10-K/A 1 fm10ka2nd2002-1508.txt FORM 10-K/A #2 - CENTRAL BANCORP, INC. 3-31-02 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K/A NO. 2 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File No. 0-25251 CENTRAL BANCORP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) MASSACHUSETTS 04-3447594 ------------------------------------------ ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 399 HIGHLAND AVENUE, SOMERVILLE, MASSACHUSETTS 02144 -------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 628-4000 -------------- Securities registered under Section 12(b) of the Act: NONE ---- Securities registered under Section 12(g) of the Act: COMMON STOCK, PAR VALUE $1.00 PER SHARE --------------------------------------- (Title of Class) STOCK PURCHASE RIGHTS --------------------- (Title of Class) Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $25.5 million based on the closing sales price of the registrant's common stock as reported on the Nasdaq National Market SM on June 21, 2002 ($30.00 per share). Solely for purposes of this calculation, directors, executive officers and greater than 5% stockholders are treated as affiliates. As of June 21, 2002, there were issued and outstanding 1,632,789 shares of the registrant's common stock, par value $1.00 per share (of which 781,028 shares were deemed held by affiliates). ================================================================================ EXPLANATION FOR AMENDMENT: The Annual Report on Form 10-K of Central Bancorp, Inc. (the "Company") for the fiscal year ended March 31, 2002 filed with the Securities and Exchange Commission (the "Commission") on June 28, 2002 and amended on July 25, 2002 (the "2002 Form 10-K") is being amended hereby to reflect a change in Note 13 to the Consolidated Financial Statements of the Company filed under Item 8 of the 2002 Form 10-K. * * * * * ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- Page Consolidated Balance Sheets................................................ 3 Consolidated Statements of Income.......................................... 4 Consolidated Statement of Changes in Stockholders' Equity.................. 5 Consolidated Statement of Cash Flows....................................... 7 Notes to Consolidated Financial Statements................................. 8 Independent Auditors' Report............................................... 26 2 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets (Dollars In Thousands)
MARCH 31, ---------------------- 2002 2001 ---- ---- ASSETS Cash and due from banks $ 5,109 $ 5,351 Short-term investments 2,455 35,718 --------- --------- Cash and cash equivalents 7,564 41,069 --------- --------- Investment securities available for sale (amortized cost of $74,935 in 2002 and $50,136 in 2001) (note 2) 73,884 49,388 Stock in Federal Home Loan Bank of Boston, at cost (notes 2 and 7) 8,300 6,150 The Co-operative Central Bank Reserve Fund (note 2) 1,576 1,576 --------- --------- Total investments 83,760 57,114 --------- --------- Loans (notes 3) 371,707 345,793 Less allowance for loan losses (note 4) 3,292 3,106 --------- --------- Net loans 368,415 342,687 --------- --------- Accrued interest receivable 2,530 2,426 Banking premises and equipment, net (note 5) 1,836 2,018 Deferred tax asset, net (note 8) 1,289 801 Goodwill, net (note 1) 2,232 2,520 Other assets 593 702 --------- --------- Total assets $ 468,219 $ 449,337 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (note 6) $ 261,907 $ 287,167 Federal Home Loan Bank advances (notes 2 and 7) 164,000 121,000 Advance payments by borrowers for taxes and insurance 1,111 1,220 Accrued expenses and other liabilities 2,247 1,738 --------- --------- Total liabilities 429,265 411,125 --------- --------- Commitments and contingencies (notes 8, 9 and 12) Stockholders' equity (note 10): Preferred stock $1.00 par value, authorized 5,000,000 shares; none issued -- -- Common stock $1.00 par value, authorized 15,000,000 shares; 1,999,588 shares issued at March 31, 2002 and 1,970,000 shares issued at March 31, 2001 2,000 1,970 Additional paid-in capital 11,934 11,190 Retained income 33,141 30,950 Treasury stock (366,799 shares at March 31, 2002 and 285,836 shares at March 31, 2001), at cost (7,189) (5,230) Accumulated other comprehensive (loss) income (626) (431) Unearned compensation - ESOP (note 11) (306) (237) --------- --------- Total stockholders' equity 38,954 38,212 --------- --------- Total liabilities and stockholders' equity $ 468,219 $ 449,337 ========= =========
See accompanying notes to consolidated financial statements. 3 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31, --------------------------------------------- 2002 2001 2000 --------------------------------------------- Interest and dividend income: Mortgage loans $ 23,799 $ 25,613 $ 21,806 Other loans 438 716 599 Short-term investments 866 487 421 Investments 4,170 4,101 3,598 -------------------------------------------- Total interest and dividend income 29,273 30,917 26,424 -------------------------------------------- Interest expense: Deposits 8,119 10,087 8,553 Federal Home Loan Bank advances 6,741 6,916 4,496 -------------------------------------------- Total interest expense 14,860 17,003 13,049 -------------------------------------------- Net interest and dividend income 14,413 13,914 13,375 Provision for loan losses (note 4) -- -- -- -------------------------------------------- Net interest and dividend income after provision for loan losses 14,413 13,914 13,375 -------------------------------------------- Non-interest income: Deposit service charges 482 428 414 Net gain (loss) from sale and write-down of investment securities (note 2) (150) 680 1,013 Brokerage income 100 -- -- Other income 256 180 242 -------------------------------------------- Total non-interest income 688 1,288 1,669 -------------------------------------------- Non-interest expenses: Salaries and employee benefits (note 11) 5,652 5,571 5,017 Occupancy and equipment (note 5) 1,124 1,192 1,167 Data processing service fees 966 847 534 Professional fees 1,049 757 875 Goodwill amortization 288 288 288 Other expenses 1,385 1,675 1,464 -------------------------------------------- Total