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 SEPTEMBER 30, 2002
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COMMISSION FILE NUMBER: 0-25251
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CENTRAL BANCORP, INC.
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(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)
(617) 628-4000
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REGISTRANT'S TELEPHONE NUMBER
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
--- ---
Common Stock, $1.00 par value 1,659,933
----------------------------- --------------------------------
Class Outstanding at November 12, 2002
CENTRAL BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
September 30, 2002 and March 31, 2002 1
Consolidated Statements of Income for the three
and six months ended September 30, 2002 and 2001 2
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended September 30, 2002
and 2001 3
Consolidated Statements of Cash Flows for the six
months ended September 30, 2002 and 2001 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Liquidity and Capital Resources 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES AND CERTIFICATIONS
Item 1. Financial Statements
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, March 31,
(Dollars in Thousands) 2002 2002
- -------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 7,482 $ 5,109
Short-term investments 7,511 2,455
----------- -----------
Cash and cash equivalents 14,993 7,564
----------- -----------
Investment securities available for sale (amortized cost of $70,779
at September 30, 2002 and $74,935 at March 31, 2002) 70,546 73,884
Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300
The Co-operative Central Bank Reserve Fund 1,576 1,576
----------- -----------
Total investments 80,422 83,760
----------- -----------
Loans (Note 2) 369,843 371,707
Less allowance for loan losses 3,294 3,292
----------- -----------
Net loans 366,549 368,415
----------- -----------
Accrued interest receivable 2,626 2,530
Banking premises and equipment, net 1,863 1,836
Deferred tax asset, net 1,371 1,289
Goodwill, net (Note 1) 2,232 2,232
Other assets 487 593
----------- -----------
Total assets $ 470,543 $ 468,219
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 3) $ 276,448 $ 261,907
Advances from Federal Home Loan Bank of Boston 151,700 164,000
Advance payments by borrowers for taxes and insurance 1,029 1,111
Accrued expenses and other liabilities 1,947 2,247
----------- -----------
Total liabilities 431,124 429,265
----------- -----------
Commitments and Contingencies (Note 5)
Stockholders' equity (Note 6):
Preferred stock $1.00 par value; authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock $1.00 par value; authorized 15,000,000 shares;
2,025,227 shares issued at September 30, 2002 and
1,999,588 shares issued at March 31, 2002 2,025 2,000
Additional paid-in capital 12,573 11,934
Retained income 34,506 33,141
Treasury stock (365,294 shares at September 30, 2002 and
at March 31, 2002), at cost (7,204) (7,189)
Accumulated other comprehensive income (loss) (Note 4) (108) (626)
Unearned compensation - ESOP (2,373) (306)
----------- -----------
Total stockholders' equity 39,419 38,954
----------- -----------
Total liabilities and stockholders' equity $ 470,543 $ 468,219
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
1
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest and dividend income:
Mortgage loans $ 6,088 $ 5,797 $ 12,292 $ 11,946
Other loans 147 182 293 364
Short-term investments 68 329 95 801
Investments 1,147 872 2,328 1,668
-------- -------- -------- --------
Total interest and dividend income 7,450 7,180 15,008 14,779
-------- -------- -------- --------
Interest expense:
Deposits 1,486 2,177 2,981 4,814
Advances from Federal Home Loan Bank of Boston 1,848 1,643 3,631 3,369
-------- -------- -------- --------
Total interest expense 3,334 3,820 6,612 8,183
-------- -------- -------- --------
Net interest and dividend income 4,116 3,360 8,396 6,596
Provision for loan losses -- -- -- --
-------- -------- -------- --------
Net interest and dividend income after
provision for loan losses 4,116 3,360 8,396 6,596
-------- -------- -------- --------
Non-interest income:
Deposit service charges 133 105 262 229
Net gains (losses) from sales and write-downs
of investment securities (221) 121 (210) 324
Other income 146 111 229 193
-------- -------- -------- --------
Total non-interest income 58 337 281 746
-------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 1,653 1,515 3,291 3,048
Occupancy and equipment 288 277 569 595
Data processing service fees 255 220 546 490
Professional fees 454 362 703 554
Goodwill amortization (Note 1) -- 72 -- 144
Other expenses 482 360 914 787
-------- -------- -------- --------
Total non-interest expenses 3,132 2,806 6,023 5,618
-------- -------- -------- --------
Income before income taxes 1,042 891 2,654 1,724
Provision for income taxes 374 327 959 630
-------- -------- -------- --------
Net income $ 668 $ 564 $ 1,695 $ 1,094
======== ======== ======== ========
Earnings per common share - basic $ 0.42 $ 0.34 $ 1.06 $ 0.66
======== ======== ======== ========
Earnings per common share - diluted $ 0.42 $ 0.34 $ 1.05 $ 0.65
======== ======== ======== ========
Weighted average common shares outstanding - basic 1,585 1,666 1,592 1,664
Weighted average common and equivalent shares
outstanding - diluted 1,600 1,683 1,609 1,678
See accompanying notes to unaudited consolidated financial statements.
