10-K/A 1 fm10ka33101-1508.txt FORM 10-K/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A 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, 2001 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 $21.6 million based on the closing sales price of the registrant's common stock as reported on the Nasdaq National MarketSM on June 8, 2001 ($19.50 per share). Solely for purposes of this calculation, directors, executive officers and greater than 5% stockholders are treated as affiliates. As of June 8, 2001, there were issued and outstanding 1,702,164 shares of the registrant's common stock, par value $1.00 per share (of which 594,620 shares were deemed held by affiliates). ================================================================================ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- CENTRAL BANCORP INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Page Consolidated Balance Sheets...................................................3 Consolidated Statements of Income.............................................4 Consolidated Statement of Changes in Stockholders' Equity.....................5 Consolidated Statement of Cash Flows..........................................6 Notes to Consolidated Financial Statements....................................8 Independent Auditors' Report.................................................27 2 CENTRAL BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars In Thousands)
March 31, --------------------------- 2001 2000 ---- ---- ASSETS Cash and due from banks $ 5,351 $ 6,588 Short-term investments 34,529 14,802 Investments available for sale: Investment securities (amortized cost of $31,702 in 2001 and $32,839 in 2000) (notes 2 and 11) 31,263 32,135 Mortgage-backed securities (amortized cost of $19,623 in 2001 and $23,862 in 2000) (note 2) 19,314 23,308 Stock in Federal Home Loan Bank of Boston, at cost (note 7) 6,150 5,800 The Co-operative Central Bank Reserve Fund (note 8) 1,576 1,576 -------- -------- Total investments 92,832 77,621 Loans: Mortgage loans (notes 3, 5 and 11) 338,898 314,966 Other loans (notes 4 and 5) 6,895 5,047 -------- -------- 345,793 320,013 Less allowance for loan losses (note 6) 3,106 2,993 -------- -------- Net loans 342,687 317,020 -------- -------- Accrued interest receivable 2,426 2,036 Office properties and equipment, net (note 9) 2,018 2,218 Deferred tax asset, net (note 12) 801 1,071 Goodwill, net 2,520 2,808 Other assets 702 195 -------- -------- Total assets $449,337 $409,557 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (note 10) $287,167 $258,339 Advances from Federal Home Loan Bank of Boston (note 11) 121,000 111,000 Advance payments by borrowers for taxes and insurance 1,220 1,053 Accrued interest payable 608 542 Accrued expenses and other liabilities 1,130 1,226 -------- -------- Total liabilities 411,125 372,160 -------- -------- Commitments and contingencies (notes 9, 13 and 16) Stockholders' equity (note 14): 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; 1,970,000 shares issued; outstanding 1,684,164 and 1,810,450 shares at March 31, 2001 and 2000, respectively 1,970 1,970 Additional paid-in capital 11,190 11,190 Retained income 30,950 28,538 Treasury stock (285,836 and 159,550 shares at March 31, 2001 and 2000, respectively), at cost (5,230) (3,043) Accumulated other comprehensive (loss) income (431) (825) Unearned compensation - ESOP (note 15) (237) (433) -------- -------- Total stockholders' equity 38,212 37,397 -------- -------- Total liabilities and stockholders' equity $449,337 $409,557 ======== ========
See accompanying notes to consolidated financial statements. 3 CENTRAL BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31, --------------------------------------------- 2001 2000 1999 --------------------------------------------- Interest and dividend income: Mortgage loans $ 25,613 $ 21,806 $ 21,250 Other loans 716 599 423 Short-term investments 487 421 650 Investment securities 2,603 2,039 1,481 Mortgage-backed securities 1,412 1,465 2,097 The Co-operative Central Bank Reserve Fund 86 94 95 -------------------------------------------- Total interest and dividend income 30,917 26,424 25,996 -------------------------------------------- Interest expense: Deposits 10,087 8,553 10,770 Advances from Federal Home Loan Bank of Boston 6,916 4,496 3,279 -------------------------------------------- Total interest expense 17,003 13,049 14,049 -------------------------------------------- Net interest and dividend income 13,914 13,375 11,947 Provision for loan losses (note 6) -- -- -- -------------------------------------------- Net interest and dividend income after provision for loan losses 13,914 13,375 11,947 -------------------------------------------- Non-interest income: Deposit service charges 428 414 431 Net gain from sale of investment securities (note 2) 680 1,013 580 Gain on sale of building -- -- 105 Other income 180 242 252 -------------------------------------------- Total non-interest income 1,288 1,669 1,368 -------------------------------------------- Operating expenses: Salaries and employee benefits (note 15) 5,571 5,017 4,379 Occupancy and equipment (note 9) 1,192 1,167 1,468 Data processing service fees 847 534 543 Professional fees 757 875 756 Foreclosure expenses, net 1 (6) 1 Goodwill amortization 288 288 288 Other expenses 1,674 1,470 1,338 -------------------------------------------- Total operating expenses 10,330 9,345 8,773 -------------------------------------------- Income before income taxes 4,872 5,699 4,452 Income tax expense (note 12) 1,763 2,132 1,860 -------------------------------------------- Net income before cumulative effect of change in accounting principle 3,109 3,567 2,682 Cumulative effect of change in accounting principle, net of taxes -- (234) -- -------------------------------------------- Net income $ 3,109 $ 3,333 $ 2,682 ============================================ Earnings per common share (note 1): Before cumulative effect of change in accounting principle $ 1.81 $ 1.90 $ 1.38 ============================================ Before cumulative effect of change in accounting principle - assuming dilution $ 1.81 $ 1.89 $ 1.38 ============================================ After cumulative effect of change in accounting principle $ 1.81 $ 1.77 $ 1.38 ============================================ After cumulative effect of change in accounting principle - assuming dilution $ 1.81 $ 1.77 $ 1.38 ============================================ Weighted average common shares outstanding 1,717 1,882 1,938 ============================================ Weighted average common shares outstanding, diluted 1,719 1,885 1,946 ============================================