non-interest expenses 10,464 10,330 9,345 -------------------------------------------- Income before income taxes 4,637 4,872 5,699 Provision for income taxes (note 8) 1,777 1,763 2,132 -------------------------------------------- Income before cumulative effect of change in accounting principle 2,860 3,109 3,567 Cumulative effect of change in accounting principle, net of taxes (note 1) -- -- (234) --------------------------------------------- Net income $ 2,860 $ 3,109 $ 3,333 ============================================ Earnings per common share (note 1): Before cumulative effect of change in accounting principle-basic $ 1.73 $ 1.81 $ 1.90 ============================================ Before cumulative effect of change in accounting principle - diluted $ 1.72 $ 1.81 $ 1.89 ============================================ After cumulative effect of change in accounting principle-basic $ 1.73 $ 1.81 $ 1.77 ============================================ After cumulative effect of change in accounting principle - diluted $ 1.72 $ 1.81 $ 1.77 ============================================ Weighted average common shares outstanding 1,650 1,717 1,882 ============================================ Weighted average common shares outstanding-diluted 1,665 1,719 1,885 ============================================
See accompanying notes to consolidated financial statements. 4 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity (In Thousands, Except Per Share Data)
ACCUMULATED ADDITIONAL OTHER UNEARNED TOTAL COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE COMPENSATION STOCKHOLDERS' STOCK CAPITAL INCOME STOCK (LOSS) INCOME ESOP EQUITY ----- ------- ------ ----- ------------- ---- ------ Balance at March 31, 1999 $1,967 $11,171 $25,894 $ -- $ 327 $(617) $38,742 Net income -- -- 3,333 -- -- -- 3,333 Other comprehensive income, net of tax: Unrealized (loss) on securities, net of reclassification adjustment -- -- -- -- (1,152) -- (1,152) ------- Comprehensive income 2,181 ------- Proceeds from exercise of stock options 3 19 -- -- -- -- 22 Purchase of treasury stock -- -- -- (3,043) -- -- (3,043) Dividends paid ($0.36 per share) -- -- (689) -- -- -- (689) Amortization of unearned compensation -ESOP -- -- -- -- -- 184 184 -------------------------------------------------------------------------------- Balance at March 31, 2000 1,970 11,190 28,538 (3,043) (825) (433) 37,397 Net income -- -- 3,109 -- -- -- 3,109 Other comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 394 -- 394 ------- Comprehensive income 3,503 ------- Purchase of treasury stock -- -- -- (2,187) -- -- (2,187) Dividends paid ($0.40 per share) -- -- (697) -- -- -- (697) Amortization of unearned compensation -ESOP -- -- -- -- -- 196 196 ------------------------------------------------------------------------------- Balance at March 31, 2001 1,970 11,190 30,950 (5,230) (431) (237) 38,212 Net income -- -- 2,860 -- -- -- 2,860 Other comprehensive income, net of tax: Unrealized (loss) on securities, net of reclassification adjustment -- -- -- -- (195) -- (195) ------- Comprehensive income 2,665 ------- Purchase of shares by ESOP (note 11) -- -- -- -- -- (199) (199) Purchase of treasury stock -- -- -- (1,924) -- -- (1,924) Dividends paid ($0.40 per share) -- -- (669) -- -- -- (669) Proceeds from exercise of stock options 30 462 -- -- -- -- 492 Amortization of unearned compensation -ESOP -- 175 -- -- -- 130 305 Other equity transactions -- 107 -- (35) -- -- 72 ------------------------------------------------------------------------------- Balance at March 31, 2002 $2,000 $11,934 $33,141 $(7,189) $ (626) $(306) $38,954 ===============================================================================
5 The Bank's other comprehensive income (loss) and related tax effect for the years ended March 31 are as follows:
2002 ---------------------------------------------- BEFORE-TAX TAX (BENEFIT) AFTER-TAX in thousands AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized net holding losses during period $ (451) $ (163) $ (288) Less reclassification adjustment for net losses included in net income 150 57 93 ---------------------------------------------- Other comprehensive loss $ (301) $ (106) $ (195) ============================================== 2001 ---------------------------------------------- BEFORE-TAX TAX (BENEFIT) AFTER-TAX In thousands AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized net holding gains during period $ 1,188 $ 360 $ 828 Less reclassification adjustment for net gains included in net income (680) (246) (434) ---------------------------------------------- Other comprehensive income $ 508 $ 114 $ 394 ============================================== 2000 ---------------------------------------------- BEFORE-TAX TAX (BENEFIT) AFTER-TAX in thousands AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized net holding losses during period $ (815) $ (297) $ (518) Less reclassification adjustment for net gains included in net income (1,013) (379) (634) ---------------------------------------------- Other comprehensive loss $(1,828) $ (679) $(1,152) ===================================================
See accompanying notes to consolidated financial statements. 6 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (In Thousands, Except Per Share Data)