2
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
- --------------------------------------------------------------------------------------------------------
Six Months Ended September 30, 2002
- -----------------------------------
Balance at March 31, 2002 $ 2,000 $ 11,934 $ 33,141 $ (7,189)
Net Income -- -- 1,695 --
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- -- -- --
Comprehensive income
Proceeds from exercise of stock options 25 449 -- --
Tax benefit of stock options -- 55 -- --
Purchase of shares by ESOP -- -- -- --
Director deferred compensation
transactions -- 9 -- (15)
Dividends paid ($0.20 per share) -- -- (330) --
Amortization of unearned compensation -
ESOP -- 126 -- --
--------- ----------- ----------- ----------
Balance at September 30, 2002 $ 2,025 $ 12,573 $ 34,506 $ (7,204)
========= =========== =========== ==========
Six Months Ended September 30, 2001
- -----------------------------------
Balance at March 31, 2001 $ 1,970 $ 11,190 $ 30,950 $ (5,230)
Net Income -- -- 1,094 --
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- -- -- --
Comprehensive income
Proceeds from exercise of stock options 20 317 -- --
Purchase of treasury stock -- -- -- (729)
Dividends paid ($0.20 per share) -- -- (336) --
Amortization of unearned compensation -
ESOP -- 95 -- --
--------- ----------- ----------- ----------
Balance at September 30, 2001 $ 1,990 $ 11,602 $ 31,708 $ (5,959)
========= =========== =========== ==========
Accumulated
Other Unearned Total
Comprehensive Compensation Stockholders'
(In Thousands) Income (Loss) ESOP Equity
- ---------------------------------------------------------------------------------------------------------
Six Months Ended September 30, 2002
- -----------------------------------
Balance at March 31, 2002 $ (626) $ (306) $ 38,954
Net Income -- -- 1,695
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment 518 -- 518
--------
Comprehensive income 2,213
--------
Proceeds from exercise of stock options -- -- 474
Tax benefit of stock options -- -- 55
Purchase of shares by ESOP -- (2,123) (2,123)
Director deferred compensation
transactions -- -- (6)
Dividends paid ($0.20 per share) -- -- (330)
Amortization of unearned compensation -
ESOP -- 56 182
----------- ---------- --------
Balance at September 30, 2002 $ (108) $ (2,373) $ 39,419
=========== ========== ========
Six Months Ended September 30, 2001
- -----------------------------------
Balance at March 31, 2001 $ (431) $ (237) $ 38,212
Net Income -- -- 1,094
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment 13 -- 13
--------
Comprehensive income 1,107
--------
Proceeds from exercise of stock options -- -- 337
Purchase of treasury stock -- -- (729)
Dividends paid ($0.20 per share) -- -- (336)
Amortization of unearned compensation -
ESOP -- 65 160
----------- ---------- --------
Balance at September 30, 2001 $ (418) $ (172) $ 38,751
=========== ========== ========
See accompanying notes to unaudited consolidated financial statements.
