================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A NO. 2
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- --------------
Commission File No. 0-25251
CENTRAL BANCORP, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-3447594
- ------------------------------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
399 HIGHLAND AVENUE, SOMERVILLE, MASSACHUSETTS 02144
- -------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 628-4000
--------------
Securities registered under Section 12(b) of the Act: NONE
----
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
STOCK PURCHASE RIGHTS
---------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $25.5 million based on the closing sales price of
the registrant's common stock as reported on the Nasdaq National Market SM on
June 21, 2002 ($30.00 per share). Solely for purposes of this calculation,
directors, executive officers and greater than 5% stockholders are treated as
affiliates.
As of June 21, 2002, there were issued and outstanding 1,632,789 shares of
the registrant's common stock, par value $1.00 per share (of which 781,028
shares were deemed held by affiliates).
================================================================================
EXPLANATION FOR AMENDMENT:
The Annual Report on Form 10-K of Central Bancorp, Inc. (the "Company")
for the fiscal year ended March 31, 2002 filed with the Securities and Exchange
Commission (the "Commission") on June 28, 2002 and amended on July 25, 2002 (the
"2002 Form 10-K") is being amended hereby to reflect a change in Note 13 to the
Consolidated Financial Statements of the Company filed under Item 8 of the 2002
Form 10-K.
* * * * *
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Page
Consolidated Balance Sheets................................................ 3
Consolidated Statements of Income.......................................... 4
Consolidated Statement of Changes in Stockholders' Equity.................. 5
Consolidated Statement of Cash Flows....................................... 7
Notes to Consolidated Financial Statements................................. 8
Independent Auditors' Report............................................... 26
2
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars In Thousands)
MARCH 31,
----------------------
2002 2001
---- ----
ASSETS
Cash and due from banks $ 5,109 $ 5,351
Short-term investments 2,455 35,718
--------- ---------
Cash and cash equivalents 7,564 41,069
--------- ---------
Investment securities available for sale
(amortized cost of $74,935 in 2002 and
$50,136 in 2001) (note 2) 73,884 49,388
Stock in Federal Home Loan Bank of Boston, at
cost (notes 2 and 7) 8,300 6,150
The Co-operative Central Bank Reserve Fund (note 2) 1,576 1,576
--------- ---------
Total investments 83,760 57,114
--------- ---------
Loans (notes 3) 371,707 345,793
Less allowance for loan losses (note 4) 3,292 3,106
--------- ---------
Net loans 368,415 342,687
--------- ---------
Accrued interest receivable 2,530 2,426
Banking premises and equipment, net (note 5) 1,836 2,018
Deferred tax asset, net (note 8) 1,289 801
Goodwill, net (note 1) 2,232 2,520
Other assets 593 702
--------- ---------
Total assets $ 468,219 $ 449,337
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 6) $ 261,907 $ 287,167
Federal Home Loan Bank advances (notes 2 and 7) 164,000 121,000
Advance payments by borrowers for taxes and insurance 1,111 1,220
Accrued expenses and other liabilities 2,247 1,738
--------- ---------
Total liabilities 429,265 411,125
--------- ---------
Commitments and contingencies (notes 8, 9 and 12)
Stockholders' equity (note 10):
Preferred stock $1.00 par value, authorized
5,000,000 shares; none issued -- --
Common stock $1.00 par value, authorized 15,000,000
shares; 1,999,588 shares issued at March 31,
2002 and 1,970,000 shares issued at March 31, 2001 2,000 1,970
Additional paid-in capital 11,934 11,190
Retained income 33,141 30,950
Treasury stock (366,799 shares at March 31, 2002
and 285,836 shares at March 31, 2001), at cost (7,189) (5,230)
Accumulated other comprehensive (loss) income (626) (431)
Unearned compensation - ESOP (note 11) (306) (237)
--------- ---------
Total stockholders' equity 38,954 38,212
--------- ---------
Total liabilities and stockholders' equity $ 468,219 $ 449,337
========= =========
See accompanying notes to consolidated financial statements.
3
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31,
---------------------------------------------
2002 2001 2000
---------------------------------------------
Interest and dividend income:
Mortgage loans $ 23,799 $ 25,613 $ 21,806
Other loans 438 716 599
Short-term investments 866 487 421
Investments 4,170 4,101 3,598
--------------------------------------------
Total interest and dividend income 29,273 30,917 26,424
--------------------------------------------
Interest expense:
Deposits 8,119 10,087 8,553
Federal Home Loan Bank advances 6,741 6,916 4,496
--------------------------------------------
Total interest expense 14,860 17,003 13,049
--------------------------------------------
Net interest and dividend income 14,413 13,914 13,375
Provision for loan losses (note 4) -- -- --
--------------------------------------------
Net interest and dividend income after
provision for loan losses 14,413 13,914 13,375
--------------------------------------------
Non-interest income:
Deposit service charges 482 428 414
Net gain (loss) from sale and write-down
of investment securities (note 2) (150) 680 1,013
Brokerage income 100 -- --
Other income 256 180 242
--------------------------------------------
Total non-interest income 688 1,288 1,669
--------------------------------------------
Non-interest expenses:
Salaries and employee benefits (note 11) 5,652 5,571 5,017
Occupancy and equipment (note 5) 1,124 1,192 1,167
Data processing service fees 966 847 534
Professional fees 1,049 757 875
Goodwill amortization 288 288 288
Other expenses 1,385 1,675 1,464
--------------------------------------------
Total non-interest expenses 10,464 10,330 9,345
--------------------------------------------
Income before income taxes 4,637 4,872 5,699
Provision for income taxes (note 8) 1,777 1,763 2,132
--------------------------------------------
Income before cumulative effect of change in
accounting principle 2,860 3,109 3,567
Cumulative effect of change in accounting principle,
net of taxes (note 1) -- -- (234)
---------------------------------------------
Net income $ 2,860 $ 3,109 $ 3,333
============================================
Earnings per common share (note 1):
Before cumulative effect of change in accounting
principle-basic $ 1.73 $ 1.81 $ 1.90
============================================
Before cumulative effect of change in accounting
principle - diluted $ 1.72 $ 1.81 $ 1.89
============================================
After cumulative effect of change in accounting
principle-basic $ 1.73 $ 1.81 $ 1.77
============================================
After cumulative effect of change in accounting
principle - diluted $ 1.72 $ 1.81 $ 1.77
============================================
Weighted average common shares outstanding 1,650 1,717 1,882
============================================
Weighted average common shares outstanding-diluted 1,665 1,719 1,885
============================================
See accompanying notes to consolidated financial statements.