YEARS ENDED MARCH 31, ----------------------------------- 2002 2001 2000 ---- ---- ---- Cash flows from operating activities: Net income $ 2,860 $ 3,109 $ 3,333 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 372 438 462 Amortization of premiums and discounts 176 86 132 Amortization of goodwill 288 288 288 Decrease (increase) in deferred tax assets (380) 270 (327) Amortization of unearned compensation - ESOP 305 196 184 Net (gain) loss from sale and write-down of investment securities 150 (680) (1,013) Cumulative effect of change in accounting principle -- -- 234 (Increase) decrease in accrued interest receivable (104) (390) (422) (Increase) decrease in other assets 109 (507) 59 Increase (decrease) in advance payments by borrowers for taxes and insurance (109) 167 (336) Increase (decrease) in accrued interest payable (23) 66 251 Increase (decrease) in accrued expenses and other liabilities 532 (96) 415 ----------------------------------- Net cash provided by operating activities 4,176 2,947 3,260 ----------------------------------- Cash flows from investing activities: Principal collected on loans 132,138 56,949 68,641 Loan originations and purchases (157,866) (82,616) (108,363) Principal payments on mortgage-backed securities 7,246 4,069 9,420 Purchase of investment securities (61,256) (6,170) (21,716) Proceeds from sales of investment securities 2,885 3,955 6,159 Maturities and redemptions of investment securities 26,000 4,000 2,500 Net (increase) decrease in short-term investments 33,263 (19,727) 2,137 Purchase of stock in FHLB of Boston (2,150) (350) (2,450) Purchase of banking premises and equipment, net (190) (238) (130) ----------------------------------- Net cash used by investing activities (19,930) (40,128) (43,802) ----------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits (25,260) 28,828 (8,124) Proceeds from FHLB advances 68,000 152,000 124,000 Repayments of FHLB advances (25,000) (142,000) (70,000) Proceeds from exercise of stock options 492 -- 22 Purchase of treasury stock (1,924) (2,187) (3,043) Payments of dividends (669) (697) (689) Purchase of stock by ESOP (199) -- -- Other equity transactions 72 -- -- ----------------------------------- Net cash provided by financing activities 15,512 35,944 42,166 ----------------------------------- Net increase (decrease) in cash and due from banks (242) (1,237) 1,624 Cash and due from banks at beginning of year 5,351 6,588 4,964 ----------------------------------- Cash and due from banks at end of year $ 5,109 $ 5,351 $ 6,588 =================================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 14,883 $ 16,937 $ 12,798 Income taxes 1,715 1,850 2,094
See accompanying notes to consolidated financial statements. 7 CENTRAL BANCORP, INC AND SUBSIDIARY Notes to Consolidated Financial Statements March 31, 2002 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, and its wholly-owned subsidiary, Central Co-operative Bank (the "Bank"). The Bank was organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock form in 1986. The primary business of the Bank is to generate funds in the form of deposits and use the funds to make mortgage loans for the construction, purchase and refinancing of residential properties, and to make loans on commercial real estate in its market area. The Bank is subject to competition from other financial institutions. The Company is subject to the regulations of, and periodic examinations by, the Federal Reserve Bank ("FRB"). The Bank is also subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The Bank's deposits are insured by the Bank Insurance Fund of the FDIC for deposits up to $100,000 and the Share Insurance Fund ("SIF") for deposits in excess of $100,000. The Company conducts its business through one operating segment, the Bank. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the year. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. Certain prior year amounts have been reclassified to conform to the current year's presentation. The following is a summary of the more significant accounting policies adopted by the Bank. Cash and Due from Banks The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Such reserves are calculated based upon deposit levels and amounted to approximately $2,735, 000 at March 31, 2002. Investments Investments are classified as either held to maturity, available for sale or trading. Investments classified as trading securities are reported at fair value, with unrealized gains and losses included in earnings. Investments classified as available for sale are reported at fair value, with unrealized gains and losses reported as other comprehensive income (loss) within stockholders' equity. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Gains and losses on sales of securities are recognized when realized with the cost basis of investments sold determined on a specific-identification basis. Premiums and discounts on investment and mortgage-backed securities are amortized or accreted to interest income over the actual or expected lives of the securities using the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included in the results of operations. Loans Loans are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination costs and fees. Loans classified as held for sale are stated at the lower of aggregate cost or market value. Market value is estimated based on outstanding investor commitments or, in the absence of cash commitments, current investor yield requirements. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. No loans were classified as held for sale at March 31, 2002 and 2001. 8 Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans and amortization of net deferred loan fees or costs are discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or when a loan becomes contractually past due 90 days with respect to interest or principal. The accrual on some loans, however, may continue even though they are more than 90 days past due if management deems it appropriate, provided that the loans are well secured and in the process of collection, When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The Bank records interest income on non-accrual and impaired loans on the cash basis of accounting. Loan origination fees, net of certain direct loan origination costs, are considered adjustments of interest-rate yield and are amortized into interest income over the loan term using the level-yield method. Loans are classified as impaired when it is probable that the Bank will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, are accounted for at the present value of the expected future cash flows discounted at the loan's effective interest rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair value of the collateral or the recorded amount of the loan. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged off when management believes that the collectibility of the loan's principal is remote. Management considers non-accrual loans, except for smaller balance, homogeneous residential mortgage loans, to be impaired. Allowance for Loan Losses The allowance for loan losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans deemed uncollectible. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's systematic periodic review of the collectibility of the loans. Primary considerations in this evaluation are prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management's estimation of future losses. The Bank evaluates specific loan status reports on certain commercial and commercial real estate loans rated "substandard" or worse. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. The remaining commercial and commercial real estate loans are provided for as part of pools of similar loans based on a combination of historical loss experience and qualitative adjustments. Smaller balance, homogeneous loans, including residential real estate loans and consumer loans, are evaluated as a group by applying estimated charge off and recovery percentages, based on historical experience and certain qualitative factors, to the current outstanding balance in each category. Based on these analyses, the resulting allowance is deemed adequate to absorb all probable credit losses in the portfolio Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of a changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Changes in estimates are provided currently in earnings. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting basis and the tax basis of the Bank's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Bank's deferred tax asset is reviewed periodically and adjustments to such asset are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. 9 Banking Premises and Equipment Banking premises and equipment are stated at cost, less allowances for depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or terms of the leases, if shorter. Goodwill Through March 31, 2002, goodwill arising from acquisitions was amortized on a straight-line basis over 15 years. As discussed below under the caption "Recent Accounting Pronouncements", amortization of goodwill is generally no longer permitted in fiscal years beginning after December 15, 2001. Pension Benefits The Bank provides pension benefits for its employees in a multi-employer pension plan through membership in the Co-operative Banks Employees Retirement Association. Pension costs are funded as they are accrued and are accounted for on a defined contribution plan basis. Stock-Based Compensation The Company follows the intrinsic value method set forth in APB Opinion No. 25 "Accounting for Stock Issued to Employees" (APB No. 25) under which there is generally no charge to earnings for stock option grants. Companies that elect to use this method are required to disclose the pro forma effect of using the fair value method of accounting for stock-based compensation that is encouraged by SFAS No. 123. (See Note 11). Earnings Per Share Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Unallocated ESOP shares are not considered outstanding in computing basic EPS. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, were exercised or converted into common stock. Recent Accounting Pronouncements During 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Accounting for Costs of a Start-Up Entity. SOP 98-5 requires organizational costs, which were being amortized, to be expensed and accounted for as a cumulative effect of a change in accounting principle. On April 1, 1999, the Bank expensed unamortized organizational costs relating to the formation of the bank holding company resulting in a charge to earnings, net of taxes, of $234,000 or $0.13 per share ($0.12 per share assuming dilution). In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No. 141, "Business Combinations" which is effective for transactions initiated after June 30, 2001. Under SFAS No. 141, all business combinations must be accounted for using the purchase method of accounting; use of the pooling-of-interests method is no longer permitted. In addition, this Statement requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" which is effective for fiscal years beginning after December 15, 2001. Under prior accounting standards, goodwill resulting from a business combination was amortized against income over its estimated life. After the effective date of SFAS No. 142, goodwill will generally no longer be amortized as an expense but instead will be reviewed and tested for impairment using a fair value methodology prescribed in this Statement. Goodwill will be tested for impairment at least annually or more frequently as a result of an event or change in circumstances (e.g. recurring operating losses by the acquired entity) that would indicate an impairment adjustment may be necessary. Based on its assessment of the current economic environment, management does not anticipate an impairment adjustment to the goodwill reflected in the accompanying consolidated balance sheet upon adoption of SFAS No. 142. The effect of adopting SFAS No. 141 and No. 142 will be that the Company will cease amortizing the goodwill balance of $2.2 million which will have the effect of eliminating goodwill amortization of $288,000 in fiscal 2003. 10 NOTE 2. INVESTMENTS (Dollars in Thousands) The amortized cost and fair value of investments securities available for sale are summarized as follows:
MARCH 31, 2002 ---------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR COST GAINS LOSSES VALUE -------- -------- -------- -------- U.S. Government and agency obligations $ 13,995 $ 73 $ (72) $ 13,996 Corporate bonds 39,012 231 (675) 38,568 Mortgage-backed securities 18,377 168 (205) 18,340 -------- -------- -------- -------- Total debt securities 71,384 472 (952) 70,904 Marketable equity securities 3,551 17 (588) 2,980 -------- -------- -------- -------- Total $ 74,935 $ 489 $ (1,540) $ 73,884 ======== ======== ======== ========
MARCH 31, 2001 ---------------------------------------------- AMORTIZED GROSS UNREALIZED FAIR COST GAINS LOSSES VALUE -------- -------- -------- -------- U.S. Government and agency obligations $18,970 $ 88 $ (7) $19,051 Corporate bonds 4,984 261 -- 5,245 Mortgage-backed securities 19,623 152 (461) 19,314 ------- ------- ------- ------- Total debt securities 43,577 501 (468) 43,610 Marketable equity securities 6,559 605 (1,386) 5,778 ------- ------- ------- ------- Total $50,136 $ 1,106 $(1,854) $49,388 ======= ======= ======= =======