3
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
September 30,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,695 $ 1,094
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 157 205
Amortization of premiums 115 68
Amortization of goodwill -- 144
Stock-based compensation 182 160
Net (gains) losses from sales and write-downs of
investment securities 210 (324)
(Increase) decrease in accrued interest receivable (96) (47)
(Increase) decrease in other assets (276) 169
Increase in advance payments by borrowers for taxes and insurance (82) 33
Increase (decrease) in accrued expenses and other liabilities (467) (273)
-------- --------
Net cash provided by operating activities 1,438 1,229
-------- --------
Cash flows from investing activities:
Net decrease in loans 1,866 27,637
Principal payments on mortgage-backed securities 3,142 3,573
Purchase of investment securities (5,183) (39,106)
Maturities and calls of investment securities 2,000 20,000
Proceeds from sales of investment securities 4,096 1,295
Purchase of banking premises and equipment (186) (137)
-------- --------
Net cash provided by investing activities 5,735 13,262
-------- --------
Cash flows from financing activities:
Increase (decrease) in deposits 14,541 (16,299)
Proceeds from advances from FHLB of Boston 24,000 --
Repayments on advances from FHLB of Boston (36,300) (13,000)
Proceeds from exercise of stock options 474 337
Purchase of treasury stock -- (729)
Purchase of shares by ESOP (2,123) --
Dividends paid (330) (336)
Net directors deferred compensation (6) --
-------- --------
Net cash provided by (used in) financing activities 256 (30,027)
-------- --------
Net increase (decrease) in cash and cash equivalents 7,429 (15,536)
Cash and cash equivalents at beginning of period 7,564 39,880
-------- --------
Cash and cash equivalents at end of period $ 14,993 $ 24,344
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,612 $ 8,271
Income taxes $ 1,820 $ 868
See accompanying notes to unaudited consolidated financial statements.
4
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Central Bancorp, Inc.
and its wholly-owned subsidiary Central Co-operative Bank (collectively referred
to as "the Company") presented herein should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
March 31, 2002, included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation. Interim results are not necessarily indicative of results to be
expected for the entire year.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K for the
year ended March 31, 2002. For interim reporting purposes, the Company follows
the same significant accounting policies. As set forth in Note 1 of the Form
10-K, the Company initially applied the requirements of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142) beginning April 1, 2002 and, accordingly, no amortization of goodwill was
recorded for the six months ended September 30, 2002. Net income and earnings
per share for the three and six month periods ended September 30, 2001 would
have been as follows had the requirements of SFAS No. 142 been applied
retroactively (in thousands, except per share amounts):
Three Months Ended Six Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net income $ 636 $ 1,238
Earnings per share - basic $ 0.38 $ 0.74
Earnings per share - diluted $ 0.38 $ 0.74
In the opinion of management, based upon its assessment, there was no
impairment in the carrying value of goodwill at September 30, 2002.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. Such reclassifications
have no effect on previously reported net income.
(2) LOANS
Loans as of September 30, 2002 and March 31, 2002 are summarized below (in
thousands):
September 30, March 31,
2002 2002
------------- ------------
Real estate loans:
Residential real estate $ 247,876 $ 246,045
Commercial real estate 88,740 87,013
Construction 16,647 20,998
Second mortgage and home equity lines of credit 9,305 9,154
----------- -----------
Total real estate loans 362,568 363,210
----------- -----------
Commercial loans 5,870 6,901
Consumer loans 1,405 1,596
----------- -----------
Total loans 369,843 371,707
Less: allowance for loan losses (3,294) (3,292)
----------- -----------
Total loans, net $ 366,549 $ 368,415
=========== ===========
There were no non-accrual loans at September 30, 2002 and March 31, 2002.
5
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(3) DEPOSITS
Deposits at September 30, 2002 and March 31, 2002 are summarized as follows
(in thousands):
September 30, March 31,
2002 2002
------------- -----------
Demand deposit accounts $ 30,007 $ 25,370
NOW accounts 33,905 36,277
Regular, Club and 90 day notice accounts 70,719 72,944
Money market deposit accounts 34,973 17,997
----------- -----------
Total non certificate accounts 169,604 152,588
----------- -----------
Term deposit certificates
Certificates of $100 and above 28,030 27,233
Certificates less than $100 78,814 82,086
----------- -----------
Total term deposit certificates 106,844 109,319
----------- -----------
Total deposits $ 276,448 $ 261,907
=========== ===========
(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 (in thousands):
For the Six Months Ended
September 30, 2002
------------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
-------- ----------- ---------
Unrealized gains (losses) on securities:
Unrealized net holding gains arising during period $ 608 $ 229 $ 379
Less: reclassification adjustment for net
losses included in net income (210) (71) (139)
------- ------- -------
Other comprehensive income $ 818 $ 300 $ 518
======= ======= =======
6
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(4) REPORTING COMPREHENSIVE INCOME (CONTINUED)
For the Six Months Ended
September 30, 2001
------------------------------------
Before-
Tax Tax(Benefit) After-Tax
Amount Expense Amount
-------- ----------- ---------
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period $ 286 $ 67 $ 219
Less: reclassification adjustment for net
gains included in net income 324 118 206
------- ------- -------
Other comprehensive income $ (38) $ (51) $ 13
======= ======= =======
(5) CONTINGENCIES
Legal Proceedings
The Company from time to time is involved as plaintiff or defendant in
various legal actions incident to its business. Except as described herein, none
of these actions are believed to be material, either individually or
collectively, to the results of operations and financial condition of the
Company.