See accompanying notes to consolidated financial statements. 4 CENTRAL BANCORP, INC. AND SUBSIDIARIES 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, 1998 $1,965 $11,159 $23,841 $ -- $ 544 $(723) $36,786 Net income -- -- 2,682 -- -- -- 2,682 Other comprehensive income, net of tax: Unrealized (loss) on securities, net of reclassification adjustment -- -- -- -- (217) -- (217) ------- Comprehensive income -- -- -- -- -- -- 2,465 ------- Proceeds from exercise of stock options 2 12 -- -- -- -- 14 Dividend paid ($0.32 per share) -- -- (629) -- -- -- (629) Amortization of unearned compensation - ESOP -- -- -- -- -- 106 106 --------------------------------------------------------------------------------- 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) Dividend 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 (note 2) -- -- -- -- 394 -- 394 ------- Comprehensive income -- -- -- -- -- -- 3,503 ------- Purchase of treasury stock -- -- -- (2,187) -- -- (2,187) Dividend 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 =================================================================================
The Bank's other comprehensive income (loss) and related tax effect for the fiscal years ending March 31 are as follows:
2001 ---------------------------------------------- BEFORE-TAX TAX (BENEFIT) AFTER-TAX in thousands AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding gains during period $ 1,188 $ 360 $ 828 Less reclassification adjustment for (gains) realized 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 holding (losses) during period $ (815) $ (297) $ (518) Less reclassification adjustment for (gains) realized in net income (1,013) (379) (634) -------------------------------------------- Other comprehensive income $(1,828) $ (676) $(1,152) ============================================
See accompanying notes to consolidated financial statements. 5 CENTRAL BANCORP, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31, --------------------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 3,109 $ 3,333 $ 2,682 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 438 462 729 Amortization of premiums and discounts 86 132 461 Amortization of goodwill 288 288 288 Decrease (increase) in deferred tax assets 270 (327) (175) Net gains from sale of investment and mortgage-backed securities (680) (1,013) (580) Net gain from sale of building -- -- (105) Cumulative effect of change in accounting principle -- 234 -- (Increase) decrease in accrued interest receivable (390) (422) 296 (Increase) decrease in other assets (507) 59 (256) Increase (decrease) in advance payments by borrowers for taxes and insurance 167 (336) 160 Increase (decrease) in accrued interest payable 66 251 (192) (Decrease) increase in accrued expenses and other liabilities (96) 415 (560) --------------------------------------- Net cash provided by operating activities 2,751 3,076 2,748 --------------------------------------- Cash flows from investing activities: Principal collected on loans 56,949 68,641 112,825 Loan originations (82,616) (108,363) (111,231) Principal payments on mortgage-backed securities available for sale 4,069 9,420 14,942 Purchase of mortgage-backed securities available for sale -- (3,216) -- Purchase of investment securities available for sale (6,170) (18,500) (16,622) Proceeds from sales of investment securities available for sale 3,955 6,159 4,049 Maturities and redemptions of investment securities held to maturity -- -- 4,000 Maturities and redemptions of investment securities available for sale 4,000 2,500 15,100 Net (increase) decrease in short-term investments (19,727) 2,137 (13,618) Purchase of stock in FHLB of Boston (350) (2,450) (200) Proceeds from sale of land and building -- -- 239 Purchase of office properties and equipment, net (238) (130) (576) --------------------------------------- Net cash used by investing activities (40,128) (43,802) 8,908 --------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits 28,828 (8,124) (9,901) Proceeds from advances from FHLB of Boston 169,095 155,500 43,495 Payments on advances from FHLB of Boston (159,095) (101,500) (45,495) Proceeds from exercise of stock options -- 22 14 Purchase of treasury stock (2,187) (3,043) -- Payments of dividends on common stock (697) (689) (629) Amortization of unearned compensation - ESOP 196 184 106 --------------------------------------- Net cash provided by financing activities 36,140 42,350 (12,410) --------------------------------------- Net increase (decrease) in cash and due from banks (1,237) 1,624 (754) Cash and due from banks at beginning of year 6,588 4,964 5,718 --------------------------------------- Cash and due from banks at end of year $ 5,351 $ 6,588 $ 4,964 =======================================
6 CENTRAL BANCORP, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows, continued (In Thousands, Except Per Share Data)
FISCAL YEARS ENDED MARCH 31, ----------------------------------------- 2001 2000 1999 ---- ---- ---- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $16,937 $12,798 $14,241 Income Taxes 1,850 2,094 2,413 Schedule of non-cash investing activities: Transfer from mortgage loans to real estate acquired by foreclosure $ -- $ -- $ --
See accompanying notes to financial statements. 7 Notes to Consolidated Financial Statements Fiscal Years Ended March 31, 2001, 2000 and 1999 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, was organized by Central Bank (the "Bank") to be a bank holding company. The Company was organized at the direction of the Bank on September 30, 1998, to acquire all of the capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding company form of ownership, which was completed on January 8, 1999. The Company's common stock, par value $1.00 per share (the "Common Stock"), became registered under the Securities Exchange Act of 1934 on January 8, 1999. The Company has no significant assets other than the common stock of the Bank and various other liquid assets that it invests in the ordinary course of business. For that reason, substantially all of the discussion in these consolidated financial statements relates to the operations of the Bank and its subsidiaries. Central 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 acquire 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 a lesser extent, to make loans on commercial real estate in its market area. The Bank also makes a limited amount of consumer loans, including home improvement and secured and unsecured personal loans. 