U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 2001
-----------------
COMMISSION FILE NUMBER: 0-25251
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CENTRAL BANCORP, INC.
---------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
MASSACHUSETTS
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
I.R.S. EMPLOYER IDENTIFICATION NO. 04-3447594
399 HIGHLAND AVENUE, SOMERVILLE, MA. 02144
------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER
(617) 628-4000
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Class Outstanding at February 13, 2002
------------------------------- --------------------------------
Common Stock, $1.00 par value 1,647,784
CENTRAL BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition at March 31,
2001 and December 31, 2001 (unaudited)
Consolidated Statements of Income for the three and nine
month periods ended December 31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows for the nine month
periods ended December 31, 2001 and 2000 (unaudited)
Consolidated Statements of Changes in Stockholders' Equity
for the nine month periods ended December 31, 2001 and 2000
(unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the three and nine month
periods ended December 31, 2001 and 2000
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Item 1-Financial Statements:
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
December 31, March 31,
2001 2001
- -------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 7,508 $ 5,351
-------------------------------------
Short-term investments 3,296 34,529
Investments available for sale:
Investment securities 60,210 31,263
Mortgage-backed securities 20,287 19,314
Stock in Federal Home Loan Bank of Boston, at cost 6,361 6,150
The Co-operative Central Bank Reserve Fund 1,576 1,576
-------------------------------------
Total investments 91,730 92,832
-------------------------------------
Loans:
Mortgage loans 320,982 338,898
Other loans 7,850 6,895
-------------------------------------
328,832 345,793
Less allowance for loan losses (3,291) (3,106)
-------------------------------------
Net loans 325,541 342,687
-------------------------------------
Accrued interest receivable 2,486 2,426
Office properties and equipment, net 1,884 2,018
Deferred tax asset, net 887 801
Goodwill, net 2,304 2,520
Other assets 507 702
-------------------------------------
Total assets $ 432,847 $ 449,337
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 262,032 $ 287,167
Advances from Federal Home Loan Bank of Boston 129,206 121,000
Advance payments by borrowers for taxes and insurance 988 1,220
Accrued interest payable 559 608
Accrued expenses and other liabilities 1,147 1,130
-------------------------------------
Total liabilities 393,932 411,125
-------------------------------------
Commitments and Contingencies (Note 2)
Stockholders' equity:
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;
Issued 1,999,588 and 1,970,000 shares(outstanding 1,649,284 and
1,684,164) at December 31, 2001 and March 31, 2001 respectively 2,000 1,970
Additional paid-in capital 11,792 11,190
Retained income 32,484 30,950
Treasury stock (350,304 shares and 285,836 shares at December 31,
2001, and March 31, 2001, respectively), at cost (6,679) (5,230)
Accumulated other comprehensive income (loss) (note 4) (542) (431)
Unearned compensation - ESOP (140) (237)
-------------------------------------
Total stockholders' equity 38,915 38,212
-------------------------------------
Total liabilities and stockholders' equity $ 432,847 $ 449,337
=====================================
See accompanying notes to unaudited consolidated financial statements.
