UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number: 0-25251
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CENTRAL BANCORP, INC.
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(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-3447594
- ------------------------------------------------ --------------------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
399 HIGHLAND AVENUE
SOMERVILLE, MASSACHUSETTS 02144
- ------------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
(617) 628-4000
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Common Stock, $1.00 par value 1,665,732
----------------------------- ------------------------------
Class Outstanding at August 13, 2004
CENTRAL BANCORP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30, 2004 and 1
March 31, 2004
Consolidated Statements of Income for the three months ended 2
June 30, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity for the three 3
months ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows for the three months ended 4
June 30, 2004 and 2003
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results 8
of Operations
Liquidity and Capital Resources 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
Item 1. Financial Statements
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
June 30, March 31,
(Dollars in Thousands) 2004 2004
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 6,153 $ 7,113
Short-term investments 23,856 27,224
--------- --------
Cash and cash equivalents 30,009 34,337
--------- --------
Certificate of deposit 1,217 1,211
Investment securities available for sale (amortized cost of $105,019
at June 30, 2004 and $80,201 at March 31, 2004) 106,700 83,771
Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300
The Co-operative Central Bank Reserve Fund 1,576 1,576
--------- --------
Total investments 116,576 93,647
--------- --------
Loans held for sale 925 799
Loans (Note 2) 354,868 356,625
Less allowance for loan losses 3,599 3,537
--------- --------
Net loans 351,269 353,088
--------- --------
Accrued interest receivable 2,108 2,203
Banking premises and equipment, net 2,146 2,113
Deferred tax asset, net 920 243
Goodwill, net 2,232 2,232
Other assets 932 1,024
--------- --------
Total assets $ 508,334 $490,897
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 3) $ 314,167 $295,920
Short-term borrowings 928 845
Federal Home Loan Bank advances 138,100 141,100
ESOP Loan 3,214 3,311
Advance payments by borrowers for taxes and insurance 1,095 1,182
Accrued expenses and other liabilities 8,196 5,085
--------- --------
Total liabilities 465,700 447,443
--------- --------
Commitments and Contingencies (Note 5)
Stockholders' equity (Note 6):
Preferred stock $1.00 par value; authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock $1.00 par value; authorized 15,000,000 shares;
2,027,727 shares issued at June 30, 2004 and
March 31, 2004 2,030 2,030
Additional paid-in capital 12,947 12,920
Retained income 37,123 36,855
Treasury stock (365,294 shares at June 30, 2004 and
March 31, 2004), at cost (7,312) (7,311)
Accumulated other comprehensive income (Note 4) 1,082 2,293
Unearned compensation - ESOP (3,236) (3,333)
--------- --------
Total stockholders' equity 42,634 43,454
--------- --------
Total liabilities and stockholders' equity $ 508,334 $490,897
========= ========
See accompanying notes to unaudited consolidated financial statements.
1
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
June 30,
------------------------------
2004 2003
--------- ----------
Interest and dividend income:
Mortgage loans $ 5,383 6,039
Other loans 79 126
Short-term investments 64 18
Investments 1,088 840
---------- ---------
Total interest and dividend income 6,614 7,023
---------- ---------
Interest expense:
Deposits 1,150 1,157
Advances from Federal Home Loan Bank of Boston 1,718 1,756
Other borrowings 39 1
---------- ---------
Total interest expense 2,907 2,914
---------- ---------
Net interest and dividend income 3,707 4,109
Provision for loan losses 50 50
---------- ---------
Net interest and dividend income after
provision for loan losses 3,657 4,059
---------- ---------
Non-interest income:
Deposit service charges 145 161
Net gains (losses) from sales of investment securities 134 (5)
Gain on sales of loans 63 141
Other income 106 117
---------- ---------
Total non-interest income 448 414
---------- ---------
Non-interest expenses:
Salaries and employee benefits 1,903 1,800
Occupancy and equipment 322 270
Data processing service fees 280 281
Professional fees 268 130
Marketing 138 121
Other expenses 483 401
---------- ---------
Total non-interest expenses 3,394 3,003
---------- ---------
Income before income taxes 711 1,470
Provision for income taxes (Note 5) 257 182
---------- ---------
Net income $ 454 $ 1,288
========== =========
Earnings per common share - basic (Note 7) $ 0.29 $ 0.83
========== =========
Earnings per common share - diluted (Note 7) $ 0.29 $ 0.83
========== =========
Weighted average common shares outstanding - basic 1,559 1,546
Weighted average common and equivalent shares
outstanding - diluted 1,573 1,559
See accompanying notes to unaudited consolidated financial statements.
