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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-25251
CENTRAL BANCORP, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3447594
- -------------------------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 HIGHLAND AVENUE, SOMERVILLE, MASSACHUSETTS 02144
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 628-4000
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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
---------------------------------------
(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 $21.6 million based on the closing sales price of
the registrant's common stock as reported on the Nasdaq National MarketSM on
June 8, 2001 ($19.50 per share). Solely for purposes of this calculation,
directors, executive officers and greater than 5% stockholders are treated as
affiliates.
As of June 8, 2001, there were issued and outstanding 1,702,164 shares of
the registrant's common stock, par value $1.00 per share (of which 594,620
shares were deemed held by affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Proxy Statement for the 2001 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
Item 1. Business........................................................... 3
Item 2. Properties.........................................................25
Item 3. Legal Proceedings..................................................25
Item 4. Submission of Matters to a Vote of Security Holders................26
PART II
Item 5. Market the Registrant's Common Equity and Related
Stockholder Matters...........................................26
Item 6. Selected Financial Data............................................27
Item 7. Management's Discussion Analysis of Financial Condition
and Results of Operations.....................................28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........36
Item 8. Financial Statements and Supplementary Data........................37
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure......................................63
PART III
Item 10. Directors and Principal Officers of the Registrant.................63
Item 11. Executive Compensation.............................................63
Item 12. Security Ownership of Certain Beneficial Owners and Management.....63
Item 13. Certain Relationships and Related Transactions.....................63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...64
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") and qualifies under Section
38B of Chapter 63 of the Massachusetts General Laws as a Massachusetts security
corporation. The Company has no significant assets other than the Common Stock
of the Bank and various other liquid assets in which it invests in the ordinary
course of business. For that reason, substantially all of the discussion in this
Annual Report on Form 10-K relates to the operations of the Bank and its
subsidiaries.
The executive offices of the Company are located at 399 Highland Avenue,
Somerville, Massachusetts 02144. The telephone number is (617) 628-4000.
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 acquire 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 a
lesser extent, to make loans on commercial real estate in its market area. The
Bank also makes a limited amount of consumer loans including home improvement
and secured and unsecured personal loans. In recent years, the Bank has engaged
in increased commercial lending and has used excess funds to purchase investment
and mortgage-backed securities. The Bank's operations are conducted through
eight full-service office facilities located in Somerville, Arlington,
Burlington, Chestnut Hill, Malden, Melrose and Woburn, Massachusetts. 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 Bank's main office is located at 399 Highland Avenue, Somerville,
Massachusetts 02144 and its 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 areas for deposits. The majority of the
properties securing the Bank's loans are located in Suffolk, Norfolk and
Middlesex Counties, including the City of Boston. The Bank's market area
consists of established suburban areas and includes portions of the Route 128
high-technology corridor.
The Bank faces strong competition from commercial banks, mortgage banking
companies, diversified financial services companies and other thrift
institutions. See "Business -- Competition." Although legislation and
regulations have expanded the activities in which the Bank may engage, the
Bank's ability to remain competitive in its industry will depend upon how
successfully it can respond to the rapidly evolving competitive, regulatory,
technological and demographic developments affecting its operations.
Weakness in the New England real estate market caused many financial
institutions in the region to experience significant losses in the early 1990s
due to increases in problem real estate loans, primarily loans on commercial
real estate. Such deterioration was due to a severe downturn in the New England
economy which, generally beginning in fiscal 1990 and continuing through fiscal
1993, severely affected the Bank's real estate market. The weakness in the
Bank's real estate market stabilized during fiscal 1994, and since that time the
Bank's asset quality has improved with the recovery of the local economy. Any
reversal of the apparent improvement of the economy, however, could result in
the Bank experiencing increases in problem assets which would likely negatively
affect the Bank's results of operations. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio in the future, will not
request that the Bank further increase its allowance for loan losses, thereby
negatively impacting the Bank's financial condition and earnings. The Security
Committee of the Board of Directors of the Bank reviews the status of problem
assets on a monthly basis.
4
AVERAGE BALANCE SHEET
The following table shows the average balances of the Company's assets,
liabilities and stockholders' equity for the periods indicated. All average
balances disclosed herein are based on average daily balances.
YEARS ENDED MARCH 31,
----------------------------------
2001 2000 1999
------ ------ ------
(IN THOUSANDS)
Assets:
Cash and due from banks ............................... $ 5,241 $ 5,341 $ 4,861
Short-term investments ................................ 7,457 8,197 13,128
Investment securities ................................. 40,004 32,632 23,375
Mortgage-backed securities ............................ 21,418 25,035 37,676
Loans ................................................. 341,732 300,089 287,513
Less allowance for loan losses ..................... (3,042) (2,946) (2,912)
--------- --------- ---------
Net loans ....................................... 338,690 297,143 284,601
The Co-operative Central Bank Reserve Fund ............ 1,576 1,576 1,576
Real estate acquired by foreclosure, net .............. -- -- --
Office properties and equipment, net .................. 2,120 2,385 2,885
Other assets .......................................... 3,640 3,420 4,132
Goodwill, net ......................................... 2,675 2,963 3,240
--------- --------- ---------
Total assets ...................................... $ 422,821 $ 378,692 $ 375,474
========= ========= =========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits ............................................ $ 270,135 $ 257,536 $ 275,135
Advances from FHLB of Boston ........................ 111,980 80,907 59,901
Advance payments by borrowers for taxes and insurance 950 889 1,329
Other liabilities ................................... 1,433 1,769 1,424
--------- --------- ---------
Total liabilities ................................. 384,498 341,101 337,789
--------- --------- ---------
Stockholders' equity:
Common stock ........................................ 1,967 1,967 1,966
Additional paid-in capital .......................... 11,171 11,171 11,164
Retained income ....................................... 30,320 26,454 24,825
Treasury stock ........................................ (4,229) (1,268) --
Accumulated other comprehensive income (loss) ....... (533) (176) 417
Unearned compensation - ESOP ........................ (373) (557) (687)
--------- --------- ---------
Total stockholders' equity ........................ 38,323 37,591 37,685
--------- --------- ---------
Total liabilities and stockholders' equity ............ $ 422,821 $ 378,692 $ 375,474
========= ========= =========
5
LENDING ACTIVITIES
The Bank offers residential mortgage and home equity loans, commercial real
estate loans, construction loans, commerce and industry loans, personal, home
improvement, and various other types of consumer loans. Commerce and industry
loans represent loans to commercial enterprises which are either unsecured or
are secured by property other than real estate. For the fiscal year ended March
31, 2001, the Bank originated loans totaling $82.6 million, of which $31.5
million, or 38.1%, were fixed-rate loans and $51.1 million, or 61.9%, were
adjustable-rate loans. Of the total loans originated during fiscal 2001, $30.8
million, or 37.3%, were residential mortgage loans and $45.3 million, or 54.8%,
were commercial mortgage loans. At March 31, 2001, the Bank's residential
mortgage loans providing for periodic interest rate adjustments totaled $170.7
million, or 50.4%, of the total mortgage loan portfolio. No loans were sold
during fiscal 2001, 2000 and 1999 in the secondary market. Servicing of
fixed-rate loans sold in the secondary market is retained by the Bank. 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 8.1%, to $342.7 million at March 31,
2001 from $317.0 million at March 31, 2000. The increase was due to a slowing of
pay-offs of residential mortgages as interest rates increased, as well as a
decision by management to increase originations of commercial real estate loans
and hybrid adjustable rate residential mortgages as part of the Bank's asset and
liability management strategies.
LOAN PORTFOLIO COMPOSITION. The following table shows 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,
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2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ------------------ ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential...............$246,503 71.3% $243,563 76.1% $ 212,638 75.8% $ 207,860 73.8% $176,317 75.1%
Commercial................ 74,613 21.6 54,228 17.0 48,756 17.4 52,491 18.6 41,822 17.8
Construction.............. 9,500 2.7 9,765 3.0 5,269 1.9 8,256 2.9 3,095 1.3
Second mortgage and
home equity ........... 8,282 2.4 7,403 2.3 7,462 2.7 8,369 3.0 8,397 3.6
FHA and VA................ -- 0.0 7 0.0 21 0.0 49 0.0 85 0.0
-------- ----- -------- ----- --------- ----- --------- ----- --------- -----
Total mortgage loans.... 338,898 98.0 314,966 98.4 274,146 97.8 277,025 98.3 229,716 97.8
-------- ----- -------- ----- --------- ----- --------- ----- --------- -----
Other loans:
Commerce and Industry(1).. 5,185 1.5 3,349 1.1 4,391 1.6 2,530 0.9 2,431 1.0
Education................. -- 0.0 -- 0.0 -- 0.0 31 0.0 28 0.0
Secured by deposits....... 1,137 0.3 1,023 0.3 1,225 0.4 1,357 0.5 1,063 0.5
Consumer.................. 36 0.0 38 0.0 40 0.0 48 0.0 579 0.2
Unsecured................. 537 0.2 637 0.2 544 0.2 733 0.3 1,118 0.5
-------- ----- -------- ----- --------- ----- --------- ----- --------- -----
Total other loans....... 6,895 2.0 5,047 1.6 6,200 2.2 4,699 1.7 5,219 2.2
-------- ----- -------- ----- --------- ----- --------- ----- --------- -----
Total loans............. 345,793 100.0% 320,013 100.0% 280,346 100.0% 281,724 100.0% 234,935 100.0%
===== ===== ===== ===== =====
Less:
Allowance for possible
loan losses............ 3,106 2,993 2,913 2,886 2,900
-------- -------- --------- --------- ---------
Loans, net................$342,687 $317,020 $ 277,433 $ 278,838 $ 232,035
======== ======== ========= ========= =========
<FN>
- -----------
(1) Represents loans to commercial enterprises which are either unsecured
or secured by property other than real estate.
</FN>
6
LOAN PORTFOLIO SENSITIVITY. The following table sets forth certain
information as of March 31, 2001 regarding the dollar amount of loans maturing
in the Company'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. The table below does not include any estimate of prepayments, which
significantly shorten the average life of all mortgage loans and may cause the
Company's actual repayment experience to differ from that shown below.
DUE AFTER
DUE WITHIN ONE THROUGH DUE AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ----------- ----------- -----
(IN THOUSANDS)
Mortgage loans:
Residential...................... $ 34,275 $ 176,094 $ 36,134 $ 246,503
Commercial....................... 10,393 24,535 39,685 74,613
Construction..................... 9,047 53 400 9,500
Second mortgage and home
equity........................ 8,282 -- -- 8,282
Other loans......................... 2,523 3,212 1,160 6,895
---------- ---------- ---------- ----------
Total.......................... $ 64,520 $ 203,894 $ 77,379 $ 345,793
========== ========== ========== ==========
Of loans maturing more than one year after March 31, 2001, $94.6 million,
or 34.1%, have fixed rates and $182.9 million, or 65.9%, have floating or
variable rates.
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Company the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans
and, conversely, decreases when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
RESIDENTIAL LENDING. The Bank's residential mortgage loan programs
currently are focused on the origination of adjustable-rate mortgages and
fixed-rate mortgages. At March 31, 2001, adjustable-rate residential mortgage
loans totaled $170.7 million, or 49.4%, of the total loan portfolio. Fixed-rate
residential mortgages totaled $75.8 million, or 21.9%, of the total 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 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 set is a minimum of 2.50 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 90% of the property value. The
Bank generally requires private mortgage insurance for loans in excess of 80% of
property 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. These loans are
typically secured by income-producing properties such as
7
apartment buildings, office buildings, industrial buildings and various retail
properties. As of March 31, 2001, commercial real estate loans totaled $74.6
million and constituted 21.6% of the total loan portfolio.
Commercial real estate loans have been made for up to 80% of the appraised
value of the property and have generally been made for amounts up to $5.0
million. 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 $9.5 million, or 2.7%, of the Bank's
loan portfolio at March 31, 2001. 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 completed value of the property, based on independent appraisals.
The Bank analyzes the construction budget and reviews the developer's past
projects in addition to conducting responsible commercial real estate
underwriting practices. Funds are disbursed based on a schedule of completed
work presented to the Bank and confirmed by physical inspection of the property
by a designated Bank officer or construction consultant and, in general, after
receipt of title updates.
The Bank determines aggregate loan limitations for individual borrowers
based upon market conditions and the financial capacity of that borrower or
guarantor. During the past five years, such aggregate limits have not exceeded
$6.0 million per borrower.
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. The borrower must be approved
for permanent financing by the Bank prior to a construction loan being granted.
Such construction loans are normally made for a term of not more than one year
and based on a completed value of not more than 80%, as determined by an
independent certified or licensed appraiser.
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 90% 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 $8.3 million, or 2.4%, of the Bank's loan portfolio at March 31, 2001.