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
------------------------ ----------------------------
Interest and dividend income:
Mortgage loans $ 5,564 $ 6,596 $ 17,510 $ 19,142
Other loans 157 252 521 540
Short-term investments 47 127 848 276
Investment securities 961 780 2,047 2,006
Mortgage-backed securities 303 350 842 1,085
The Co-operative Central Bank Reserve Fund 20 17 63 63
------------------------ ----------------------------
Total interest and dividend income 7,052 8,122 21,831 23,112
------------------------ ----------------------------
Interest expense:
Deposits 1,743 2,589 6,557 7,408
Advances from Federal Home Loan Bank of Boston 1,601 1,883 4,970 5,154
------------------------ ----------------------------
Total interest expense 3,344 4,472 11,527 12,562
------------------------ ----------------------------
Net interest and dividend income 3,708 3,650 10,304 10,550
Provision for loan losses -- -- -- --
------------------------ ----------------------------
Net interest and dividend income after
provision for loan losses 3,708 3,650 10,304 10,550
------------------------ ----------------------------
Non-interest income:
Deposit service charges 136 118 364 334
Net gains from sales of investment securities 16 275 339 651
Other income 92 51 288 151
------------------------ ----------------------------
Total non-interest income 244 444 991 1,136
------------------------ ----------------------------
Operating expenses:
Salaries and employee benefits 1,334 1,517 4,382 4,145
Occupancy and equipment 273 304 868 869
Advertising 26 107 224 437
Data processing service fees 248 243 738 534
Professional fees 232 142 786 655
Goodwill amortization 72 72 216 216
Other expense 282 300 872 846
------------------------ ----------------------------
Total operating expenses 2,467 2,685 8,086 7,702
------------------------ ----------------------------
Income before income taxes 1,485 1,409 3,209 3,984
Income tax expense 536 509 1,166 1,442
------------------------ ----------------------------
Net income $ 949 $ 900 $ 2,043 $ 2,542
======================== ============================
Earnings per common share $ 0.57 $ 0.53 $ 1.23 $ 1.46
======================== ============================
Earnings per common share, diluted $ 0.57 $ 0.53 $ 1.22 $ 1.46
======================== ============================
Weighted average common shares outstanding 1,657 1,690 1,661 1,736
Weighted average common shares
outstanding, diluted 1,672 1,692 1,676 1,738
See accompanying notes to unaudited consolidated financial statements.
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
December 31,
(In Thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,043 $ 2,542
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 298 331
Amortization of premiums, fees and discounts 118 65
Amortization of goodwill 216 216
Net gains from sales of investment securities (339) (651)
Decrease in deferred tax asset -- 278
Increase in accrued interest receivable (60) (380)
Decrease (increase) in other assets 195 (278)
(Decrease) increase in advance payments by borrowers for taxes and insurance (232) 234
(Decrease) increase in accrued interest payable (49) 82
(Decrease) increase in accrued income taxes (28) 468
Increase in accrued expenses and other liabilities 45 141
----------------------------
Net cash provided by operating activities 2,207 3,048
----------------------------
Cash flows from investing activities:
Principal collected on loans 91,037 39,806
Loan originations (73,891) (70,470)
Principal payments on mortgage-backed securities available for sale 5,337 3,058
Purchase of investment securities available for sale (63,858) (5,470)
Maturities and calls of investment securities available for sale 26,000 --
Proceeds from sales of investment securities available for sale 2,625 2,692
Net decrease in short-term investments 31,233 8,138
Purchase of Stock in Federal Home Loan Bank of Boston (211) --
Purchase of office properties and equipment (164) (202)
----------------------------
Net cash provided by (used in) investing activities 18,108 (22,448)
----------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (25,135) 15,334
Proceeds from advances from FHLB of Boston 24,000 127,000
Payments on advances from FHLB of Boston (18,000) (121,000)
Net increase in short-term advances from FHLB of Boston 2,206 --
Earned ESOP shares charged to expense 140 --
Proceeds from exercise of stock options 492 --
Purchase of Treasury stock (1,449) (2,092)
Dividends paid (509) (530)
Amortization of unearned compensation - ESOP 97 97
----------------------------
Net cash (used in) provided by financing activities (18,158) 18,809
----------------------------
Net increase (decrease) in cash and due from banks 2,157 (591)
Cash and due from banks at beginning of period 5,351 6,588
----------------------------
Cash and due from banks at end of period $ 7,508 $ 5,997
============================
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 11,576 $ 12,480
Income taxes 1,194 974
See accompanying notes to unaudited consolidated financial statements.