2
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Additional Other
Common Paid-In Retained Treasury Comprehensive
(In Thousands) Stock Capital Income Stock Income
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2004
- --------------------------------
Balance at March 31, 2004 $ 2,030 $ 12,920 $ 36,855 $ (7,311) $ 2,293
Net income -- -- 454 -- --
Other comprehensive income net of tax:
Unrealized loss on securities, net
of reclassification adjustment -- -- -- -- (1,211)
Comprehensive income (loss)
Director deferred compensation
transactions -- 12 -- (1) --
Dividends paid ($.12 per share) -- -- (186) -- --
Amortization of unearned compensation -
ESOP -- 15 -- -- --
--------- ----------- ----------- ---------- -----------
Balance at June 30, 2004 $ 2,030 $ 12,947 $ 37,123 $ (7,312) $ 1,082
========= =========== =========== ========== ===========
Three Months Ended June 30, 2003
- --------------------------------
Balance at March 31, 2003 $ 2,028 $ 12,751 $ 34,601 $ (7,249) $ 1,002
Net income -- -- 1,288 -- --
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- -- -- -- 1,005
Comprehensive income
Proceeds from exercise of stock options -- 13 -- -- --
Tax benefit of stock options -- 4 -- -- --
Director deferred compensation
transactions -- 23 -- -- --
Dividends paid ($.12 per share) -- -- (126) -- --
Amortization of unearned compensation -
ESOP -- 14 -- -- --
--------- ----------- ----------- ---------- -----------
Balance at June 30, 2003 $ 2,028 $ 12,805 $ 35,763 $ (7,249) $ 2,007
========= =========== =========== =========== ===========
Unearned Total
Compensation Stockholders'
ESOP Equity
---------------------------------
Three Months Ended June 30, 2004
- --------------------------------
Balance at March 31, 2004 $ (3,333) $ 43,454
Net income -- 454
Other comprehensive income net of tax:
Unrealized loss on securities, net
of reclassification adjustment -- (1,211)
-----------
Comprehensive income (loss) (757)
-----------
Director deferred compensation
transactions -- 11
Dividends paid ($.12 per share) -- (186)
Amortization of unearned compensation -
ESOP 97 112
---------- -----------
$ (3,236) $ 42,634
Balance at June 30, 2004 ========== ===========
Three Months Ended June 30, 2003
- --------------------------------
Balance at March 31, 2003 $ (3,690) $ 39,443
Net income -- 1,288
Other comprehensive income net of tax:
Unrealized gain on securities, net
of reclassification adjustment -- 1,005
-----------
Comprehensive income 2,293
-----------
Proceeds from exercise of stock options -- 13
Tax benefit of stock options -- 4
Director deferred compensation
transactions -- 23
Dividends paid ($.12 per share) -- (126)
Amortization of unearned compensation -
ESOP 97 111
---------- -----------
Balance at June 30, 2003 $ (3,593) $ 41,761
========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
CENTRAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30,
----------------------------------
(In thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 454 $ 1,288
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization 92 79
Amortization of premiums 51 65
Provision for loan losses 50 50
Stock-based compensation 112 111
Net (gains) losses from sales of
investment securities (134) 5
Gain on sales of loans held for sale (63) (141)
Originations of loans held for sale (5,818) (10,984)
Proceeds from sale of loans originated for sale 5,755 6,721
Decrease in accrued interest receivable 95 16
Decrease (increase) in other assets, net 87 (2,028)
Decrease in advance payments by borrowers for taxes and insurance (87) (61)
Increase in accrued expenses and other liabilities, net 140 40
----------- -----------
Net cash provided by (used in) operating activities 734 (4,839)
----------- -----------
Cash flows from investing activities:
Net decrease in loans 1,769 16,939
Principal payments on mortgage-backed securities 1,516 1,365
Proceeds from sales of investment securities 593 482
Purchases of investment securities (26,844) --
Increase in due to brokers 2,971 --
Purchase of banking premises and equipment (125) (61)
------------ -----------
Net cash provided by (used in) investing activities (20,120) 18,725
----------- -----------
Cash flows from financing activities:
Increase (decrease) in deposits 18,247 (1,104)
Repayment of advances from FHLB of Boston (3,000) --
Increase (decrease) in short-term borrowings 83 (176)