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant inter-company 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 entities, if the conditions change. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses and the valuation of real estate acquired by foreclosure, management obtains independent appraisals for significant properties. Certain prior fiscal year amounts have been reclassified to conform to the current year's presentation. The following is a summary of the 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 $2,483,000 at March 31, 2001. 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 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 or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis 8 and the amount of the write-down is included as a charge against gain on sale of investment and mortgage-backed securities. Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These Statements establish comprehensive accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under these Statements, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The Company adopted these Statements on April 1, 2001. The adoption of these Statements did not have a material effect on the Company's consolidated financial statements. Loans Loans are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination fees. Loans classified as held for sale in the secondary market 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. 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. When loans are sold in the secondary market, the remaining balance of the amount deferred is included in determining the gain or loss on the sale. Impaired loans are commercial and commercial real estate loans for which 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. Allowance for Loan Losses The allowance for loan losses is established through a charge to operations. When management believes that the collection of a loan's principal balance is unlikely, the principal amount is charged against the allowance. Recoveries on loans that have been previously charged off are credited to the allowance as received. The allowance for loan losses is determined using a systematic analysis and procedural discipline based on historical experience, product types, and industry benchmarks. The allowance is segregated into three components: "general", "specific", and "unallocated". The general component is determined by applying coverage percentages to 9 groups of loans based on risk ratings and product types. A system of periodic loan reviews is performed to assess the inherent risk and assign risk ratings to each loan individually. Coverage percentages applied are determined based on industry practice and management's judgment. The specific component is established by allocating a portion of the allowance for loan losses to individual classified loans on the basis of specific circumstances and assessments. The unallocated component supplements the first two components based on management's judgment of the effect of current and forecasted economic conditions on borrowers' abilities to repay, an evaluation of the allowance for loan losses in relation to the size of the overall portfolio, and consideration of the relationship of the allowance for loan losses to non-performing loans, net charge-off trends, and other factors. While this evaluation process utilizes historical and other objective information, the classification of loans and the establishment of the allowance for loan losses relies to a great extent on the judgment and experience of management. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged to the allowance. Management believes that the allowance for loan losses is adequate. 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 additions to the allowance based on their judgments of information available to them at their examination date. 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. Office Properties and Equipment Office properties 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 Goodwill arising from acquisitions is amortized on a straight-line basis over 15 years. On an ongoing basis, management evaluates the valuation of the remaining balance of goodwill. Pension and Other 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. The pension costs are funded as they are accrued. The Company continues to follow APB Opinion No. 25 "Accounting for Stock Issued to Employees" as permitted by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). For companies that elect to continue using APB 25, SFAS 123 requires disclosure of the pro forma effect of using the fair value method of accounting for stock-based compensation that is encouraged by SFAS 123. See Note 15 for the expanded disclosures required by SFAS 123. 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. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock- New Accounting Pronouncements In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which supercedes the guidance of SFAS No. 125. The provisions of SFAS No. 140 will become effective for certain transactions occurring after March 31, 2001 and for disclosures 10 relating to certain transactions for fiscal years ending after December 15, 2000. Management does not expect SFAS No. 140 to have a material impact on the Company's consolidated financial statements. During 1998, the Financial Accounting Standards Board ("FASB") 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 resulting in a charge to earnings, net of taxes, of $234 thousand, or $0.13 per share ($0.12 per share assuming dilution). 11 NOTE 2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES (Dollars in Thousands) The amortized cost and fair value of investments and mortgage-backed securities available for sale are summarized as follows:
MARCH 31, 2001 ----------------------------------------------------------------------- GROSS UNREALIZED AMORTIZED ------------------------------------ FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------------------------------------ Common and Preferred Stock $ 7,748 $ 605 $ (1,386) $ 6,967 U.S. Government and Federal Agency obligations 18,970 88 (7) 19,051 Other bonds and obligations 4,984 261 -- 5,245 ---------------- -------------------- --------------- ---------------- Total $ 31,702 $ 954 $ (1,393) $ 31,263 ================ ==================== =============== ================ Mortgage-backed securities: GNMA $ 361 $ -- $ (10) $ 351 FNMA 13,753 86 (197) 13,642 FHLMC 3,479 66 (37) 3,508 CMOs 2,030 -- (217) 1,813 ---------------- -------------------- --------------- ---------------- Total $ 19,623 $ 152 $ (461) $ 19,314 ================ ==================== =============== ================ MARCH 31, 2000 ----------------------------------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR ------------------------------------ COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------------------------------------ Common and Preferred Stock $ 6,847 $ 929 $ (631) $ 7,145 U.S. Government and Federal Agency obligations 23,962 -- (1,009) 22,953 Other bonds and obligations 2,030 7 -- 2,037 ---------------- -------------------- --------------- ---------------- --- Total $ 32,839 $ 936 $ (1,640) $ 32,135 ================ ==================== =============== ================ Mortgage-backed securities: GNMA $ 434 $ -- $ (14) $ 420 FNMA 17,091 5 (400) 16,696 FHLMC 4,185 -- (50) 4,135 CMOs 2,152 -- (95) 2,057 ----------------- ------------------- --------------- ---------------- Total $ 23,862 $ 5 $ (559) $ 23,308 ================= =================== =============== ================
12 The maturity distribution (based on contractual maturities) and annual yields of mortgage-backed securities at March 31, 2001 and 2000 are as follows:
MARCH 31, 2001 -------------------------------------------------- AMORTIZED FAIR ANNUAL COST VALUE YIELD ---- ----- ----- Due within one year $ -- $ -- 0.00% Due after one year but within five years 703 702 6.71% Due after five years but within ten years 4,996 5,111 6.94% Due after ten years 13,924 13,501 7.21% --------- -------- Total $ 19,623 $ 19,314 7.12% ========= ======== Weighted average remaining life (in years) 17.52 ========= MARCH 31, 2000 -------------------------------------------------- AMORTIZED FAIR ANNUAL COST VALUE YIELD ---- ----- ----- Due within one year -- -- 0.00% Due after one year but within five years 687 410 6.56% Due after five years but within ten years 6,469 6,376 7.01% Due after ten years 16,706 16,522 6.26% --------- -------- Total 23,862 23,308 6.47% ========= ======== Weighted average remaining life (in years) 18.33 =========
Maturities on mortgage-backed securities are based on contractual maturities and do not take into consideration scheduled amortization or prepayments. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. The amortized cost and fair value of adjustable-rate federal agency obligations and mortgage-backed securities classified as available for sale amounted to $38,673 and $38,284, respectively, in 2001. The amortized cost and fair value of adjustable-rate federal agency obligations and mortgage-backed securities classified as available for sale amounted to $12,809 and $12,467, respectively, in 2000. The Bank had securities classified as available for sale with callable features that can be called prior to final maturity with an amortized cost of $8,974 and a fair value of $9,027 at March 31, 2001. Net realized gains on sales of investment securities classified as available for sale for the fiscal years ended March 31, 2001, 2000 and 1999 amounted to $680, $1,013 and $580, respectively. There were no sales of mortgage-backed securities classified as available for sale during the fiscal years ended March 31, 2001 and 2000. 13 The maturity distribution (based on contractual maturities) and annual yields of investment securities (excluding common and preferred stocks) at March 31, 2001 and 2000 are as follows:
MARCH 31, 2001 --------------------------------------- AMORTIZED FAIR ANNUAL COST VALUE YIELD ---- ----- ------ Due within one year $ -- $ -- 0.00% Due after one year but within five years 14,487 14,759 6.73 Due after five years but within ten years 9,467 9,537 6.63 --------------------------------------- Total $23,954 $24,296 6.69% ======================================= Weighted average remaining life (in years) 3.16 ======= MARCH 31, 2000 --------------------------------------- AMORTIZED FAIR ANNUAL COST VALUE YIELD ---- ----- ----- Due within one year $ 1,000 $ 994 6.15% Due after one year but within five years 9,056 6,869 6.80 Due after five years but within ten years 15,936 17,127 6.48 --------------------------------------- Total $25,992 $24,990 6.57% ======================================= Weighted average remaining life (in years) 5.93 =======
A FNMA mortgage pool with an amortized cost of $5,834 and fair value of $5,673 at March 31, 2001, 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. NOTE 3. MORTGAGE LOANS (In Thousands) Mortgage loans as of March 31 are summarized below:
MORTGAGE LOANS: 2001 2000 -------------------------------------------------------------------------------------- Residential Fixed $ 75,809 $ 65,765 Adjustable 170,694 177,798 Commercial 74,613 54,228 Construction 9,500 9,765 Second Mortgage and Home Equity 8,282 7,403 FHA & VA -- 7 ---------- ---------- $ 338,898 $ 314,966 ========== ==========
At March 31, 2001 and 2000, net deferred loan costs of $160 and $280, respectively, were reflected as an addition to the appropriate loan categories. Mortgage and other loans on which the accrual of interest had been discontinued at March 31, 2001, 2000 and 1999 were $000, $235, and $419, respectively. Interest income not recognized on such loans amounted to $00, $7, and $16 in fiscal 2001, 2000 and 1999, respectively. At March 31, 2001 and 2000, there were no impaired loans. Impaired loans are measured using the fair value of collateral. During fiscal 2001 and 2000, there were no impaired loans. The Bank follows the same policy 14 for recognition of income on impaired loans as it does for all other loans. During fiscal 2001 and 2000, there was no interest forgone on impaired loans that were not non-accrual loans. Mortgage loans serviced by the Bank for others amounted to $4,288 and $5,790 at March 31, 2001 and 2000, 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 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. NOTE 4. OTHER LOANS (In Thousands) Other loans at March 31 are summarized below:
OTHER LOANS 2001 2000 --------------------------------------------------------------------- Commercial $ 4,859 $ 3,349 Secured by Deposits 1,137 1,023 Consumer 36 38 Unsecured 863 637 -------------------------- $ 6,895 $ 5,047 ==========================
NOTE 5. LOANS TO DIRECTORS AND OFFICERS (In Thousands) The following summarizes the activity with respect to loans included in mortgage and other loans made to directors and officers and their related interests for the fiscal years ended March 31:
2001 2000 -------------------------- Balance at beginning of period $ 243 $ 563 New loans 444 11 New officers with loans outstanding 158 -- Repayment of principal (265) (187) No longer a director -- (144) -------------------------- Balance at end of period $ 580 $ 243 ==========================