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Additional
Common Paid-In Retained Treasury
(In Thousands) Stock Capital Income Stock
- ------------------------------------------------------------------------------------------------------------
Nine Months Ended December 31, 2000
- ------------------------------------
Balance at March 31, 2000 $ 1,970 $ 11,190 $ 28,538 $ (3,043)
-------- -------- -------- --------
Net Income -- -- 2,542 --
Other Comprehensive Income, net of tax
Unrealized gain on securities, net of
reclassification adjustment (note 4) -- -- -- --
-------- -------- -------- --------
Comprehensive income (loss) -- -- 2,542 --
-------- -------- -------- --------
Purchase of treasury stock -- -- -- (2,092)
Dividends paid -- -- (530) --
Amortization of unearned compensation - ESOP -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2000 $ 1,970 $ 11,190 $ 30,550 $ (5,135)
======== ======== ======== ========
Nine Months Ended December 31, 2001
- -----------------------------------
Balance at March 31, 2001 $ 1,970 $ 11,190 $ 30,950 $ (5,230)
-------- -------- -------- --------
Net Income -- -- 2,043 --
Other Comprehensive Income, net of tax
Unrealized gain on securities, net of
reclassification adjustment (note 4) -- -- -- --
-------- -------- -------- --------
Comprehensive income -- -- 2,043 --
-------- -------- -------- --------
Earned ESOP shares charged to expense -- 140 -- --
Proceeds from exercise of stock options 30 462 -- --
Purchase of treasury stock -- -- -- (1,449)
Dividends paid -- -- (509) --
Amortization of unearned compensation - ESOP -- -- -- --
-------- -------- -------- --------
Balance at December 31, 2001 $ 2,000 $ 11,792 $ 32,484 $ (6,679)
======== ======== ======== ========
Accumulated
Other Unearned Total
Comprehensive Compensation Stockholders'
(In Thousands) Income (Loss) ESOP Equity
- ------------------------------------------------------------------------------------------------------------
Nine Months Ended December 31, 2000
- -----------------------------------
Balance at March 31, 2000 $ (825) $ (433) $ 37,397
------ ------- --------
Net Income -- -- 2,542
Other Comprehensive Income, net of tax
Unrealized gain on securities, net of
reclassification adjustment (note 4) 560 -- 560
------ ------- --------
Comprehensive income (loss) 560 -- 3,102
------ ------- --------
Purchase of treasury stock -- -- (2,092)
Dividends paid -- -- (530)
Amortization of unearned compensation - ESOP -- 97 97
------ ------- --------
Balance at December 31, 2000 $ (265) $ (336) $ 37,974
====== ======= ========
Nine Months Ended December 31, 2001
- -----------------------------------
Balance at March 31, 2001 $ (431) $ (237) $ 38,212
------ ------- --------
Net Income -- -- 2,043
Other Comprehensive Income, net of tax
Unrealized gain on securities, net of
reclassification adjustment (note 4) (111) -- (111)
------ ------- --------
Comprehensive income (111) -- 1,932
------ ------- --------
Earned ESOP shares charged to expense -- -- 140
Proceeds from exercise of stock options -- -- 492
Purchase of treasury stock -- -- (1,449)
Dividends paid -- -- (509)
Amortization of unearned compensation - ESOP -- 97 97
------ ------- --------
Balance at December 31, 2001 $ (542) $ (140) $ 38,915
====== ======= ========
See accompanying notes to unaudited consolidated financial statements.
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
(1) BASIS OF PRESENTATION
---------------------
The consolidated financial statements of the Registrant for December 31,
2001 and 2000 presented herein should be read in conjunction with the
financial statements of the Company as of and for the year ended March 31,
2001, included in the Company's Annual Report on Form 10-K. In the opinion
of management, the accompanying unaudited consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments,
necessary to fairly present the results for the interim periods presented.
Interim results are not necessarily indicative of results to be expected
for the entire year.
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
-------------------------------------------------
Commitments to originate loans, unused lines of credit and unadvanced
portions of 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 Company
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
borrower.
Commitments at December 31, 2001 follow: (In Thousands)
Unused lines of credit............................... $ 10,227
Unadvanced portions of construction loans............ 5,192
Unadvanced portions of commercial loans.............. 5,358
Commitments to originate commercial loans............ 100
Commitments to originate commercial mortgage loans... 23,474
Commitments to purchase residential mortgage loans... 19,031
Commitments to originate residential mortgage loans:
Fixed rate..................................... 5,420
Adjustable rate................................ 462
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2001
(UNAUDITED)
(3) INCOME TAXES
------------
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are established for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.