COMMERCE AND INDUSTRY, CONSUMER AND OTHER LOANS. The Bank's commerce and
industry, consumer and other loans totaled $6.9 million, or 2.0%, of the total
loan portfolio on March 31, 2001. The Bank entered the commerce and industry
lending business in fiscal 1995 with its acquisition of Metro Bancorp, Inc. The
commerce and industry loan portfolio consists of time, demand and line-of-credit
loans to a variety of local small businesses.
RISKS OF COMMERCIAL REAL ESTATE, CONSTRUCTION, COMMERCE AND INDUSTRY, AND
CONSUMER LENDING. Commercial real estate, construction, commerce and industry
and consumer lending entail significant additional risks compared to residential
mortgage lending. In addition, the payment experience on 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. Commerce and industry
loans are 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. Consumer loans
and particularly unsecured personal loans may involve additional risks, and it
may be expensive and time consuming to recover the
8
money lent in the event of a default. The Bank has attempted to limit the risk
of loss on its commercial real estate, construction and consumer loans, and has
established provisions for loan losses. For more information see " --
Non-Performing Assets" and " -- Impaired Loans." Any reversal of the apparent
stabilization in the New England real estate market and economy would likely
negatively affect the Bank's commercial real estate, construction and consumer
loan portfolios, which would thereby negatively affect the Bank's results of
operations.
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. Most real estate loans are attributable to walk-in customers, existing
customers, real estate brokers, third party originators and builders. 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 of the Bank. Independent certified or 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 90
days, the Bank will generally proceed to foreclose and liquidate the property to
satisfy the debt. Real estate acquired through foreclosure is classified as
"real estate acquired by foreclosure" until it is sold or otherwise disposed of
by the Bank.
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.
At March 31, 2001, the Bank had no non-performing loans.
At March 31, 2001, the Bank did not have any real estate acquired by
foreclosure.
IMPAIRED LOANS. At March 31, 2001, there were no impaired loans.
9
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated.
AT MARCH 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Loans accounted for on a
non-accrual basis, non-performing loans.... $ -- $ 235 $ 419 $ 357 $2,145
Restructured loans........................... -- -- -- -- --
Real estate acquired by foreclosure.......... -- -- -- -- 13
------- ------- -------- -------- ------
Non-performing assets..................... $ -- $ 235 $ 419 $ 357 $2,158
======= ======= ======== ======== ======
Impaired loans, accruing..................... -- -- -- 1,306 664
Non-performing loans to total loans.......... 0.00% 0.07% 0.15% 0.13% 0.91%
Non-performing assets to total assets........ 0.00% 0.06% 0.12% 0.09% 0.67%
At March 31, 2001, there were no loans not reflected in the above table
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.
During the year ended March 31, 2001, the Company would not have recognized
any interest income on non-accrual loans since there were no non-accrual loans.
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 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.
10
The following table presents activity in the allowance for loan losses
during the years indicated.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of year................. $ 2,993 $ 2,913 $ 2,886 $ 2,900 $ 3,032
---------- --------- ---------- ---------- ----------
Charge-offs:
Residential mortgage....................... -- -- (88) -- (160)
Commercial mortgage........................ -- -- -- (83) (57)
Other loans................................ (4) (9) (11) (14) (7)
----------- --------- ---------- ---------- ----------
Total charge-offs........................ (4) (9) (99) (97) (224)
----------- --------- ---------- ---------- ----------
Recoveries:
Residential mortgage....................... 60 9 78 16 43
Commercial mortgage........................ 48 36 36 46 --
Other loans................................ 9 44 12 21 49
---------- --------- ---------- ---------- ----------
Total recoveries......................... 117 89 126 83 92
---------- --------- ---------- ---------- ----------
Net recoveries (charge-offs)................. 113 80 27 (14) (132)
Provision.................................... -- -- -- -- --
---------- --------- ---------- ---------- ----------
Balance at end of year....................... $ 3,106 $ 2,993 $ 2,913 $ 2,886 $ 2,900
========== ========= ========== ========== ==========
Average loans outstanding during the year.... $ 341,732 $ 300,089 $ 287,513 $ 250,329 $ 231,006
Ratio of net charge-offs to average loans.... na na na 0.01% 0.06%
Total loans outstanding at end of year....... $ 345,793 $ 320,013 $ 280,346 $ 281,724 $ 234,935
Ratio of allowance for loan
losses to loans at end of year............. 0.90% 0.94% 1.04% 1.02% 1.23%
11
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,
--------------------------------------------------------------------------------
2001 2000 1999
----------------------- ---------------------- ----------------------
% 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...... $ 1,637 71.3% $ 1,333 76.1% $ 1,120 75.8%
Commercial mortgage....... 1,058 21.6 1,202 17.0 1,556 17.4
Construction.............. 169 2.7 198 3.0 92 1.9
Second mortgage and
home equity............. 163 2.4 178 2.3 58 2.7
-------- ---- -------- ---- ------- ----
Total mortgage loans.... 3,027 98.0 2,911 98.4 2,826 97.8
Other loans................. 79 2.0 82 1.6 87 2.2
-------- ---- -------- ---- ------- -----
Total................... $ 3,106 100.0% $ 2,993 100.0% $ 2,913 100.0%
======== ===== ======== ===== ======= =====
AT MARCH 31,
---------------------------------------------------
1998 1997
----------------------- ----------------------
% OF % OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential mortgage...... $ 1,104 73.8% $ 964 75.1%
Commercial mortgage....... 1,578 18.6 1,808 17.8
Construction.............. 105 2.9 36 1.3
Second mortgage and
home equity............. 48 3.0 44 3.6
-------- ---- -------- ----
Total mortgage loans.... 2,835 98.3 2,852 97.8
Other loans................. 51 1.7 48 2.2
-------- ---- -------- ----
Total................... $ 2,886 100.0% $ 2,900 100.0%
======== ===== ======== =====
INVESTMENT ACTIVITIES
The Bank's management believes it prudent to maintain an investment
portfolio that provides not only a source of income but also a source of
liquidity to meet lending demands and fluctuations in deposit flows. As a
Massachusetts-chartered bank, the Bank is authorized to invest in various
obligations of federal and state governmental agencies, corporate bonds and
other obligations and, within certain limits, common and preferred stocks. A
substantial portion of the Bank's investment securities portfolio consists of
mortgage-backed securities which represent interests in pools of residential
mortgages. Such securities include securities issued and guaranteed by the
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), and the Government National Mortgage Association ("GNMA")
as well as collateralized mortgage obligations ("CMOs") issued primarily by FNMA
and FHLMC.
Investments are classified as 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 continue to be carried at amortized cost.
12
The following table sets forth the composition of the Bank's investment
portfolio (at amortized cost), as well as the percentage such investments
comprise of the Bank's total assets, at the dates indicated.
AT MARCH 31,
-------------------------------------------------------
2001 2000 1999
----- ------ -----
(DOLLARS IN THOUSANDS)
Short-term investments:
Interest-bearing deposits in other banks................ $ 177 $ 177 $ 177
Federal funds sold overnight............................ 34,352 14,625 16,762
---------- ---------- ----------
Total short-term investments........................ 34,529 14,802 16,939
========== ========== ==========
Percentage of total assets.......................... 7.7% 3.6% 4.7%
========== ========== ==========
Investment securities:
U. S. Government and federal
agency obligations.................................... $ 18,970 $ 23,962 $ 15,500
Other bonds and obligations............................. 4,984 2,030 --
Common and preferred stocks............................. 7,748 6,847 5,682
Mortgage-backed securities.............................. 19,623 23,862 30,190
---------- ---------- ----------
51,325 56,701 51,372
Unrealized (loss) gain on securities
available for sale.................................... (748) (1,258) 570
---------- ---------- ----------
Total investment securities......................... $ 50,577 $ 55,443 $ 51,942
========== ========== ==========
Percentage of total assets.......................... 11.3% 13.5% 18.9%
========== ========== ==========
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities with
stated maturities at March 31, 2001.
MORE THAN
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS TEN YEARS TOTAL INVESTMENT PORTFOLIO
---------------- ----------------- ------------------ ---------------- -------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
------ ------- ------- ------- ------- ------- ------ ------ -------- ------ -------
(DOLLARS IN THOUSANDS)
Securities available for sale:
U.S. government and agency
securities................ $ -- -- % $10,035 6.36% $ 9,016 6.57% $ -- -- % $ 19,051 $19,051 6.46%
Other bonds.................. -- -- 4,724 7.53 521 7.70 -- -- 5,245 5,245 7.54
Mortgage-backed securities... -- -- 702 6.71 5,111 6.94 13,501 7.21 19,314 19,314 7.12
------ ------- ------- -------- -------- -------
Total..................... $ -- $15,461 $14,648 $ 13,501 $ 43,610 $43,610
====== ======= ======= ======== ======== =======
13
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 2001, management sought to increase the deposit base in order
to fund the Bank's increased lending activity by paying more competitive rates.
As a result, total deposits increased $28.8 million, primarily in term deposit
accounts. The cost of deposits increased 40 basis points.
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,
-------------------------------------------------------------------------------------
2001 2000 1999
------------------------- -------------------------- ---------------------------
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.............................. $ 20,382 7.5% 0.00% $ 18,742 7.3% 0.00% $ 15,219 5.5% 0.00%
NOW accounts........................ 32,312 12.0 1.29 30,885 12.0 1.19 26,917 9.8 1.28
Regular, club and 90-day
notice accounts................... 62,018 22.9 2.03 61,424 23.8 2.05 61,572 22.4 2.34
Money market deposit accounts....... 17,200 6.4 2.22 21,417 8.3 2.22 22,375 8.1 2.64
Term deposit certificates:
Six-month money market............ 12,714 4.7 5.25 18,531 7.2 4.25 14,274 5.2 4.80
Other............................. 125,509 46.5 5.86 106,537 41.4 5.31 134,778 49.0 5.72
--------- ---- --------- ----- --------- -----
Total term deposit certificates. 138,223 51.2 5.81 125,068 48.6 5.16 149,052 54.2 5.63
--------- ---- --------- ----- --------- -----
Total deposits.................. $ 270,135 100.0% 3.73% $ 257,536 100.0% 3.32 $ 275,135 100.0% 3.91%
========= ===== ========= ===== ========= =====
14
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, 2001.
TIME DEPOSITS
-------------
(IN THOUSANDS)
Maturity Period of Deposits:
Three months or less................................. $ 5,825
Three through six months............................. 9,303
Six through twelve months............................ 6,534
Over twelve months................................... 12,982
---------
Total.......................................... $ 34,644
=========
BORROWINGS. From time to time the Bank borrows funds from the FHLB of
Boston on a short-term basis to compensate for reductions in deposits or deposit
inflows at less than projected levels. Such funds may also be used on a longer
term basis to support expanded lending or investment activities to increase
yields or improve asset-liability management. All advances from the FHLB of
Boston are secured by a blanket lien on residential first mortgage loans,
investment securities and all stock in the FHLB of Boston. At March 31, 2001,
the Bank had advances outstanding from the FHLB of Boston of $121 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
YEAR ENDED MARCH 31,
------------------------------------------------
2001 2000 1999
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period......................... $ 121,000 $ 111,000 $ 57,000
Weighted average rate paid on................................ 5.84% 5.66% 5.34%
Maximum amount of borrowings outstanding
at any month end........................................... $ 121,000 $ 113,000 $ 64,000
Approximate average amounts outstanding...................... $ 111,980 $ 80,907 $ 59,901
Approximate weighted average rate paid on.................... 6.18% 5.56% 5.47%
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 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.
15
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.
ACQUISITIONS. 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.
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
Community Reinvestment Act ("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.
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 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 "-- Capital Requirements."
16
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 "-- 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 various regulatory
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 servicing rights, purchased credit card
relationships and qualifying supervisory goodwill) minus identified losses and
minus investments in certain subsidiaries.
In addition to the leverage ratio (the ratio of Tier I 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 savings 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-weighted system, all of a bank's balance sheet assets and the credit
17
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 risk weight assigned to that category. The sum of these weighted
values equals the bank's risk-weighted assets.
At March 31, 2001, the Bank's ratio of Tier 1 capital to total assets was
7.75%, its ratio of Tier 1 capital to risk-weighted assets was 11.76% and its
ratio of total risk-based capital to risk-weighted assets was 12.86%.
The Federal banking regulators, including the Federal Reserve Board and the
FDIC, have proposed to revise their risk-based capital requirements to ensure
that such requirements provide for explicit consideration of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the rule or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's interest
rate risk exposure, as measured under either measurement system, exceeds 1% of
the bank's total assets, the bank is required under the rule to hold additional
capital equal to the dollar amount of the excess. Management of the Bank has not
determined what effect, if any, the FDIC's proposed interest rate risk component
would have on the Bank's capital if adopted as proposed. The FDIC has adopted a
regulation that provides that the FDIC may take into account whether a bank has
significant risks from concentrations of credit or nontraditional activities in
determining the adequacy of its capital. The Bank has not been advised that it
will be required to maintain any additional capital under this regulation.