Repayment of ESOP loan (97) --
Proceeds from exercise of stock options -- 13
Dividends paid, net (186) (126)
Net directors deferred compensation 11 23
----------- -----------
Net cash provided by (used in) financing activities 15,058 (1,370)
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,328) 12,516
Cash and cash equivalents at beginning of year 34,337 11,222
----------- -----------
Cash and cash equivalents at end of period $ 30,009 $ 23,738
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,901 $ 2,919
Income taxes $ 25 $ 546
See accompanying notes to unaudited consolidated financial statements.
4
CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Central Bancorp, Inc.
and its wholly-owned subsidiary Central Co-operative Bank (collectively referred
to as "the Company") presented herein should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
March 31, 2004, included in the Company's Annual Report on Form 10-K filed with
the Securities and Exchange Commission. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation. Interim results are not necessarily indicative of results to be
expected for the entire year.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K for the
year ended March 31, 2004. For interim reporting purposes, the Company follows
the same significant accounting policies.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. Such reclassifications
have no effect on previously reported net income.
(2) LOANS
Loans, excluding loans held for sale, as of June 30, 2004 and March 31,
2004 are summarized below (in thousands):
June 30, March 31,
2004 2004
------------- --------------
Real estate loans:
Residential real estate $ 162,853 171,682
Commercial real estate 159,510 146,107
Construction 18,178 25,112
Home equity lines of credit 8,801 9,397
---------- ----------
Total real estate loans 349,342 352,298
---------- ----------
Commercial loans 4,500 3,198
Consumer loans 1,026 1,129
---------- ----------
Total loans 354,868 356,625
Less: allowance for loan losses (3,599) (3,537)
---------- ----------
Total loans, net $ 351,269 $ 353,088
========== ==========
There were no non-accrual loans at June 30, 2004 and March 31, 2004.
5
CENTRAL BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
(3) DEPOSITS
Deposits at June 30, 2004 and March 31, 2004 are summarized as follows (in
thousands):
June 30, March 31,
2004 2004
-------------- -----------
Demand deposit accounts $ 31,027 $ 27,881
NOW accounts 35,876 37,106
Passbook and other savings accounts 74,840 73,737
Money market deposit accounts 62,732 56,084
----------- -----------
Total non certificate accounts 204,475 194,808
----------- -----------
Term deposit certificates
Certificates of $100 and above 31,098 27,607
Certificates less than $100 78,594 73,505
----------- ------------
Total term deposit certificates 109,692 101,112
----------- -----------
Total deposits $ 314,167 $ 295,920
=========== ===========
(4) OTHER COMPREHENSIVE INCOME (LOSS)
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 for
the three months ended June 30, 2004 and 2003 are as follows (in thousands):
For the Three Months Ended
June 30, 2004
------------------------------------
Before-
Tax Tax After-Tax
Amount Effect Amount
------- ------ ---------
Unrealized gains on securities:
Unrealized net holding losses during period $(1,755) $ 632 $(1,123)
Add: reclassification adjustment for net
gains included in net income 134 46 88
------- ------- -------
Other comprehensive loss $(1,889) $ 678 $(1,211)
======= ======= =======
6
CENTRAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004
(4) OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)
For the Three Months Ended
June 30, 2003
------------------------------------
Before-
Tax Tax After-Tax
Amount Effect Amount
------- ------ ---------
Unrealized gains on securities:
Unrealized net holding gains during period $ 1,623 $ 621 $ 1,002
Add: reclassification adjustment for net
losses included in net income 5 2 3
------- ------- -------
Other comprehensive income $ 1,628 $ 623 $ 1,005
======= ======= =======
(5) CONTINGENCIES
LEGAL PROCEEDINGS
The Company from time to time is involved as plaintiff or defendant in
various legal actions incident to its business. None of these actions are
believed to be material, either individually or collectively, to the results of
operations and financial condition of the Company.