(4) REPORTING COMPREHENSIVE INCOME
------------------------------
The Company has established standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by, and distributions to, shareholders. Net income is a
component of comprehensive income, with all other components referred to in
the aggregate as other comprehensive income.
The Company's other comprehensive income (loss) and related tax
effect is as follows:
For the Nine Months Ended
(In Thousands) December 31, 2001
---------------------------------------------------------------------------------------------------------------
Before-
Tax Tax (Benefit) After-Tax
Amount Expense Amount
------ ------------- ---------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 142 $ 37 $ 105
Less: reclassification adjustment for
gains realized in net income 339 123 216
---------------------------------------------
Other comprehensive loss $ (197) $ (86) $ (111)
=============================================
For the Nine Months Ended
December 31, 2000
----------------------------------------------------
Before-
Tax Tax After-Tax
Amount Expense Amount
------ ------- ---------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 1,488 $ 512 $ 976
Less: reclassification adjustment for
gains realized in net income 651 235 416
----------------------------------------------
Other comprehensive income $ 837 $ 277 $ 560
==============================================
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 2001
(UNAUDITED)
(5) DIRECTORS DEFERRED COMPENSATION PLAN
------------------------------------
In fiscal 2001, the Company established a deferred compensation plan for
its directors. The Plan allows the Company's directors to defer receipt of
all or a portion of their compensation. The plan requires that the
compensation deferred be invested in Company stock held in an irrevocable
trust. At December 31, 2001 the trust held 1,500 shares of Central Bancorp
stock that the Company has classified as treasury stock. The treasury
shares are considered outstanding in the computation of earnings per share
and book value per share.
CENTRAL BANCORP, INC. AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL:
- -------
The Registrant, Central Bancorp, Inc. is the holding company for Central
Co-operative Bank. Because substantially all of the business of the
Registrant is the business of the Bank, the discussion below focuses on the
business of the Bank. For more information, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Holding
Company" included in the Company's Annual Report on Form 10-K as of and for
the year ended March 31, 2001.
Net income amounted to $949,000, or $0.57 per diluted share for the three
months ended December 31, 2001 as compared to net income of $900,000, or
$0.53 per diluted share in the corresponding quarter ended December 31,
2000.
The earnings increase for the December 31, 2001 quarter was in part due to
a $58,000 increase in net interest and dividend income compared to the
corresponding quarter ended December 31, 2000.
FINANCIAL CONDITION:
- -------------------
The following is a discussion of the major changes and trends in financial
condition from the end of the preceding fiscal year, March 31, 2001, to
December 31, 2001.
Total assets decreased from $449.3 million at March 31, 2001 to $432.8
million at December 31, 2001 primarily as a result of net loan payoffs and
amortization. Funds generated from the reduction in loans were used to fund
planned deposit outflows.
The Company's loan balance declined by $17.2 million or 5.0% as a result of
a higher level of amortization and payoffs than originations, as the
Company made a decision to slow down long-term fixed-rate residential loan
originations earlier in the fiscal year. Loan originations amounted to
$73.9 million. Loan amortization and pay-offs amounted to $91.0 million.
The Company's investment portfolio decreased by $1.1 million, primarily as
a result of a decrease in short-term investments offset by an increase in
investment securities.
Deposits decreased during the period by $25.1 million primarily due to a
decrease in term deposit certificates, offset by increases in savings and
transaction accounts.
Advances from Federal Home Loan Bank of Boston increased during the period
by $8.2 million primarily to offset deposit outflows.
During the period, the Company continued its fourth common stock buyback
program. An additional 62,968 shares were purchased during the period at an
average price of $23.01. At December 31, 2001, 16,490 shares remained
authorized to be repurchased under that program. The shares repurchased
since the first buyback program was adopted in April 1999 total 348,804 at
an average cost of $19.12 per share, representing 17.71% of the common
stock issued and outstanding prior to the adoption of the first buyback
program.
NON-PERFORMING ASSETS:
- ---------------------
The Company had one non-accruing loan totaling $143,000 at December 31,
2001. Interest income not recognized on this non-accruing loan amounted to
$5,000 for the first nine months of fiscal 2002.