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. See "Federal and State Taxation." 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 percent of its insured deposits.
Under the FDIA, 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 SAIF.
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, 2001, the Bank is considered well capitalized. In
addition, FDIC-insured institutions are required to pay
18
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 will be assessed at the same
rate for FICO payments.
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.
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%
<FN>
- -----------
* 3.0% if institution has a composite 1 CAMELS rating.
</FN>
19
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.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. In 1995, these agencies,
including the FDIC, released interagency guidelines establishing such standards
and adopted rules with respect to safety and soundness compliance plans. The
guidelines require depository institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that depository institutions should maintain safeguards to prevent the payment
of compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the agency determines that
a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to the agency within 30 days of receipt of a request
for such a plan. Failure to submit or implement a compliance plan may subject
the institution to regulatory sanctions. Management believes that the Bank has
met substantially all the standards adopted in the interagency guidelines.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies established standards relating to asset quality and earnings. Under the
guidelines a depository institution should maintain systems, commensurate with
its size and the nature and scope of its operations, to identify problem assets
and prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards
will not have a material effect on the operations of the Bank.
UNIFORM LENDING STANDARDS. As required by FDICIA, the federal banking
agencies have adopted regulations that require banks to adopt and maintain
written policies establishing appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Real Estate
Lending Guidelines") that have been adopted by the banking agencies. The Real
Estate Lending Guidelines, among other things, call upon depository institutions
to establish internal loan-to-value limits for real estate loans that should not
exceed supervisory loan-to-value limits for the various types of real estate
loans. The Real Estate Lending Guidelines state, however, that it may be
appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits. The Bank
does not believe that the Real Estate Lending Guidelines will materially affect
its lending activities.
RESERVE REQUIREMENTS. Under Federal Reserve Board regulations, the Bank
currently must maintain average daily reserves equal to 3% of net transaction
accounts up to $42.8 million plus 10% on the remainder. This percentage is
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. At March 31,
2001, the Bank met applicable Federal Reserve Board reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System which consists of 12 regional Federal Home Loan Banks governed
and regulated by the Federal Housing Finance Board
20
("FHFB"). As a member, the Bank is required to purchase and hold stock in the
FHLB of Boston in an amount equal to the greater of 1% of its aggregate unpaid
home loan balances at the beginning of the year or an amount equal to 5% of FHLB
advances outstanding, whichever is greater. As of March 31, 2001, the Bank held
stock in the FHLB of Boston in the amount $6.150 million and was in compliance
with the above requirement.
The FHLB of Boston serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLB System. It makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLB System and the Board of Directors of the FHLB of Boston.
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. 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 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.
21
FINANCIAL MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Under the G-L-B Act any bank holding
company whose depository institution subsidiaries have satisfactory Community
Reinvestment Act ("CRA") records may elect to become a financial holding company
if it certifies to the Federal Reserve Board that all of its depository
institution subsidiaries are well-capitalized and well-managed. Financial
holding companies may engage in any activity that the Federal Reserve Board,
after consultation with the Secretary of the Treasury, determines to be
financial in nature or incidental to a financial activity. Financial holding
companies may also engage in activities that are complementary to financial
activities and do not pose a substantial risk to the safety and soundness of
their depository institution subsidiaries or the financial system generally. The
G-L-B Act specifies that activities that are financial in nature include lending
and investing activities, insurance and annuity underwriting and brokerage,
financial, investment and economic advice, selling interests in pooled
investment vehicles, securities underwriting, engaging in activities currently
permitted to bank holding companies (including activities in which bank holding
companies may currently engage outside the United States) and merchant banking
through a securities or insurance underwriting affiliate. The Federal Reserve
Board, in consultation with the Department of Treasury, may approve additional
financial activities.
The G-L-B Act permits well capitalized and well managed national banks with
satisfactory CRA records to invest in financial subsidiaries that engage in
activities that are financial in nature (or incidental thereto) on an agency
basis. National banks that are among the 50 largest insured banks and have at
least one issue of investment grade debt outstanding may invest in financial
subsidiaries that engage in activities as principal other than insurance
underwriting real estate development or merchant banking. All national banks are
given the authority to underwrite municipal revenue bonds. The aggregate total
consolidated assets of a national bank's financial subsidiaries may not exceed
the lesser of 45% of the bank's total consolidated assets or $50 billion. A
national bank would be required to deduct its investments in financial
subsidiaries from its regulatory capital. National banks must also adopt
procedures for protecting the bank against risks associated with the financial
subsidiary and to preserve the separate corporate identity of the financial
subsidiary. Financial subsidiaries of state and national banks (which include
any subsidiary engaged in an activity not permitted to a national bank directly)
would be treated as affiliates for purposes of the limitations on aggregate
transactions with affiliates in Sections 23A and 23B of the Federal Reserve Act
and for purposes of the anti-tying restrictions of the Bank Holding Company Act.
State-chartered banks would be prohibited from investing in financial
subsidiaries unless they would be well capitalized after deducting the amount of
their investment from capital and observe the other safeguards applicable to
national banks.
The G-L-B Act imposes functional regulation on bank securities and
insurance activities. Banks will only be exempt from regulation by the
Securities and Exchange Commission ("SEC") as securities brokers if they limit
their activities to those described in the G-L-B Act. Banks that advise mutual
funds will be subject to the same SEC regulation as other investment advisors.
Bank common trust funds will be regulated as mutual funds if they are advertised
or offered for sale to the general public. National banks and their subsidiaries
will be prohibited from underwriting 'insurance products other than those which
they were lawfully underwriting as of January 1, 1999 and are prohibited from
under-writing title insurance or tax-free annuities. National banks may only
sell title insurance in states in which state-chartered banks are authorized to
sell title insurance. The G-L-B Act directs the federal banking agencies to
promulgate regulations governing sales practices in connection with permissible
bank sales of insurance.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply, with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the SEC and the
Federal Trade Commission, after consultation with the National Association of
Insurance Commissioners, to promulgate implementing regulations within six
months of enactment. The privacy provisions will become effective in July 2001.
22
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of CRA examinations for smaller institutions and imposes certain
reporting requirements on depository, institutions that make payments to
non-governmental entities in connection with the CRA.
FEDERAL AND STATE TAXATION
For taxable years beginning after June 30, 1986, the Internal Revenue Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides for items of tax preference that include (a) tax-exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) for taxable years beginning
after 1989, this preference of 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Internal Revenue Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. The Bank is not currently paying any amount of alternative minimum tax
but may, depending on future results of operations, become subject to this tax.
The Massachusetts excise tax rate for co-operative banks is currently 10.5%
of federal taxable income, adjusted for certain items. Taxable income includes
income from all sources, without exclusion, less deductions, but not the
credits, allowable under the provisions of the Code, as amended. Beginning April
1, 1999, the Bank is allowed a 95% dividend received deduction. However,
carryforwards and carrybacks of net operating losses are not allowed.
The Bank's federal income tax returns for years ended March 31, 1996 and
1997 were examined and finalized in 1998.
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. 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, preauthorized payment and withdrawal systems, tax-deferred
retirement programs, and other miscellaneous services such as money orders and
travelers' checks. 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
23
credit, general and local economic conditions, current interest rate levels,
volatility in the mortgage markets and other factors which are not readily
predictable.
In addition to competing with other savings banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
increased competition from major commercial banks headquartered outside of
Massachusetts as a result of regional interstate banking laws which currently
permit banks located in New England to enter the bank's market are and compete
with it for deposits and loan originations. The Bank may also face increased
competition as a result of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 which, as of September 29, 1995, allowed the Federal
Reserve Board to approve a bank holding company's application to acquire control
of, or substantially all of the assets of, a Massachusetts bank without regard
to Massachusetts law.
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. There are a number of
pending legislative and regulatory proposals that may further alter the
structure, regulation and competitive relationships of financial institutions.
The ability of the Bank to remain competitively viable will depend upon how
successfully it can respond to the rapidly evolving competitive, regulatory,
technological and demographic developments affecting its operations.
The Bank is headquartered in Somerville, Massachusetts and operates a
network of eight full service offices located in Somerville, Arlington,
Burlington, Chestnut Hill, Malden, Melrose and Woburn, as well as an operations
center located in Somerville. All offices are located in Massachusetts, within
the Boston metropolitan area. The majority of the properties securing loans
originated by the Bank are located within the Bank's primary market area which
encompasses Suffolk, Norfolk and Middlesex Counties, including the City of
Boston. As to the principal services rendered by the Bank, "Item 1. Business --
General" is incorporated herein by reference.
The Bank does not believe that the nature of its business is seasonal.
Further, the Bank has not, within the last five fiscal years, been engaged in
any line of business in addition to its normal thrift banking activities.
EMPLOYEES
At March 31, 2001, the Bank employed 82 full-time and 26 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.
24
ITEM 2. PROPERTIES
- -------------------
The Bank owns all its offices, except the Burlington and Malden branch
offices, and the operations center located in Somerville (Inner Belt Road). 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,
2001, 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, 2001:
NET BOOK
YEAR VALUE AT
OFFICE LOCATION OPENED MARCH 31, 2001
--------------- ------ --------------
MAIN OFFICE:
399 Highland Avenue
Somerville, MA............................................. 1974 $260,796
BRANCH OFFICES:
175 Broadway
Arlington, MA............................................. 1982 121,580
85 Wilmington Road
Burlington, MA............................................ 1978(a) 4,429
1192 Boylston Street
Chestnut Hill (Brookline), MA............................. 1954 128,178
137 Pleasant Street
Malden, MA................................................ 1975(b) 28,497
846 Main Street
Melrose, MA............................................... 1994(c) 183,347
275 Main Street
Woburn, MA................................................ 1980 473,462
198 Lexington Street
Woburn, MA................................................ 1974 185,840
OPERATIONS CENTER:
17 Inner Belt Road
Somerville, MA............................................ 1994 (c) 20,181
<FN>
_________
(a) The lease for the Burlington branch expires in 2002 with an option to
extend the lease for one five-year term.
(b) The lease for the Pleasant Street branch expires in 2005 with an option to
extend the lease for one ten-year term.
(c) The Melrose and Somerville (Inner Belt Road) offices were obtained as part
of the Bank's acquisition of Metro Bancorp, Inc. The lease for the
operations center (Inner Belt Road) expires in 2004 with no renewal option.
</FN>
At March 31, 2001, the total net book value of the Bank's premises and
equipment was $2.0 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. 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.
25
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.
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 Market SM under the symbol "CEBK." At March 31, 2001, there were
1,684,164 shares of the common stock outstanding and approximately 265 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 2001 and fiscal 2000 as reported by the Nasdaq
National Market SM, and the amounts and payable dates of the cash dividends paid
during each quarter of fiscal 2001 and fiscal 2000. 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 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
Fiscal 2000 High Low Fiscal 2000 Amount
-------------------------------------------------------- ------------------------
6/30/99 $ 22.000 $ 19.375 5/21/99 $ 0.08
9/30/99 $ 22.500 $ 16.500 8/20/99 $ 0.08
12/31/99 $ 22.250 $ 14.500 11/19/99 $ 0.10
3/31/00 $ 16.750 $ 14.500 2/18/00 $ 0.10
26
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
AT OR FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
Total assets......................................... $ 449,337 $ 409,557 $ 364,696 $ 375,233 $ 320,950
Total loans.......................................... 345,793 320,013 280,346 281,724 234,935
Investments:
Available for sale............................... 85,106 70,245 68,881 73,027 63,839
Held to maturity................................. -- -- -- 4,000 4,000
Deposits............................................. 287,167 258,339 266,463 276,364 259,093
Borrowings........................................... 121,000 111,000 57,000 59,000 25,000
Total stockholders' equity........................... 38,212 37,397 38,742 36,786 33,545
Shares outstanding................................... 1,684 1,810 1,967 1,965 1,965
STATEMENTS OF OPERATIONS
Net interest and dividend income..................... $ 13,914 $ 13,375 $ 11,947 $ 11,698 $ 11,623
Provision for loan losses............................ -- -- -- -- --
Total non-interest income............................ 1,288 1,669 1,368 1,814 888
Total operating expenses............................. 10,330 9,345 8,773 8,471 8,986
Net income before cumulative effect of
accounting change.................................. 3,109 3,567 2,682 3,047 2,837
Net income........................................... 3,109 3,333 2,682 3,047 2,837
Earnings per common share before cumulative effect
of accounting change, assuming dilution............ 1.81 1.89 1.38 1.56 1.46
Earnings per common share after cumulative effect
of accounting change, assuming dilution............ 1.81 1.77 1.38 1.56 1.46
SELECTED RATIOS
Interest rate spread................................. 3.05% 3.33% 2.97% 3.11% 3.45%
Net yield on interest-earning assets................. 3.37 3.64 3.29 3.45 3.78
Equity-to-assets..................................... 8.50 9.13 10.62 9.80 10.45
Return on average assets before cumulative effect
of change in accounting principle.................. 0.74 0.94 0.72 0.88 0.89
Return on average stockholders' equity before
cumulative effect of change in accounting
principle.......................................... 8.11 9.49 7.12 8.64 8.67
Dividend payout ratio................................ 22.42 20.67 23.45 20.64 11.10
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
GENERAL
Central Bancorp, Inc. (the "Company") is a bank holding company
headquartered in Somerville, Massachusetts. The Company is the holding company
for its wholly owned subsidiary, Central Bank (the "Bank"), a state chartered
co-operative bank. Through the Bank, the Company acquires funds in the form of
deposits and uses the funds to make mortgage loans for the construction,
purchase and refinancing of residential properties, and to make loans on
commercial real estate and business loans in its market area. The Bank also
makes a limited amount of consumer loans including home improvement and secured
and unsecured personal loans. The Bank has used excess funds to purchase
investment and mortgage-backed securities.