TAX SETTLEMENT
During 2003, the Massachusetts Department of Revenue ("DOR") issued notices
of intent to assess additional state excise taxes to numerous financial
institutions in Massachusetts that had received dividends from a real estate
investment trust (REIT) subsidiary. The DOR contended that dividends received by
the banks from such subsidiaries were fully taxable in Massachusetts.
In June 2003, a settlement of this matter was reached between the DOR and
the majority of affected financial institutions. The settlement provided that
50% of all dividends received from REIT subsidiaries from 1999 through 2002 were
subject to state taxation. Interest on such additional taxes was also assessed.
Payment of such taxes and interest totaling $431,000 was made in June 2003. As a
result of this settlement, the Company recognized a recovery of $374,000 in
income taxes, which increased net income by the same amount in the quarter ended
June 30, 2003.
(6) SUBSEQUENT EVENT
On July 8, 2004, the Board of Directors voted the payment of a quarterly
cash dividend of $0.12 per share. The dividend is payable on August 13, 2004 to
stockholders of record on July 30, 2004.
(7) EARNINGS PER SHARE (EPS)
Unallocated ESOP shares are not treated as being outstanding in the
computation of either basic or diluted EPS. At June 30, 2004 and March 31, 2004,
there were approximately 104,000 and 107,000 unallocated ESOP shares,
respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on Form
10-Q, the words or phrases "will likely result," "are expected to." "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
changes in regional and national economic conditions, unfavorable judicial
decisions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting
policies. The Company considers the allowance for loan losses to be its critical
accounting policy. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
Arriving at an appropriate level of allowance for loan losses necessarily
involves a high degree of judgment. The ongoing evaluation process includes a
formal analysis of the allowance each quarter, which considers, among other
factors, the character and size of the loan portfolio, business and economic
conditions, loan growth, delinquency trends, nonperforming loans trends,
charge-off experience and other asset quality factors. The Company evaluates
specific loan status reports on certain commercial and commercial real estate
loans rated "substandard" or worse in excess of a specified dollar amount.
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. Provisions for
losses on the remaining commercial and commercial real estate loans are based on
pools of similar loans using a combination of historical loss experience and
qualitative adjustments. For the residential real estate and consumer loan
portfolios, the range of reserves is calculated by applying historical
charge-off and recovery experience to the current outstanding balance in each
loan category. 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 changes in economic conditions and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their examination.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND MARCH 31, 2004
Total assets increased by $17.4 million from $490.9 million at March 31,
2004 to $508.3 million at June 30, 2004. During the quarter ended June 30, 2004,
loans (excluding loans held for sale) decreased by $1.8 million due primarily to
$8.8 million decrease in residential mortgage loans and a $6.9 million decrease
in construction loans, partially offset by a $13.4 million increase in
commercial real estate loans. During the current quarter, prepayments of
residential mortgage loans were significant amounting to $18.8 million.
Management regularly assesses the desirability of holding newly originated
long-term, fixed-rate residential mortgage loans in portfolio or selling such
loans in the secondary market. A number of factors are evaluated to determine
whether or not to hold such loans in portfolio including, current and projected
liquidity, current and projected interest rates, projected growth in other
interest-earning assets and the current and projected interest rate risk
profile. Based on its consideration of these factors, management determined that
fixed-rate residential mortgage loans originated during
8
the current quarter should be sold in the secondary market. This decision
contributed to the aforementioned decrease in residential mortgage loans and a
$22.9 million increase in investments during the quarter ended June 30, 2004.
