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, 1999 - ------------------- COMMISSION FILE NUMBER: 0-25251 ------- CENTRAL BANCORP, INC. -------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) MASSACHUSETTS -------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) I.R.S. EMPLOYER IDENTIFICATION NO. 04-3447594 399 HIGHLAND AVENUE, SOMERVILLE, MA. 02144 ---------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER (617) 628-4000 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Class Outstanding at November 12, 1999 - ----------------------------- -------------------------------- Common Stock, $1.00 par value 1,871,650 CENTRAL BANCORP, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Consolidated Statements of financial condition at March 31, 1999 and September 30, 1999 (unaudited) Consolidated Statements of Income for the three and six month periods ended September 30, 1999 and 1998 (unaudited) Consolidated Statements of Cash Flow for the three and six month periods ended September 30, 1999 and 1998 (unaudited) Consolidated Statements of Changes in Stockholders' Equity for the three and six month periods ended September 30, 1999 and 1998 (unaudited) Notes to Consolidated Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. For the three and six month periods ended September 30, 1999 and 1998 Item 3. Quantitative and Qualitative Disclosures about Market Risk (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999) PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Item 1-Financial Statements CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition September 30, March 31, (Dollars in Thousands) 1999 1999 - ---------------------------------------------------------------------------- (Unaudited) ASSETS Cash and due from banks $ 5,111 $ 4,964 ---------- ---------- Short-term investments 5,642 16,939 Investments available for sale: Investment securities 28,582 21,943 Mortgage-backed securities 23,494 29,999 Stock in Federal Home Loan Bank of Boston, at cost 3,664 3,350 The Co-operative Central Bank Reserve Fund 1,576 1,576 ---------- ---------- Total investments 62,958 73,807 ---------- ---------- Loans: Mortgage loans 291,254 274,146 Other loans 6,992 6,200 ---------- ---------- 298,246 280,346 Less allowance for loan losses (2,950) (2,913) ---------- ---------- Net loans 295,296 277,433 ---------- ---------- Accrued interest receivable 1,898 1,614 Office properties and equipment, net 2,344 2,550 Deferred tax asset, net 1,180 744 Goodwill, net 2,952 3,096 Other assets 231 488 ---------- ---------- Total assets $ 371,970 $ 364,696 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 256,347 $ 266,463 Advances from Federal Home Loan Bank of Boston 74,435 57,000 Advance payments by borrowers for taxes and insurance 1,130 1,389 Accrued interest payable 340 291 Accrued income taxes 446 -- Accrued expenses and other liabilities 1,078 811 ---------- ---------- Total liabilities 333,776 325,954 ---------- ---------- Commitments and Contingencies (Note 2) Stockholders' equity: Preferred stock $1.00 par value; authorized 5,000,000 shares; none issued or outstanding -- -- Common stock $1.00 par value; authorized 15,000,000 shares; issued 1,967,000 shares(outstanding 1,914,500 at September 30, 1999 and 1,967,000 shares at March 31, 1999) 1,967 1,967 Additional paid-in capital 11,171 11,171 Retained income 27,092 25,894 Treasury stock (52,500 shares and 0 shares at September 30, 1999, and March 31, 1999, respectively), at cost (1,094) -- Accumulated other comprehensive income (loss) (note 4) (391) 327 Unearned compensation - ESOP (551) (617) ---------- ---------- Total stockholders' equity 38,194 38,742 ---------- ---------- Total liabilities and stockholders' equity $ 371,970 $ 364,696 ========== ========== See accompanying notes to unaudited consolidated financial statements. CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In Thousands Except Per Share Data) (Unaudited) Three Months Ended Six Months Ended September 30, September 30, 1999 1998 1999 1998 -------------------- ------------------- Interest and dividend income: Mortgage loans $5,268 $5,476 $10,343 $10,825 Other loans 147 97 284 201 Short-term investments 48 102 255 182 Investment securities 472 389 857 787 Mortgage-backed securities 352 558 752 1,168 The Co-operative Central Bank Reserve Fund 27 27 50 49 ------ ------ ------- ------- Total interest and dividend income 6,314 6,649 12,541 13,212 ------ ------ ------- ------- Interest expense: Deposits 2,161 2,816 4,488 5,656 Advances from Federal Home Loan Bank of Boston 877 872 1,647 1,693 ------ ------ ------- ------- Total interest expense 3,038 3,688 6,135 7,349 ------ ------ ------- ------- Net interest and dividend income 3,276 2,961 6,406 5,863 Provision for loan losses -- -- -- -- ------ ------ ------- ------- Net interest and dividend income after provision for loan losses 3,276 2,961 6,406 5,863 ------ ------ ------- ------- Non-interest income: Deposit service charges 99 106 207 213 Net gains from sales of investment securities 494 21 612 184 Other income 67 61 119 122 ------ ------ ------- ------- Total