The following table sets forth information with respect to the Company's
non-performing assets for the dates indicated:
Dec. 31, March 31, Dec. 31,
2001 2001 2000
-------- --------- --------
(Dollars in thousands)
Loans accounted for on a
non-accrual basis, (non-accruing loans) $ 143 $ -- $ 16
Impaired loans, accruing -- -- --
Non-accruing loans as a percentage of
total loans 0.04% 0.00% 0.00%
Non-accruing loans as a percentage of
total assets 0.03% 0.00% 0.00%
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2001, AND 2000:
- ---------------------
Net income for the three months ended December 31, 2001, and 2000, amounted
to $949,000 or $0.57 per diluted share and $900,000 or $0.53 per diluted
share, respectively.
Interest income from the Company's loan portfolio decreased $1,127,000 in
the third quarter of fiscal 2002 as compared to the third quarter of fiscal
2001. This decrease was primarily the result of a $28.4 million decrease in
the average loan balance combined with a 71 basis point decrease in average
rates earned on these loans.
Income from the Company's investment portfolio (which includes income on
short term investments, investment securities, mortgage-backed securities,
FHLB stock and The Co-operative Central Bank Reserve Fund) increased by
$57,000 during the third quarter of fiscal 2002 when compared to the same
fiscal 2001 period. The yield on these assets decreased by 123 basis points
while the average balance increased by $18.6 million during the fiscal 2002
quarter.
Average earning assets decreased by $9.8 million while the rate earned on
these assets decreased 86 basis points to 6.88% during the third quarter of
fiscal 2002 when compared to the third quarter of fiscal 2001.
The Company's cost of deposits decreased by $846,000 during the third
quarter of fiscal 2002 when compared to the same fiscal 2001 quarter. The
rate paid on deposits decreased 120 basis points from 3.81% during the
quarter ended December 31, 2000 to 2.61% during the quarter ended December
31, 2001. The average balance of these deposits decreased $4.9 million to
$267.0 million during the third quarter of fiscal 2002 from $271.9 million
during the fiscal 2001 third quarter.
The average balance of borrowed funds decreased by $6.1 million to $112.0
million in the fiscal 2002 third quarter compared to $118.1 million in the
same fiscal 2001 quarter. The rate paid on borrowings decreased by 66 basis
points in the fiscal 2002 quarter to 5.72% from 6.38% in the fiscal 2001
quarter. The combined effect of these changes resulted in an decrease of
$282,000 in interest expense on borrowings to $1.6 million in the third
quarter of fiscal 2002 compared to $1.9 million in fiscal 2001's third
quarter.
The average balance of interest-bearing liabilities decreased $11.0 million
while the rates paid on these liabilities decreased by 106 basis points
during the quarter ended December 31, 2001 when compared to the same period
one year ago.
These developments resulted in a $1,070,000 decrease in interest and
dividend income and a decrease of $1,128,000 in interest expense. The
combination resulted in a $58,000 increase in net interest and dividend
income from the fiscal 2001 quarter to the fiscal 2002 quarter.
The provision for loan losses is made to maintain the allowance for loan
losses at a level which management considers adequate to provide for
probable losses based on an evaluation of known and inherent risks in the
loan portfolio. Due to the Bank's stable and relatively high level of asset
quality, and, consistent with the current evaluation of the loan portfolio,
the Company did not make any provision for the third quarter of fiscal 2002
or fiscal 2001.
Non-interest income decreased by $200,000 to $244,000 in the third quarter
of fiscal 2002 from $444,000 in the third fiscal 2001 quarter. The Company
recorded $16,000 and $275,000 in net gains from sales of investment
securities during the third quarter of fiscal 2002 and fiscal 2001,
respectively. Service charges on deposit accounts increased by $18,000 to
$136,000 during fiscal 2002 and other income, including fees from non
deposit investment products, increased by $41,000 to $92,000 in fiscal
2002.
Operating expenses decreased $218,000 in the third quarter of fiscal 2002
compared to the same quarter of fiscal 2001. The decrease is primarily
attributable to a decrease of $183,000 in salaries and employee benefits
and a decrease in advertising costs of $81,000, offset by an increase in
professional fees of $90,000. Operating expenses in the third fiscal 2001
quarter were impacted by a one-time expenditure relating to the settlement
of a severance claim. Absent this expenditure, operating expenses would
have increased from last year.