The Company experienced growth of $9.7 million in core deposits and $8.6
million in term deposits resulting in an increase in total deposits of $18.3
million. The growth in core deposits was principally related to the increase of
$6.6 million in money market deposit accounts. Because of the continuation of
the low interest rates for deposits in recent years and the tiered pricing used
with this type of account, money market accounts have attracted large average
balances. The growth in core deposits was also aided by growth in most other
types of accounts. The Company began a major marketing initiative in March 2004
to promote a new free checking account product which contributed to this growth.
During the current quarter, the Company promoted a 15-month certificate of
deposit which resulted in new funds of approximately $12.0 million as of June
30, 2004. Exclusive of this special promotion, the Company continued to
experience a decline in certificates of deposit due primarily to the current low
rate environment.
The decrease in stockholders' equity of $820 thousand to $42.6 million at
June 30, 2004 resulted primarily from net income of $454 thousand offset by a
net decrease of $1.2 million in the unrealized gain on investment securities.
This decrease is due to the increase in longer term rates which occurred
subsequent to March 31, 2004.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2004 AND 2003
Net income decreased by $834 thousand to $454 thousand for the quarter
ended June 30, 2004, compared to the same quarter in the prior year. Included in
net income in the prior year quarter, was a recovery of income taxes of $374,000
resulting from the settlement of the REIT tax dispute among Massachusetts banks
and the Massachusetts Department of Revenue (DOR). Exclusive of this item, net
income for the quarter ended June 30, 2004 decreased $460 thousand, or 50.3%,
compared to the corresponding quarter in the prior year. This decline was
primarily attributable to the reduction in net interest income and margin in the
current quarter.
The Company's net interest margin decreased 47 basis points from 3.57% in
the prior year quarter to 3.10% in the current quarter. The unfavorable trend in
the net interest margin is primarily reflective of the limitations the Company
has in reducing its overall cost of funds. This limitation is due to two
factors. First, the Company's utilization of long-term FHLB advances, which
represented 33.8% of interest-bearing liabilities in the current quarter, has
provided for limited repricing opportunities during the period of declining
rates. These advances can not be prepaid without a substantial penalty, which
management has elected not to pay. Second, the ability to reduce deposit rates
continues to be limited after the past several years of rate reductions as well
as competitive market factors.
The reduction in the net interest margin is also partially attributable to
the shift in the mix of interest-earning assets from loans to short-term
investments and investment securities. During the current quarter, loans
represented 74.6% of the average balance of total interest-earning assets
compared to 84.0% in the prior year quarter. This shift to shorter-term, lower
yielding assets results from the Company's decision to sell most long-term
fixed-rate residential mortgages loans originated during the past two years due
to the historically low rates which existed during much of this period.
Interest Income. Interest income for the quarter ended June 30, 2004 was $6.6
million compared to $7.0 million in the prior year quarter. This decrease
occurred due to the continuing decline in interest rates experienced over the
past year, which has caused an unprecedented level of loan refinancing and loan
modification activity. As a result, the yield on interest-earning assets
decreased from 6.11% in the quarter ended June 30, 2003 to 5.54% in the current
quarter. This decrease was partially offset by an increase in average
interest-earning assets of $17.5 million in the current year period.
9
Interest Expense. Interest expense for the quarter ended June 30, 2004 was
unchanged at $2.9 million compared to the quarter ended June 30, 2003. A
decrease of 13 basis points in the cost of funds from 2.92% in the quarter ended
June 30, 2003 to 2.79% in the quarter ended June 30, 2004 was offset by an
increase in average interest-bearing liabilities of $17.7 million in the current
year period. The factors contributing to the modest decrease in the rate paid on
interest-bearing liabilities were set forth on the prior page.