The maturity distribution (based on contractual maturities) and annual yields of debt securities at March 31, 2002 are as follows:
AMORTIZED FAIR ANNUAL COST VALUE YIELD ---------- --------- ---------- Due within one year $ 259 $ 262 6.62 % Due after one year but within five years 42,532 42,196 6.54 Due after five years but within ten years 13,277 13,287 7.50 Due after ten years 15,316 15,159 6.99 ------- ------- $71,384 $70,904 6.99 ======= =======
Mortgage-backed securities are shown at their contractual maturity dates but actual maturities may differ as borrowers have the right to prepay obligations without incurring prepayment penalties. 11 Proceeds from sales of investment securities and related gains and losses for the years ended March 31, 2002, 2001, and 2000 (all classified as available for sale) were as follows: 2002 2001 2000 ---- ---- ---- Proceeds from sales $ 2,885 $ 3,955 $ 6,159 Gross gains 546 694 1,013 Gross losses 54 14 -- During the year ended March 31, 2002, the Bank recognized write-downs in certain equity securities totaling $642 as a result of declines in the fair value of such securities judged to be other than temporary. These write-downs are not included in the preceding table. A mortgage-backed security pool with an amortized cost of $3,747 and fair value of $3,686 at March 31, 2002, was pledged to provide collateral for customers and for the Bank's employee tax withholdings that are to be remitted to the federal government in excess of the $100 of withholdings insured by the FDIC. In addition, investment securities carried at $5,783 were pledged under a blanket lien to partially secure the Bank's advances from the Federal Home Loan Bank of Boston ("FHLB of Boston"). As a member of the FHLB of Boston, the Bank is required to invest in stock of the FHLB of Boston in an amount equal to 1% of its outstanding home loans or 1/20th of its outstanding advances from the FHLB of Boston, whichever is higher. If such stock is redeemed, the Bank will receive from the FHLB of Boston an amount equal to the par value of the stock. The Co-operative Central Bank Reserve Fund (the "Fund") was established for liquidity purposes and consists of deposits required of all insured co-operative banks in Massachusetts. The Fund is used by The Co-operative Central Bank to advance funds to member banks or to make other investments. NOTE 3. LOANS (In Thousands) Loans as of March 31, 2002 and 2001 are summarized below: 2002 2001 --------- --------- Real estate loans: Residential real estate $ 246,045 $ 248,459 Commercial real estate 87,013 69,949 Construction 20,998 9,152 Second mortgage and home equity lines of credit 9,154 10,977 --------- --------- Total real estate loans 363,210 338,537 --------- --------- Commercial loans 6,901 4,979 Consumer loans 1,596 2,277 --------- --------- Total loans 371,707 345,793 Less: allowance for loan losses (3,292) (3,106) --------- --------- Total loans, net $ 368,415 $ 342,687 ========= ========= At March 31, 2002 and 2001, net deferred loan (fees) and costs of ($692) and $160, respectively, were reflected as an adjustment to the appropriate loan categories. The Bank has no non-accrual loans at March 31, 2002 and 2001. During the years ended March 31, 2002 2001 and 2000, there were no impaired loans. The Bank follows the same policy for recognition of income on impaired loans as it does for all other loans. Mortgage loans serviced by the Bank for others amounted to $2,616 and $4,288 at March 31, 2002 and 2001, respectively. The Bank's lending activities are conducted principally in communities in the suburban Boston area. The Bank grants mortgage loans on residential property, commercial real estate, construction of residential homes, second mortgages, home equity and other loans. Substantially all loans granted by the Bank are secured by real estate collateral. The ability and willingness of residential mortgage borrowers to honor their repayment 12 commitments are generally impacted by the level of overall economic activity within the borrowers' geographic areas and real estate values. The ability and willingness of commercial real estate and construction loan borrowers to honor their repayment commitments are generally impacted by the health of the real estate market in the borrowers' geographic area and the general economy. The following summarizes the activity with respect to loans made to directors and officers and their related interests for the years ended March 31: 2002 2001 ----- ----- Balance at beginning of year $ 580 $ 243 New loans 434 444 New officers with loans outstanding 66 158 Repayment of principal (215) (265) ----- ----- Balance at end of year $ 865 $ 580 ===== ===== Loans included above were made in the Bank's ordinary course of business, on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unrelated persons. All loans included above are performing in accordance with the terms of the respective loan. NOTE 4. ALLOWANCE FOR LOAN LOSSES (In Thousands) A summary of changes in the allowance for loan losses follows:
YEARS ENDED MARCH 31, ----------------------------- 2002 2001 2000 ------- ------- ------- Balance at beginning of year $ 3,106 $ 2,993 $ 2,913 Provision charged to expense -- -- -- Amounts charged-off (4) (4) (9) Recoveries on accounts previously charged-off 190 117 89 ------- ------- ------- Balance at end of year $ 3,292 $ 3,106 $ 2,993 ======= ======= =======
NOTE 5. BANKING PREMISES AND EQUIPMENT (In Thousands) A summary of cost, accumulated depreciation and amortization of banking premises and equipment at March 31 follows:
ESTIMATED 2002 2001 USEFUL LIVES ------- ------- ------------ Land $ 589 $ 589 Buildings and improvements 2,339 2,304 15.50 years Furniture and fixtures 5,744 5,596 5.00 years Leasehold improvements 482 475 7.75 years ------- ------- 9,154 8,964 Less accumulated depreciation and amortization (7,318) (6,946) ------- ------- Total $ 1,836 $ 2,018 ======= =======