Central Co-operative Bank (the Bank) has been named as defendant in a civil
suit filed March 28, 2002 in Middlesex Superior Court under the caption Yi v.
Central Bank in which it is alleged, inter alia, that the Bank committed an
unfair or deceptive trade practice by failing to pay surplus foreclosure
proceeds to a junior lien holder in 1994. Plaintiff seeks damages of $160,000
plus interest of approximately $150,000 and has applied for a multiple damage
award under Chapter 93A of the Massachusetts General Laws which provides for up
to treble damages if a violation is found to be willful or knowing. The Bank
believes that it has meritorious defenses to all such claims and intends to
vigorously defend against them.
State Income Taxes
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535,000 plus interest with respect to its tax years ended March
31, 2000 and 2001. In October 2002, the DOR sent the Bank a Notice of Assessment
for the same amount. For the period April 1, 2001 to September 30, 2002,
additional state excise taxes would be $420,000 applying the methodology set
forth in the DOR's aforementioned notices. The Bank is aware that the DOR has
sent similar notices to numerous other financial institutions in Massachusetts
that reported a deduction for dividends received from a REIT during this period.
Assessed amounts ultimately paid, if any, would be deductible expenses for
federal income tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Company intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
7
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2002
(6) SUBSEQUENT EVENTS
ESOP Stock Purchases
During fiscal 2002, the Company's Board of Directors authorized the Central
Co-operative Bank Employee Stock Ownership Plan Trust (the ESOP) to acquire up
to an additional 5% of outstanding shares of Company stock. During the six
months ended September 30, 2002, the ESOP acquired 68,962 shares at a cost of
$2,123,000. During October 2002, the Company completed its purchase of shares
under this authorization by acquiring an additional 8,151 shares at a cost of
$242,000.
Dividend
On October 10, 2002, the Board of Directors voted the payment of a
quarterly cash dividend of $.12 per share. The dividend is payable on November
15, 2002 to stockholders of record on November 1, 2002.
The Co-operative Central Bank Special Dividend
On November 12, 2002, the Company received a special dividend of $144,700
from the Co-operative Central Bank, the entity which insures deposit balances in
excess of FDIC coverage limits. While the payment of this dividend is determined
each year based on an evaluation of relevant economic factors, the Company had
received a special dividend for the same amount in the prior fiscal year.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on Form
10-Q, the words or phrases "will likely result," "are expected to." "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
changes in regional and national economic conditions, unfavorable judicial
decisions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND MARCH 31, 2002
Total assets increased by $2.3 million from $468.2 million at March 31,
2002 to $470.5 million at September 30, 2002. This increase occurred as a result
of net deposit growth of $14.5 million which was primarily used to paydown
maturing FHLB advances.
During the six months ended September 30, 2002, cash and cash equivalents
increased by $7.4 million while investment securities and loans decreased by
$3.3 million and $1.9 million, respectively. These changes reflect the impact of
higher than normal loan prepayments due to the current lower rate interest
environment. During the six months ended September 30, 2002, the Company
originated $66.8 million in loans, including $27.6 million in commercial real
estate loans.
During the six months ended September 30, 2002, the Company experienced
core deposit growth of $17.0 million, or 11.2%. All of this growth was in money
market deposits, the Company's highest-paying core deposit account. While
deposit flows can vary significantly on a daily basis, the Company has
experienced steady growth in core deposits during the past five quarters. This
growth has been aided by the introduction and promotion of the Bank's Community
Package Account product and the continuing uncertainty in the stock market.
FHLB advances were reduced by $12.3 million during the six months ended
September 30, 2002. This decrease is consistent with the Company's overall
strategy of reducing its utilization of FHLB advances.