non-interest income 660 188 938 519 ------ ------ ------- ------- Operating expenses: Salaries and employee benefits 1,216 1,081 2,407 2,171 Occupancy and equipment 293 340 589 637 Data processing service fees 144 143 281 271 Professional fees 198 191 412 363 Goodwill amortization 72 72 144 144 Other expense 345 383 668 735 ------ ------ ------- ------- Total operating expenses 2,268 2,210 4,501 4,321 ------ ------ ------- ------- Income before income taxes 1,668 939 2,843 2,061 Income tax expense 636 375 1,098 826 ------ ------ ------- ------- Net Income before cumulative effect of change in accounting principle 1,032 564 1,745 1,235 Cumulative effect of change in accounting principle -- -- (234) -- ------ ------ ------- ------- Net income $1,032 $ 564 $ 1,511 $ 1,235 ====== ====== ======= ======= Earnings per common share before cumulative effect of change in accounting principle $ 0.54 $ 0.29 $ 0.91 $ 0.64 ====== ====== ======= ======= Earnings per common share before cumulative effect of change in accounting principle, diluted $ 0.54 $ 0.29 $ 0.91 $ 0.63 ====== ====== ======= ======= Earnings per common share after cumulative effect of change in accounting principle $ 0.54 $ 0.29 $ 0.79 $ 0.64 ====== ====== ======= ======= Earnings per common share after cumulative effect of change in accounting principle, diluted $ 0.54 $ 0.29 $ 0.78 $ 0.63 ====== ====== ======= ======= Weighted average common shares outstanding 1,907 1,937 1,920 1,937 Weighted average common shares outstanding, diluted 1,914 1,945 1,926 1,950 See accompanying notes to unaudited consolidated financial statements. CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, (In Thousands) 1999 1998 - ------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 1,511 $ 1,235 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 238 284 Amortization of premiums, fees and discounts 65 110 Amortization of goodwill 144 144 Net gains from sales of investment securities (612) (184) Decrease(increase) in accrued interest receivable (284) (99) (Increase) in deferred tax asset (436) 0 Decrease in other assets 257 14 Increase(decrease) in advance payments by borrowers for taxes and insurance (259) 253 Increase(decrease) in accrued interest payable 49 (183) Increase (decrease) in accrued income taxes 446 (902) Increase in accrued expenses and other liabilities 267 137 -------- -------- Net cash provided by operating activities 1,386 809 -------- -------- Cash flows from investing activities: Principal collected on loans 41,716 56,868 Loan originations (59,579) (70,724) Principal payments on mortgage-backed securities available for sale 6,315 8,288 Purchase of investment securities available for sale (13,022) (572) Maturities of investment securities available for sale 2,000 6,100 Proceeds from sales of investment securities available for sale 4,402 470 Maturities of investment securities held to maturity 0 2,000 Net (increase) decrease in short-term investments 11,297 (5,256) Purchase of Stock in Federal Home Loan Bank of Boston (314) (150) Purchase of office properties and equipment (32) (456) -------- -------- Net cash used by investing activities (7,217) (3,432) -------- -------- Cash flows from financing activities: Net (decrease)increase in deposits (10,116) 661 Proceeds from advances from FHLB of Boston 29,435 38,000 Payments on advances from FHLB of Boston (12,000) (37,000) Purchase of Treasury stock (1,094) 0 Payments of dividends on common stock (313) (314) Amortization of unearned compensation - ESOP 66 6 -------- -------- Net cash provided by financing activities 5,978 1,353 -------- -------- Net (decrease)increase in cash and due from banks 147 (1,270) Cash and due from banks at beginning of period 4,964 5,718 -------- -------- Cash and due from banks at end of period $ 5,111 $ 4,448 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 6,086 $ 7,532 Income taxes 652 1,728 Schedule of noncash investing activities: Transfer of mortgage loans to real estate acquired by foreclosure 0 0 See accompanying notes to unaudited consolidated financial statements. CENTRAL BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Additional Other Common Paid-in Retained Comprehensive (In Thousands) Stock Capital Income Income - ------------------------------------------------------------------------------------------------------------------ Six Months Ended September 30, 1998 - ------------------------------------- Balance at March 31, 1998 $1,965 $11,159 $23,841 $ 544 ------ ------- -------- -------- Net income -- -- 1,235 -- Other Comprehensive Income (loss), net of tax Unrealized (losses) on securities, net of reclassification adjustment (note 4) -- -- -- (181) ------ ------- -------- ------- Comprehensive income (loss) -- -- 1,235 (181) ------ ------- -------- ------- Dividends Paid -- -- (314) -- Amortization of unearned compensation - ESOP -- -- -- -- ------ ------- -------- ------- Balance at September 30, 1998 $1,965 $11,159 $24,762 $ 363 ====== ======= ======= ======= Six Months Ended September 30, 1999 - ----------------------------------- Balance at March 31, 1999 $1,967 $11,171 $25,894 $ 327 ------ ------- -------- ------- Net Income -- -- 1,511 -- Other Comprehensive Income (loss), net of tax Unrealized (losses) on securities, net of reclassification adjustment (note 4) -- -- -- (718) ------ ------- -------- ------- Comprehensive income (loss) -- -- 1,511 (718) ------ ------- -------- ------- Purchase of treasury stock -- -- -- -- Dividends Paid -- -- (313) -- Amortization of unearned compensation - ESOP -- -- -- -- ------ ------- -------- ------- Balance at September 30, 1999 $1,967 $11,171 $ 27,092 $ (391) ====== ======= ======== ======= Unearned Total Treasury Compensation Stockholders' (In Thousands) Stock ESOP Equity - ------------------------------------------------------------------------------------------------------------------ Six Months Ended September 30, 1998 - ----------------------------------- Balance at March 31, 1998 $ -- $ (723) $ 36,786 ----- ------- -------- Net Income -- -- 1,235 Other Comprehensive Income (loss), net of tax Unrealized (losses) on securities, net of reclassification adjustment (note 4) -- -- (181) ----- ------- -------- Comprehensive income (loss) -- -- 1,054 ----- ------- -------- Dividends paid -- -- (314) Amortization of unearned compensation - ESOP -- 6 6 ----- ------- -------- Balance at September 30, 1998 $ -- $ (717) $ 37,532 ===== ======= ======== Six Months Ended September 30, 1999 - ----------------------------------- Balance at March 31, 1999 $ -- $ (617) $ 38,742 ------- ------- -------- Net income -- -- 1,511 Other Comprehensive Income (loss), net of tax Unrealized (losses) on securities, net of reclassification adjustment (note 4) -- -- (718) ------- ------- -------- Comprehensive income (loss) -- -- 793 ------- ------- -------- Purchase of treasury stock (1,094) -- (1,094) Dividends Paid -- -- (313) Amortization of unearned compensation - ESOP -- 66 66 ------- ------- -------- Balance at September 30, 1999 $(1,094) $ (551) $ 38,194 ======= ======= ======== CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) BASIS OF PRESENTATION The consolidated financial statements of the Company for September 30, 1999 and the Bank for September 30, 1998 presented herein should be read in conjunction with the financial statements of the Company as of and for the year ended March 31, 1999, included in the Company's Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to fairly present the results for the interim periods presented. Interim results are not necessarily indicative of results to be expected for the entire year. (2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Commitments at September 30, 1999 follow: Unused lines of credit...................... $ 9,522,000 Unadvanced portions of construction loans... 3,696,000 Unadvanced portions of commercial loans..... 10,939,000 Commitments to originate residential mortgage loans: Fixed rate........................ 619,000 Adjustable rate................... 2,140,000 CENTRAL BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (3) INCOME TAXES The Company accounts for income taxes using the asset and liability tax method. Deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. (4) REPORTING COMPREHENSIVE INCOME The Company has established standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by, and distributions to, shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The Company's other comprehensive income (loss) and related tax effect is as follows: For the Six Months Ended (In Thousands) September 30, 1999 - ---------------------------------------------------------------------------------- Before- Tax Tax (Benefit) After-Tax Amount Expense Amount ------ --------- --------- Unrealized gains (losses) on securities Unrealized holding gains arising during period $ (542) $(200) $ (342) Less: reclassification adjustment for gains realized in net income 612 236 376 ------------------------------ Other comprehensive income (loss) $(1,154) $(436) $ (718) ============================== For the Six Months Ended (In Thousands) September 30, 1998 - ---------------------------------------------------------------------------------- Before- Tax Tax (Benefit) After-Tax Amount Expense Amount ------ --------- --------- Unrealized gains (losses) on securities Unrealized holding gains arising during period $ (108) $ (41) $ (67) Less: reclassification adjustment for gains realized in net income 184 70 114 ------------------------------ Other comprehensive loss $ (292) $(111) $(181) ============================== CENTRAL BANCORP, INC. AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL: - ------- On January 8, 1999, the Registrant, Central Bancorp, Inc. became the holding company of Central Co-operative Bank when the Bank completed its holding company reorganization. Because substantially all of the business of the Registrant is the business of the Bank, the discussion below focuses on the business of the Bank. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Holding Company" included in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 1999. Net income amounted to $1,032,000, or $0.54 per diluted share for the three months ended September 30, 1999 as compared to net income of $564,000, or $0.29 per diluted share in the corresponding quarter ended September 30, 1998. Net income for the current quarter was higher than net income for the same period in 1998 primarily due to an increase in net interest income of $315,000 and an increase of $473,000 in net gains from sales of investment securities offset by an increase of $261,000 in income tax expense. YEAR 2000 READINESS DISCLOSURE: - ------------------------------ The statements in this section include "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act. The following "Year 2000" discussion contains forward looking statements which represent the Company's beliefs or expectations regarding future events. Forward-looking statements include, without limitation, the Company's expectations as to when it will complete the phases of the Plan, its estimated costs, and its belief that its statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources, the ability to identify and remediate all date sensitive lines of computer code, and the actions of governmental agencies or other third parties with respect to Year 2000 problems. This disclosure should be read in conjunction with the Year 2000 Readiness Disclosure contained in the Company's Annual Report on Form 10-K as of and for the year ended March 31, 1999. The impact of computer systems ability to process dates beyond 1999 creates a significant business challenge for the Company. The Company has dedicated significant resources to this issue. The Company has formed a committee with members from all departments of the Company to address Year 2000 readiness. The committee has developed plans based upon the Federal Financial Institutions Examination Council ("FFIEC") to address this and related issues. The components of the Company's plan focus on; software and hardware utilized by the Company, communication equipment and other equipment and facilities utilized by the Company, including security and environmental systems. Additionally, the plan includes analysis of other risks posed by this issue such as liquidity, cash requirements, credit risk, supplier risk, borrower readiness, etc. The Company is utilizing both internal and external resources to test for Year 2000 compliance. The external cost associated with Year 2000 issues is estimated to be between $50,000 and $100,000. Included in the estimated cost are such things as third party proxy testing and other testing of critical systems, customer awareness programs, any necessary new equipment or upgrades, and other contingencies that may arise. To date the Company has recorded external costs amounting to approximately $50,000. This total does not include internal costs relating to Year 2000 issues, which are not readily determinable. The costs of the Year 2000 project and the date on which the Company plans to complete any necessary modifications are based upon management's best estimates, which were derived utilizing numerous assumptions. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Third party service bureaus provide the majority of the material data processing of the Company that could be affected by this problem. During the first quarter of fiscal 1999, the Company converted its data processing to a service provider that has represented to the Company that it is Year 2000 compliant. Planned testing has been completed for all critical systems. Additional testing will continue for the remainder of the year to ensure that any normal software changes installed after original testing was completed did not negatively impact the systems as they relate to the Year 2000 issue. The Company has initiated an extensive education and investigation program with regard to the borrowers of the Company. This effort has been directed at determining the level of risk to the Company in the loan portfolio from the failure of borrowers that encounter business problems relating to Year 2000 compliance. This process has included questionnaires and interviews with large borrowers to try to assess this risk. To date no additional loan loss provision has been deemed necessary. However, this is an ongoing process and will be evaluated at least quarterly for as long as necessary. The Company has prepared a contingency plan of action to address any business interruption problems arising with regard to Year 2000. This is a dynamic plan and will be updated as deemed appropriate by management. The plan includes operating in an off-line mode if our data processing supplier's systems unexpectedly fail. Additionally, the plan includes operating alternatives such as the use of paper based records and forms, alternative power sources and cellular phones should there be a failure of any critical services utilized by the Company such as electricity or telephone services. The Company presently believes that, based on current information, the Year 2000 problem will not pose significant operational problems for the Company. However, the majority of any further modifications, if required, are beyond the direct control of the Company because the Company's third party