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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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
--------------
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).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
CENTRAL BANCORP INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Consolidated Balance Sheets...................................................3
Consolidated Statements of Income.............................................4
Consolidated Statement of Changes in Stockholders' Equity.....................5
Consolidated Statement of Cash Flows..........................................6
Notes to Consolidated Financial Statements....................................8
Independent Auditors' Report.................................................27
2
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.
3
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
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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.
4
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.
5
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
=======================================
6
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.
7
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
8
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
9
groups of loans based on risk ratings and product types. A system of periodic
loan reviews is performed to assess the 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.
The Company continues to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" as permitted by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). For companies
that elect to continue using APB 25, SFAS 123 requires disclosure of the pro
forma effect of using the fair value method of accounting for stock-based
compensation that is encouraged by SFAS 123. See Note 15 for the expanded
disclosures required by SFAS 123.
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
10
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, or $0.13 per
share ($0.12 per share assuming dilution).
11
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
-----------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED 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
================= =================== =============== ================
12
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.
13
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
14
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
=========== ========== =============
15
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.
16
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.
17
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
===========================================
18
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 1.8 2.2
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.
19
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.
20
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 %
21
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. At the beginning of fiscal
1999, options to purchase 30,000 shares were outstanding at an exercise price of
$16.25 per share. During fiscal 1999, 2,000 options were exercised resulting in
an additional $14 of capital being recorded. At the end of fiscal 1999, options
to purchase 28,000 shares were outstanding at an exercise price of $16.25 per
share.
During fiscal 2000, 3,000 shares were exercised resulting in an additional
$22 of capital being recorded. At the end of fiscal 2000, options to purchase
25,000 shares were outstanding at an exercise price of $16.25 per share. 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. The first options granted
under this plan were awarded during fiscal 2000. 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.
22
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS 123, the Company's net
income would have been reduced to the pro forma amounts indicated below. No
options were granted during fiscal 1999.
2001 2000
Net income before cumulative effect of change in accounting principle, as reported 3,109 3,567
Cumulative effect of change in accounting principle, as reported - (234)
Net income after cumulative effect of change in accounting principle, as reported 3,109 3,333
Pro forma net income before cumulative effect of change in accounting principle 2,934 3,308
Pro forma cumulative effect of change in accounting principle - (234)
Pro forma net income after cumulative effect of change in accounting principle 2,934 3,074
Earnings per common share
Before cumulative effect of change in accounting principle, as reported $1.81 $1.90
Before cumulative effect of change in accounting principle, pro forma $1.71 $1.76
Before cumulative effect of change in accounting principle--assuming dilution, as reported $1.81 $1.89
Before cumulative effect of change in accounting principle--assuming dilution, pro forma $1.71 $1.75
After cumulative effect of change in accounting principle, as reported $1.81 $1.77
After cumulative effect of change in accounting principle, pro forma $1.71 $1.63
After cumulative effect of change in accounting principle--assuming dilution, as reported $1.81 $1.77
After cumulative effect of change in accounting principle--assuming dilution, pro forma $1.71 $1.63
The per share weighted average fair value of stock options granted during 2001
and 2000 was $5.39 and $7.98, respectively, on the date of grant. These fair
values were determined using the Black Scholes option pricing model with the
following weighted average assumptions:
2001 2000
---- ----
Expected dividend yield..................... 2.00% 2.00%
Risk-free interest rate..................... 5.20 6.00
Expected volatility......................... 31.00 39.00
Expected life in years...................... 6.00 yrs 6.00 yrs
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.
23
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 -- -- -- --
24
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.
25
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
26
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
Accrued expenses and other liabilities $ 70 $ --
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
===========================================
27
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
=====================================================
28
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
29
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 +
30
10.10*** Severance Agreement between the Bank and David
W. Kearn, dated December 14, 1994 +
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.
****** Incorporated by reference to the Form 10-K for the fiscal years ended
March 31, 2001 filed on June 26, 2001.
31
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: August 9, 2001 By:/s/ John D. Doherty
--------------------------------------
John D. Doherty
President, Chief Executive Officer and
Duly Authorized Representative