4
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Per Share Data)
ACCUMULATED
ADDITIONAL OTHER UNEARNED TOTAL
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE COMPENSATION STOCKHOLDERS'
STOCK CAPITAL INCOME STOCK (LOSS) INCOME ESOP EQUITY
----- ------- ------ ----- ------------- ---- ------
Balance at March 31, 1999 $1,967 $11,171 $25,894 $ -- $ 327 $(617) $38,742
Net income -- -- 3,333 -- -- -- 3,333
Other comprehensive income, net of tax:
Unrealized (loss) on securities, net of
reclassification adjustment -- -- -- -- (1,152) -- (1,152)
-------
Comprehensive income 2,181
-------
Proceeds from exercise of stock options 3 19 -- -- -- -- 22
Purchase of treasury stock -- -- -- (3,043) -- -- (3,043)
Dividends paid ($0.36 per share) -- -- (689) -- -- -- (689)
Amortization of unearned compensation -ESOP -- -- -- -- -- 184 184
--------------------------------------------------------------------------------
Balance at March 31, 2000 1,970 11,190 28,538 (3,043) (825) (433) 37,397
Net income -- -- 3,109 -- -- -- 3,109
Other comprehensive income, net of tax:
Unrealized gain on securities, net of
reclassification adjustment -- -- -- -- 394 -- 394
-------
Comprehensive income 3,503
-------
Purchase of treasury stock -- -- -- (2,187) -- -- (2,187)
Dividends paid ($0.40 per share) -- -- (697) -- -- -- (697)
Amortization of unearned compensation -ESOP -- -- -- -- -- 196 196
-------------------------------------------------------------------------------
Balance at March 31, 2001 1,970 11,190 30,950 (5,230) (431) (237) 38,212
Net income -- -- 2,860 -- -- -- 2,860
Other comprehensive income, net of tax:
Unrealized (loss) on securities, net of
reclassification adjustment -- -- -- -- (195) -- (195)
-------
Comprehensive income 2,665
-------
Purchase of shares by ESOP (note 11) -- -- -- -- -- (199) (199)
Purchase of treasury stock -- -- -- (1,924) -- -- (1,924)
Dividends paid ($0.40 per share) -- -- (669) -- -- -- (669)
Proceeds from exercise of stock options 30 462 -- -- -- -- 492
Amortization of unearned compensation -ESOP -- 175 -- -- -- 130 305
Other equity transactions -- 107 -- (35) -- -- 72
-------------------------------------------------------------------------------
Balance at March 31, 2002 $2,000 $11,934 $33,141 $(7,189) $ (626) $(306) $38,954
===============================================================================
5
The Bank's other comprehensive income (loss) and related tax effect for the
years ended March 31 are as follows:
2002
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
in thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding losses during period $ (451) $ (163) $ (288)
Less reclassification adjustment for net losses
included in net income 150 57 93
----------------------------------------------
Other comprehensive loss $ (301) $ (106) $ (195)
==============================================
2001
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
In thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding gains during period $ 1,188 $ 360 $ 828
Less reclassification adjustment for net gains
included in net income (680) (246) (434)
----------------------------------------------
Other comprehensive income $ 508 $ 114 $ 394
==============================================
2000
----------------------------------------------
BEFORE-TAX TAX (BENEFIT) AFTER-TAX
in thousands AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on securities:
Unrealized net holding losses during period $ (815) $ (297) $ (518)
Less reclassification adjustment for net gains
included in net income (1,013) (379) (634)
----------------------------------------------
Other comprehensive loss $(1,828) $ (679) $(1,152)
===================================================
See accompanying notes to consolidated financial statements.
6
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31,
-----------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 2,860 $ 3,109 $ 3,333
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 372 438 462
Amortization of premiums and discounts 176 86 132
Amortization of goodwill 288 288 288
Decrease (increase) in deferred tax assets (380) 270 (327)
Amortization of unearned compensation - ESOP 305 196 184
Net (gain) loss from sale and write-down of investment securities 150 (680) (1,013)
Cumulative effect of change in accounting principle -- -- 234
(Increase) decrease in accrued interest receivable (104) (390) (422)
(Increase) decrease in other assets 109 (507) 59
Increase (decrease) in advance payments by borrowers for taxes and insurance (109) 167 (336)
Increase (decrease) in accrued interest payable
(23) 66 251
Increase (decrease) in accrued expenses and other liabilities 532 (96) 415
-----------------------------------
Net cash provided by operating activities 4,176 2,947 3,260
-----------------------------------
Cash flows from investing activities:
Principal collected on loans 132,138 56,949 68,641
Loan originations and purchases (157,866) (82,616) (108,363)
Principal payments on mortgage-backed securities 7,246 4,069 9,420
Purchase of investment securities (61,256) (6,170) (21,716)
Proceeds from sales of investment securities 2,885 3,955 6,159
Maturities and redemptions of investment securities 26,000 4,000 2,500
Net (increase) decrease in short-term investments 33,263 (19,727) 2,137
Purchase of stock in FHLB of Boston (2,150) (350) (2,450)
Purchase of banking premises and equipment, net (190) (238) (130)
-----------------------------------
Net cash used by investing activities (19,930) (40,128) (43,802)
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (25,260) 28,828 (8,124)
Proceeds from FHLB advances 68,000 152,000 124,000
Repayments of FHLB advances (25,000) (142,000) (70,000)
Proceeds from exercise of stock options 492 -- 22
Purchase of treasury stock (1,924) (2,187) (3,043)
Payments of dividends (669) (697) (689)
Purchase of stock by ESOP (199) -- --
Other equity transactions 72 -- --
-----------------------------------
Net cash provided by financing activities 15,512 35,944 42,166
-----------------------------------
Net increase (decrease) in cash and due from banks (242) (1,237) 1,624
Cash and due from banks at beginning of year 5,351 6,588 4,964
-----------------------------------
Cash and due from banks at end of year $ 5,109 $ 5,351 $ 6,588
===================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,883 $ 16,937 $ 12,798
Income taxes 1,715 1,850 2,094
See accompanying notes to consolidated financial statements.
7
CENTRAL BANCORP, INC AND SUBSIDIARY
Notes to Consolidated Financial Statements
March 31, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, and its
wholly-owned subsidiary, Central Co-operative Bank (the "Bank").
The Bank was organized as a Massachusetts chartered co-operative bank in
1915 and converted from mutual to stock form in 1986. The primary business of
the Bank is to generate funds in the form of deposits and use the funds to make
mortgage loans for the construction, purchase and refinancing of residential
properties, and to make loans on commercial real estate in its market area. The
Bank is subject to competition from other financial institutions. The Company is
subject to the regulations of, and periodic examinations by, the Federal Reserve
Bank ("FRB"). The Bank is also subject to the regulations of, and periodic
examination by, the Federal Deposit Insurance Corporation ("FDIC") and the
Massachusetts Division of Banks. The Bank's deposits are insured by the Bank
Insurance Fund of the FDIC for deposits up to $100,000 and the Share Insurance
Fund ("SIF") for deposits in excess of $100,000.
The Company conducts its business through one operating segment, the Bank.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. All significant intercompany balances and transactions have been
eliminated in consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the year. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change relate
to the determination of the allowance for loan losses.
Certain prior year amounts have been reclassified to conform to the current
year's presentation. The following is a summary of the more significant
accounting policies adopted by the Bank.
Cash and Due from Banks
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserves are calculated based upon deposit levels and
amounted to approximately $2,735, 000 at March 31, 2002.
Investments
Investments are classified as either held to maturity, available for sale
or trading. Investments classified as trading securities are reported at fair
value, with unrealized gains and losses included in earnings. Investments
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as other comprehensive income (loss) within
stockholders' equity. Securities that the Bank has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
amortized cost.
Gains and losses on sales of securities are recognized when realized with
the cost basis of investments sold determined on a specific-identification
basis. Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted to interest income over the actual or expected lives of
the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment
is judged to be other than temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the write-down
is included in the results of operations.