Depreciation and amortization for the years ended March 31, 2002, 2001 and 2000 amounted to $372, $438 and $462, respectively, and is included in occupancy and equipment expense in the accompanying consolidated statements of income. 13 A summary of minimum rentals of banking premises for future periods under non-cancelable operating leases follows: YEARS ENDING MARCH 31, 2003 $ 118 2004 118 2005 73 2006 65 2007 49 Thereafter 18 Certain leases contain renewal options the potential impact of which is not included above. Rental expense for the years ended March 31, 2002, 2001 and 2000 was $133, $125 and $123, respectively, and is included in occupancy and equipment expense in the accompanying consolidated statements of income. NOTE 6. DEPOSITS (Dollars in Thousands) Deposits at March 31 are summarized as follows: 2002 2001 -------- -------- Demand deposit accounts $ 25,370 $ 22,438 NOW accounts 36,277 33,373 Regular, Club and 90 day notice accounts 72,944 64,011 Money market deposit accounts 17,997 15,327 -------- -------- Total non certificate accounts 152,588 135,149 -------- -------- Term deposit certificates Certificates of $100 and above 27,233 34,644 Certificates less than $100 82,086 117,374 -------- -------- Total term deposit certificates 109,319 152,018 -------- -------- $261,907 $287,167 ======== ======== Contractual maturities of term deposit certificates with weighted average interest rates at March 31, 2002 are as follows: AMOUNT RATE ------ ---- Within 1 year $ 92,381 4.21% Over 1 to 3 years 15,016 4.24 Over 3 years 1,922 4.62 -------- $109,319 4.37 ======== 14 NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands) A summary of the maturity distribution of FHLB of Boston advances (based on final maturity dates) with weighted average interest rates at March 31 follows: 2002 2001 ------------------- ------------------- AMOUNT RATE AMOUNT RATE --------- -------- --------- -------- Within 1 year $ 58,600 2.61% $ 25,000 6.46% Over 1 to 5 years 21,400 4.83 12,000 6.48 Over 5 to 10 years 82,000 5.52 82,000 5.52 Over 10 years 2,000 5.49 2,000 4.49 -------- -------- $164,000 4.39 $121,000 5.84 ======== ======== At March 31, 2002, advances totaling $84,000 were callable prior to the scheduled maturity of the advances. The Bank is subject to a substantial penalty upon prepayment of FHLB of Boston advances. The FHLB of Boston is authorized to make advances to its members subject to such regulations and limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLB of Boston stock and a blanket lien on certain qualified collateral, defined principally as 90% of the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of first mortgage loans on owner-occupied residential property. The Bank's unused borrowing capacity with the FHLB of Boston was approximately $21,000 and $80,200 at March 31, 2002 and 2001, respectively. NOTE 8. INCOME TAXES (Dollars in Thousands) The components of the provision for income taxes for the years indicted are as follows: YEARS ENDED MARCH 31, ---------------------------- 2002 2001 2000 ------- ------- ------- Current Federal $ 1,930 $ 1,555 $ 1,745 State 229 52 44 ------- ------- ------- Total current provision 2,159 1,607 1,789 Deferred (prepaid) (382) 156 343 ------- ------- ------- $ 1,777 $ 1,763 $ 2,132 ======= ======= ======= The provision for income taxes for the periods presented is different from the amounts computed by applying the statutory Federal income tax rate to income before income taxes. The differences between expected tax rates and effective tax rates are as follows: YEARS ENDED MARCH 31, ------------------------- 2002 2001 2000 ------ ------- ------- Statutory Federal tax rate 34.0% 34.0% 34.0% Items affecting Federal income tax rate: Dividends received deduction (0.4) (0.6) (0.4) Goodwill amortization 2.1 2.0 1.8 State income taxes, net of Federal benefit 2.6 1.2 1.6 Other -- (0.4) 0.4 ----- ---- ---- Effective tax rate 38.3% 36.2% 37.4% ===== ==== ==== 15 The components of gross deferred tax assets and gross deferred tax liabilities that have been recognized as of March 31 are as follows: 2002 2001 ------ ------ Deferred tax assets: Allowance for loan losses $ 549 $ 548 Deferred loan origination fees 53 74 Depreciation 298 265 Post-employee retirement benefit accrual 241 227 Unrealized loss on securities 425 319 Write-down of investment securities 218 -- Other 59 74 ------ ------ Gross deferred tax asset 1,843 1,507 ------ ------ Deferred tax liabilities: Accrued dividend receivable 30 47 Deferred loan origination fees 285 437 Deferred income 239 222 ------ ------ Gross deferred tax liability 554 706 ------ ------ Net deferred tax asset $1,289 $ 801 ====== ====== Based on the Bank's historical and current pretax earnings, management believes it is more likely than not that the Bank will realize the net deferred tax asset existing at March 31, 2002. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Bank generates net taxable income. At March 31, 2002, recoverable income taxes, plus estimated taxes for fiscal 2003, exceed the amount of the net deferred tax asset. There can be no assurance, however, that the Bank will generate any earnings or any specific level of continuing earnings. The unrecaptured base year tax bad debt reserves will not be subject to recapture as long as the Bank continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continues to be subject to provision of present law that requires recapture in the case of certain excess distributions to shareholders. The tax effect of pre-1988 bad debt reserves subject to recapture in the case of certain excess distributions is approximately $1,300. In June 2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR") a Notice of Intent to Assess additional state excise taxes of $535 plus interest and penalties with respect to its tax years ended March 31, 2000 and 2001. The Bank is aware that the DOR has sent similar notices to numerous other financial institutions in Massachusetts that reported a deduction for dividends received from a REIT during this period. Assessed amounts ultimately paid, if any, would be deductible expenses for federal income tax purposes. The DOR contends that dividend distributions by the Bank's REIT to the Bank are fully taxable in Massachusetts. The Bank believes that the Massachusetts statute that provides for a dividends received deduction equal to 95% of certain dividend distributions applies to the distributions made by the Bank's REIT. Accordingly, no provision has been made in the Company's consolidated financial statements for the amounts assessed or additional amounts that might be assessed in the future. The Bank intends to vigorously appeal the assessment and to pursue all available means to defend its position. NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (In Thousands) The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unused lines of credit, unadvanced portions of commercial and construction loans, and commitments to originate loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. 