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 Federal
Deposit Insurance Corporation ("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 years and its financial condition at the end of
fiscal years 2001 and 2000. 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.
RESULTS OF OPERATIONS
The Bank reported net income of $3.1 million or $1.81 per diluted share for
fiscal 2001, as compared to $3.3 million or $1.77 per diluted share for fiscal
2000 after cumulative effect of change in accounting principle and $2.7 million
or $1.38 per diluted share after cumulative effect of change in accounting
principle for fiscal 1999.
The Bank's earnings decrease for fiscal 2001 compared with fiscal 2000 was
primarily the result of an increase in operating expenses offset by higher net
interest income and a decrease in net gain on investment securities. The
increase in salaries and benefits 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 resulted from
management's decision to aggressively price deposits which caused the overall
cost of funds to increase.
Fiscal 2000 results were reduced by a one-time charge of $234,000, net of
taxes, for costs associated with the establishment, on January 8, 1999, of
Central Bancorp, Inc. as the holding company for Central Bank. This charge
represented the balance of unamortized organization costs outstanding as of
April 1, 1999, that were required to be written off in accordance with a new
accounting rule regarding reporting costs of organization activities. Excluding
this cumulative effect of a change in accounting principle, Central Bancorp's
net income for the fiscal year ended March 31, 2000, was $3.6 million or $1.89
per diluted share.
28
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.
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- -------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans................. $334,513 $25,613 7.66% $293,126 $21,806 7.44% $282,631 $21,250 7.52%
Other loans.................... 7,219 716 9.92 6,963 599 8.60 4,882 423 8.66
Short-term investments......... 7,457 487 6.53 8,197 421 5.14 13,128 650 4.95
Investment securities.......... 40,004 2,603 6.53 32,632 2,039 6.25 23,375 1,481 6.34
Mortgage-backed securities..... 21,418 1,412 6.59 25,035 1,465 5.85 37,676 2,097 5.57
The Co-operative Central Bank
Reserve Fund................. 1,576 86 5.46 1,576 94 5.96 1,576 95 6.03
-------- ------- -------- ------- -------- -------
Total interest-earning
assets................... $412,187 30,917 7.50 $367,529 26,424 7.19 $363,268 25,996 7.16
======== ------- ======== ------- ======== -------
Interest-bearing liabilities:
Deposits....................... $270,135 10,087 3.73 $257,536 8,553 3.32 $275,135 10,770 3.91
Advances from FHLB of Boston... 111,980 6,916 6.18 80,907 4,496 5.56 59,901 3,279 5.47
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities............ $382,115 17,003 4.45 $338,443 13,049 3.86 $335,036 14,049 4.19
======== ------- ======== ------- ======== -------
Net interest and dividend income. $13,914 $13,375 $11,947
======= ======= =======
Interest rate spread............. 3.05% 3.33% 2.97%
==== ==== ====
Net yield on interest-earning
assets ........................ 3.37% 3.64% 3.29%
==== ==== ====
29
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.
2001 VS. 2000 2000 VS. 1999
----------------------------- -----------------------------
CHANGES DUE TO CHANGES DUE TO
INCREASE (DECREASE) IN: INCREASE (DECREASE) IN:
----------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
Interest income:
Mortgage loans....................... $ 3,148 $ 659 $ 3,807 $ 784 $ (228) $ 556
Other................................ 23 94 117 179 (3) 176
-------- ------- -------- ------- ------- -------
Total income from loans.......... 3,171 753 3,924 963 (231) 732
-------- ------- -------- ------- ------- -------
Short-term investments............... (41) 107 66 (253) 24 (229)
Investment securities................ 476 88 564 579 (21) 558
Mortgage-backed securities........... (226) 173 (53) (733) 101 (632)
The Co-operative Central Bank
Reserve Fund......................... -- (8) (8) -- (1) (1)
-------- ------- -------- ------- ------- -------
Total income from investments.... 209 360 569 (407) 103 (304)
-------- ------- -------- ------- ------- -------
Total interest and dividend
income......................... 3,380 1,113 4,493 557 (128) 428
-------- ------- -------- ------- ------- -------
Interest expense:
Deposits............................. 435 1,099 1,534 (660) (1,557) (2,217)
Advances from FHLB of Boston......... 1,875 545 2,420 1,162 55 1,217
-------- ------- -------- ------- ------- -------
Total interest expense........... 2,310 1,644 3,954 502 (1,502) (1,000)
-------- ------- -------- ------- ------- -------
Net interest and dividend income....... $ 1,070 $ (531) $ 539 $ 54 $ 1,374 $ 1,428
======== ======= ======== ======= ======= =======
INTEREST AND DIVIDEND INCOME. The Bank experienced a $4.5 million overall
increase in interest and dividend income for the fiscal 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, of which $51.1 million were adjustable-rate loans.
The increase in the loan portfolio reflects a management decision to increase
loan originations in a favorable interest rate environment. As rates have
declined during the current calendar year, management has decided to slow down
residential lending but expects to continue 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.
The Bank experienced a $428 thousand overall increase in interest and
dividend income for the fiscal year ended March 31, 2000 compared to fiscal
1999. Interest income on loans increased by $732 thousand to $22.4 million due
to a $12.6 million increase in average loan balances. Total loans increased by
$39.7 million from March 31, 1999 to March 31, 2000. Partly offsetting the
increase in average loans outstanding was a 7 basis point decrease in the
average yield on these loans. The Bank originated new loans amounting to $108.4
million, of which $78.5 million were adjustable-rate loans. Additionally,
interest and dividend income on investments decreased by $304 thousand due
primarily to an $8.3 million decrease in average total balances of investments
partly offset by a 25 basis point increase in the rate earned on investments
during fiscal 2000. The overall total average balance of
30
interest-earning assets increased by $4.3 million from fiscal 1999 to fiscal
2000, and the average yield on all interest-earning assets increased by 3 basis
points between the two fiscal years.
INTEREST EXPENSE. 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 41 basis points
in the interest rate paid on deposits from 3.32% during fiscal 2000 to 3.73% in
fiscal 2001, plus an increase in the average total balance of deposits to $270.1
million during fiscal 2001 from $257.5 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 $43.7 million during fiscal 2001 compared to fiscal 2000.
Interest expense on deposits decreased during the fiscal year ended March
31, 2000 by $2.2 million, from $10.8 million in fiscal 1999 to $8.6 million in
fiscal 2000. The decrease can be attributed to a decrease of 59 basis points in
the interest rate paid on deposits, from 3.91% during fiscal 1999 to 3.32 %
during fiscal 2000, as well as a decrease in the average balance of deposits to
$257.5 million during fiscal 2000 from $275.1 million during fiscal 1999.
Interest expense on borrowings increased as the average balance of borrowings
rose to $80.9 million during fiscal 2000 from $59.9 million during fiscal 1999
and the average rate paid on borrowed funds increased 9 basis points from 5.47%
in fiscal 1999 to 5.56% in fiscal 2000. Both factors combined to cause a $1.2
million increase in interest expense on borrowings during fiscal 2000. There was
an overall increase in the average balance of interest-bearing liabilities of
$3.4 million during fiscal 2000 compared to fiscal 1999 while the cost of those
liabilities declined by 33 basis points, to 3.86% in fiscal 2000.
PROVISION FOR LOAN LOSSES. Due to the Bank's stable and relatively high
level of asset quality, there was no provision for loan losses during fiscal
2001, 2000 and 1999. At March 31, 2001, 2000 and 1999, problem assets totaled
$0, $235 thousand and $420 thousand, representing 0%, 0.06% and 0.1% of total
assets, respectively. Problem assets are loans 90 days or more past due, real
estate acquired by foreclosure and impaired loans. There were no loans 90 days
or more past due at March 31, 2001. Loans 90 days or more past due amounted to
$235 thousand at March 31, 2000, a decrease of $184 thousand from $419 thousand
at March 31, 1999. There were no impaired loans at March 31, 2001 and March 31,
2000. There was no real estate acquired by foreclosure at March 31, 2001, 2000
or 1999.
NON-INTEREST INCOME. 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 during fiscal 2001 of $680 thousand compared to $1.0 million during
fiscal 2000.
Total non-interest income for fiscal 2000 was $1.7 million, compared to
$1.4 million during fiscal 1999. The primary reason for the $301 thousand
increase was an increase in gains from the sales of investment and
mortgage-backed securities during fiscal 2000 of $1.0 million compared to $580
thousand during fiscal 1999. Additionally, during fiscal 1999, the Bank sold a
non-banking facility, realizing a net gain on sale of $105 thousand.
OPERATING EXPENSES. Operating expenses increased $985 thousand during the
fiscal year ended March 31, 2001, as compared to the fiscal 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, in data processing service fees of $313
thousand due to a change in computer processing systems and an increase in other
expenses of $204 thousand. The primary reason for the increase in other expenses
were $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.
Operating expenses increased $572 thousand during the fiscal year ended
March 31, 2000, as compared to the fiscal year ended March 31, 1999. This
increase was primarily attributable to increases in salaries and benefits of
$638 thousand, in professional fees of $119 thousand and other expenses of $132
thousand. These increases were partially offset by a reduction in occupancy and
equipment expenses during fiscal 2000 of $301 thousand.
31
INCOME TAXES. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the Bank's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled.
During fiscal 1999, the Bank's effective income tax expense increased
substantially to approximately the statutory rate. The Company instituted
certain tax-saving techniques in fiscal 2000 that resulted in a decline in the
effective tax rate. The effective rates of income tax expense for the fiscal
years ended March 31, 2001, 2000 and 1999 were 36.2%, 37.4%, and 41.0%,
respectively.
FINANCIAL CONDITION
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. Total assets at March 31,
2000 increased $44.9 million from $364.7 million at March 31, 1999. During
fiscal 2001, increases in the Bank's deposits and in borrowed funds were used to
fund the increase in loans and investments.
Net loans increased $25.7 million to $342.7 million at March 31, 2001 from
$317.0 million at March 31, 2000. At March 31, 2001, mortgage loans were $338.9
million, a $23.9 million increase from March 31, 2000. During the fiscal year
ended March 31, 2001, the Bank originated loans totaling $82.6 million, of which
$31.5 million were fixed-rate loans and $51.1 million were adjustable-rate
loans. Total loans originated during the fiscal year ended March 31, 2000,
totaled $108.4 million, of which $29.9 million were fixed-rate loans and $78.5
million were adjustable-rate loans.
RISK ELEMENTS. The improvement in the Bank's real estate portfolio
continued through fiscal 2001, which resulted in a $235 thousand overall
decrease in its problem assets to nil at March 31, 2001 as compared to March 31,
2000. Any reversal of the favorable economic conditions experienced during
fiscal 2001 could result in the Bank experiencing increases in problem assets
that would negatively affect the Bank's results of operations.
The allowance for loan losses is maintained at a level which management
considers adequate to provide for inherent probable losses based on an
evaluation of known and inherent risks in the portfolio. Such evaluation
includes identification of adverse situations that 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.
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 current
evaluations. Any such adjustments to the allowance could negatively affect the
Bank's net income. Additions to the allowance are charged to earnings; realized
losses, net of recoveries, are charged to the allowance.
INVESTMENT ACTIVITIES. The Bank's management believes it prudent to
maintain an investment portfolio that provides not only a source of income but
also a source of liquidity to meet lending demands and fluctuations in deposit
flows.
