
fair value which was judged to be other than temporary.
52
Independent Auditors' Report
The Board of Directors and Stockholders
Central Bancorp, Inc.:
We have audited the consolidated balance sheets of Central Bancorp, Inc. and
subsidiary as of March 31, 2002 and 2001, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended March 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Bancorp,
Inc. and subsidiary as of March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
April 25, 2002
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections titled "Proposal I -- Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference
to the section titled "Executive Compensation and Other Benefits" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- --------------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I - Election of Directors
-- Security Ownership of Management" in the Proxy Statement.
(c) CHANGES IN CONTROL
Not applicable.
(d) EQUITY COMPENSATION PLANS
The Company has adopted the 1999 Stock Option and Incentive Plan
pursuant to which equity may be awarded to participants. This plan has
been approved by stockholders.
54
The following table sets forth certain information with respect to the
Company's Equity Compensation Plans.
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE ISSUED WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
UPON EXERCISE OF OUTSTANDING PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES
PLAN CATEGORY OPTIONS, WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
- ------------- ---------------------------- ---------------------------- ------------------------
Equity compensation plans 59,613 $18.448 33,299
approved by security holders
Equity compensation plans not 0 0 0
approved by security holders
Total (1)
- ----------
(1) The 1999 Stock Option and Incentive Plan provides for a proportionate
adjustment to the number of shares reserved thereunder in the event of a
stock split, stock dividend reclassification or similar event.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section titled "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) FINANCIAL STATEMENTS
--------------------
For the Financial Statements filed as part of this Annual Report on
Form 10-K, reference is made to "Item 8 -- Financial Statements and
Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
All financial statement schedules have been omitted as not applicable
or not required or because they are included in the financial
statements appearing at Item 8.
(3) EXHIBITS REQUIRED BY PARAGRAPH (C) OF ITEM 14
---------------------------------------------
See "Item 14(c) -- Exhibits"
(b) REPORTS ON FORM 8-K -- The Registrant did not file any Current Reports on
-------------------
Form 8-K during the fourth quarter of the fiscal year ended March 31, 2002.
(c) EXHIBITS
--------
The following exhibits are filed as exhibits to this report.
55
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* Articles of Organization of Central Bancorp, Inc.
3.2* Bylaws of Central Bancorp, Inc.
4.1** Shareholder Rights Agreement, dated as of October 11, 2001, by and
between the Central Bancorp, Inc. and EquiServe Trust Company, as
Rights Agent
10.1* Employment Agreement between the Bank and John D. Doherty, dated
October 24, 1986 +
10.2* First Amendment to Employment Agreement between the Bank and John D.
Doherty, dated March 31, 1992 +
10.3* Second Amendment to Employment Agreement between the Bank and John D.
Doherty, dated June 8, 1995 +
10.4* Third Amendment to the Employment Agreement between the Bank and John
D. Doherty, dated January 8, 1999 +
10.5* Termination Agreement, dated March 31, 1992, by and between the Bank
and Joseph R. Doherty +
10.6* Consulting Agreement, dated March 31, 1992, by and between the Bank
and Joseph R. Doherty +
10.7* Amendment to Consulting Agreement between the Bank and Joseph R.
Doherty, dated August 11, 1994 +
10.8*** Severance Agreement between the Bank and William P. Morrissey, dated
December 14, 1994 +
10.9*** Severance Agreement between the Bank and David W. Kearn, dated
December 14, 1994 +
10.10*** Severance Agreement between the Bank and Paul S. Feeley, dated May
14, 1998 +
10.11*** Amendments to Severance Agreements between the Bank and Messrs.
Feeley, Kearn and Morrissey, dated January 8, 1999. +
10.12**** 1999 Stock Option and Incentive Plan +
10.13***** Deferred Compensation Plan for Non-Employee Directors +
10.14 Management Incentive Plan +
10.15 Severance Agreement between the Bank and Michael K. Devlin, dated
February 25, 2002. +
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
- ----------
+ Management contract or compensatory plan required to be filed pursuant
to Item 14(c).
* Incorporated herein by reference to the Form 10-K for the fiscal year
ended March 31, 1999, filed with the SEC on June 28, 1999.
** Incorporated by reference to the Form 8-A filed with the SEC on
October 12, 2001.
*** Incorporated herein by reference to the Registration Statement on Form
S-8 (File No. 333-71165) filed on January 26, 1999.
**** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-87005) filed on September 13, 1999.
***** Incorporated by reference to the Registration Statement on Form S-8
(File No. 333-49264) filed on November 3, 2000.
56
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CENTRAL BANCORP, INC.
Date: June 24, 2002 By: /s/ John D. Doherty
-----------------------------------
John D. Doherty
President, Chief Executive Officer
and Duly Authorized Representative
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ John D. Doherty Date: June 24, 2002
-------------------------------------------------
John D. Doherty
President, Chief Executive Officer
and Director
By: /s/ Michael K. Devlin Date: June 24, 2002
-------------------------------------------------
Michael K. Devlin
Senior Vice President - Treasurer
and Chief Financial and
Accounting Officer
By: /s/ Joseph R. Doherty Date: June 24, 2002
-------------------------------------------------
Joseph R. Doherty
Chairman of the Board and Director
By: /s/ Terence D. Kenney Date: June 24, 2002
-------------------------------------------------
Terence D. Kenney
Director
By: Date:
-------------------------------------------------
John G. Quinn
Director
By: . Date:
-------------------------------------------------
John F. Gilgun, Jr.
Director
By: Date:
-------------------------------------------------
Marat E. Santini
Director
By: /s/ Nancy D. Neri Date: June 24, 2002
-------------------------------------------------
Nancy D. Neri
Director
By: /s/ Gregory W. Boulos Date: June 24, 2002
-------------------------------------------------
Gregory W. Boulos
Director