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 6. ALLOWANCE FOR LOAN LOSSES (In Thousands)
March 31, ------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------------------------------- Balance at beginning of period $2,993 $2,913 $2,886 Provision charged to expense - - - Amounts charged-off (4) (9) (99) Recoveries on accounts previously charged-off 117 89 126 ----------- ---------- ------------- Balance at end of period $3,106 $2,993 $2,913 =========== ========== =============
15 NOTE 7. STOCK IN FEDERAL HOME LOAN BANK OF BOSTON (In Thousands) As a member of the Federal Home Loan Bank of Boston ("FHLB of Boston"), the Bank is required to invest in $100 par value 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. The Bank's investment exceeded the required level by $100 and $250 at March 31, 2001 and 2000, respectively. If such stock is redeemed, the Bank will receive from the FHLB of Boston an amount equal to the par value of the stock. NOTE 8. THE CO-OPERATIVE CENTRAL BANK RESERVE FUND The Co-operative Central Bank Reserve 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 9. OFFICE PROPERTIES AND EQUIPMENT (In Thousands) A summary of cost, accumulated depreciation and amortization of office properties and equipment at March 31 follows:
2001 2000 ---- ---- Land $ 589 $ 589 Buildings 2,304 2,287 Furniture 5,596 5,376 Leasehold improvements 475 474 -------------------------- 8,964 8,726 Less accumulated depreciation and amortization (6,946) (6,508) -------------------------- $2,018 $2,218 ==========================
A summary of minimum rentals for future periods under non-cancelable operating leases follows: MINIMUM RENTALS ------- Years Ending March 31, 2002 $ 92 2003 78 2004 59 2005 14 Thereafter 6 Rental expense for the fiscal years ended March 31, 2001, 2000 and 1999 was $125, $123 and $118, respectively. 16 NOTE 10. DEPOSITS (Dollars in Thousands) Deposits at March 31 are summarized as follows:
2001 2000 ---- ---- AMOUNT INTEREST RATES AMOUNT INTEREST RATES ------ -------------- ------ -------------- Demand (non-interest-bearing) $24,434 -- 18,634 -- NOW Accounts 31,377 1.01 - 1.52% 32,218 1.01 - 1.52% Regular, club and 90 day Notice 64,011 2.00% 61,475 2.00% Money Market deposit Accounts 15,327 2.15 - 2.35% 19,045 2.15 - 2.35% --------- -------- $ 135,149 $131,372 Term Deposit Certificates Six Month money market $ 20,437 4.00 - 6.25% $ 16,469 4.00 - 6.00% Other 131,581 4.00 - 7.25% 110,498 4.00 - 7.00% --------- -------- Total Term Deposit Certificates 152,018 126,967 --------- -------- $ 287,167 $258,339 ========= ======== Weighted average interest rate 3.80% 3.37%
Contractual maturities of term deposit certificates at March 31, 2001 are -------------------------------------------------------------------------------- summarized as follows: --------------------- Years Ending March 31, 2002 $ 102,821 2003 43,336 2004 2,704 2005/2006 3,157 --------- $ 152,018 ========= The aggregate amount of individual term deposit certificates with a minimum denomination of $100 or more was $34,644 and $24,937 at March 31, 2001 and 2000, respectively. Interest expense on these deposits was $1,763, $795 and $934 for fiscal years ended March 31, 2001, 2000 and 1999, respectively. 17 NOTE 11. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands) Advances from FHLB of Boston, by year of maturity, at March 31 consist of the following:
2001 2000 ------------------------------------------------------------------------------------------------------- INTEREST RATE DUE IN YEAR ENDING MARCH 31, 5.76% - 6.95% 2001 $ -- $ 18,000 5.21% - 6.95% 2002 25,000 4,000 6.60% 2003 8,000 -- 4.99% - 5.69% 2004 -- 5,000 6.23% 2006 4,000 -- 6.10% - 6.42% 2008 13,000 -- 4.49% - 5.89% 2009 15,000 26,000 4.49% - 6.21% 2010 20,000 18,000 3.99% - 6.56% 2011 34,000 33,000 5.49% 2014 2,000 2,000 5.25% 2015 -- 5,000 --------- --------- $ 121,000 $ 111,000 ========= ========= Weighted Average Rate 5.84% 5.66%
At March 31, 2001, advances totaling $88 million were callable prior to the scheduled maturity of the 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. Applying these ratios, the Bank's overall borrowing capacity was approximately $201,200 and $202,400 at March 31, 2001 and 2000, respectively. The highest month-end balance of FHLB of Boston advances outstanding was $121,000, $113,000, and $64,000 during the fiscal years ended March 31, 2001, 2000 and 1999, respectively. NOTE 12. INCOME TAXES (Dollars in Thousands) The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Bank's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Income tax expense was allocated as follows:
Fiscal Years Ended March 31, --------------------------------------------- 2001 2000 1999 --------------------------------------------- Current income tax expense Federal $ 1,555 $ 1,745 $ 1,669 State 52 44 366 ------------------------------------------- Total current tax expense 1,607 1,789 2,035 Deferred income tax expense (benefit) 156 343 (175) Change in valuation reserve -- -- -- ------------------------------------------- Total income tax expense $ 1,763 $ 2,132 $ 1,860 ===========================================
18 Income tax expense 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:
FISCAL YEARS ENDED MARCH 31, ----------------------------------------------- 2001 2000 1999 ----------------------------------------------- Statutory Federal tax rate 34.0 % 34.0 % 34.0% Items affecting Federal income tax rate: Dividends received deduction (0.6) (0.4) (0.6) Goodwill amortization 2.0 1.8 2.2 State income taxes, net of Federal income tax benefit 1.2 1.6 4.7 Other (0.4) 0.4 0.7 ---------------------------------------------- 36.2 % 37.4 % 41.0 % ==============================================
The components of gross deferred tax assets and gross deferred tax liabilities that have been recognized as of March 31 are as follows:
2001 2000 ----------------------- Deferred tax assets: Loan losses $ 548 $ 547 Deferred loan origination fees 74 74 Depreciation 265 258 Post-employee retirement benefit accrual 227 201 Unrealized depreciation on securities 319 433 Other 74 56 ----------------------- Gross deferred tax asset 1,507 1,569 Valuation reserve -- -- ----------------------- Net deferred tax asset 1,507 1,569 ----------------------- Deferred tax liabilities: Accrued dividend receivable 47 44 Deferred loan origination fees 437 454 Deferred income 222 -- ---------------------- Gross deferred tax liability 706 498 ---------------------- Net deferred tax asset $ 801 $ 1,071 =======================