DEPOSITS. Total deposits at March 31, 2001 were $287.2 million, a $28.9
million increase from $258.3 million one year earlier. Savings accounts and
other types of deposits have traditionally been an important source of funds for
lending, investment purchases, and for other general business purposes. The
increase in deposits resulted from management's decision to price deposits in a
competitive interest rate environment, which caused the overall cost of funds to
increase.
ADVANCES FROM THE FEDERAL HOME LOAN BANK OF BOSTON. Advances from the
Federal Home Loan Bank of Boston increased to $121.0 million at March 31, 2001
from $111.0 million at March 31, 2000.
ASSET/LIABILITY MANAGEMENT AND 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.
32
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.
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 following two tables reflect different methods of disclosing the Bank's
exposure to a change in interest rates and its potential impact on the Bank's
net interest income. The gap analysis uses contractual maturities and next
repricing dates, while the market risk simulation measures changes in net
interest income as a result of changes in market interest rates. The interest
rate sensitivity of the Bank's assets and liabilities in both tables would vary
substantially if different assumptions were used or if actual experience differs
from the assumptions provided.
33
TIME INTERVAL FROM MARCH 31, 2001
------------------------------------------------------------------------------
0-30 31-90 91-180 181-365 1-3 3-5
DAYS DAYS DAYS DAYS YEARS YEARS THEREAFTER TOTAL
---- ----- ------ ------- ----- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Interest-sensitive assets
- -------------------------
Short-term investments $34,529 $ -- $ -- $ -- $ -- $ -- $ -- $ 34,529
Investment securities (including
stock in the FHLB of Boston) 6,967 6,150 -- -- 506 14,253 9,537 37,413
Adjustable-rate loans (a) 8,584 11,056 11,942 10,236 75,018 110,279 11,531 238,646
Fixed-rate loan amortization (b) 430 856 1,316 2,731 12,060 13,939 75,815 107,147
Mortgage-backed securities
amortization (b) 47 94 143 294 1,285 1,481 15,970 19,314
The Co-Operative Central Bank
Reserve Fund -- -- 1,576 -- -- -- -- 1,576
------- -------- -------- -------- -------- -------- -------- --------
Total interest-sensitive
assets 50,557 18,156 14,977 13,261 88,869 139,952 112,853 438,625
------- -------- -------- -------- -------- -------- -------- --------
Interest-sensitive liabilities
- ------------------------------
NOW accounts (c) 7,844 -- -- -- -- -- 23,533 31,377
Regular, club and 90-day notice
accounts (c) 16,003 6 -- -- -- -- 48,002 64,011
Money market deposit accounts 15,327 -- -- -- -- -- -- 15,327
Term deposit certificates 5,780 27,806 44,476 24,759 46,039 3,147 11 152,018
Advances from FHLB of Boston 2,000 5,000 6,000 12,000 8,000 4,000 84,000 121,000
------- -------- -------- -------- -------- -------- -------- --------
Total interest-sensitive
liabilities 46,954 32,812 50,476 36,759 54,039 7,147 155,546 383,733
------- -------- -------- -------- -------- -------- -------- --------
Interest-sensitivity gap
(assets minus liabilities) $ 3,603 $(14,656) $(35,499) $(23,498) $ 34,830 $132,805 $(42,693) $ 54,892
======= ======== ======== ======== ======== ======== ======== ========
Cumulative gap $ 3,603 $(11,053) $(46,552) $(70,050) $(35,220) $ 97,585 $ 54,892
======= ======== ======== ======== ======== ======== ========
Cumulative interest-sensitive
assets as a percent of cumulative
interest-sensitive liabilities 107.7% 86.1% 64.3% 58.1% 64.1% 142.6% 114.3%
Cumulative gap as a percent of
total assets 0.9% (2.7)% (11.4)% (17.1)% (8.6)% 23.6% 13.4%
<FN>
- --------------
(a) Adjustable-rate mortgage loan amounts and other loans subject to repricing
are accumulated as if the entire balance came due on the repricing date.
(b) Amortization is shown in the time period corresponding to the contractual
amortization or, when such information was not available, the computed
principal amortization based on weighted average maturities and weighted
average rates. Fixed-rate demand loans are shown in the "0-30 Days"
category and are usually amortized over longer periods and can be repriced
at the option of the Bank
(c) Although NOW and regular accounts are subject to immediate withdrawal and
repricing, management considers these accounts to have significantly longer
effective maturities and repricing terms; therefore, the majority of such
accounts have been included in the "Thereafter" category. If NOW and
regular accounts had been assumed to be subject to repricing within one
year, the cumulative excess of interest sensitive liabilities over
interest-sensitive assets would have been $141,591 or 34.6% of total
assets.
</FN>
The above table indicates that the Company is liability sensitive during
the period of one year or less. Accordingly, the Bank's net interest income
would be negatively affected by a rising interest rate environment since its
interest-bearing liabilities would reprice upwards more quickly than its
interest-earning assets.
34
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 in the first year
of the model.
The following table indicates the estimated exposure as a percentage of
estimated net interest income for the next twelve and twenty-four month periods:
PERCENTAGE CHANGES IN ESTIMATED
NET INTEREST INCOME OVER
---------------------------------
12 MONTHS 24 MONTHS
--------- ---------
300 basis point increase in rates.................... (3.6)% (10.2)%
200 basis point decrease in rates.................... (10.3)% (16.5)%
Based on the scenario above, net interest income of the Company would be
adversely affected by either a 300 basis point increase or a 200 basis point
decrease in rates in both the twelve and twenty-four month periods.
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
the continued competition in recent years. During fiscal 2001, deposit balances
increased by $28.9 million to $287.2 million from $258.3 million at March 31,
2000.
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, 2001 and 2000, the Bank had outstanding FHLB of Boston
advances of $121.0 million and $111.0 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, investment 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.
Loan originations, including purchases, totaled $82.6 million, $108.4
million, and $111.2 million for the fiscal years ended March 31, 2001, 2000 and
1999, respectively. At March 31, 2001, outstanding commitments to originate
mortgage loans totaled $17.1 million, and commitments for unadvanced funds on
home equity, commercial and construction loans totaled $24.9 million. Currently,
the Bank does not have any mortgage loans available for
35
sale in the secondary market. Management believes that the Bank has adequate
sources of liquidity to fund these commitments.
CAPITAL RESOURCES
Massachusetts chartered co-operative banks with deposits insured by the
FDIC, such as 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, 2001, the minimum total risk-based capital ratio required
was 8.00%. The Bank's risk-based total capital ratio at March 31, 2001 was
12.86%.
To complement the risk-based standards, the FDIC adopted a leverage ratio
(stockholders' equity divided by total 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 Bank's
leverage ratio was 7.75% at March 31, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The tabular and narrative information set forth in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management and Market Risk" in Part II of this report discloses
detailed quantitative and qualitative information about market risks and their
effects on the Company and its subsidiaries, particularly with respect to
changes in market interest rates on interest-earning assets and interest-bearing
liabilities.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
CENTRAL BANCORP INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Consolidated Balance Sheets............................................... 38
Consolidated Statements of Income......................................... 39
Consolidated Statement of Changes in Stockholders' Equity................. 40
Consolidated Statement of Cash Flows...................................... 41
Notes to Consolidated Financial Statements................................ 43
Independent Auditors' Report.............................................. 62
37
CENTRAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars In Thousands)
MARCH 31,
---------------------------
2001 2000
---- ----
ASSETS
Cash and due from banks $ 5,351 $ 6,588
Short-term investments
34,529 14,802
Investments available for sale:
Investment securities (amortized cost of $31,702 in 2001 and $32,839 in 2000)
(notes 2 and 11) 31,263 32,135
Mortgage-backed securities (amortized cost of $19,623 in 2001 and $23,862 in 2000)
(note 2) 19,314 23,308
Stock in Federal Home Loan Bank of Boston, at cost (note 7) 6,150 5,800
The Co-operative Central Bank Reserve Fund (note 8) 1,576 1,576
-------- --------
Total investments 92,832 77,621
Loans:
Mortgage loans (notes 3, 5 and 11) 338,898 314,966
Other loans (notes 4 and 5) 6,895 5,047
-------- --------
345,793 320,013
Less allowance for loan losses (note 6) 3,106 2,993
-------- --------
Net loans 342,687 317,020
-------- --------
Accrued interest receivable 2,426 2,036
Office properties and equipment, net (note 9) 2,018 2,218
Deferred tax asset, net (note 12) 801 1,071
Goodwill, net 2,520 2,808
Other assets 702 195
-------- --------
Total assets $449,337 $409,557
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 10) $287,167 $258,339
Advances from Federal Home Loan Bank of Boston (note 11) 121,000 111,000
Advance payments by borrowers for taxes and insurance 1,220 1,053
Accrued interest payable 608 542
Accrued expenses and other liabilities 1,130 1,226
-------- --------
Total liabilities 411,125 372,160
-------- --------
Commitments and contingencies (notes 9, 13 and 16)
Stockholders' equity (note 14):
Preferred stock $1.00 par value, authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock $1.00 par value, authorized 15,000,000 shares;
1,970,000 shares issued; outstanding 1,684,164 and 1,810,450 shares
at March 31, 2001 and 2000, respectively 1,970 1,970
Additional paid-in capital 11,190 11,190
Retained income 30,950 28,538
Treasury stock (285,836 and 159,550 shares at March 31, 2001 and 2000,
respectively), at cost (5,230) (3,043)
Accumulated other comprehensive (loss) income (431) (825)
Unearned compensation - ESOP (note 15) (237) (433)
-------- --------
Total stockholders' equity 38,212 37,397
-------- --------
Total liabilities and stockholders' equity $449,337 $409,557
======== ========
See accompanying notes to consolidated financial statements.
38
CENTRAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------
2001 2000 1999
---------------------------------------------
Interest and dividend income:
Mortgage loans $ 25,613 $ 21,806 $ 21,250
Other loans 716 599 423
Short-term investments 487 421 650
Investment securities 2,603 2,039 1,481
Mortgage-backed securities 1,412 1,465 2,097
The Co-operative Central Bank Reserve Fund 86 94 95
--------------------------------------------
Total interest and dividend income 30,917 26,424 25,996
--------------------------------------------
Interest expense:
Deposits 10,087 8,553 10,770
Advances from Federal Home Loan Bank of Boston 6,916 4,496 3,279
--------------------------------------------
Total interest expense 17,003 13,049 14,049
--------------------------------------------
Net interest and dividend income 13,914 13,375 11,947
Provision for loan losses (note 6) -- -- --
--------------------------------------------
Net interest and dividend income after
provision for loan losses 13,914 13,375 11,947
--------------------------------------------
Non-interest income:
Deposit service charges 428 414 431
Net gain from sale of investment securities (note 2) 680 1,013 580
Gain on sale of building -- -- 105
Other income 180 242 252
--------------------------------------------
Total non-interest income 1,288 1,669 1,368
--------------------------------------------
Operating expenses:
Salaries and employee benefits (note 15) 5,571 5,017 4,379
Occupancy and equipment (note 9) 1,192 1,167 1,468
Data processing service fees 847 534 543
Professional fees 757 875 756
Foreclosure expenses, net 1 (6) 1
Goodwill amortization 288 288 288
Other expenses 1,674 1,470 1,338
--------------------------------------------
Total operating expenses 10,330 9,345 8,773
--------------------------------------------
Income before income taxes 4,872 5,699 4,452
Income tax expense (note 12) 1,763 2,132 1,860
--------------------------------------------
Net income before cumulative effect of change in
accounting principle 3,109 3,567 2,682
Cumulative effect of change in accounting principle,
net of taxes -- (234) --
--------------------------------------------
Net income $ 3,109 $ 3,333 $ 2,682
============================================
Earnings per common share (note 1):
Before cumulative effect of change in accounting
principle $ 1.81 $ 1.90 $ 1.38
============================================
Before cumulative effect of change in accounting
principle - assuming dilution $ 1.81 $ 1.89 $ 1.38
============================================
After cumulative effect of change in accounting
principle $ 1.81 $ 1.77 $ 1.38
============================================
After cumulative effect of change in accounting
principle - assuming dilution $ 1.81 $ 1.77 $ 1.38
============================================
Weighted average common shares outstanding 1,717 1,882 1,938
============================================
Weighted average common shares outstanding, diluted 1,719 1,885 1,946
============================================
See accompanying notes to consolidated financial statements.