The increase in stockholders' equity of $465,000 to $39.4 million at
September 30, 2002 resulted primarily from net income of $1.7 million, an
increase of $518,000 in the market value of investment securities available for
sale, net of taxes and proceeds from the exercise of stock options of $474,000.
These increases were partially offset by cash dividends and stock purchases by
the Employee Stock Ownership Plan (ESOP) totaling $2.5 million. During the first
half of the year, an additional 68,692 shares were purchased by the ESOP for a
total purchase price of $2,123,000 ($30.91 share) which was funded by an
internal loan.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2002 AND
2001
Net income increased by $104,000, or 18.4%, to $668,000 ($0.42 per diluted
share) for the quarter ended September 30, 2002, compared to $564,000 ($0.34 per
diluted share) in the same quarter in the prior year. Exclusive of the after tax
impact of gains and losses on the sales and write-downs of investment
securities, which adversely affected the increase in net income between years by
$223,000, net income would have increased $327,000, or 67.1% for the quarter
ended September 30, 2002 compared to the same quarter in the prior year. The
significant increase was primarily due to an increase of $756,000 in net
interest and dividend income, an increase of $63,000 in non-interest income
(excluding securities transactions), partially offset by an increase of $326,000
in
9
non-interest expenses. The Company's effective tax rate was substantially
unchanged at approximately 36% in both periods.
Interest Income. Interest income for the quarter ended September 30, 2002 was
$7.5 million, an increase of $270,000 over the same quarter in the prior year
despite a decrease in the yield on interest-earning assets from 6.81% in the
second quarter of the prior year to 6.45% in the current quarter. Average
interest-earning assets increased by $38.6 million, or 9.1%, to $462.0 million
during the quarter ended September 30, 2002 from $423.4 million for the quarter
ended September 30, 2001.
The principal area of growth in average balances for the quarter ended
September 30, 2002 was in real estate loans (up $41.9 million, or 13.3%), which
was partially offset by a decrease in investments of $3.6 million, all as
compared to average balances for the quarter ended September 30, 2001.
Interest Expense. Interest expense for the quarter ended September 30, 2002 was
$3.3 million compared to $3.8 million for the quarter ended September 30, 2001,
a decrease of $486,000, or 12.7%. This significant decrease resulted from an 88
basis points decrease in the cost of funds from 4.21% in the quarter ended
September 30, 2001 to 3.33% in the quarter ended September 30, 2002. This
decrease was partially offset by an increase in average interest-bearing
liabilities of $36.9 million in the current year period.
The significant decrease in the cost of funds in the second quarter of
fiscal 2003 reflected the impact of the series of rate decreases initiated by
the Federal Reserve Board beginning in January 2001, the repricing of a majority
of certificates of deposit during the past year and a shift in deposits from
higher cost certificates of deposit which represented 51.1% of deposits at the
beginning of the second quarter of the prior fiscal year compared to 39.9% at
the beginning of the second quarter of the current fiscal year.
Provisions for Loan Losses. The Company provides for loan losses in order to
maintain the allowance for loan losses at a level that management estimates is
adequate to absorb future charge-offs of loans deemed uncollectible. In
determining the appropriate level of the allowance for loan losses, management
considers past and anticipated loss experience, evaluations of underlying
collateral, prevailing economic conditions, the nature and volume of the loan
portfolio and the levels of non-performing and other classified loans. The
amount of the allowance is based on estimates and ultimate losses may vary from
such estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly in order to maintain the adequacy of
the allowance.
Due to the high level of asset quality, as measured by low delinquency
rates and the absence of non-performing loans during the past two years, the
Company made no provision for loan losses during the quarters ended September
30, 2002 and 2001.
Non-interest Income. Exclusive of securities transactions, as previously
discussed, non-interest income was $279,000 for the quarter ended September 30,
2002 compared to $216,000 in the same period of 2001. The primary reason for the
current year increase was prepayment penalties on commercial real estate loans.
Net gains (losses) from sales and write-downs of investment securities were
($221,000) for the quarter ended September 30, 2002 compared to $121,000 in the
prior year period. The Company recorded a write-down of $220,000 in certain
equity securities which had experienced a decline in fair value judged to be
other than temporary during the quarter ended September 30, 2002.