Loans
Loans are reported at the principal amount outstanding, adjusted by
unamortized discounts, premiums, and net deferred loan origination costs and
fees. Loans classified as held for sale are stated at the lower of aggregate
cost or market value. Market value is estimated based on outstanding investor
commitments or, in the absence of cash commitments, current investor yield
requirements. Net unrealized losses, if any, are provided for in a valuation
allowance by charges to operations. No loans were classified as held for sale at
March 31, 2002 and 2001.
8
Loans on which the accrual of interest has been discontinued are designated
as non-accrual loans. Accrual of interest on loans and amortization of net
deferred loan fees or costs are discontinued either when reasonable doubt exists
as to the full and timely collection of interest or principal, or when a loan
becomes contractually past due 90 days with respect to interest or principal.
The accrual on some loans, however, may continue even though they are more than
90 days past due if management deems it appropriate, provided that the loans are
well secured and in the process of collection, When a loan is placed on
non-accrual status, all interest previously accrued but not collected is
reversed against current period interest income. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when, in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest. The Bank records
interest income on non-accrual and impaired loans on the cash basis of
accounting.
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest-rate yield and are amortized into interest
income over the loan term using the level-yield method.
Loans are classified as impaired when it is probable that the Bank will not
be able to collect all amounts due in accordance with the contractual terms of
the loan agreement. Impaired loans, except those loans that are accounted for at
fair value or at lower of cost or fair value, are accounted for at the present
value of the expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient in the case of collateral dependent
loans, the lower of the fair value of the collateral or the recorded amount of
the loan. Management considers the payment status, net worth and earnings
potential of the borrower, and the value and cash flow of the collateral as
factors to determine if a loan will be paid in accordance with its contractual
terms. Management does not set any minimum delay of payments as a factor in
reviewing for impaired classification. Impaired loans are charged off when
management believes that the collectibility of the loan's principal is remote.
Management considers non-accrual loans, except for smaller balance, homogeneous
residential mortgage loans, to be impaired.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level determined to be
adequate by management to absorb future charge-offs of loans deemed
uncollectible. This allowance is increased by provisions charged to operating
expense and by recoveries on loans previously charged off, and reduced by
charge-offs on loans.
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The allowance for loan losses is evaluated
on a regular basis by management and is based upon management's systematic
periodic review of the collectibility of the loans. Primary considerations in
this evaluation are prior loan loss experience, the character and size of the
loan portfolio, business and economic conditions and management's estimation of
future losses. The Bank evaluates specific loan status reports on certain
commercial and commercial real estate loans rated "substandard" or worse.
Estimated reserves for each of these credits is determined by reviewing current
collateral value, financial information, cash flow, payment history and trends
and other relevant facts surrounding the particular credit. The remaining
commercial and commercial real estate loans are provided for as part of pools of
similar loans based on a combination of historical loss experience and
qualitative adjustments. Smaller balance, homogeneous loans, including
residential real estate loans and consumer loans, are evaluated as a group by
applying estimated charge off and recovery percentages, based on historical
experience and certain qualitative factors, to the current outstanding balance
in each category. Based on these analyses, the resulting allowance is deemed
adequate to absorb all probable credit losses in the portfolio
Although management uses available information to establish the appropriate
level of the allowance for loan losses, future additions to the allowance may be
necessary based on estimates that are susceptible to change as a result of a
changes in economic conditions and other factors. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.
Changes in estimates are provided currently in earnings.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Bank's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Bank's deferred tax asset is reviewed periodically and
adjustments to such asset are recognized as deferred income tax expense or
benefit based on management's judgments relating to the realizability of such
asset.
9
Banking Premises and Equipment
Banking premises and equipment are stated at cost, less allowances for
depreciation and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets or terms of
the leases, if shorter.
Goodwill
Through March 31, 2002, goodwill arising from acquisitions was amortized on
a straight-line basis over 15 years. As discussed below under the caption
"Recent Accounting Pronouncements", amortization of goodwill is generally no
longer permitted in fiscal years beginning after December 15, 2001.
Pension Benefits
The Bank provides pension benefits for its employees in a multi-employer
pension plan through membership in the Co-operative Banks Employees Retirement
Association. Pension costs are funded as they are accrued and are accounted for
on a defined contribution plan basis.
Stock-Based Compensation
The Company follows the intrinsic value method set forth in APB Opinion No.
25 "Accounting for Stock Issued to Employees" (APB No. 25) under which there is
generally no charge to earnings for stock option grants. Companies that elect to
use this method are required to disclose the pro forma effect of using the fair
value method of accounting for stock-based compensation that is encouraged by
SFAS No. 123. (See Note 11).
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Unallocated ESOP shares are not considered
outstanding in computing basic EPS. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
stock options, were exercised or converted into common stock.
Recent Accounting Pronouncements
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Accounting for Costs of a Start-Up Entity.
SOP 98-5 requires organizational costs, which were being amortized, to be
expensed and accounted for as a cumulative effect of a change in accounting
principle. On April 1, 1999, the Bank expensed unamortized organizational costs
relating to the formation of the bank holding company resulting in a charge to
earnings, net of taxes, of $234,000 or $0.13 per share ($0.12 per share assuming
dilution).
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 141, "Business Combinations" which is effective for transactions initiated
after June 30, 2001. Under SFAS No. 141, all business combinations must be
accounted for using the purchase method of accounting; use of the
pooling-of-interests method is no longer permitted. In addition, this Statement
requires that certain intangible assets acquired in a business combination be
recognized apart from goodwill.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets" which is effective for fiscal years beginning after December
15, 2001. Under prior accounting standards, goodwill resulting from a business
combination was amortized against income over its estimated life. After the
effective date of SFAS No. 142, goodwill will generally no longer be amortized
as an expense but instead will be reviewed and tested for impairment using a
fair value methodology prescribed in this Statement. Goodwill will be tested for
impairment at least annually or more frequently as a result of an event or
change in circumstances (e.g. recurring operating losses by the acquired entity)
that would indicate an impairment adjustment may be necessary. Based on its
assessment of the current economic environment, management does not anticipate
an impairment adjustment to the goodwill reflected in the accompanying
consolidated balance sheet upon adoption of SFAS No. 142. The effect of adopting
SFAS No. 141 and No. 142 will be that the Company will cease amortizing the
goodwill balance of $2.2 million which will have the effect of eliminating
goodwill amortization of $288,000 in fiscal 2003.
10
NOTE 2. INVESTMENTS (Dollars in Thousands)
The amortized cost and fair value of investments securities available for
sale are summarized as follows:
MARCH 31, 2002
----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and agency obligations $ 13,995 $ 73 $ (72) $ 13,996
Corporate bonds 39,012 231 (675) 38,568
Mortgage-backed securities 18,377 168 (205) 18,340
-------- -------- -------- --------
Total debt securities 71,384 472 (952) 70,904
Marketable equity securities 3,551 17 (588) 2,980
-------- -------- -------- --------
Total $ 74,935 $ 489 $ (1,540) $ 73,884
======== ======== ======== ========
MARCH 31, 2001
----------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
U.S. Government and agency obligations $18,970 $ 88 $ (7) $19,051
Corporate bonds 4,984 261 -- 5,245
Mortgage-backed securities 19,623 152 (461) 19,314
------- ------- ------- -------
Total debt securities 43,577 501 (468) 43,610
Marketable equity securities 6,559 605 (1,386) 5,778
------- ------- ------- -------
Total $50,136 $ 1,106 $(1,854) $49,388
======= ======= ======= =======
The maturity distribution (based on contractual maturities) and annual
yields of debt securities at March 31, 2002 are as follows:
AMORTIZED FAIR ANNUAL
COST VALUE YIELD
---------- --------- ----------
Due within one year $ 259 $ 262 6.62 %
Due after one year but within five years 42,532 42,196 6.54
Due after five years but within ten years 13,277 13,287 7.50
Due after ten years 15,316 15,159 6.99
------- -------
$71,384 $70,904 6.99
======= =======
Mortgage-backed securities are shown at their contractual maturity dates
but actual maturities may differ as borrowers have the right to prepay
obligations without incurring prepayment penalties.