16 The amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to its financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet risks as of March 31, included the following: 2002 2001 ------- ------- Unused lines of credit $11,035 $11,012 Unadvanced portions of construction loans 4,574 4,427 Unadvanced portions of commercial loans 1,574 5,651 Commitments to originate commercial mortgage loans 13,674 14,189 Commitments to originate residential mortgage loans 11,468 2,900 Commitments to originate loans, unused lines of credit and unadvanced portions of commercial and construction loans are agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. NOTE 10. STOCKHOLDERS' EQUITY (Dollars in Thousands, except per share amount) The Company and the Bank may not declare or pay cash dividends on their stock if the effect thereof would cause capital to be reduced below regulatory requirements, or if such declaration and payment would otherwise violate regulatory requirements. In October 1991, the Bank adopted a Shareholder Rights Plan. The plan entitles each shareholder to purchase the Company's stock at a discount price in the event any person or group of persons exceeds predetermined ownership limitations of the Company's outstanding common stock and, in certain circumstances, engages in specific activities deemed adverse to the interests of the Company's shareholders. This plan was due to expire in October 2001 but was renewed by the Board of Directors during fiscal 2002 and is now scheduled to expire in October 2011. . Beginning in April 1999, the Board of Directors authorized a series of four separate 5% stock repurchase programs under which the Company has acquired 365,294 shares of its stock at an average cost of $19.56 per share. The fourth repurchase program was completed in March 2002. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulations that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The minimum core (leverage) capital ratio required for banks with the highest overall rating from bank regulatory agencies is 3.00% and is 4.00%-5.00% for all others. The Bank must also have a minimum total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital, consisting of common stockholders' equity). As of March 31, 2002, the Bank met all capital adequacy requirements to which it is subject. 17 The most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum risk-weighted capital, Tier 1 capital and tangible capital ratios as set forth in the table. There are no conditions or events, since that notification, that management believes would cause a change in the Bank's categorization. No deduction was taken from capital for interest-rate risk. The Company's and the Bank's Tier 1/leverage, Tier 1 risk-based and total risk-based capital ratios together with related regulatory minimum requirements are summarized below:
TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS ------------------------- --------------------------- --------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------- --------- ------------- --------- ------------- --------- As of March 31, 2002: COMPANY (CONSOLIDATED) Total capital $ 40,303 13.06% $ 24,694 =>8.00% N/A N/A Tier 1 capital 37,011 11.99 12,347 =>4.00 N/A N/A Tier 1 leverage capital 37,011 8.09 18,304 =>4.00 N/A N/A BANK Total capital 38,134 12.35 24,700 =>8.00% $ 30,875 =>10.00% Tier 1 capital 34,842 11.28 12,350 =>4.00 18,525 =>6.00 Tier 1 leverage capital 34,842 7.61 18,304 =>4.00 22,880 =>5.00 As of March 31, 2001: COMPANY (CONSOLIDATED) Total capital 38,448 13.60 22,612 =>8.00% N/A N/A Tier 1 capital 35,342 12.50 11,306 =>4.00 N/A N/A Tier 1 leverage capital 35,342 8.06 17,539 =>4.00 N/A N/A BANK Total capital 36,362 12.83 22,665 =>8.00% 28,331 =>10.00% Tier 1 capital 33,256 11.74 11,332 =>4.00 16,999 =>6.00 Tier 1 leverage capital 33,256 7.75 17,156 =>4.00 21,445 =>5.00
NOTE 11. EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data) PENSION AND SAVINGS PLANS As a participating employer in the Co-operative Banks Employees' Retirement Association ("CBERA"), a multi-employer plan, the Bank has in effect a noncontributory defined benefit plan ("Pension Plan") and a defined contribution plan ("Savings Plan") covering substantially all eligible employees. Benefits under the Pension Plan are determined at the rate of 1% and 1.5%, respectively, of certain elements of final average pay times years of credited service and are generally provided at age 65 based on years of service and the average of the participants' three highest consecutive years of compensation from the Bank. Employee contributions are made to a Savings Plan which qualifies under section 401(k) of the Internal Revenue Code of 1986, as amended. The Bank matches 50% of an eligible deferral contribution on the first 5% of the deferral amount subject to the maximum allowable under federal regulations. Pension benefits and employer contributions to the Savings Plan become vested over six years. Expenses for the Pension Plan and the Savings Plan were $289, $269 and $237 for the years ended March 31, 2002, 2001 and 2000, respectively. Forfeitures are used to reduce expenses of the plans. 