The provision for Federal and state income taxes amounted to $536,000 and
$509,000 during the third quarter of fiscal 2002 and fiscal 2001,
respectively. The increased expense relates primarily to the increased
level of pre-tax income.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 2001, AND 2000:
- --------------------
Net income for the nine months ended December 31, 2001, and 2000, amounted
to $2.0 million or $1.22 per diluted share and $2.5 million or $1.46 per
diluted share, respectively.
Interest income from the Company's loan portfolio decreased $1,651,000 for
the nine months ended December 31, 2001. This decrease was the result of a
$12.3 million decrease in the average loan balance in addition to a 38
basis point decrease in average rates earned on these loans.
Income from the Company's investment portfolio (which includes income on
short term investments, investment securities, mortgage-backed securities,
FHLB stock and The Co-operative Central Bank Reserve Fund) increased by
$370,000 during the nine months ended December 31, 2001 when compared
to the same fiscal 2001 period. The yield on these assets decreased by 126
basis points while the average balance increased by $25.3 million during
the nine months ended December 31, 2001.
Average earning assets increased by $13.0 million while the rate earned on
these assets decreased 64 basis points to 6.90% during the nine months
ended December 31, 2001 when compared to the same period of fiscal 2001.
The Company's cost of deposits decreased by $851,000 during the nine months
ended December 31, 2001 when compared to the same fiscal 2001 period. The
rate paid on deposits decreased 53 basis points from 3.68% during the nine
months ended December 31, 2000 to 3.15% during the nine months ended
December 31, 2001. The average balance of these deposits increased $9.3
million to $277.8 million during the nine months ended December 31, 2001
from $268.5 million during the fiscal 2001 nine month period.
The average balance of borrowed funds increased by $3.8 million to $114.6
million in the nine months ended December 31, 2001 compared to $110.8
million in the same period in fiscal 2001. The rate paid on borrowings
decreased by 42 basis points in the fiscal 2002 period to 5.78% from 6.20%
in the same nine month period in fiscal 2001. The combined effect of these
changes resulted in an decrease of $184,000 in interest expense on
borrowings to $5.0 million in the nine months ended December 31, 2001
compared to $5.2 million for the nine months ended December 31, 2000.
The average balance of total interest-bearing liabilities increased $13.1
million while the rates paid on these liabilities decreased by 50 basis
points during the nine months ended December 31, 2001 when compared to the
same period one year ago.
These developments resulted in a $1,281,000 decrease in interest and
dividend income and a decrease of $1,035,000 in interest expense. The
combination resulted in a $246,000 decrease in net interest and dividend
income from the nine months ended December 31, 2000 to the same period in
fiscal 2002.
The provision for loan losses is made to maintain the allowance for loan
losses at a level which management considers adequate to provide for
probable losses based on an evaluation of known and inherent risks in the
loan portfolio. Consistent with the current evaluation of the loan
portfolio, the Company did not make any provision for the nine months ended
December 31, 2001 or 2000.
Non-interest income decreased by $145,000 to $991,000 in the nine months
ended December 31, 2001 from $1,136,000 in the same period in fiscal 2001.
The Company recorded $339,000 and $651,000 in net gains from sales of
investment securities during the nine months ended December 31, 2001 and
2000, respectively.
Operating expenses increased $384,000 in the nine months ended December 31,
2001 compared to the same period of fiscal 2001. This increase is primarily
attributable to an increase of $237,000 in salaries and employee benefits,
an increase of $204,000 in data processing service fees and an increase in
professional fees of $131,000 as a result of added personnel to market the
company's new non-deposit investment products and to originate and monitor
its lending activities, a new computer processing system and increased
legal and consulting fees, offset by a reduction in advertising expense of
$213,000.