11
Proceeds from sales of investment securities and related gains and losses
for the years ended March 31, 2002, 2001, and 2000 (all classified as available
for sale) were as follows:
2002 2001 2000
---- ---- ----
Proceeds from sales $ 2,885 $ 3,955 $ 6,159
Gross gains 546 694 1,013
Gross losses 54 14 --
During the year ended March 31, 2002, the Bank recognized write-downs in
certain equity securities totaling $642 as a result of declines in the fair
value of such securities judged to be other than temporary. These write-downs
are not included in the preceding table.
A mortgage-backed security pool with an amortized cost of $3,747 and fair
value of $3,686 at March 31, 2002, was pledged to provide collateral for
customers and for the Bank's employee tax withholdings that are to be remitted
to the federal government in excess of the $100 of withholdings insured by the
FDIC. In addition, investment securities carried at $5,783 were pledged under a
blanket lien to partially secure the Bank's advances from the Federal Home Loan
Bank of Boston ("FHLB of Boston").
As a member of the FHLB of Boston, the Bank is required to invest in stock
of the FHLB of Boston in an amount equal to 1% of its outstanding home loans or
1/20th of its outstanding advances from the FHLB of Boston, whichever is higher.
If such stock is redeemed, the Bank will receive from the FHLB of Boston an
amount equal to the par value of the stock.
The Co-operative Central Bank Reserve Fund (the "Fund") was established for
liquidity purposes and consists of deposits required of all insured co-operative
banks in Massachusetts. The Fund is used by The Co-operative Central Bank to
advance funds to member banks or to make other investments.
NOTE 3. LOANS (In Thousands)
Loans as of March 31, 2002 and 2001 are summarized below:
2002 2001
--------- ---------
Real estate loans:
Residential real estate $ 246,045 $ 248,459
Commercial real estate 87,013 69,949
Construction 20,998 9,152
Second mortgage and home equity lines of credit 9,154 10,977
--------- ---------
Total real estate loans 363,210 338,537
--------- ---------
Commercial loans 6,901 4,979
Consumer loans 1,596 2,277
--------- ---------
Total loans 371,707 345,793
Less: allowance for loan losses (3,292) (3,106)
--------- ---------
Total loans, net $ 368,415 $ 342,687
========= =========
At March 31, 2002 and 2001, net deferred loan (fees) and costs of ($692)
and $160, respectively, were reflected as an adjustment to the appropriate loan
categories.
The Bank has no non-accrual loans at March 31, 2002 and 2001. During the
years ended March 31, 2002 2001 and 2000, there were no impaired loans. The Bank
follows the same policy for recognition of income on impaired loans as it does
for all other loans.
Mortgage loans serviced by the Bank for others amounted to $2,616 and
$4,288 at March 31, 2002 and 2001, respectively.
The Bank's lending activities are conducted principally in communities in
the suburban Boston area. The Bank grants mortgage loans on residential
property, commercial real estate, construction of residential homes, second
mortgages, home equity and other loans. Substantially all loans granted by the
Bank are secured by real estate collateral. The ability and willingness of
residential mortgage borrowers to honor their repayment
12
commitments are generally impacted by the level of overall economic activity
within the borrowers' geographic areas and real estate values. The ability and
willingness of commercial real estate and construction loan borrowers to honor
their repayment commitments are generally impacted by the health of the real
estate market in the borrowers' geographic area and the general economy.
The following summarizes the activity with respect to loans made to
directors and officers and their related interests for the years ended March 31:
2002 2001
----- -----
Balance at beginning of year $ 580 $ 243
New loans 434 444
New officers with loans outstanding 66 158
Repayment of principal (215) (265)
----- -----
Balance at end of year $ 865 $ 580
===== =====
Loans included above were made in the Bank's ordinary course of business,
on substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
unrelated persons. All loans included above are performing in accordance with
the terms of the respective loan.
NOTE 4. ALLOWANCE FOR LOAN LOSSES (In Thousands)
A summary of changes in the allowance for loan losses follows:
YEARS ENDED MARCH 31,
-----------------------------
2002 2001 2000
------- ------- -------
Balance at beginning of year $ 3,106 $ 2,993 $ 2,913
Provision charged to expense -- -- --
Amounts charged-off (4) (4) (9)
Recoveries on accounts previously charged-off 190 117 89
------- ------- -------
Balance at end of year $ 3,292 $ 3,106 $ 2,993
======= ======= =======
NOTE 5. BANKING PREMISES AND EQUIPMENT (In Thousands)
A summary of cost, accumulated depreciation and amortization of banking
premises and equipment at March 31 follows:
ESTIMATED
2002 2001 USEFUL LIVES
------- ------- ------------
Land $ 589 $ 589
Buildings and improvements 2,339 2,304 15.50 years
Furniture and fixtures 5,744 5,596 5.00 years
Leasehold improvements 482 475 7.75 years
------- -------
9,154 8,964
Less accumulated depreciation and amortization (7,318) (6,946)
------- -------
Total $ 1,836 $ 2,018
======= =======
Depreciation and amortization for the years ended March 31, 2002, 2001 and
2000 amounted to $372, $438 and $462, respectively, and is included in occupancy
and equipment expense in the accompanying consolidated statements of income.
13
A summary of minimum rentals of banking premises for future periods under
non-cancelable operating leases follows:
YEARS ENDING MARCH 31,
2003 $ 118
2004 118
2005 73
2006 65
2007 49
Thereafter 18
Certain leases contain renewal options the potential impact of which is not
included above. Rental expense for the years ended March 31, 2002, 2001 and 2000
was $133, $125 and $123, respectively, and is included in occupancy and
equipment expense in the accompanying consolidated statements of income.
NOTE 6. DEPOSITS (Dollars in Thousands)
Deposits at March 31 are summarized as follows:
2002 2001
-------- --------
Demand deposit accounts $ 25,370 $ 22,438
NOW accounts 36,277 33,373
Regular, Club and 90 day notice accounts 72,944 64,011
Money market deposit accounts 17,997 15,327
-------- --------
Total non certificate accounts 152,588 135,149
-------- --------
Term deposit certificates
Certificates of $100 and above 27,233 34,644
Certificates less than $100 82,086 117,374
-------- --------
Total term deposit certificates 109,319 152,018
-------- --------
$261,907 $287,167
======== ========
Contractual maturities of term deposit certificates with weighted
average interest rates at March 31, 2002 are as follows:
AMOUNT RATE
------ ----
Within 1 year $ 92,381 4.21%
Over 1 to 3 years 15,016 4.24
Over 3 years 1,922 4.62
--------
$109,319 4.37
========
14
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands)
A summary of the maturity distribution of FHLB of Boston advances (based on
final maturity dates) with weighted average interest rates at March 31 follows:
2002 2001
------------------- -------------------
AMOUNT RATE AMOUNT RATE
--------- -------- --------- --------
Within 1 year $ 58,600 2.61% $ 25,000 6.46%
Over 1 to 5 years 21,400 4.83 12,000 6.48
Over 5 to 10 years 82,000 5.52 82,000 5.52
Over 10 years 2,000 5.49 2,000 4.49
-------- --------
$164,000 4.39 $121,000 5.84
======== ========
At March 31, 2002, advances totaling $84,000 were callable prior to the
scheduled maturity of the advances. The Bank is subject to a substantial penalty
upon prepayment of FHLB of Boston advances.