Non-interest Expenses. Non-interest expenses increased $326,000 during the
quarter ended September 30, 2002 as compared to the same quarter in 2001.
Exclusive of the elimination of the amortization of goodwill in the current year
as required by generally accepted accounting principles (SFAS No. 142),
non-interest expenses increased $398,000, or 14.6%, due principally to increases
in salaries and employee benefits ($138,000) and additional costs of
approximately $275,000 (primarily professional fees) incurred in connection with
the contested election of directors at the 2002 Annual Meeting of Stockholders.
The increase in salaries and employee benefits of $138,000, or 9.1%, during
the quarter ended September 30, 2002, was due to overall salary increases
averaging 4.7%, increases in staffing to support higher mortgage loan
originations and additional ESOP expense due to an increase in market value of
the Company's stock.
10
The increase in other expenses of $122,000, or 33.9%, during the quarter
ended September 30, 2002 was primarily due to increases in advertising costs
associated with lending activities and costs attributable to the aforementioned
contested election of directors.
Income Taxes. The effective tax rates for the quarters ended September 30, 2002
and 2001 were 35.9% and 36.7%, respectively. These rates vary from the statutory
income tax rate for banks of approximately 40.9% due to the Company's use of
both a securities corporation and a REIT subsidiary for state tax purposes.
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535,000 plus interest with respect to its tax years ended March
31, 2000 and 2001. In October 2002, the DOR sent the Bank a Notice of Assessment
for the same amount. For the period April 1, 2001 to September 30, 2002,
additional state excise taxes would be $420,000 applying the methodology set
forth in the DOR's aforementioned notices. The Bank is aware that the DOR has
sent similar notices to numerous other financial institutions in Massachusetts
that reported a deduction for dividends received from a REIT during this period.
Assessed amounts ultimately paid, if any, would be deductible expenses for
federal income tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Company intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002 AND
2001
Net income increased by $601,000, or 54.9%, to $1.7 million ($1.05 per
diluted share) for the six months ended September 30, 2002, compared to $1.1
million ($0.65 per diluted share) in the same period in the prior year.
Exclusive of the after tax impact of gains and losses on the sales and
write-downs of investment securities, which adversely affected the increase in
net income between years by $346,000, net income would have increased by
$947,000, or 106.8%, for the six months ended September 30, 2002 compared to the
same period in the prior year. The significant increase was primarily due an
increase of $1.8 million in net interest and dividend income, partially offset
by an increase of $405,000 in non-interest expenses. The Company's effective tax
rate was unchanged at approximately 36% in both periods.
Interest Income. Interest income for the six months ended September 30, 2002 was
$15.0 million, or $229,000 greater than the amount earned in the same period in
the prior year despite a decrease in the yield on interest-earning assets from
6.90% in the first six months of the prior year to 6.54% in the same period of
the current year. Average interest-earning assets increased by $30.4 million, or
7.1%, to $458.7 million during the six months ended September 30, 2002 from
$428.3 million for the six months ended September 30, 2001.
The principal area of growth in average balances for the six months ended
September 30, 2002 was in real estate loans (up $33.4 million, or 10.3%) which
was partially offset by a decrease in investments of $3.5 million, all as
compared to average balances for the six months ended September 30, 2001.
Interest Expense. Interest expense for the six months ended September 30, 2002
was $6.6 million compared to $8.2 million for the six months ended September 30,
2001, a decrease of $1.6 million, or 19.2%. This significant decrease resulted
from a 110 basis points decrease in the cost of funds from 4.41% in the six
months ended September 30, 2001 to 3.31% in the six months ended September 30,
2002. This decrease was partially offset by an increase in average
interest-bearing liabilities of $28.2 million in the current year period.
The significant decrease in the cost of funds in the first half of fiscal
2003 reflected the impact of the series of rate decreases initiated by the
Federal Reserve Board beginning in January 2001, the repricing of a majority of
certificates of deposit during the past year and a shift in deposits from higher
cost certificates of deposit which
11
represented 52.9% of deposits at the beginning of the prior year compared to
41.7% at the beginning of the current year.
Provisions for Loan Losses. Due to the high level of asset quality, as measured
by low delinquency rates and the absence of non-performing loans during the past
two years, the Company made no provision for loan losses during the six months
ended September 30, 2002 and 2001.