39
CENTRAL BANCORP, INC. AND SUBSIDIARIES
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, 1998 $1,965 $11,159 $23,841 $ -- $ 544 $(723) $36,786
Net income -- -- 2,682 -- -- -- 2,682
Other comprehensive income,
net of tax:
Unrealized (loss) on securities,
net of reclassification
adjustment -- -- -- -- (217) -- (217)
-------
Comprehensive income -- -- -- -- -- -- 2,465
-------
Proceeds from exercise of stock options 2 12 -- -- -- -- 14
Dividend paid ($0.32 per share) -- -- (629) -- -- -- (629)
Amortization of unearned compensation
- ESOP -- -- -- -- -- 106 106
---------------------------------------------------------------------------------
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)
Dividend 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 (note 2) -- -- -- -- 394 -- 394
-------
Comprehensive income -- -- -- -- -- -- 3,503
-------
Purchase of treasury stock -- -- -- -- -- -- (2,187)
(2,187)
Dividend 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
=================================================================================
The Bank's other comprehensive income (loss) and related tax effect for the
fiscal years ending March 31 are as follows:
2001
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
in thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized holding gains during
period $ 1,188 $ 360 $ 828
Less reclassification adjustment for (gains) realized 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 holding (losses) during
period $ (815) $ (297) $ (518)
Less reclassification adjustment for (gains) realized in net
income (1,013) (379) (634)
--------------------------------------------
Other comprehensive income $(1,828) $ (676) $(1,152)
============================================
See accompanying notes to consolidated financial statements.
40
CENTRAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $ 3,109 $ 3,333 $ 2,682
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 438 462 729
Amortization of premiums and discounts 86 132 461
Amortization of goodwill 288 288 288
Decrease (increase) in deferred tax assets 270 (327) (175)
Net gains from sale of investment and mortgage-backed securities (680) (1,013) (580)
Net gain from sale of building -- -- (105)
Cumulative effect of change in accounting principle -- 234 --
(Increase) decrease in accrued interest receivable (390) (422) 296
(Increase) decrease in other assets (507) 59 (256)
Increase (decrease) in advance payments by borrowers for taxes and insurance 167 (336) 160
Increase (decrease) in accrued interest payable 66 251 (192)
(Decrease) increase in accrued expenses and other liabilities (96) 415 (560)
-----------------------------------------
Net cash provided by operating activities 2,751 3,076 2,748
-----------------------------------------
Cash flows from investing activities:
Principal collected on loans 56,949 68,641 112,825
Loan originations (82,616) (108,363) (111,231)
Principal payments on mortgage-backed securities available for sale 4,069 9,420 14,942
Purchase of mortgage-backed securities available for sale -- (3,216) --
Purchase of investment securities available for sale (6,170) (18,500) (16,622)
Proceeds from sales of investment securities available for sale 3,955 6,159 4,049
Maturities and redemptions of investment securities held to maturity -- -- 4,000
Maturities and redemptions of investment securities available for sale 4,000 2,500 15,100
Net (increase) decrease in short-term investments (19,727) 2,137 (13,618)
Purchase of stock in FHLB of Boston (350) (2,450) (200)
Proceeds from sale of land and building -- -- 239
Purchase of office properties and equipment, net (238) (130) (576)
-----------------------------------------
Net cash used by investing activities (40,128) (43,802) 8,908
-----------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 28,828 (8,124) (9,901)
Proceeds from advances from FHLB of Boston 169,095 155,500 43,495
Payments on advances from FHLB of Boston (159,095) (101,500) (45,495)
Proceeds from exercise of stock options -- 22 14
Purchase of treasury stock (2,187) (3,043) --
Payments of dividends on common stock (697) (689) (629)
Amortization of unearned compensation - ESOP 196 184 106
-----------------------------------------
Net cash provided by financing activities 36,140 42,350 (12,410)
-----------------------------------------
Net increase (decrease) in cash and due from banks (1,237) 1,624 (754)
Cash and due from banks at beginning of year 6,588 4,964 5,718
-----------------------------------------
Cash and due from banks at end of year $ 5,351 $ 6,588 $ 4,964
=========================================
Continued
41
CENTRAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows, continued
(In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Supplemental disclosure of cash flow information: Cash paid during
the year for:
Interest $ 16,937 $ 12,798 $ 14,241
Income Taxes 1,850 2,094 2,413
Schedule of non-cash investing activities:
Transfer from mortgage loans to real estate acquired by foreclosure $ -- $ -- $ --
See accompanying notes to financial statements.
42
Notes to Consolidated Financial Statements
Fiscal Years Ended March 31, 2001, 2000 and 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, was
organized by Central Bank (the "Bank") to be a bank holding company. The Company
was organized at the direction of the Bank on September 30, 1998, to acquire all
of the capital stock of the Bank upon the consummation of the reorganization of
the Bank into the holding company form of ownership, which was completed on
January 8, 1999. The Company's common stock, par value $1.00 per share (the
"Common Stock"), became registered under the Securities Exchange Act of 1934 on
January 8, 1999. The Company has no significant assets other than the common
stock of the Bank and various other liquid assets that it invests in the
ordinary course of business. For that reason, substantially all of the
discussion in these consolidated financial statements relates to the operations
of the Bank and its subsidiaries.
Central 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 acquire 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 a lesser extent, to make loans on commercial
real estate in its market area. The Bank also makes a limited amount of consumer
loans, including home improvement and secured and unsecured personal loans. 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 consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All
significant inter-company 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 entities, if the
conditions change.
Material estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses. In connection with the
determination of the allowance for loan losses and the valuation of real estate
acquired by foreclosure, management obtains independent appraisals for
significant properties.
Certain prior fiscal year amounts have been reclassified to conform to the
current year's presentation. The following is a summary of the 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 $2,483,000 at March 31, 2001.
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 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
or mortgage-backed security is judged to be other than temporary, the cost basis
of the investment is written down to fair value as a new cost basis
43
and the amount of the write-down is included as a charge against gain on sale of
investment and mortgage-backed securities.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
These Statements establish comprehensive accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. They require that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and measure those instruments at fair
market value. Under these Statements, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. The
Company adopted these Statements on April 1, 2001. The adoption of these
Statements did not have a material effect on the Company's consolidated
financial statements.
Loans
Loans are reported at the principal amount outstanding, adjusted by
unamortized discounts, premiums, and net deferred loan origination fees. Loans
classified as held for sale in the secondary market 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.
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. When loans are sold in
the secondary market, the remaining balance of the amount deferred is included
in determining the gain or loss on the sale.
Impaired loans are commercial and commercial real estate loans for which 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.
Allowance for Loan Losses
The allowance for loan losses is established through a charge to
operations. When management believes that the collection of a loan's principal
balance is unlikely, the principal amount is charged against the allowance.
Recoveries on loans that have been previously charged off are credited to the
allowance as received.
The allowance for loan losses is determined using a systematic analysis and
procedural discipline based on historical experience, product types, and
industry benchmarks. The allowance is segregated into three components:
"general", "specific", and "unallocated". The general component is determined by
applying coverage percentages to groups of loans based on risk ratings and
product types. A system of periodic loan reviews is performed to assess the
44
inherent risk and assign risk ratings to each loan individually. Coverage
percentages applied are determined based on industry practice and management's
judgment. The specific component is established by allocating a portion of the
allowance for loan losses to individual classified loans on the basis of
specific circumstances and assessments. The unallocated component supplements
the first two components based on management's judgment of the effect of current
and forecasted economic conditions on borrowers' abilities to repay, an
evaluation of the allowance for loan losses in relation to the size of the
overall portfolio, and consideration of the relationship of the allowance for
loan losses to non-performing loans, net charge-off trends, and other factors.
While this evaluation process utilizes historical and other objective
information, the classification of loans and the establishment of the allowance
for loan losses relies to a great extent on the judgment and experience of
management. Additions to the allowance are charged to earnings; realized losses,
net of recoveries, are charged to the allowance. Management believes that the
allowance for loan losses is adequate.
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
judgments of information available to them at their examination date.
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.
Office Properties and Equipment
Office properties 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
Goodwill arising from acquisitions is amortized on a straight-line basis
over 15 years. On an ongoing basis, management evaluates the valuation of the
remaining balance of goodwill.
Pension and Other 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. The pension costs are funded as they are accrued.
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. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
New Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
supercedes the guidance of SFAS No. 125. The provisions of SFAS No. 140 will
become effective for certain transactions occurring after March 31, 2001 and for
disclosures relating to certain transactions for fiscal years ending after
December 15, 2000. Management does not expect SFAS No. 140 to have a material
impact on the Company's consolidated financial statements.
During 1998, the Financial Accounting Standards Board ("FASB") 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
resulting in a charge to earnings, net of taxes, of $234 thousand.
45
NOTE 2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES (Dollars in ThousandS)
The amortized cost and fair value of investments and mortgage-backed
securities available for sale are summarized as follows:
MARCH 31, 2001
-----------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------------------ FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------------------------
Common and Preferred Stock $ 7,748 $ 605 $ (1,386) $ 6,967
U.S. Government and Federal Agency obligations 18,970 88 (7) 19,051
Other bonds and obligations 4,984 261 -- 5,245
---------------- -------------------- --------------- ----------------
Total $ 31,702 $ 954 $ (1,393) $ 31,263
================ ==================== =============== ================
Mortgage-backed securities:
GNMA $ 361 $ -- $ (10) $ 351
FNMA 13,753 86 (197) 13,642
FHLMC 3,479 66 (37) 3,508
CMOs 2,030 -- (217) 1,813
---------------- -------------------- --------------- ----------------
Total $ 19,623 $ 152 $ (461) $ 19,314
================ ==================== =============== ================
MARCH 31, 2000
-----------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ------------------------------------ FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------------------------
Common and Preferred Stock $ 6,847 $ 929 $ (631) $ 7,145
U.S. Government and Federal Agency obligations 23,962 -- (1,009) 22,953
Other bonds and obligations 2,030 7 -- 2,037
---------------- -------------------- --------------- ----------------
---
Total $ 32,839 $ 936 $ (1,640) $ 32,135
================ ==================== =============== ================
Mortgage-backed securities:
GNMA $ 434 $ -- $ (14) $ 420
FNMA 17,091 5 (400) 16,696
FHLMC 4,185 -- (50) 4,135
CMOs 2,152 -- (95) 2,057
----------------- ------------------- --------------- ----------------
Total $ 23,862 $ 5 $ (559) $ 23,308
================= =================== =============== ================
46
The maturity distribution (based on contractual maturities) and annual
yields of mortgage-backed securities at March 31, 2001 and 2000 are as follows:
MARCH 31, 2001
--------------------------------------------------
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---- ----- -----
Due within one year $ -- $ -- 0.00%
Due after one year but within five years 703 702 6.71%
Due after five years but within ten years 4,996 5,111 6.94%
Due after ten years 13,924 13,501 7.21%
------- -------
Total $19,623 $19,314 7.12%
======= =======
Weighted average remaining life (in years) 17.52
=======
MARCH 31, 2000
--------------------------------------------------
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---- ----- -----
Due within one year $ -- $ -- 0.00%
Due after one year but within five years 687 410 6.56%
Due after five years but within ten years 6,469 6,376 7.01%
Due after ten years 16,706 16,522 6.26%
------- -------
Total $23,862 $23,308 6.47%
======= =======
Weighted average remaining life (in years) 18.33
=======
Maturities on mortgage-backed securities are based on contractual
maturities and do not take into consideration scheduled amortization or
prepayments. Actual maturities will differ from contractual maturities due to
scheduled amortization and prepayments.
The amortized cost and fair value of adjustable-rate federal agency
obligations and mortgage-backed securities classified as available for sale
amounted to $38,673 and $38,284, respectively, in 2001. The amortized cost and
fair value of adjustable-rate federal agency obligations and mortgage-backed
securities classified as available for sale amounted to $12,809 and $12,467,
respectively, in 2000.
The Bank had securities classified as available for sale with callable
features that can be called prior to final maturity with an amortized cost of
$8,974 and a fair value of $9,027 at March 31, 2001.
Net realized gains on sales of investment securities classified as
available for sale for the fiscal years ended March 31, 2001, 2000 and 1999
amounted to $680, $1,013 and $580, respectively.
There were no sales of mortgage-backed securities classified as available
for sale during the fiscal years ended March 31, 2001 and 2000.
47
The maturity distribution (based on contractual maturities) and annual
yields of investment securities (excluding common and preferred stocks) at March
31, 2001 and 2000 are as follows:
MARCH 31, 2001
--------------------------------------------------
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---- ----- -----
Due within one year $ -- $ -- 0.00%
Due after one year but within five years 14,487 14,759 6.73
Due after five years but within ten years 9,467 9,537 6.63
-------------------------------------------
Total $23,954 $24,296 6.69%
===========================================
Weighted average remaining life (in years) 3.16
=======
MARCH 31, 2000
--------------------------------------------------
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---- ----- -----
Due within one year $ 1,000 $ 994 6.15%
Due after one year but within five years 9,056 6,869 6.80
Due after five years but within ten years 15,936 17,127 6.48
Total -------------------------------------------
$25,992 $24,990 6.57%
===========================================
Weighted average remaining life (in years) 5.93
=======
A FNMA mortgage pool with an amortized cost of $5,834 and fair value of
$5,673 at March 31, 2001, 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.