data processing vendor must make them. Therefore, if any further modifications are not completed in a timely manner, the Year 2000 problem may have a material adverse impact on the operations of the Company. FINANCIAL CONDITION: - ------------------- The following is a discussion of the major changes and trends in financial condition from the end of the preceding fiscal year, March 31, 1999, to September 30, 1999. Total assets increased from $364.7 million at March 31, 1999 to $372.0 million at September 30, 1999 primarily as a result of an increase in the Company's loan portfolio, offset by a decrease in investments. The Company's loan balance grew by $17.9 million or 6.4% as a result of loan originations amounting to $59.6 million, $42.4 million of which were in residential real estate loans. Loan amortization and pay- offs amounted to approximately $41.7 million. The Company's investment portfolio decreased by $10.8 million, primarily as a result of net pay-downs of mortgage-backed securities, maturities, calls, purchases and sales of investment securities and a decline in short term investments. Funds from the decline in the Company's investment portfolio were primarily used to fund the increase in the loan portfolio. Deposits decreased during the six month period by $10.1 million. Because of the competitive deposit rate environment in the Bank's primary market area, the Bank chose to allow some volatile, interest rate sensitive deposits to run off and to utilize favorably priced FHLB advances to offset this deposit loss and to fund the loan growth. Advances from the Federal Home Loan Bank of Boston increased from $57.0 million to $74.4 million. As previously announced, the Company has extended for six months, the stock repurchase program it adopted in April 1999, whereby it intends to acquire up to 98,350 shares of the Company's common stock, which represented approximately 5% of the outstanding shares of common stock at the time of the adoption of the program. Through September 30, 1999, the Company had repurchased 52,500 shares of Common Stock. NON-PERFORMING ASSETS: - --------------------- The Company had non-accruing loans totaling $38,000 at September 30, 1999, a decrease of $381,000 or 90.9% from $419,000 on March 31, 1999. Interest income not recognized on non-accruing loans amounted to approximately $1,000 for the first six months of fiscal 2000. The following table sets forth information with respect to the Company's non-performing assets for the dates indicated: Sept.30, March 31, Sept.30, 1999 1999 1998 ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis, (non-accruing loans) $ 38 $ 419 $ 204 Impaired loans, accruing 0 0 1,296 Non-accruing loans as a percentage of total loans 0.01% 0.15% 0.07% Non-accruing loans as a percentage of total assets 0.01% 0.11% 0.05% RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999, AND 1998: Net income for the three months ended September 30, 1999, and 1998, amounted to $1,032,000 or $0.54 per diluted share and $564,000 or $0.29 per diluted share, respectively. Average earning assets decreased by $9.4 million while the rate earned on these assets decreased 13 basis points to 7.07% during the second quarter of fiscal 2000 when compared to the second quarter of fiscal 1999. The average balance of interest-bearing liabilities decreased $12.7 million while the rates paid on these liabilities decreased by 65 basis points during the quarter ended September 30, 1999 when compared to the same period one year ago. Together these developments resulted in a $335,000 decrease in interest and dividend income and a corresponding decrease of $650,000 in interest expense. The combination resulted in a $315,000 increase in net interest and dividend income from the fiscal 1999 quarter to the fiscal 2000 quarter. Interest income from the Company's loan portfolio decreased $158,000 in the second quarter of fiscal 2000. This decrease was primarily the result of a $4.5 million increase in the average loan balance offset by a 33 basis point decrease in average rates earned on these loans. Income from the Company's investment portfolio (which includes short term investments, investment securities, mortgage backed securities and The Co-operative Central Bank Reserve Fund) decreased by $177,000 during the second quarter of fiscal 2000 when compared to the same fiscal 1999 period. The yield on these assets increased by 10 basis points while the average balance decreased by $13.9 million during the fiscal 2000 quarter. The Company's cost of deposits decreased by $655,000 during the second quarter of fiscal 2000 when compared to the same fiscal 1999 quarter. The rate paid on deposits decreased 46 basis points from 4.03% during the quarter ended September 30, 1998 to 3.57% during the quarter ended September 30, 1999. The average balance of these deposits decreased $21.0 million to $241.8 million during the second quarter of fiscal 2000 from $262.8 million during the fiscal 1999 second quarter. The average balance of borrowed funds increased by $8.3 million to $70.8 million in the fiscal 2000 second quarter compared to $62.5 