The following table presents average balances and average rates earned/paid
by the Company for the quarter ended June 30, 2004 compared to the quarter ended
June 30, 2003:
Three Months Ended June 30,
-------------------------------------------------------------------------------
2004 2003
----------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- --------- ------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $ 351,421 $5,383 6.13% $ 378,812 $ 6,039 6.38%
Other loans 4,949 79 6.39 7,699 126 6.55
Investment securities 94,092 1,088 4.63 68,601 840 4.90
Short-term investments 27,217 64 0.94 5,026 18 1.43
---------- ------ ---------- --------
Total interest-earning assets 477,679 6,614 5.54 460,138 7,023 6.11
---------- ------ ---------- --------
Allowance for loan losses (3,557) (3,301)
Noninterest-earning assets 19,000 18,791
---------- ----------
Total assets $ 493,122 $ 475,628
========== ==========
Interest-bearing liabilities:
Deposits $ 272,264 1,150 1.69 $ 254,835 1,157 1.82
Advances from FHLB of Boston 141,067 1,718 4.87 144,400 1,756 4.87
Other borrowings 3,955 39 3.94 392 1 1.02
---------- ------ ---------- --------
Total interest-bearing liabilities 417,286 2,907 2.79 399,627 2,914 2.92
------ --------
Noninterest-bearing liabilities 32,803 35,399
---------- ----------
Total liabilities 450,089 435,026
Stockholders' equity 43,033 40,602
---------- ----------
Total liabilities and
stockholders' equity $ 493,122 $ 475,628
========== ==========
Net interest and dividend income $3,707 $ 4,109
====== ========
Net interest spread 2.75% 3.19%
==== ====
Net interest margin 3.10% 3.57%
==== ====
Provisions for Loan Losses. The Company provides for loan losses in order to
maintain the allowance for loan losses at a level that management estimates is
adequate to absorb probable losses based on an evaluation of known and inherent
risks in the portfolio. In determining the appropriate level of the allowance
for loan losses, management considers past and anticipated loss experience,
evaluations of underlying collateral, prevailing economic conditions, the nature
and volume of the loan portfolio and the levels of non-performing and other
classified loans. The amount of the allowance is based on estimates and ultimate
losses may vary from such estimates. Management assesses the allowance for loan
losses on a quarterly basis and provides for loan losses monthly in order to
maintain the adequacy of the allowance.
During the quarter ended June 30, 2004 and 2003, the Company provided $50
thousand for loan losses. The Company's asset quality, as measured principally
by delinquency rates, charge-offs and loan classifications, continues to be
outstanding.
10
Non-interest Income. Total non-interest income was $448 thousand for the quarter
ended June 30, 2004 compared to $414 thousand in the same period of 2003. The
primary reason for the $34 thousand increase in the current year was the gain on
sales of securities which amounted to $134 thousand. This additional
non-interest income was partially offset by a decline in loan sale gains of $78
thousand in the current quarter. Overall, residential loan origination activity
has declined in the current quarter compared to the same quarter last year,
especially fixed rate loan originations, resulting in fewer loans being sold.
Non-interest Expenses. Non-interest expenses increased $391 thousand, or 13.0%,
during the quarter ended June 30, 2004 as compared to the same quarter in 2003
due principally to increases in professional fees ($138 thousand), salaries and
employee benefits ($103 thousand) and other non-interest expenses ($82
thousand).
The increase in salaries and employee benefits of $103 thousand, or 5.7%,
during the quarter ended June 30, 2004, was due to overall salary increases
averaging 3.5%, increases in staffing, as well as increases in pension and
health care costs.
Professional fees increased $138 thousand during the current quarter due to
the recognition of a partial reimbursement of legal defense costs from the
Company's insurance carrier in the prior year quarter, which reduced expense in
that period by $145 thousand. The legal defense costs were incurred in
connection with shareholder litigation, which was settled in August 2003.
Other non-interest expenses increased $82 thousand in the current quarter
due principally to increases in various insurance costs as well as smaller
increases in several categories of expense.