The FHLB of Boston is authorized to make advances to its members subject to
such regulations and limitations as the Federal Home Loan Bank Board may
prescribe. The advances are secured by FHLB of Boston stock and a blanket lien
on certain qualified collateral, defined principally as 90% of the fair value of
U.S. Government and federal agency obligations and 75% of the carrying value of
first mortgage loans on owner-occupied residential property. The Bank's unused
borrowing capacity with the FHLB of Boston was approximately $21,000 and $80,200
at March 31, 2002 and 2001, respectively.
NOTE 8. INCOME TAXES (Dollars in Thousands)
The components of the provision for income taxes for the years indicted are
as follows:
YEARS ENDED MARCH 31,
----------------------------
2002 2001 2000
------- ------- -------
Current
Federal $ 1,930 $ 1,555 $ 1,745
State 229 52 44
------- ------- -------
Total current provision 2,159 1,607 1,789
Deferred (prepaid) (382) 156 343
------- ------- -------
$ 1,777 $ 1,763 $ 2,132
======= ======= =======
The provision for income taxes for the periods presented is different from
the amounts computed by applying the statutory Federal income tax rate to income
before income taxes. The differences between expected tax rates and effective
tax rates are as follows:
YEARS ENDED MARCH 31,
-------------------------
2002 2001 2000
------ ------- -------
Statutory Federal tax rate 34.0% 34.0% 34.0%
Items affecting Federal income tax rate:
Dividends received deduction (0.4) (0.6) (0.4)
Goodwill amortization 2.1 2.0 1.8
State income taxes, net of Federal benefit 2.6 1.2 1.6
Other -- (0.4) 0.4
----- ---- ----
Effective tax rate 38.3% 36.2% 37.4%
===== ==== ====
15
The components of gross deferred tax assets and gross deferred tax
liabilities that have been recognized as of March 31 are as follows:
2002 2001
------ ------
Deferred tax assets:
Allowance for loan losses $ 549 $ 548
Deferred loan origination fees 53 74
Depreciation 298 265
Post-employee retirement benefit accrual 241 227
Unrealized loss on securities 425 319
Write-down of investment securities 218 --
Other 59 74
------ ------
Gross deferred tax asset 1,843 1,507
------ ------
Deferred tax liabilities:
Accrued dividend receivable 30 47
Deferred loan origination fees 285 437
Deferred income 239 222
------ ------
Gross deferred tax liability 554 706
------ ------
Net deferred tax asset $1,289 $ 801
====== ======
Based on the Bank's historical and current pretax earnings, management
believes it is more likely than not that the Bank will realize the net deferred
tax asset existing at March 31, 2002. Further, management believes the existing
net deductible temporary differences will reverse during periods in which the
Bank generates net taxable income. At March 31, 2002, recoverable income taxes,
plus estimated taxes for fiscal 2003, exceed the amount of the net deferred tax
asset. There can be no assurance, however, that the Bank will generate any
earnings or any specific level of continuing earnings.
The unrecaptured base year tax bad debt reserves will not be subject to
recapture as long as the Bank continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be subject
to provision of present law that requires recapture in the case of certain
excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is
approximately $1,300.
In June 2002, the Bank received from the Commonwealth of Massachusetts
Department of Revenue ("DOR") a Notice of Intent to Assess additional state
excise taxes of $535 plus interest and penalties with respect to its tax years
ended March 31, 2000 and 2001. The Bank is aware that the DOR has sent similar
notices to numerous other financial institutions in Massachusetts that reported
a deduction for dividends received from a REIT during this period. Assessed
amounts ultimately paid, if any, would be deductible expenses for federal income
tax purposes.
The DOR contends that dividend distributions by the Bank's REIT to the Bank
are fully taxable in Massachusetts. The Bank believes that the Massachusetts
statute that provides for a dividends received deduction equal to 95% of certain
dividend distributions applies to the distributions made by the Bank's REIT.
Accordingly, no provision has been made in the Company's consolidated financial
statements for the amounts assessed or additional amounts that might be assessed
in the future. The Bank intends to vigorously appeal the assessment and to
pursue all available means to defend its position.
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (In Thousands)
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include unused lines of credit, unadvanced portions
of commercial and construction loans, and commitments to originate loans. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets.
16
The amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to its financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Financial instruments with off-balance sheet risks as of March 31, included
the following:
2002 2001
------- -------
Unused lines of credit $11,035 $11,012
Unadvanced portions of construction loans 4,574 4,427
Unadvanced portions of commercial loans 1,574 5,651
Commitments to originate commercial mortgage loans 13,674 14,189
Commitments to originate residential mortgage loans 11,468 2,900
Commitments to originate loans, unused lines of credit and unadvanced
portions of commercial and construction loans are agreements to lend to a
customer, provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower.
NOTE 10. STOCKHOLDERS' EQUITY (Dollars in Thousands, except per share amount)
The Company and the Bank may not declare or pay cash dividends on their
stock if the effect thereof would cause capital to be reduced below regulatory
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
In October 1991, the Bank adopted a Shareholder Rights Plan. The plan
entitles each shareholder to purchase the Company's stock at a discount price in
the event any person or group of persons exceeds predetermined ownership
limitations of the Company's outstanding common stock and, in certain
circumstances, engages in specific activities deemed adverse to the interests of
the Company's shareholders. This plan was due to expire in October 2001 but was
renewed by the Board of Directors during fiscal 2002 and is now scheduled to
expire in October 2011. .
Beginning in April 1999, the Board of Directors authorized a series of four
separate 5% stock repurchase programs under which the Company has acquired
365,294 shares of its stock at an average cost of $19.56 per share. The fourth
repurchase program was completed in March 2002.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulations that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. The minimum core (leverage) capital ratio
required for banks with the highest overall rating from bank regulatory agencies
is 3.00% and is 4.00%-5.00% for all others. The Bank must also have a minimum
total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital,
consisting of common stockholders' equity). As of March 31, 2002, the Bank met
all capital adequacy requirements to which it is subject.
17
The most recent notification from the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Bank must maintain minimum risk-weighted
capital, Tier 1 capital and tangible capital ratios as set forth in the table.