Non-interest Income. Exclusive of securities transactions, as previously
discussed, non-interest income was $491,000 for the six months ended September
30, 2002 compared to $422,000 in the same period of 2001. The primary reason for
the $69,000 increase in the current year was prepayment penalties on commercial
real estate loans.
Net gains (losses) from sales and write-downs of investment securities were
($210,000) for the six months ended September 30, 2002 compared to $324,000 in
the comparable prior year period. During the six months ended September 30,
2002, the Company recorded write-downs of $440,000 in certain equity securities
which had experienced a decline in fair value judged to be other than temporary.
Non-interest Expenses. Non-interest expenses increased $405,000 during the six
months ended September 30, 2002 as compared to the corresponding period in the
prior year. Exclusive of the elimination of the amortization of goodwill in the
current year as required by generally accepted accounting principles (SFAS No.
142), non-interest expenses increased $549,000, or 10.0%, due principally to
increases in salaries and employee benefits ($243,000) and additional costs of
approximately $350,000 (primarily professional fees) incurred in connection with
the contested election of directors at the 2002 Annual Meeting of Stockholders.
The increase in salaries and employee benefits of $243,000, or 8.0%, during
the six months ended September 30, 2002, was due to overall salary increases
averaging 4.7%, increases in staffing to support higher mortgage loan
originations and additional ESOP expense due to an increase in market value of
the Company's stock.
The increase in other expenses of $127,000, or 16.1%, during the six months
ended September 30, 2002 was primarily due to increases in costs associated with
the higher level of lending activities and costs attributable to the
aforementioned contested election of directors.
Income Taxes. The effective tax rates for the six months ended September 30,
2002 and 2001 were 36.1% and 36.5%, respectively. These rates vary from the
statutory income tax rate for banks of approximately 40.9% due to the Company's
use of both a securities corporation and a REIT subsidiary for state tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are loan amortization, loan
prepayments, increases in deposits, advances from the Federal Home Loan Bank
(FHLB) of Boston and funds from operations. The Bank is a voluntary member of
the FHLB of Boston and as such is entitled to borrow up to the value of its
qualified collateral that has not been pledged to others. Qualified collateral
generally consists of residential first mortgage loans, U. S. Government and
agencies securities and funds on deposit at the FHLB of Boston. At September 30,
2002, the Bank had approximately $31.7 million in unused borrowing capacity at
the FHLB of Boston.
At September 30, 2002, the Company had commitments to originate loans,
unused outstanding lines of credit and undisbursed proceeds of loans totaling
$80.3 million. Since many of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments.
12
The Company's and the Bank's capital ratios at September 30, 2002 were as
follows:
Company Bank
------- ----
Total Capital (to risk-weighted assets) 12.93% 11.89%
Tier 1 Capital (to risk-weighted assets) 11.87 10.82
Tier 1 Capital (to average assets) 7.77 7.09
These ratios placed the Company in excess of regulatory standards and the
Bank in the "well capitalized" category as set forth by the FDIC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are largely dependent on its net interest income,
which is the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. The Company seeks to reduce its exposure
to changes in interest rate, or market risk, through active monitoring and
management of its interest-rate risk exposure. The policies and procedures for
managing both on- and off-balance sheet activities are established by the Bank's
asset/liability management committee ("ALCO"). The Board of Directors reviews
and approves the ALCO policy annually and monitors related activities on an
ongoing basis.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, borrowing and deposit taking activities.
The main objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on net interest income and preserve
capital, while adjusting the asset/liability structure to control interest-rate
risk. However, a sudden and substantial increase or decrease in interest rates
may adversely impact earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
The Company quantifies its interest-rate risk exposure using a
sophisticated simulation model. Simulation analysis is used to measure the
exposure of net interest income to changes in interest rates over a specific
time horizon. Simulation analysis involves projecting future interest income and
expense under various rate scenarios. The simulation is based on forecasted cash
flows and assumptions of management about the future changes in interest rates
and levels of activity (loan originations, loan prepayments, deposit flows,
etc). The assumptions are inherently uncertain and, therefore, actual results
will differ from simulated results due to timing, magnitude and frequency of
interest rate changes as well as changes in market conditions and strategies.