The provision for Federal and state income taxes amounted to $1,166,000 and
$1,442,000 during the nine months ended December 31, 2001 and 2000,
respectively. The decreased expense relates primarily to the decreased
level of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
The Company's principal sources of liquidity are loan amortization, loan
prepayments, increases in deposits and advances from The Federal Home Loan
Bank (FHLB) of Boston. The Company is a voluntary member of the FHLB of
Boston and as such is generally entitled to borrow. Cash from these
liquidity sources is used to fund loan originations, security investments,
deposit maturities and repayment of FHLB of Boston advances. The Company's
capital to assets ratio was 8.99% on December 31, 2001, which exceeded
regulatory requirements.
NEW ACCOUNTING PRONOUNCEMENT:
- ----------------------------
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, "Business
Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS
141 requires the use of purchase method of accounting for all business
combinations initiated after June 30, 2001, thereby eliminating the use of
the pooling of interests method. It also provides new criteria that
determine whether an acquired intangible asset should be recognized
separately from goodwill. The Company does not expect the adoption of this
statement to have a material impact on its financial statements.
SFAS 142 requires that upon adoption of the Statement, any goodwill
recorded on an entity's balance sheet would no longer be amortized. This
would include existing goodwill (i.e., recorded goodwill at the date the
statements are issued), as well as goodwill arising subsequent to the
effective date of the Statement. Goodwill will not be amortized but will be
reviewed for impairment periodically or upon the occurrence of certain
triggering events. This Statement is effective for fiscal years beginning
after December 15, 2001 which for the Company will commence on April 1,
2002. At December 31, 2001, the Company had $2.3 million of goodwill on its
balance sheet that was being amortized at a rate of $288,000 annually.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
The Bank's earnings are largely dependent on its net interest income, which
is the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. The Bank seeks to reduce its exposure to changes
in interest rate, or market risk, through active monitoring and management of
its interest-rate risk exposure. 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 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 150 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.................... (3.7)% (3.6)%
150 basis point decrease in rates.................... (0.4)% (2.5)%
Based on the scenario above, net interest income of the Company would be
adversely affected by either a 300 basis point increase or a 150 basis point
decrease in rates in both the twelve and twenty-four month periods.
For a complete discussion of interest rate sensitivity and liquidity, see
the Corporation's Annual Report on Form 10-K for the year ended March 31, 2001.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report includes forward-looking statements that involve inherent risks
and uncertainties. A number of important factors could cause actual results
to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing
in geographic and business areas in which the Company operates, prevailing
interest rates, changes in government regulations and policies affecting
financial services companies, and credit quality and credit risk
management. Central Bancorp, Inc. undertakes no obligation to release
revisions to these forward-looking statements or reflect events or
circumstances after the date of this report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The Registrant's 2002 Annual Meeting of Stockholders
will be held on September 30, 2002. The deadline for
submission of shareholder proposals for inclusion in
the proxy statement and form of proxy for the 2002
Annual Meeting will be April 19, 2002. The date after
which notice of a shareholder proposal submitted
outside the process of Rule 14a-8 will be considered
untimely under the Company's Articles of Organization
will be September 1, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended December 31, 2001,
the Registrant filed the following Current
Reports on Form 8-K:
Date Items Reported
-------------------------------
10/11/01 Item 5 -- The Registrant reported that its
Board of Directors had declared
a dividend payable October 24,
2001 of one right per share of
Common Stock outstanding on
October 24, 2001. The terms of
the rights are governed by a
Shareholder Rights Agreement
dated October 11, 2001 between
the Registrant and EquiServe
Trust Company, N.A.
10/30/01 Item 5 -- The Registrant reported that it
had issued a letter responding
to certain statements made by
the PL Capital - Archimedes
Overseas, Ltd. Group.
No financial statements were filed with the foregoing
Current Reports on Form 8-K.
CENTRAL BANCORP, INC. AND SUBSIDIARY
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
CENTRAL BANCORP, INC. AND SUBSIDIARY
------------------------------------
02/14/02 /s/ John D. Doherty
-------- -------------------
Date John D. Doherty
President and Chief Executive Officer
02/14/02 /s/ Paul S. Feeley
- --------- ------------------
Date Paul S. Feeley
Senior Vice President, Treasurer
and Chief Financial Officer