There are no conditions or events, since that notification, that management
believes would cause a change in the Bank's categorization. No deduction was
taken from capital for interest-rate risk. The Company's and the Bank's Tier
1/leverage, Tier 1 risk-based and total risk-based capital ratios together with
related regulatory minimum requirements are summarized below:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
As of March 31, 2002:
COMPANY (CONSOLIDATED)
Total capital $ 40,303 13.06% $ 24,694 =>8.00% N/A N/A
Tier 1 capital 37,011 11.99 12,347 =>4.00 N/A N/A
Tier 1 leverage capital 37,011 8.09 18,304 =>4.00 N/A N/A
BANK
Total capital 38,134 12.35 24,700 =>8.00% $ 30,875 =>10.00%
Tier 1 capital 34,842 11.28 12,350 =>4.00 18,525 =>6.00
Tier 1 leverage capital 34,842 7.61 18,304 =>4.00 22,880 =>5.00
As of March 31, 2001:
COMPANY (CONSOLIDATED)
Total capital 38,448 13.60 22,612 =>8.00% N/A N/A
Tier 1 capital 35,342 12.50 11,306 =>4.00 N/A N/A
Tier 1 leverage capital 35,342 8.06 17,539 =>4.00 N/A N/A
BANK
Total capital 36,362 12.83 22,665 =>8.00% 28,331 =>10.00%
Tier 1 capital 33,256 11.74 11,332 =>4.00 16,999 =>6.00
Tier 1 leverage capital 33,256 7.75 17,156 =>4.00 21,445 =>5.00
NOTE 11. EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data)
PENSION AND SAVINGS PLANS
As a participating employer in the Co-operative Banks Employees' Retirement
Association ("CBERA"), a multi-employer plan, the Bank has in effect a
noncontributory defined benefit plan ("Pension Plan") and a defined contribution
plan ("Savings Plan") covering substantially all eligible employees.
Benefits under the Pension Plan are determined at the rate of 1% and 1.5%,
respectively, of certain elements of final average pay times years of credited
service and are generally provided at age 65 based on years of service and the
average of the participants' three highest consecutive years of compensation
from the Bank. Employee contributions are made to a Savings Plan which qualifies
under section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank
matches 50% of an eligible deferral contribution on the first 5% of the deferral
amount subject to the maximum allowable under federal regulations. Pension
benefits and employer contributions to the Savings Plan become vested over six
years.
Expenses for the Pension Plan and the Savings Plan were $289, $269 and $237
for the years ended March 31, 2002, 2001 and 2000, respectively. Forfeitures are
used to reduce expenses of the plans.
18
EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal 1991, the Bank established an Employee Stock Ownership Plan
("ESOP") that is authorized to purchase shares of outstanding common stock of
the Company from time to time in the open market or in negotiated transactions.
The ESOP is a tax-qualified defined contribution plan established for the
exclusive benefit of the Bank's employees.
During fiscal 2002, the Company's Board of Directors authorized the ESOP to
acquire up to an additional 5% of outstanding shares of Company stock. Such
purchases are to be funded by loans from the Company. During fiscal 2002, 7,222
shares were purchased under such authorization at a purchase price of $199.
The ESOP is repaying its loans to the Bank and the Company with funds from
the Bank's contributions to the plan and earnings from the ESOP's assets.
Repayments of $129, $196 and $184 were made during fiscal 2002, 2001 and 2000,
respectively.
Prior to fiscal 2002, compensation expense was recognized as the shares
were allocated to ESOP participants based upon the cost of the shares to the
ESOP. Beginning in fiscal 2002, compensation expense was recognized as the
shares were allocated to participants based upon the fair value of the shares at
the time they were allocated. Consequently, changes in market value of the
Company's stock have an effect on the Company's results of operations but have
no effect on stockholders' equity. ESOP expense for fiscal 2002, 2001 and 2000
amounted to $305, $130 and $130, respectively.
STOCK OPTION PLAN
The Company has adopted two qualified Stock Option Plans for the benefit of
officers and other employees under which an aggregate of 281,500 shares had been
reserved for issuance. One of these plans terminated in 1997.
Stock option activity is as follows for the years indicated:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -------------
Balance March 31, 1999 28,000 $ 16.250
Granted 32,499 20.250
Exercised (3,000) 16.250
-------
Balance March 31, 2000 57,499 18.511
Granted 32,501 16.625
-------
Balance March 31, 2001 90,000 17.830
Forfeited (799) 16.625
Exercised (29,588) 16.617
-------
Balance March 31, 2002 59,613 18.448
=======
The exercise price of an option will not be less than the fair market value
of the common stock on the date of grant of the option. At March 31, 2002,
33,299 shares were reserved for issuance under the remaining plan.
All stock options are fully vested and exercisable at the time of grant.
The range of exercise prices and weighted average remaining contractual life of
outstanding stock options at March 31, 2002 are as follows:
EXERCISE NUMBER REMAINING
PRICE OUTSTANDING LIFE
----- ----------- ----
$16.625 29,638 8.7 years
20.250 29,975 7.7 years
------
59,613
======
19
The Company follows the intrinsic value method in accounting for stock
options and, accordingly, no compensation expense has been recognized in the
financial statements. Had the Company determined compensation expense based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income and EPS would have been reduced to the pro forma amounts
indicated below. No options were granted during fiscal 2002 and forfeitures
during the year were insignificant. Consequently, no material difference in net
income occurred in fiscal 2002 as a result of the Company's use of the intrinsic
value method rather than the fair value method of accounting for stock-based
compensation.
2001 2000
---- ----
NET INCOME:
Income before cumulative effect of change in accounting principle, as reported $ 3,109 $ 3,567
Cumulative effect of change in accounting principle, as reported -- (234)
Net income after cumulative effect of change in accounting principle, as reported 3,109 3,333
Pro forma income before cumulative effect of change in accounting principle 2,934 3,308
Cumulative effect of change in accounting principle -- (234)
Pro forma net income after cumulative effect of change in accounting principle 2,934 3,074
EARNINGS PER COMMON SHARE:
Before cumulative effect of change in accounting principle, as reported 1.81 1.90
Before cumulative effect of change in accounting principle, pro forma 1.71 1.76
Before cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.89
Before cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.75
After cumulative effect of change in accounting principle, as reported 1.81 1.77
After cumulative effect of change in accounting principle, pro forma 1.71 1.63
After cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.77
After cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.63
The per share weighted average fair value of stock options granted during
2001 and 2000 was $5.39 and $7.98, respectively, on the date of grant. These
fair values were determined using the Black Scholes option pricing model with
the following weighted average assumptions:
2001 2000
---------- -----------
Expected dividend yield 2.00 % 2.00 %
Risk-free interest rate 5.20 6.00
Expected volatility 31.00 39.00
Expected life in years 6.00 6.00
20
OTHER POST-RETIREMENT BENEFITS
The Bank maintains a post-retirement medical insurance plan and life
insurance plan for certain individuals. The following tables summarize the
funded status and the actuarial benefit obligations of these plans for fiscal
2002 and 2001.