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, 2001. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Bank generates net taxable income. At March 31, 2001, recoverable income taxes, plus estimated taxes for fiscal 2002, 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. 19 The unrecaptured base year tax bad debt reserves will not be subject to recapture as long as the institution 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. NOTE 13. 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. 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, follows:
2001 2000 --------------------------- Unused lines of credit $11,012 $10,243 Unadvanced portions of construction loans 8,239 4,427 Unadvanced portions of commercial loans 5,651 3,468 Commitments to originate commercial loans 14,189 15,713 Commitments to originate residential mortgage loans: Fixed rate 1,868 1,104 Adjustable rate 1,032 1,270
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 14. STOCKHOLDERS' EQUITY (Dollars in Thousands) The Bank may not declare or pay cash dividends on its common stock if the effect thereof would cause its equity to be reduced below regulatory capital requirements, or if such declaration and payment would otherwise violate regulatory requirements. On October 24, 1991, the Bank adopted a Shareholder Rights Plan. The plan entitles each shareholder to purchase the Bank's stock at a discount price in the event any person or group of persons exceeds predetermined ownership limitations of the Bank's outstanding common stock and, in certain circumstances, engages in specific activities deemed adverse to the interests of the Bank's shareholders. This plan expires on October 24, 2001. The minimum core (leverage) capital ratio (stockholders' equity divided by total assets) required for banks with a CAMEL rating of 1 is 3.00% and 4.00%-5.00% for all others. The Bank must 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). At March 31, 2001 and 2000, the Bank's capital ratios were in excess of all required standards. 20 The Bank is subject to various regulatory capital requirements administered by the federal banking services. 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. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of risk-weighted, core and tangible capital (as defined). Management represents that, as of March 31, 2001, the Bank met all capital adequacy requirements to which it is subject. 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. As of March 31, 2001, the Bank was categorized as "well capitalized" based on its ratios of risk-weighted, Tier 1 and tangible capital. There are no conditions or events, since that notification, that management believes would cause a change in the Bank's categorization. The Bank's actual capital amounts and ratios are presented in the table. No deduction was taken from capital for interest-rate risk. The Bank's Tier 1/leverage, Tier 1 risk-based and total risk-based capital together with related regulatory minimum requirements are summarized below:
MARCH 31, 2001 ---------------------------------------------- TIER 1 TIER 1 TOTAL LEVERAGE RISK-BASED RISK-BASED CAPITAL CAPITAL CAPITAL -------- ---------- ---------- Regulatory capital measure Amount $33,256 $33,256 $36,362 Ratio 7.75 % 11.76 % 12.86 % Adequately capitalized requirement: Amount $17,156 $11,308 $22,617 Ratio 4.00 % 4.00 % 8.00 % Well capitalized requirement Amount $21,445 $16,963 $28,271 Ratio 5.00 % 6.00 % 10.00 % MARCH 31, 2000 ---------------------------------------------- TIER 1 TIER 1 TOTAL LEVERAGE RISK-BASED RISK-BASED CAPITAL CAPITAL CAPITAL -------- ---------- ---------- Regulatory capital measure Amount $ 34,268 $ 34,268 $ 37,376 Ratio 8.66 % 13.31 % 14.52 % Adequately capitalized requirement: Amount $ 15,836 $ 10,295 $ 20,591 Ratio 4.00 % 4.00 % 8.00 % Well capitalized requirement Amount $ 19,795 $ 15,443 $ 25,739 Ratio 5.00 % 6.00 % 10.00 %
21 NOTE 15. EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data) PENSION PLAN 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 officers and 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 revised Savings Plan which qualifies under section 401 (k) of the Internal Revenue Code of 1986, as amended. Such contributions are matched on a one-half for-one basis by the Bank up to a maximum of 5% of each employee's salary. Pension benefits and employer contributions to the Savings Plan become vested over six years. Expenses for the Pension Plan and the Savings Plan were $371, $363 and $202 for the fiscal years ended March 31, 2001, 2000 and 1999, respectively. Forfeitures are used to reduce expenses of the plans. STOCK OPTION PLAN The Company has adopted two Stock Option Plans for the benefit of officers and other employees. Under the first plan, the Company reserved 184,000 shares of authorized but unissued common stock for issuance under the Plan. At the beginning of fiscal 1999, options to purchase 30,000 shares were outstanding at an exercise price of $16.25 per share. During fiscal 1999, 2,000 options were exercised resulting in an additional $14 of capital being recorded. At the end of fiscal 1999, options to purchase 28,000 shares were outstanding at an exercise price of $16.25 per share. During fiscal 2000, 3,000 shares were exercised resulting in an additional $22 of capital being recorded. At the end of fiscal 2000, options to purchase 25,000 shares were outstanding at an exercise price of $16.25 per share. No options were exercised during fiscal 2001. Of the 25,000 options outstanding under the first plan, at March 31, 2001, all were exercisable with an average exercise price per share of $16.25. Under the second plan, the Company reserved 97,500 shares of authorized but unissued common shares for issuance under the plan. The first options granted under this plan were awarded during fiscal 2000. During fiscal 2000, options to purchase 32,499 shares were granted at an average exercise price of $20.25 per share and none of these options were exercised. During fiscal 2001, options to purchase 32,501 shares were granted at an average exercise price of $16.625. Of the 65,000 options outstanding under the second plan, at March 31, 2001, all were exercisable with an average exercise price per share of $18.437. The weighted average exercise price of all outstanding options at March 31, 2001, was $17.830. The exercise price of any option granted will not be less than the fair market value of the common stock on the date of grant of the option. 22 The Company applies APB Opinion No. 25 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 123, the Company's net income would have been reduced to the pro forma amounts indicated below. No options were granted during fiscal 1999.