NOTE 3. MORTGAGE LOANS (In Thousands)
Mortgage loans as of March 31 are summarized below:
MORTGAGE LOANS: 2001 2000
- --------------------------------------------------------------------------------------
Residential
Fixed $ 75,809 $ 65,765
Adjustable 170,694 177,798
Commercial 74,613 54,228
Construction 9,500 9,765
Second Mortgage and Home Equity 8,282 7,403
FHA & VA -- 7
---------- ----------
$ 338,898 $ 314,966
========== ==========
At March 31, 2001 and 2000, net deferred loan costs of $160 and $280,
respectively, were reflected as an addition to the appropriate loan categories.
Mortgage and other loans on which the accrual of interest had been
discontinued at March 31, 2001, 2000 and 1999 were $000, $235, and $419,
respectively. Interest income not recognized on such loans amounted to $00, $7,
and $16 in fiscal 2001, 2000 and 1999, respectively.
At March 31, 2001 and 2000, there were no impaired loans. Impaired loans
are measured using the fair value of collateral. During fiscal 2001 and 2000,
there were no impaired loans. The Bank follows the same policy
48
for recognition of income on impaired loans as it does for all other loans.
During fiscal 2001 and 2000, there was no interest forgone on impaired loans
that were not non-accrual loans.
Mortgage loans serviced by the Bank for others amounted to $4,288 and
$5,790 at March 31, 2001 and 2000, 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 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.
NOTE 4. OTHER LOANS (In Thousands)
Other loans at March 31 are summarized below:
OTHER LOANS 2001 2000
----------------------------------------------------------------------------------------
Commercial $ 4,859 $ 3,349
Secured by Deposits 1,137 1,023
Consumer 36 38
Unsecured 863 637
--------------------------
$ 6,895 $ 5,047
==========================
NOTE 5. LOANS TO DIRECTORS AND OFFICERS (In Thousands)
The following summarizes the activity with respect to loans included in
mortgage and other loans made to directors and officers and their related
interests for the fiscal years ended March 31:
2001 2000
--------------------------
Balance at beginning of period $ 243 $ 563
New loans 444 11
New officers with loans outstanding 158 --
Repayment of principal (265) (187)
No longer a director -- (144)
--------------------------
Balance at end of period $ 580 $ 243
==========================
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 6. ALLOWANCE FOR LOAN LOSSES (In Thousands)
MARCH 31,
-------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------------------
Balance at beginning of period $2,993 $2,913 $2,886
Provision charged to expense -- -- --
Amounts charged-off (4) (9) (99)
Recoveries on accounts previously charged-off 117 89 126
----------- ---------- -------------
Balance at end of period $3,106 $2,993 $2,913
=========== ========== =============
49
NOTE 7. STOCK IN FEDERAL HOME LOAN BANK OF BOSTON (In Thousands)
As a member of the Federal Home Loan Bank of Boston ("FHLB of Boston"), the
Bank is required to invest in $100 par value 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. The Bank's investment
exceeded the required level by $100 and $250 at March 31, 2001 and 2000,
respectively. If such stock is redeemed, the Bank will receive from the FHLB of
Boston an amount equal to the par value of the stock.
NOTE 8. THE CO-OPERATIVE CENTRAL BANK RESERVE FUND
The Co-operative Central Bank Reserve 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 9. OFFICE PROPERTIES AND EQUIPMENT (In Thousands)
A summary of cost, accumulated depreciation and amortization of office
properties and equipment at March 31 follows:
2001 2000
---- ----
Land $ 589 $ 589
Buildings 2,304 2,287
Furniture 5,596 5,376
Leasehold improvements 475 474
--------------------------
8,964 8,726
Less accumulated depreciation and amortization (6,946) (6,508)
--------------------------
$2,018 $2,218
==========================
A summary of minimum rentals for future periods under non-cancelable
operating leases follows:
MINIMUM
RENTALS
-------
Years Ending March 31,
2002 $ 92
2003 78
2004 59
2005 14
Thereafter 6
Rental expense for the fiscal years ended March 31, 2001, 2000 and 1999 was
$125, $123 and $118, respectively.
50
NOTE 10. DEPOSITS (Dollars in Thousands)
Deposits at March 31 are summarized as follows:
2001 2000
---- ----
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
------ -------------- ------ --------------
Demand (non-interest-bearing) $ 24,434 -- $ 18,634 --
NOW Accounts 31,377 1.01 - 1.52% 32,218 1.01 - 1.52%
Regular, club and 90 day Notice 64,011 2.00% 61,475 2.00%
Money Market deposit Accounts 15,327 2.15 - 2.35% 19,045 2.15 - 2.35%
--------- --------
$ 135,149 $131,372
Term Deposit Certificates
Six Month money market $ 20,437 4.00 - 6.25% $ 16,469 4.00 - 6.00%
Other 131,581 4.00 - 7.25% 110,498 4.00 - 7.00%
--------- --------
Total Term Deposit Certificates 152,018 126,967
--------- --------
$ 287,167 $258,339
========= ========
Weighted average interest rate 3.80% 3.37%
Contractual maturities of term deposit certificates at March 31, 2001 are
- --------------------------------------------------------------------------------
summarized as follows:
- ----------------------
Years Ending March 31,
2002 $ 102,821
2003 43,336
2004 2,704
2005/2006 3,157
---------
$ 152,018
==========
The aggregate amount of individual term deposit certificates with a minimum
denomination of $100 or more was $34,644 and $24,937 at March 31, 2001 and 2000,
respectively. Interest expense on these deposits was $1,763, $795 and $934 for
fiscal years ended March 31, 2001, 2000 and 1999, respectively.
51
NOTE 11. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands)
- -------------------------------------------------------
Advances from FHLB of Boston, by year of maturity, at March 31 consist of
the following:
2001 2000
-------------------------------------------------------------------------------------------------------
INTEREST RATE DUE IN YEAR ENDING MARCH 31,
5.76% - 6.95% 2001 $ -- $ 18,000
5.21% - 6.95% 2002 25,000 4,000
6.60% 2003 8,000 --
4.99% - 5.69% 2004 -- 5,000
6.23% 2006 4,000 --
6.10% - 6.42% 2008 13,000 --
4.49% - 5.89% 2009 15,000 26,000
4.49% - 6.21% 2010 20,000 18,000
3.99% - 6.56% 2011 34,000 33,000
5.49% 2014 2,000 2,000
5.25% 2015 -- 5,000
--------- ---------
$ 121,000 $ 111,000
========= =========
Weighted Average Rate 5.84% 5.66%
At March 31, 2001, advances totaling $88 million were callable prior to the
scheduled maturity of the 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. Applying these
ratios, the Bank's overall borrowing capacity was approximately $201,200 and
$202,400 at March 31, 2001 and 2000, respectively.
The highest month-end balance of FHLB of Boston advances outstanding was
$121,000, $113,000, and $64,000 during the fiscal years ended March 31, 2001,
2000 and 1999, respectively.
NOTE 12. INCOME TAXES (Dollars in Thousands)
The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Bank's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
Income tax expense was allocated as follows:
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------
2001 2000 1999
---------------------------------------------
Current income tax expense
Federal $ 1,555 $ 1,745 $ 1,669
State 52 44 366
-------------------------------------------
Total current tax expense 1,607 1,789 2,035
Deferred income tax expense (benefit) 156 343 (175)
Change in valuation reserve -- -- --
-------------------------------------------
Total income tax expense $ 1,763 $ 2,132 $ 1,860
===========================================
52
Income tax expense 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:
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------
2001 2000 1999
-------------------------------------------
Statutory Federal tax rate 34.0 % 34.0 % 34.0%
Items affecting Federal income tax rate:
Dividends received deduction (0.6) (0.4) (0.6)
Goodwill amortization 2.0
State income taxes, net of
Federal income tax benefit 1.2 1.6 4.7
Other (0.4) 0.4 0.7
-------------------------------------------
36.2% 37.4% 41.0%
===========================================
The components of gross deferred tax assets and gross deferred tax
liabilities that have been recognized as of March 31 are as follows:
2001 2000
---------------------
Deferred tax assets:
Loan losses $ 548 $ 547
Deferred loan origination fees 74 74
Depreciation 265 258
Post-employee retirement benefit accrual 227 201
Unrealized depreciation on securities 319 433
Other 74 56
---------------------
Gross deferred tax asset 1,507 1,569
Valuation reserve -- --
---------------------
Net deferred tax asset 1,507 1,569
---------------------
Deferred tax liabilities:
Accrued dividend receivable 47 44
Deferred loan origination fees 437 454
Deferred income 222 --
---------------------
Gross deferred tax liability 706 498
---------------------
Net deferred tax asset $ 801 $ 1,071
=====================
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, 2001. Further, management believes the existing
net deductible temporary differences will reverse during periods in which the
Bank generates net taxable income. At March 31, 2001, recoverable income taxes,
plus estimated taxes for fiscal 2002, 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.
53
The unrecaptured base year tax bad debt reserves will not be subject to
recapture as long as the institution 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.
NOTE 13. 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. 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, follows:
2001 2000
-------------------------
Unused lines of credit $11,012 $10,243
Unadvanced portions of construction loans 8,239 4,427
Unadvanced portions of commercial loans 5,651 3,468
Commitments to originate commercial loans 14,189 15,713
Commitments to originate residential mortgage loans:
Fixed rate 1,868 1,104
Adjustable rate 1,032 1,270
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 14. STOCKHOLDERS' EQUITY (Dollars in Thousands)
The Bank may not declare or pay cash dividends on its common stock if the
effect thereof would cause its equity to be reduced below regulatory capital
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
On October 24, 1991, the Bank adopted a Shareholder Rights Plan. The
plan entitles each shareholder to purchase the Bank's stock at a discount price
in the event any person or group of persons exceeds predetermined ownership
limitations of the Bank's outstanding common stock and, in certain
circumstances, engages in specific activities deemed adverse to the interests of
the Bank's shareholders. This plan expires on October 24, 2001.
The minimum core (leverage) capital ratio (stockholders' equity divided by
total assets) required for banks with a CAMEL rating of 1 is 3.00% and
4.00%-5.00% for all others. The Bank must 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). At March 31, 2001 and 2000, the Bank's capital
ratios were in excess of all required standards.
54
The Bank is subject to various regulatory capital requirements administered
by the federal banking services. 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of risk-weighted, core and tangible capital (as defined).
Management represents that, as of March 31, 2001, the Bank met all capital
adequacy requirements to which it is subject.
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.
As of March 31, 2001, the Bank was categorized as "well capitalized" based on
its ratios of risk-weighted, Tier 1 and tangible capital. There are no
conditions or events, since that notification, that management believes would
cause a change in the Bank's categorization. The Bank's actual capital amounts
and ratios are presented in the table. No deduction was taken from capital for
interest-rate risk. The Bank's Tier 1/leverage, Tier 1 risk-based and total
risk-based capital together with related regulatory minimum requirements are
summarized below:
MARCH 31, 2001
----------------------------------------------
TIER 1 TIER 1 TOTAL
LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
Regulatory capital measure
Amount $33,256 $33,256 $36,362
Ratio 7.75% 11.76% 12.86%
Adequately capitalized requirement:
Amount $17,156 $11,308 $22,617
Ratio 4.00% 4.00% 8.00%
Well capitalized requirement
Amount $21,445 $16,963 $28,271
Ratio 5.00% 6.00% 10.00%
MARCH 31, 2000
----------------------------------------------
TIER 1 TIER 1 TOTAL
LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
Regulatory capital measure
Amount $ 34,268 $ 34,268 $ 37,376
Ratio 8.66% 13.31% 14.52%
Adequately capitalized requirement:
Amount $ 15,836 $ 10,295 $ 20,591
Ratio 4.00% 4.00% 8.00%
Well capitalized requirement
Amount $ 19,795 $ 15,443 $ 25,739
Ratio 5.00% 6.00% 10.00%
55
NOTE 15. EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data)
PENSION PLAN
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 officers and
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 revised Savings Plan which
qualifies under section 401 (k) of the Internal Revenue Code of 1986, as
amended. Such contributions are matched on a one-half for-one basis by the Bank
up to a maximum of 5% of each employee's salary. Pension benefits and employer
contributions to the Savings Plan become vested over six years.
Expenses for the Pension Plan and the Savings Plan were $371, $363 and $202
for the fiscal years ended March 31, 2001, 2000 and 1999, respectively.
Forfeitures are used to reduce expenses of the plans.
STOCK OPTION PLAN
The Company has adopted two Stock Option Plans for the benefit of officers
and other employees.
Under the first plan, the Company reserved 184,000 shares of authorized but
unissued common stock for issuance under the Plan. During fiscal 1999, 2,000
options were exercised resulting in an additional $14 of capital being recorded.