The net interest income projection resulting from use of forecasted cash flows
and management's assumptions is compared to net interest income projections
based on an immediate shift of 300 basis points upward and 150 basis points
downward. Internal guidelines on interest rate risk state that for every 100
basis points immediate shift in interest rates, estimated net interest income
over the next twelve months should decline by no more than 5%.
The following table indicates the estimated exposure, as a percentage of
estimated net interest income, for the twelve month period following the date
indicated assuming an immediate shift in interest rates as set forth below:
September 30, March 31,
2002 2002
------------ ----------
300 basis point increase in rates................ (7.7)% (12.9)%
150 basis point decrease in rates................ (0.7)% 0.5%
13
For each one percentage point change in net interest income in the
September 2002 projections, the effect on net income would be $109,000 assuming
a 36% tax rate.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures (as such term is
defined in Rule 13a-14(c) under the Exchange Act) as of a date within 90 days of
the date of filing of this Form 10-Q. Based upon such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that such
controls and procedures are effective to ensure that the information required to
be disclosed by the Company in the reports it files under the Exchange Act is
gathered, analyzed and disclosed with adequate timeliness.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of the evaluation described above.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and each of its directors were named as defendants in a suit
filed on October 1, 2002 by Richard Lashley and PL Capital, LLC in the U.S.
District Court for the District of Massachusetts. The suit alleges that the
adjournment of the 2002 Annual Meeting of Stockholders until October 11, 2002
violated Massachusetts law and the Company's Bylaws and constituted a breach of
fiduciary duty by the defendant directors. The suit seeks declaratory relief and
the issuance of a temporary restraining order and preliminary injunction. On
October 8, 2002, the Court declined to issue a temporary restraining order and
denied injunctive relief. The Company has moved for dismissal of the suit as
moot. On November 12, 2002, the plaintiffs responded to the Company's motion for
dismissal by amending their complaint to allege breaches of fiduciary duty by
the directors for their failure to elect PL Capital's nominees to the Board of
the Company's principal subsidiary, Central Co-operative Bank, their alleged
failure to conduct a reasonable investigation into the sale of the Company, and
their alleged consenting to the reimbursement of legal fees of Joseph and John
Doherty and to allege unfair and deceptive trade practices within the meaning of
chapter 93A of the Massachusetts General Laws. The Company believes that the
plaintiff's claims are without merit and intends to vigorously defend against
them.
See Note 5 of the Notes to Unaudited Consolidated Financial Statements
presented elsewhere herein.
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
On September 30, 2002, the Registrant convened its Annual Meeting of
Stockholders. The only item submitted to a vote of stockholders was the election
of three directors. Paul E. Bulman, Garrett Goodbody and Richard Fates were
elected directors and the terms of office of the following directors continued
after the meeting: Joseph R. Doherty, John D. Doherty, Nancy D. Neri, Gregory W.
Boulos and Terence Kenney. The following is a record of the voting in the
election of directors:
ELECTION OF DIRECTORS FOR WITHHELD
Marat E. Santini 702,922.349 3,843.070
John F. Gilgun, Jr. 702,864.479 3,843.070
Paul E. Bulman 1,511,028.951 5,843.070
Garrett Goodbody 810,937.252 2,000
Richard Fates 810,937.252 2,000
There were no abstentions or broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification under Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 15, 2002, the Registrant filed a Form 8-K reporting its
earnings for the quarter ended June 30, 2002 under Item 5.
On October 10, 2002, the Registrant filed a Form 8-K reporting
the increase in its quarterly cash dividend to $0.12 per share.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL BANCORP, INC.
---------------------
Registrant
November 14, 2002 /s/ John D. Doherty
- ----------------- --------------------------------------
Date John D. Doherty
President and Chief Executive Officer
November 14, 2002 /s/ Michael K. Devlin
- ----------------- --------------------------------------
Date Michael K. Devlin
Senior Vice President, Treasurer
and Chief Financial Officer
CERTIFICATION
I, John D. Doherty, President and Chief Executive Officer of Central Bancorp,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within these
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John D. Doherty
-------------------------------------
John D. Doherty
President and Chief Executive Officer
CERTIFICATION
I, Michael K. Devlin, Senior Vice President, Treasurer and Chief Financial
Officer of Central Bancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Central Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within these
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Michael K. Devlin
-------------------------------------------------
Michael K. Devlin
Senior Vice President, Treasurer and
Chief Financial Officer