2001 2000 Net 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 net income before cumulative effect of change in accounting principle 2,934 3,308 Pro forma 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--assuming dilution, as reported $1.81 $1.89 Before cumulative effect of change in accounting principle--assuming dilution, 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--assuming dilution, as reported $1.81 $1.77 After cumulative effect of change in accounting principle--assuming dilution, 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 yrs 6.00 yrs
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 Bank 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. The ESOP is repaying its loan to the Bank with funds from the Bank's contributions to the plan and earnings from the ESOP's assets. Repayments of $196, $183 and $184 were made during fiscal 2001, 2000 and 1999, respectively. The scheduled repayment of the amount outstanding at March 31, 2001 is as follows: 2002 130 2003 96 Compensation expense is recognized as the ESOP shares are allocated to participants in the plan and was $130, $130, $51 for fiscal 2001, 2000 and 1999, respectively. 23 As amended by SFAS 132, the components of the life plan and medical plan for the years ended March 31, 2001 and 2000, respectively, follow:
2001 2000 -------------------------------------------------- LIFE MEDICAL LIFE MEDICAL ---- ------- ---- ------- Actuarial present value of benefits obligation: Retirees $ (222) $ (413) $ (193) $ (397) Fully eligible participants (44) (307) (40) (283) Other plan participants -- -- ------- ------- ------- ------- Total $ (266) $ (720) $ (233) $ (680) ======= ======= ======= ======= Change in projected benefit obligation: Accumulated benefit obligations at prior year-end $ (233) $ (680) $ (256) $ (781) Service cost less expense component -- -- Interest cost (19) (51) (17) (48) Actuarial gain (loss) (7) 2 21 69 Assumptions (8) (29) 18 46 Benefits paid 1 38 1 34 ------- ------- ------- ------- Accumulated benefit obligations at year-end $ (266) $ (720) $ (233) (680) ======= ======= ======= ======= Change in plan assets: Fair value of plan assets at prior fiscal year-end $ -- $ -- $ -- $ -- Actual return on plan assets -- -- -- -- Employer contribution 1 38 1 34 Benefits paid end expenses (1) (38) (1) (34) ------- ------- ------- ------- Fair value of plan assets at current fiscal year-end $ -- $ -- $ -- $ -- ======= ======= ======= ======= Funded $ (266) $ (720) $ (233) $ (680) Unrecognized net obligation 103 297 111 322 Unrecognized prior year service -- -- -- -- Unrecognized net (loss) gain (48) 80 (64) 53 ------- ------- ------- ------- $ (211) $ (343) $ (186) $ (305) ======= ======= ======= ======= Reconciliation of (accrual) prepaid: (Accrued) prepaid pension cost at prior year-end $ (186) $ (305) $ (159) $ (241) Minus net periodic cost (26) (76) (28) (98) Plus employee contributions 1 38 1 34 ------- ------- ------- ------- (Accrued) prepaid cost $ (211) $ (343) $ (186) $ (305) ======= ======= ======= ======= Benefit obligation weighted average assumption as of fiscal year-end: Discount rate 7.25% 7.25% 7.75% 7.75% Expected return on plan assets 7.25% 7.25% 7.75% 7.75% Rate of compensation increase -- -- -- --
1 PERCENTAGE POINT INCREASE -------------------------------------------- 2001 2000 Impact of 1% change in health care trend rates: Effect on total service and interest cost components n/a $ (5) n/a $ (5) Effect on the post retirement benefit obligations n/a 63 n/a 72 Components of net periodic benefit obligations: Service cost $ -- $ -- $ -- $ -- Interest cost 19 51 17 49 Expected return on plan assets -- -- -- -- Amortization of prior service cost 9 25 17 25 Recognized actuarial (gain) loss (1) -- (6) 24 ----- ------- ------- ------- Net periodic benefit cost for fiscal year ending $ 27 $ 76 $ 28 $ 98 ===== ======= ======= ======= Periodic benefit cost weighted average assumptions: Discount rate 7.75% 7.25% 7.00% 7.00% Expected return on plan assets 7.75% 7.25% 7.00% 7.00% Rate of compensation increase -- -- -- --
24 For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the fiscal year ended March 31, 2000. The rate was assumed to decrease gradually to 5.5% for the fiscal year ending March 31, 2003 and remain at that level thereafter. NOTE 16. LEGAL PROCEEDINGS The Bank is a party to certain litigation in the normal course of business. Management and counsel are of the opinion that the aggregate liability, if any, resulting from such litigation would not be material to the Bank's financial position. NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands) The FASB issued SFAS No. 107, Disclosures about Fair Value of Financial Instruments, which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. 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. Other significant assets and liabilities that are not considered financial assets or liabilities include real estate acquired by foreclosure and office properties 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. 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. 25 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. 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. ADVANCES FROM FHLB OF BOSTON Fair values of advances from 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. 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. The estimated carrying amounts and fair values of the Bank's financial instruments are as follows:
AT MARCH 31, 2001 AT MARCH 31, 2000 ----------------- ----------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- ASSETS Cash and due from banks $ 5,351 $ 5,351 $ 6,588 $ 6,588 Short-term investments 34,529 34,529 14,802 14,802 Investments available for sale: Investment securities 31,263 31,263 32,135 32,135 Mortgage-backed securities 19,314 19,314 23,308 23,308 Net loans 342,687 350,028 317,020 310,543 Accrued interest receivable 2,426 2,426 2,036 2,036 Stock in Federal Home Loan Bank of Boston, at cost 6,150 6,150 5,800 5,800 The Co-operative Central Bank Reserve Fund 1,576 1,576 1,576 1,576 LIABILITIES Deposits $ 287,167 $288,297 $ 258,339 $258,332 Advances from Federal Home Loan Bank of Boston 121,000 119,965 111,000 110,200 Advance payments by borrowers for taxes and insurance 1,220 1,220 1,053 1,053 Accrued interest payable 608 608 542 542
26 NOTE 18. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands) The following are the condensed financial statements for Central Bancorp, Inc. (the "Parent") only:
BALANCE SHEETS MARCH 31, 2001 2000 --------------------------------------------------------------------------------------------------- ASSETS Cash deposit in subsidiary bank $ 2,153 $ 1,046 Investment in subsidiary, at equity 36,129 36,251 Other assets -- 100 ---------------------- Total assets $ 38,282 $ 37,397 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other liabilities $ 70 $ -- Total stockholders' equity 38,212 37,397 ---------------------- Total liabilities and stockholders' equity $ 38,282 $ 37,397 ======================
STATEMENTS OF INCOME FISCAL YEARS ENDED MARCH 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Dividend income $ 4,000 $ 3,012 $ 2,500 Non-interest expense 266 331 62 ------------------------------------------- Income before income taxes 3,734 2,681 2,438 Income tax benefit (87) (109) 20 ------------------------------------------- Net income before cumulative effect of change in accounting principle 3,821 2,790 2,458 Cumulative effect of change in accounting principle -- (234) -- ------------------------------------------- Net income before equity in net income of subsidiary 3,821 2,556 2,458 Equity in net income of subsidiary (712) 777 224 ------------------------------------------- Net income $ 3,109 $ 3,333 $ 2,682 ===========================================
STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED MARCH 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities: Net income $ 3,109 $ 3,333 $ 2,682 Adjustment to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary 712 (777) (224) Decrease (increase) in other assets 100 (100) (235) Increase (decrease) in accrued expenses and other liabilities 70 (15) 15 Cumulative effect of change in accounting principle -- 234 -- ------------------------------------------- Net cash provided by operating activities 3,991 2,675 2,238 Cash flows from financing activities: Proceeds from exercise of stock options -- 22 -- Purchase of treasury stock (2,187) (3,043) -- Cash dividends paid (697) (689) (157) ------------------------------------------- Net cash used by financing activities (2,884) (3,710) (157) ------------------------------------------- Net increase (decrease) in cash deposit in subsidiary bank 1,107 (1,035) 2,081 Cash deposit in subsidiary bank at beginning of year 1,046 2,081 -- ------------------------------------------- Cash deposit in subsidiary bank at end of year $ 2,153 $ 1,046 2,081 ===========================================
27 NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In Thousands, Except Per Share Data)
2001 QUARTERS ----------------------------------------------------- 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 Operating 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.......................... $ 0.43 $ 0.51 $ 0.53 $ 0.34 ===================================================== Earnings per common share - assuming dilution...... $ 0.43 $ 0.51 $ 0.53 $ 0.34 ===================================================== 2000 QUARTERS ----------------------------------------------------- FIRST SECOND THIRD FOURTH ----- ------ ----- ------- Interest and dividend income....................... $ 6,227 $ 6,314 $ 6,779 $ 7,104 Interest expense................................... 3,097 3,038 3,302 3,612 ----------------------------------------------------- Net interest and dividend income.............. 3,130 3,276 3,477 3,492 Non-interest income................................ 278 660 394 337 Operating expenses................................. 2,233 2,268 2,248 2,596 ----------------------------------------------------- Income before income taxes.................... 1,175 1,668 1,623 1,233 Income tax......................................... 462 636 603 431 ----------------------------------------------------- Net income before cumulative effect of change in accounting principle....................... 713 1,032 1,020 802 Cumulative effect of change in accounting principle, net of taxes....................... (234) -- -- -- ----------------------------------------------------- Net income.................................... $ 479 $ 1,032 $ 1,020 $ 802 ===================================================== Earnings per common share: Before cumulative effect of change in accounting principle.......................... $ 0.37 $ 0.54 $ 0.55 $ 0.44 ===================================================== Before cumulative effect of change in accounting principle - assuming dilution...... $ 0.37 $ 0.54 $ 0.55 $ 0.44 ===================================================== After cumulative effect of change in accounting principle.......................... $ 0.25 $ 0.54 $ 0.55 $ 0.44 ===================================================== After cumulative effect of change in accounting principle - assuming dilution...... $ 0.25 $ 0.54 $ 0.55 $ 0.44 =====================================================
28 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts May 9, 2001 29 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 -- No current reports on Form 8-K were filed during the ------------------- last quarter of the fiscal year covered by this report. (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** Rights Agreement, dated as of January 8, 1999, by and between the Central Bancorp, Inc. and State Street Bank & 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* Termination Agreement, dated March 31, 1992, by and between the Bank and Joseph R. Doherty + 10.6* Consulting Agreement, dated March 31, 1992, by and between the Bank and Joseph R. Doherty + 10.7* Amendment to Consulting Agreement between the Bank and Joseph R. Doherty, dated August 11, 1994 + 10.8*** 1986 Stock Option Plan, as amended + 10.9*** Severance Agreement between the Bank and William P. Morrissey, dated December 14, 1994 + 30 10.10*** Severance Agreement between the Bank and David W. Kearn, dated December 14, 1994 + 10.11*** Severance Agreement between the Bank and Paul S. Feeley, dated May 14, 1998 + 10.12*** Amendments to Severance Agreements between the Bank and Messrs. Feeley, Kearn and Morrissey, dated January 8, 1999. + 10.13**** 1999 Stock Option and Incentive Plan + 10.14***** Deferred Compensation Plan for Non-Employee Directors + 10.15****** Management Incentive Plan + 21****** Subsidiaries of Registrant 23 Consent of KPMG LLP _________ + 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 January 8, 1999. *** Incorporated herein by reference to the Registration Statement on Form S-8 (File No. 333-71165) filed on January 26, 1999. **** Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-87005) filed on September 13, 1999. ***** 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 Form 10-K for the fiscal years ended March 31, 2001 filed on June 26, 2001. 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL BANCORP, INC. Date: August 9, 2001 By:/s/ John D. Doherty -------------------------------------- John D. Doherty President, Chief Executive Officer and Duly Authorized Representative