During fiscal 2000, 3,000 shares were exercised resulting in an additional $22
of capital being recorded. No options were exercised during fiscal 2001. Of the
25,000 options outstanding under the first plan, at March 31, 2001, all were
exercisable with an average exercise price per share of $16.25.
Under the second plan, the Company reserved 97,500 shares of authorized but
unissued common shares for issuance under the plan. During fiscal 2000, options
to purchase 32,499 shares were granted at an average exercise price of $20.25
per share and none of these options were exercised. During fiscal 2001, options
to purchase 32,501 shares were granted at an average exercise price of $16.625.
Of the 65,000 options outstanding under the second plan, at March 31, 2001, all
were exercisable with an average exercise price per share of $18.437. The
weighted average exercise price of all outstanding options at March 31, 2001,
was $17.830. The exercise price of any option granted will not be less than the
fair market value of the common stock on the date of grant of the option.
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 Bank 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.
The ESOP is repaying its loan to the Bank with funds from the Bank's
contributions to the plan and earnings from the ESOP's assets. Repayments of
$196, $183 and $184 were made during fiscal 2001, 2000 and 1999, respectively.
The scheduled repayment of the amount outstanding at March 31, 2001 is as
follows:
2002 130
2003 96
Compensation expense is recognized as the ESOP shares are allocated to
participants in the plan and was $130, $130, $51 for fiscal 2001, 2000 and 1999,
respectively.
56
As amended by SFAS 132, the components of the life plan and medical
plan for the years ended March 31, 2001 and 2000, respectively, follow:
2001 2000
----------------------------------------------
LIFE MEDICAL LIFE MEDICAL
---- ------- ---- -------
Actuarial present value of benefits obligation:
Retirees $ (222) $ (413) $ (193) $ (397)
Fully eligible participants (44) (307) (40) (283)
Other plan participants -- --
------- ------- ------- -------
Total $ (266) $ (720) $ (233) $ (680)
======= ======= ======= =======
Change in projected benefit obligation:
Accumulated benefit obligations at prior
year-end $ (233) $ (680) $ (256) $ (781)
Service cost less expense component -- --
Interest cost (19) (51) (17) (48)
Actuarial gain (loss) (7) 2 21 69
Assumptions (8) (29) 18 46
Benefits paid 1 38 1 34
------- ------- ------- -------
Accumulated benefit obligations at
year-end $ (266) $ (720) $ (233) $ (680)
======= ======= ======= =======
Change in plan assets:
Fair value of plan assets at prior fiscal
year-end $ -- $ -- $ -- $ --
Actual return on plan assets -- -- -- --
Employer contribution 1 38 1 34
Benefits paid end expenses (1) (38) (1) (34)
------- ------- ------- -------
Fair value of plan assets at current
fiscal year-end $ -- $ -- $ -- $ --
======= ======= ======= =======
Funded $ (266) $ (720) $ (233) $ (680)
Unrecognized net obligation 103 297 111 322
Unrecognized prior year service -- -- -- --
Unrecognized net (loss) gain (48) 80 (64) 53
------- ------- ------- -------
$ (211) $ (343) $ (186) $ (305)
======= ======= ======= =======
Reconciliation of (accrual) prepaid:
(Accrued) prepaid pension cost at prior
year-end $ (186) $ (305) $ (159) $ (241)
Minus net periodic cost (26) (76) (28) (98)
Plus employee contributions 1 38 1 34
------- ------- ------- -------
(Accrued) prepaid cost $ (211) $ (343) $ (186) $ (305)
======= ======= ======= =======
Benefit obligation weighted average assumption as
of fiscal year-end:
Discount rate 7.25% 7.25% 7.75% 7.75%
Expected return on plan assets 7.25% 7.25% 7.75% 7.75%
Rate of compensation increase -- -- -- --
1 PERCENTAGE POINT INCREASE
-------------------------------------
2001 2000
---- ----
Impact of 1% change in health care trend rates:
Effect on total service and interest cost components n/a $ (5) n/a $ (5)
Effect on the post retirement benefit obligations n/a 63 n/a 72
Components of net periodic benefit obligations:
Service cost $ -- $ -- $ -- $ --
Interest cost 19 51 17 49
Expected return on plan assets -- -- -- --
Amortization of prior service cost 9 25 17 25
Recognized actuarial (gain) loss (1) -- (6) 24
----- ----- ----- -----
Net periodic benefit cost for fiscal year ending $ 27 $ 76 $ 28 $ 98
===== ===== ===== =====
Periodic benefit cost weighted average assumptions:
Discount rate 7.75% 7.25% 7.00% 7.00%
Expected return on plan assets 7.75% 7.25% 7.00% 7.00%
Rate of compensation increase -- -- -- --
57
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the fiscal year ended March
31, 2000. The rate was assumed to decrease gradually to 5.5% for the fiscal year
ending March 31, 2003 and remain at that level thereafter.
NOTE 16. LEGAL PROCEEDINGS
The Bank is a party to certain litigation in the normal course of business.
Management and counsel are of the opinion that the aggregate liability, if any,
resulting from such litigation would not be material to the Bank's financial
position.
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands)
The FASB issued SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. 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.
Other significant assets and liabilities that are not considered financial
assets or liabilities include real estate acquired by foreclosure and office
properties 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.
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.
58
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.
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.
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.
The estimated carrying amounts and fair values of the Bank's financial
instruments are as follows:
AT MARCH 31, 2001 AT MARCH 31, 2000
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------- ---------- -------- ----------
ASSETS
Cash and due from banks $ 5,351 $ 5,351 $ 6,588 $ 6,588
Short-term investments 34,529 34,529 14,802 14,802
Investments available for sale:
Investment securities 31,263 31,263 32,135 32,135
Mortgage-backed securities 19,314 19,314 23,308 23,308
Net loans 342,687 350,028 317,020 310,543
Accrued interest receivable 2,426 2,426 2,036 2,036
Stock in Federal Home Loan Bank of Boston, at cost 6,150 6,150 5,800 5,800
The Co-operative Central Bank Reserve Fund 1,576 1,576 1,576 1,576
LIABILITIES
Deposits $287,167 $288,297 $258,339 $258,332
Advances from Federal Home Loan Bank of Boston 121,000 119,965 111,000 110,200
Advance payments by borrowers for taxes and insurance 1,220 1,220 1,053 1,053
Accrued interest payable 608 608 542 542
59
NOTE 18. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands)
The following are the condensed financial statements for Central Bancorp,
Inc. (the "Parent") only:
BALANCE SHEETS MARCH 31,
2001 2000
---------------------------------------------------------------------------------------------------
ASSETS
Cash deposit in subsidiary bank $ 2,153 $ 1,046
Investment in subsidiary, at equity 36,129 36,251
Other assets -- 100
---------------------
Total assets $ 38,282 $ 37,397
=====================
Liabilities and Stockholders' Equity
$ 70 $
Accrued expenses and other liabilities --
Total stockholders' equity 38,212 37,397
---------------------
Total liabilities and stockholders' equity $ 38,282 $ 37,397
=====================
STATEMENTS OF INCOME
FISCAL YEARS ENDED MARCH 31,
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Dividend income $ 4,000 $ 3,012 $ 2,500
Non-interest expense 266 331 62
-------------------------------------------
Income before income taxes 3,734 2,681 2,438
Income tax benefit (87) (109) 20
-------------------------------------------
Net income before cumulative effect of change in
accounting principle 3,821 2,790 2,458
Cumulative effect of change in accounting principle -- (234) --
-------------------------------------------
Net income before equity in net income of subsidiary 3,821 2,556 2,458
Equity in net income of subsidiary (712) 777 224
-------------------------------------------
Net income $ 3,109 $ 3,333 $ 2,682
===========================================
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31,
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities:
Net income $ 3,109 $ 3,333 $ 2,682
Adjustment to reconcile net income to net cash provided
by operating activities
Equity in undistributed income of subsidiary 712 (777) (224)
Decrease (increase) in other assets 100 (100) (235)
Increase (decrease) in accrued expenses and other
liabilities 70 (15) 15
Cumulative effect of change in accounting principle -- 234 --
-------------------------------------------
Net cash provided by operating activities 3,991 2,675 2,238
Cash flows from financing activities:
Proceeds from exercise of stock options -- 22 --
Purchase of treasury stock (2,187) (3,043) --
Cash dividends paid (697) (689) (157)
-------------------------------------------
Net cash used by financing activities (2,884) (3,710) (157)
-------------------------------------------
Net increase (decrease) in cash deposit in subsidiary bank 1,107 (1,035) 2,081
Cash deposit in subsidiary bank at beginning of year 1,046 2,081 --
-------------------------------------------
Cash deposit in subsidiary bank at end of year $ 2,153 $ 1,046 $ 2,081
===========================================
60
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In Thousands, Except Per
Share Data)
2001 QUARTERS
-----------------------------------------------------
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
Operating 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.......................... $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
Earnings per common share - assuming dilution...... $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
2000 QUARTERS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Interest and dividend income....................... $ 6,227 $ 6,314 $ 6,779 $ 7,104
Interest expense................................... 3,097 3,038 3,302 3,612
-----------------------------------------------------
Net interest and dividend income.............. 3,130 3,276 3,477 3,492
Non-interest income................................ 278 660 394 337
Operating expenses................................. 2,233 2,268 2,248 2,596
-----------------------------------------------------
Income before income taxes.................... 1,175 1,668 1,623 1,233
Income tax......................................... 462 636 603 431
-----------------------------------------------------
Net income before cumulative effect of change
in accounting principle....................... 713 1,032 1,020 802
Cumulative effect of change in accounting
principle, net of taxes....................... (234) -- -- --
-----------------------------------------------------
Net income.................................... $ 479 $ 1,032 $ 1,020 $ 802
=====================================================
Earnings per common share:
Before cumulative effect of change in
accounting principle.......................... $ 0.37 $ 0.54 $ 0.55 $ 0.44
=====================================================
Before cumulative effect of change in
accounting principle - assuming dilution...... $ 0.37 $ 0.54 $ 0.55 $ 0.44
=====================================================
After cumulative effect of change in
accounting principle.......................... $ 0.25 $ 0.54 $ 0.55 $ 0.44
=====================================================
After cumulative effect of change in
accounting principle - assuming dilution...... $ 0.25 $ 0.54 $ 0.55 $ 0.44
=====================================================
61
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
May 9, 2001
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND PRINCIPAL 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
- ------------------------------------------------------------------------
(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.
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.
63
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 -- No current reports on Form 8-K were filed during the
-------------------
last quarter of the fiscal year covered by this report.
(C) EXHIBITS
--------
The following exhibits are filed as exhibits to this report.
Exhibit No. Description
3.1* Articles of Organization of Central Bancorp, Inc.
3.2* Bylaws of Central Bancorp, Inc.
4.1** Rights Agreement, dated as of January 8, 1999, by and
between the Central Bancorp, Inc. and State Street
Bank & 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*** 1986 Stock Option Plan, as amended +
10.9*** Severance Agreement between the Bank and William P.
Morrissey, dated December 14, 1994 +
10.10*** Severance Agreement between the Bank and David
W. Kearn, dated December 14, 1994 +
64
10.11*** Severance Agreement between the Bank and Paul S.
Feeley, dated May 14, 1998 +
10.12*** Amendments to Severance Agreements between the Bank
and Messrs. Feeley, Kearn and Morrissey, dated
January 8, 1999. +
10.13**** 1999 Stock Option and Incentive Plan +
10.14***** Deferred Compensation Plan for Non-Employee
Directors +
10.15 Management Incentive Plan +
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 January 8,
1999.
*** 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.
65
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 20, 2001 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 20, 2001
-------------------------------------------------
John D. Doherty
President, Chief Executive Officer
and Director
By: /s/ Paul S. Feeley Date: June 20, 2001
-------------------------------------------------
Paul S. Feeley
Senior Vice President - Treasurer
and Chief Financial and
Accounting Officer
By: /s/ Joseph R. Doherty Date: June 20, 2001
-------------------------------------------------
Joseph R. Doherty
Chairman of the Board and Director
By: /s/ Terence D. Kenney Date: June 20, 2001
-------------------------------------------------
Terence D. Kenney
Director
By: /s/ John G. Quinn Date: June 20, 2001
-------------------------------------------------
John G. Quinn
Director
By: /s/ John F. Gilgun, Jr. Date: June 20, 2001
-------------------------------------------------
John F. Gilgun, Jr.
Director
By: /s/ Marat E. Santini Date: June 20, 2001
-------------------------------------------------
Marat E. Santini
Director
By: /s/ Nancy D. Neri Date: June 20, 2001
-------------------------------------------------
Nancy D. Neri
Director
By: /s/ Gregory W. Boulos Date: June 20, 2001
-------------------------------------------------
Gregory W. Boulos
Director