2002 2001
----------------------------------
LIFE MEDICAL LIFE MEDICAL
---- ------- ---- -------
Actuarial present value of benefits obligation:
Retirees $(220) $(614) $(222) $(413)
Fully eligible participants (12) (132) (44) (307)
Other plan participants -- -- -- --
----- ----- ----- -----
Total $(232) $(746) $(266) $(720)
===== ===== ===== =====
Change in projected benefit obligation:
Accumulated benefit obligations at prior
year-end $(266) $(720) $(233) $(680)
Service cost less expense component -- -- --
Interest cost (16) (51) (19) (51)
Actuarial gain (loss) 45 (12) (7) 2
Assumptions (5) (13) (8) (29)
Benefits paid 10 50 1 38
----- ----- ----- -----
Accumulated benefit obligations at
year-end $(232) $(746) $(266) $(720)
===== ===== ===== =====
Change in plan assets:
Fair value of plan assets at prior year-end $ -- $ -- $ -- $ --
Actual return on plan assets -- -- -- --
Employer contribution 10 50 1 38
Benefits paid end expenses (10) (50) (1) (38)
----- ----- ----- -----
Fair value of plan assets at current
year-end $ -- $ -- $ -- $ --
===== ===== ===== =====
Funded $(232) $(746) $(266) $(720)
Unrecognized net obligation 95 273 103 297
Unrecognized prior year service -- -- -- --
Unrecognized net (loss) gain (82) 102 (48) 80
----- ----- ----- -----
$(219) $(371) $(211) $(343)
===== ===== ===== =====
Reconciliation of (accrual) prepaid:
(Accrued) prepaid pension cost at beginning of year $(211) $(343) $(186) $(305)
Minus net periodic cost (18) (78) (26) (76)
Plus employee contributions 10 50 1 38
----- ----- ----- -----
(Accrued) prepaid cost at end of year $(219) $(371) $(211) $(343)
===== ===== ===== =====
Benefit obligation weighted average assumption as
of fiscal year-end:
Discount rate 7.00% 7.00% 7.25% 7.25%
Expected return on plan assets 7.00% 7.00% 7.25% 7.25%
Rate of compensation increase -- -- -- --
1 PERCENTAGE POINT INCREASE
-----------------------------------------
2002 2001
---- ----
Impact of 1% change in health care trend rates:
Effect on total service and interest cost components N/A $ (4) N/A $ (5)
Effect on the post retirement benefit obligations N/A 55 N/A 63
Components of net periodic benefit obligations:
Service cost $ -- $ -- $ -- $ --
Interest cost 16 51 19 51
Expected return on plan assets -- -- -- --
Amortization of prior service cost 9 25 9 25
Recognized actuarial (gain) loss (6) 2 (1) --
------- ------- ------- ------
Net periodic benefit cost for fiscal year
ending $ 19 $ 78 $ 27 $ 76
======= ======= ======= ======
Periodic benefit cost weighted average assumptions:
Discount rate 7.25% 7.25% 7.75% 7.25%
Expected return on plan assets 7.25% 7.25% 7.75% 7.25%
Rate of compensation increase -- -- -- --
21
For measurement purposes, a 6.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the fiscal year ended March
31, 2001. The rate was assumed to decrease to 5.5% for the fiscal year ending
March 31, 2002 and remain at that level thereafter.
NOTE 12. LEGAL PROCEEDINGS
The Bank from time to time is involved as plaintiff or defendant in various
legal actions incident to its business. Except as described herein, none of
these actions are believed to be material, either individually or collectively,
to the results of operations and financial condition of the Company or any
subsidiary.
The Bank has been named as defendant in a civil suit filed March 28, 2002
in Middlesex Superior Court under the caption Yi v. Central Bank in which it is
alleged, inter alia, that the Bank committed an unfair or deceptive trade
practice by failing to pay surplus foreclosure proceeds to a junior lien holder
in 1994. Plaintiff seeks damages of $160,000 plus interest of approximately
$150,000 and has applied for a multiple damage award under Chapter 93A of the
Massachusetts General Laws which provides for up to treble damages if a
violation is found to be willful or knowing. The Bank believes that it has
meritorious defenses to all such claims and intends to vigorously defend against
them.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands)
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the intangible value inherent
in deposit relationships (i.e. core deposits) and banking premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair values and
have not been considered in any of the estimates. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair values of its financial instruments:
CASH AND DUE FROM BANKS
The carrying values reported in the balance sheet for cash and due from
banks approximate their fair value because of the short maturity of these
instruments.
SHORT-TERM INVESTMENTS
The carrying values reported in the balance sheet for short-term
investments approximate fair value because of the short maturity of these
investments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair values presented for investment and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS
The fair values of loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
ACCRUED INTEREST RECEIVABLE
The carrying value reported in the balance sheet for accrued interest
receivable approximates its fair value because of the short maturity of these
accounts.
STOCK IN FHLB OF BOSTON
The carrying amount reported in the balance sheet for FHLB stock
approximates its fair value. If redeemed, the Bank will receive an amount equal
to the par value of the stock.
22
THE CO-OPERATIVE CENTRAL BANK RESERVE FUND
The carrying amount reported in the balance sheet for the Co-operative
Central Bank Reserve Fund approximates its fair value.
DEPOSITS
The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair
values for term deposit certificates are estimated using a discounted cash flow
technique that applies interest rates currently being offered on certificates to
a schedule of aggregated monthly maturities on time deposits with similar
remaining maturities.
ADVANCES FROM FHLB OF BOSTON
Fair values of non-callable advances from the FHLB of Boston are estimated
using a discounted cash flow technique that applies interest rates currently
being offered on advances to a schedule of aggregated monthly maturities on FHLB
advances. Fair values of callable advances from the FHLB of Boston are estimated
using the prepayment fee payable to the FHLB of Boston assuming all such
advances were prepaid on the reporting date.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE AND ACCRUED INTEREST
PAYABLE
The carrying values reported in the balance sheet for advance payments by
borrowers for taxes and insurance and accrued interest payable approximate their
fair value because of the short maturity of these accounts.
OFF-BALANCE SHEET INSTRUMENTS
The Bank's commitments for unused lines of credit and unadvanced portions
of loans are at floating rates, which approximate current market rates, and,
therefore, no fair value adjustment has been made.