million in the same fiscal 1999 quarter. The rate paid on borrowings decreased by 50 basis points in the fiscal 2000 quarter to 4.95% from 5.45% in the fiscal 1999 quarter. The combined effect of these changes resulted in an increase of $5,000 in interest expense on borrowings to $877,000 in the second quarter of fiscal 2000 compared to $872,000 in fiscal 1999's second quarter. The provision for loan losses is made to maintain the allowance for loan losses at a level which management considers adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio. Consistent with the current evaluation of the loan portfolio, the Company did not make any provision for the second quarter of fiscal 2000 or fiscal 1999. Non-interest income increased by $472,000 to $660,000 in the second quarter of fiscal 2000 from $188,000 in the second fiscal 1999 quarter. The Company recorded $494,000 and $21,000 in net gains from sales of investment securities during the second quarter of fiscal 2000 and fiscal 1999, respectively. This $473,000 increase in net gains from the sale of investment securities is the primary reason for the increase in non- interest income between the two quarters. Operating expenses increased $58,000 in the second quarter of fiscal 2000 compared to the same quarter of fiscal 1999. This increase is primarily attributable to increases in salaries and employee benefits of $135,000 offset by decreases of $47,000 in occupancy and equipment and $38,000 in other expense. The provision for Federal and state income taxes amounted to $636,000 and $375,000 during the second quarter of fiscal 2000 and fiscal 1999, respectively. The increased expense relates primarily to the increased level of pre-tax income. During the second quarter of fiscal 2000, the Bank implemented a tax saving strategy that reduced the effective tax rate from 39.9% for the three month period ended September 30, 1998 to 38.1% for the three month period ended September 30, 1999. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1999, AND 1998: Net income for the six months ended September 30, 1999, and 1998, amounted to $1,511,000 or $0.78 per diluted share and $1,235,000 or $0.63 per diluted share, respectively. Net income for the six month period ended September 30, 1999, included a one-time charge of $234,000, net of taxes, for costs associated with the establishment on January 8, 1999, of Central Bancorp, Inc., as the holding company for Central Bank. This charge, which was previously reported, represented the balance of unamortized organization costs outstanding as of April 1, 1999, that were required to be written off in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5, Reporting of the Costs of Start-up Activities. Net income before the cumulative effect of this change in accounting principle for the six months ended September 30, 1999, was $1,745,000, or $0.91 per diluted share. The average balance of earning assets decreased by $12.5 million during the first six months of fiscal 2000 while the rate earned on these assets decreased 23 basis points when compared to the first six months of fiscal 1999. Average interest-bearing liabilities decreased $18.4 million while the rates paid on these liabilities decreased by 51 basis points during the first six months of fiscal 2000 when compared to the same period one year ago. The combination of these developments resulted in a $671,000 decrease in interest and dividend income and a decrease of $1.2 million in interest expense which caused net interest and dividend income to increase by $543,000 in the first six months of fiscal 2000 from the same fiscal 1999 six month period. Total interest and dividend income in the six months ended September 30, 1999 amounted to $12.5 million compared to $13.2 million in the first six months of fiscal 1999. The decrease resulted from a decrease in the average balance of interest earning assets from $366.7 million in the first six months of fiscal 1999 to $359.6 million in the first six months of fiscal 2000. The yield on interest earning assets decreased by 23 basis points to 6.98% in the first six months of fiscal 2000 from 7.21% in the comparable fiscal 1999 period. The decrease of $399,000 in interest income from the Bank's loan portfolio during the first six months of fiscal 2000 was primarily the result of a reduction of 28 basis points in the average rates earned on these loans from 7.67% during the first six months of fiscal 1999 to 7.39% during the current six month period offset by an increase in the average loan balance of $445,000 from the first six months of fiscal 1999 to the first six months of fiscal 2000. Interest and dividend income from the Bank's investment portfolio decreased by $272,000 during the first six months of fiscal 2000 when compared to the same fiscal 1999 period. The decrease in income was a result of the average balance decreasing by $7.5 million and a 36 basis points yield decrease during the first six months of fiscal 2000 as compared to the same fiscal 1999 period. Total interest expense decreased by $1.2 million during the first six months of fiscal 2000 when compared