Income Taxes. The effective tax rates for the quarters ended June 30, 2004 and
2003 were 36.1% and 12.4%, respectively. As previously noted, the Company
recovered $374,000 in taxes during the prior year as a result of the settlement
of the REIT tax dispute with the DOR. Exclusive of this item, the effective tax
rate for the quarter ended June 30, 2003 would have been 37.8%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are customer deposits,
short-term investments, loan repayments, advances from the Federal Home Loan
Bank (FHLB) of Boston and funds from operations. The Bank is a voluntary member
of the FHLB of Boston and, as such, is entitled to borrow up to the value of its
qualified collateral that has not been pledged to others. Qualified collateral
generally consists of residential first mortgage loans, U. S. Government and
agencies securities, mortgage-backed securities and funds on deposit at the FHLB
of Boston. At June 30, 2004, the Company had approximately $29.8 million in
unused borrowing capacity at the FHLB of Boston.
At June 30, 2004, the Company had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $52.8
million. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company anticipates that it will have sufficient funds available to meet its
current loan commitments.
The Company's and the Bank's capital ratios at June 30, 2004 were as
follows:
Company Bank
------- ----
Tier 1 Capital (to average assets) 8.01% 7.73%
Tier 1 Capital (to risk-weighted assets) 11.25 10.85
Total Capital (to risk-weighted assets) 12.30 11.90
These ratios placed the Company in excess of regulatory standards and the
Bank in the "well capitalized" category as set forth by the FDIC.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are largely dependent on its net interest income,
which is the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities. The Company seeks to reduce its exposure
to changes in interest rate, or market risk, through active monitoring and
management of its interest-rate risk exposure. The policies and procedures for
managing both on- and off-balance sheet activities are established by the Bank's
asset/liability management committee ("ALCO"). The Board of Directors reviews
and approves the ALCO policy annually and monitors related activities on an
ongoing basis.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, borrowing and deposit taking activities.
The main objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on net interest income and preserve
capital, while adjusting the asset/liability structure to control interest-rate
risk. However, a sudden and substantial increase or decrease in interest rates
may adversely impact earnings to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis.
The Company quantifies its interest-rate risk exposure using a
sophisticated simulation model. Simulation analysis is used to measure the
exposure of net interest income to changes in interest rates over a specific
time horizon. Simulation analysis involves projecting future interest income and
expense under various rate scenarios. The simulation is based on both actual and
forecasted cash flows and assumptions of management about the future changes in
interest rates and levels of activity (loan originations, loan prepayments,
deposit flows, etc). The assumptions are inherently uncertain and, therefore,
actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and
strategies. The net interest income projection resulting from use of actual and
forecasted cash flows and management's assumptions is compared to net interest
income projections based on an immediate shift of 300 basis points upward and 75
basis points downward. Internal guidelines on interest rate risk state that for
every 100 basis points immediate shift in interest rates, estimated net interest
income over the next twelve months should decline by no more than 5%.
The following table indicates the estimated exposure, as a percentage of
estimated net interest income, for the twelve month period following the date
indicated assuming an immediate shift in interest rates as set forth below
(dollars in thousands):
June 30, March 31,
2004 2004
-------------------- ---------------------
Amount % Change Amount % Change
------ -------- ------ --------
300 basis point increase in rates......... $(1,976) (12.3)% $ (1,236) (8.1)%
75 basis point decrease in rates........... (60) (0.4) (315) (2.1)
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
12
In addition, there have been no changes in the Company's internal control
over financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company's last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification
(b) Reports on Form 8-K
DATE OF REPORT ITEM(S) REPORTED FINANCIAL STATEMENTS FILED
-------------- ---------------- --------------------------
April 8, 2004 7,10 N/A
April 30, 2004 7,12 N/A
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL BANCORP, INC.
---------------------
Registrant
August 13, 2004 /s/ John D. Doherty
---------------------- -------------------------------------
Date John D. Doherty
Chairman, President and Chief
Executive Officer
August 13, 2004 /s/ Michael K. Devlin
------------------ --------------------------------------
Date Michael K. Devlin
Senior Vice President, Treasurer
and Chief Financial Officer