The estimated carrying amounts and fair values of the Bank's financial
instruments are as follows:
MARCH 31, 2002 MARCH 31, 2001
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
ASSETS
Cash and due from banks $ 5,109 $ 5,109 $ 5,351 $ 5,351
Short-term investments 2,455 2,455 35,718 35,718
Investment securities 73,884 73,884 49,388 49,388
Net loans 368,415 367,893 342,687 350,028
Accrued interest receivable 2,530 2,530 2,426 2,426
Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300 6,150 6,150
The Co-operative Central Bank Reserve Fund 1,576 1,576 1,576 1,576
LIABILITIES
Deposits $261,907 $262,810 $287,167 $288,297
Advances from Federal Home Loan Bank of Boston 164,000 169,896 121,000 119,965
Advance payments by borrowers for taxes and insurance 1,111 1,111 1,220 1,220
Accrued interest payable 618 618 608 608
23
NOTE 14. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands)
The following are the condensed financial statements for Central Bancorp,
Inc. (the "Parent Company") only:
MARCH 31,
-----------------
BALANCE SHEETS 2002 2001
- ----------------------------------------------------------------
ASSETS
Cash deposit in subsidiary bank $ 1,970 $ 2,153
Investment in subsidiary 36,785 36,129
ESOP loan 199 --
------- -------
Total assets $38,954 $38,282
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued taxes and other liabilities $ -- $ 70
Total stockholders' equity 38,954 38,212
------- -------
Total liabilities and stockholders' equity $38,954 $38,282
======= =======
YEARS ENDED MARCH 31,
-------------------------------
STATEMENTS OF INCOME 2002 2001 2000
- ---------------------------------------------------------------------------------------
Dividend from subsidiary $ 2,500 $ 4,000 $ 3,012
Non-interest expenses 466 266 331
------- ------- -------
Income before income taxes 2,034 3,734 2,681
Income tax benefit (154) (87) (109)
------- ------- -------
Income before cumulative effect of change in
accounting principle 2,188 3,821 2,790
Cumulative effect of change in accounting principle -- -- (234)
------- ------- -------
Income before equity in undistributed net income
of subsidiary 2,188 3,821 2,556
Equity in undistributed net income of subsidiary 672 (712) 777
------- ------- -------
Net income $ 2,860 $ 3,109 $ 3,333
======= ======= =======
YEARS ENDED MARCH 31,
-------------------------------
STATEMENTS OF CASH FLOWS 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,860 $ 3,109 $ 3,333
Adjustment to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of subsidiary (672) 712 (777)
Decrease (increase) in other assets -- 100 (100)
Increase (decrease) in accrued taxes and other liabilities (71) 70 (15)
Cumulative effect of change in accounting principle -- -- 234
------- ------- -------
Net cash provided by operating activities 2,117 3,991 2,675
------- ------- -------
Cash flows from investing activities:
ESOP loan (199) -- --
------- ------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 492 -- 22
Purchase of treasury stock (1,924) (2,187) (3,043)
Cash dividends paid (669) (697) (689)
------- ------- -------
Net cash used by financing activities (2,101) (2,884) (3,710)
------- ------- -------
Net increase (decrease) in cash in subsidiary bank (183) 1,107 (1,035)
Cash in subsidiary bank at beginning of year 2,153 1,046 2,081
------- ------- -------
Cash in subsidiary bank at end of year $ 1,970 $ 2,153 $ 1,046
======= ======= =======
24
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (Unaudited) (In Thousands, Except Per
Share Data)
The following tables summarize the operating results on a quarterly basis
for the years ended March 31, 2002 and 2001.
2002
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Interest and dividend income....................... $ 7,599 $ 7,180 $ 7,052 $ 7,442
Interest expense................................... 4,364 3,820 3,344 3,332
-----------------------------------------------------
Net interest and dividend income.............. 3,235 3,360 3,708 4,110
Non-interest income................................ 409 337 244 (302)
Non-interest expenses.............................. 2,811 2,806 2,467 2,380
-----------------------------------------------------
Income before income taxes.................... 833 891 1,485 1,428
Income tax......................................... 303 327 536 611
-----------------------------------------------------
Net income.................................... $ 530 $ 564 $ 949 $ 817
=====================================================
Earnings per common share-- basic.................. $ 0.32 $ 0.34 $ 0.57 $ 0.50
=====================================================
Earnings per common share-- diluted................ $ 0.32 $ 0.34 $ 0.57 $ 0.50
=====================================================
2001
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
Interest and dividend income....................... $ 7,230 $ 7,759 $ 8,122 $ 7,805
Interest expense................................... 3,793 4,297 4,472 4,440
-----------------------------------------------------
Net interest and dividend income.............. 3,437 3,462 3,650 3,365
Non-interest income................................ 338 354 444 152
Non-interest expenses.............................. 2,576 2,440 2,685 2,629
-----------------------------------------------------
Income before income taxes.................... 1,199 1,376 1,409 888
Income tax......................................... 434 499 509 321
-----------------------------------------------------
Net income.................................... $ 765 $ 877 $ 900 $ 567
=====================================================
Earnings per common share-- basic.................. $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
Earnings per common share-- diluted................ $ 0.43 $ 0.51 $ 0.53 $ 0.34
=====================================================
During the quarter ended March 31, 2002, the Bank recognized write-downs of
$457 for certain marketable equity securities which had experienced a decline in
fair value which was judged to be other than temporary.
25
Independent Auditors' Report
The Board of Directors and Stockholders
Central Bancorp, Inc.:
We have audited the consolidated balance sheets of Central Bancorp, Inc. and
subsidiary as of March 31, 2002 and 2001, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended March 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Bancorp,
Inc. and subsidiary as of March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
April 25, 2002
26
* * * * *
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) FINANCIAL STATEMENTS
--------------------
For the Financial Statements filed as part of this Annual Report on
Form 10-K, reference is made to "Item 8 -- Financial Statements and
Supplementary Data"
(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
All financial statement schedules have been omitted as not applicable
or not required or because they are included in the financial
statements appearing at Item 8.
(3) EXHIBITS REQUIRED BY PARAGRAPH (C) OF ITEM 14
---------------------------------------------
See "Item 14(c) -- Exhibits"
(b) REPORTS ON FORM 8-K -- The Registrant did not file any Current Reports on
-------------------
Form 8-K during the fourth quarter of the fiscal year ended March 31, 2002.
(c) EXHIBITS
--------
The following exhibits are filed as exhibits to this report.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* Articles of Organization of Central Bancorp, Inc.
3.2* Bylaws of Central Bancorp, Inc.
4.1** Shareholder Rights Agreement, dated as of October 11, 2001, by and between
the Central Bancorp, Inc. and EquiServe Trust Company, as
Rights Agent
10.1* Employment Agreement between the Bank and John D. Doherty, dated October 24, 1986 +
10.2* First Amendment to Employment Agreement between the Bank and John D. Doherty, dated March
31, 1992 +
10.3* Second Amendment to Employment Agreement between the Bank and John D. Doherty, dated June
8, 1995 +
10.4* Third Amendment to the Employment Agreement between the Bank and
John D. Doherty, dated January 8, 1999 +
10.5* Severance Agreement between the Bank and William P. Morrissey, dated December 14, 1994 +
10.6* Severance Agreement between the Bank and David W. Kearn, dated December 14, 1994 +
10.7* Severance Agreement between the Bank and Paul S. Feeley, dated May 14, 1998 +
10.8* Amendments to Severance Agreements between the Bank and Messrs. Feeley, Kearn
and Morrissey, dated January 8, 1999. +
27
10.9*** 1999 Stock Option and Incentive Plan +
10.10**** Deferred Compensation Plan for Non-Employee Directors +
10.11***** Management Incentive Plan +
10.12***** Severance Agreement between the Bank and Michael K. Devlin, dated February 25, 2002. +
21***** Subsidiaries of Registrant
23 Consent of KPMG LLP
99 Certification under Section 906 of Sarbanes-Oxley Act of 2002
____________
+ Management contract or compensatory plan required to be filed pursuant to
Item 14(c).
* Incorporated herein by reference to the Form 10-K for the fiscal year ended
March 31, 1999, filed with the SEC on June 28, 1999.
** Incorporated by reference to the Form 8-A filed with the SEC on October 12,
2001.
*** Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-49264) filed on November 3, 2000.
**** Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-87005) filed on September 13, 1999.
*****Previously filed.
28
SIGNATURES
In accordance with Section 13 or 15(d) 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.
Date: March 20, 2003 By:/s/ John D. Doherty
----------------------------------------------
John D. Doherty
President and Chief Executive Officer
Duly Authorized Representative
CERTIFICATION
I, John D. Doherty, President and Chief Executive Officer of Central Bancorp,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K/A of Central Bancorp, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
Date: March 20, 2003
/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 annual report on Form 10-K/A of Central Bancorp, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
Date: March 20, 2003
/s/ Michael K. Devlin
------------------------------------------
Michael K. Devlin
Senior Vice President, Treasurer and Chief
Financial Officer