to the same fiscal 1999 period. Interest expense on deposits decreased by $1.2 million during the six months ended September 30, 1999 when compared to fiscal 1999's first six months. The rate paid on deposits decreased 56 basis points from 4.07% to 3.51% while the average balance of these deposits also decreased by $21.6 million to $255.7 million from $277.3 million during the first six months of fiscal 2000 when compared to the first six months of fiscal 1999. The average balance of borrowed funds increased by $3.1 million to $63.9 million in the fiscal 2000 first six months compared to $60.8 million in the same fiscal 1999 six months. The rate paid on borrowings decreased by 32 basis points in the fiscal 2000 six months to 5.15% from 5.47% in fiscal 1999. The combined effect of these changes resulted in interest expense on borrowings decreasing $46,000 to $1.6 million in the first six months of fiscal 2000 compared to $1.7 million during the six months ended September 30, 1998. The provision for loan losses is made to maintain the allowance for loan losses at a level which management considers adequate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio. Consistent with the current evaluation of the loan portfolio, the Company did not make any provision for the second quarter of fiscal 2000 or fiscal 1999. Non-interest income increased by $419,000 to $938,000 in the first six months of fiscal 2000 from $519,000 in the same period of fiscal 1999. The Company recorded $612,000 and $184,000 in net gains from sales of investment securities during the first six months of fiscal 2000 and fiscal 1999, respectively. This $428,000 increase in net gains from the sale of investment securities is the primary reason for the increase in non-interest income between the two periods. Operating expenses increased $180,000 during the first six months of fiscal 2000 compared to the same period of fiscal 1999. This increase is primarily attributable to increases in salaries and employee benefits of $236,000 and in professional fees of $ 49,000 offset by decreases of $48,000 in occupancy and equipment and $67,000 in other expense. The provision for Federal and state income taxes amounted to $1,098,000 and $826,000 during the first six months of fiscal 2000 and fiscal 1999, respectively. The increased expense relates primarily to the increased level of pre-tax income. LIQUIDITY AND CAPITAL RESOURCES: - ------------------------------- The Company's principal sources of liquidity are loan amortization, loan prepayments, increases in deposits and advances from The Federal Home Loan Bank (FHLB) of Boston. The Company is a voluntary member of the FHLB of Boston and as such is generally entitled to borrow up to 30% of its total assets. Cash from these liquidity sources is used to fund loan originations, security investments, deposit maturities and repayment of FHLB of Boston advances. The Company's capital to assets ratio was 10.27% on September 30, 1999, which exceeded regulatory requirements. NEW ACCOUNTING PRONOUNCEMENT: - ---------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair market value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is gains and losses) depends on the intended use of the derivative and the resulting designation. In June 1999, the FASB issued SFAS 137 which delays the effective date of SFAS 133 so that it is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect this statement to have a material effect on its consolidated financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ---------------------------------------------------------- The Company has experienced no material changes in market risk since March 31, 1999. FORWARD-LOOKING STATEMENTS - -------------------------- This report includes forward-looking statements that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include the economic environment, competition, products and pricing in geographic and business areas in which the Company operates, prevailing interest rates, changes in government regulations and policies affecting financial services companies, and credit quality and credit risk management. Central Bancorp, Inc. undertakes no obligation to release revisions to these forward- looking statements or reflect events or circumstances after the date of this report. Part II. Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds Not Applicable Item 3. Defaults upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27, FDS, Financial Data Schedule (b) Reports on Form 8-K During the quarter ended September 30, 1999, the Registrant did not file a Current Report on Form 8-K. CENTRAL BANCORP, INC. AND SUBSIDIARY CENTRAL BANCORP, INC. AND SUBSIDIARY Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized CENTRAL BANCORP, INC. AND SUBSIDIARY ------------------------------------ 11/12/99 /s/ John D. Doherty - ---------- ------------------------------------- Date John D. Doherty President and Chief Executive Officer 11/12/99 /s/ Paul S. Feeley - ---------- ------------------------------------- Date Paul S. Feeley Senior Vice President, Treasurer and Chief Financial Officer