18 EMPLOYEE STOCK OWNERSHIP PLAN During fiscal 1991, the Bank established an Employee Stock Ownership Plan ("ESOP") that is authorized to purchase shares of outstanding common stock of the Company from time to time in the open market or in negotiated transactions. The ESOP is a tax-qualified defined contribution plan established for the exclusive benefit of the Bank's employees. During fiscal 2002, the Company's Board of Directors authorized the ESOP to acquire up to an additional 5% of outstanding shares of Company stock. Such purchases are to be funded by loans from the Company. During fiscal 2002, 7,222 shares were purchased under such authorization at a purchase price of $199. The ESOP is repaying its loans to the Bank and the Company with funds from the Bank's contributions to the plan and earnings from the ESOP's assets. Repayments of $129, $196 and $184 were made during fiscal 2002, 2001 and 2000, respectively. Prior to fiscal 2002, compensation expense was recognized as the shares were allocated to ESOP participants based upon the cost of the shares to the ESOP. Beginning in fiscal 2002, compensation expense was recognized as the shares were allocated to participants based upon the fair value of the shares at the time they were allocated. Consequently, changes in market value of the Company's stock have an effect on the Company's results of operations but have no effect on stockholders' equity. ESOP expense for fiscal 2002, 2001 and 2000 amounted to $305, $130 and $130, respectively. STOCK OPTION PLAN The Company has adopted two qualified Stock Option Plans for the benefit of officers and other employees under which an aggregate of 281,500 shares had been reserved for issuance. One of these plans terminated in 1997. Stock option activity is as follows for the years indicated: NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- ------------- Balance March 31, 1999 28,000 $ 16.250 Granted 32,499 20.250 Exercised (3,000) 16.250 ------- Balance March 31, 2000 57,499 18.511 Granted 32,501 16.625 ------- Balance March 31, 2001 90,000 17.830 Forfeited (799) 16.625 Exercised (29,588) 16.617 ------- Balance March 31, 2002 59,613 18.448 ======= The exercise price of an option will not be less than the fair market value of the common stock on the date of grant of the option. At March 31, 2002, 33,299 shares were reserved for issuance under the remaining plan. All stock options are fully vested and exercisable at the time of grant. The range of exercise prices and weighted average remaining contractual life of outstanding stock options at March 31, 2002 are as follows: EXERCISE NUMBER REMAINING PRICE OUTSTANDING LIFE ----- ----------- ---- $16.625 29,638 8.7 years 20.250 29,975 7.7 years ------ 59,613 ====== 19 The Company follows the intrinsic value method in accounting for stock options and, accordingly, no compensation expense has been recognized in the financial statements. Had the Company determined compensation expense based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income and EPS would have been reduced to the pro forma amounts indicated below. No options were granted during fiscal 2002 and forfeitures during the year were insignificant. Consequently, no material difference in net income occurred in fiscal 2002 as a result of the Company's use of the intrinsic value method rather than the fair value method of accounting for stock-based compensation.
2001 2000 ---- ---- NET INCOME: Income before cumulative effect of change in accounting principle, as reported $ 3,109 $ 3,567 Cumulative effect of change in accounting principle, as reported -- (234) Net income after cumulative effect of change in accounting principle, as reported 3,109 3,333 Pro forma income before cumulative effect of change in accounting principle 2,934 3,308 Cumulative effect of change in accounting principle -- (234) Pro forma net income after cumulative effect of change in accounting principle 2,934 3,074 EARNINGS PER COMMON SHARE: Before cumulative effect of change in accounting principle, as reported 1.81 1.90 Before cumulative effect of change in accounting principle, pro forma 1.71 1.76 Before cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.89 Before cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.75 After cumulative effect of change in accounting principle, as reported 1.81 1.77 After cumulative effect of change in accounting principle, pro forma 1.71 1.63 After cumulative effect of change in accounting principle -- diluted, as reported 1.81 1.77 After cumulative effect of change in accounting principle -- diluted, pro forma 1.71 1.63
The per share weighted average fair value of stock options granted during 2001 and 2000 was $5.39 and $7.98, respectively, on the date of grant. These fair values were determined using the Black Scholes option pricing model with the following weighted average assumptions: 2001 2000 ---------- ----------- Expected dividend yield 2.00 % 2.00 % Risk-free interest rate 5.20 6.00 Expected volatility 31.00 39.00 Expected life in years 6.00 6.00 20 OTHER POST-RETIREMENT BENEFITS The Bank maintains a post-retirement medical insurance plan and life insurance plan for certain individuals. The following tables summarize the funded status and the actuarial benefit obligations of these plans for fiscal 2002 and 2001.
2002 2001 ---------------------------------- LIFE MEDICAL LIFE MEDICAL ---- ------- ---- ------- Actuarial present value of benefits obligation: Retirees $(220) $(614) $(222) $(413) Fully eligible participants (12) (132) (44) (307) Other plan participants -- -- -- -- ----- ----- ----- ----- Total $(232) $(746) $(266) $(720) ===== ===== ===== ===== Change in projected benefit obligation: Accumulated benefit obligations at prior year-end $(266) $(720) $(233) $(680) Service cost less expense component -- -- -- Interest cost (16) (51) (19) (51) Actuarial gain (loss) 45 (12) (7) 2 Assumptions (5) (13) (8) (29) Benefits paid 10 50 1 38 ----- ----- ----- ----- Accumulated benefit obligations at year-end $(232) $(746) $(266) $(720) ===== ===== ===== ===== Change in plan assets: Fair value of plan assets at prior year-end $ -- $ -- $ -- $ -- Actual return on plan assets -- -- -- -- Employer contribution 10 50 1 38 Benefits paid end expenses (10) (50) (1) (38) ----- ----- ----- ----- Fair value of plan assets at current year-end $ -- $ -- $ -- $ -- ===== ===== ===== ===== Funded $(232) $(746) $(266) $(720) Unrecognized net obligation 95 273 103 297 Unrecognized prior year service -- -- -- -- Unrecognized net (loss) gain (82) 102 (48) 80 ----- ----- ----- ----- $(219) $(371) $(211) $(343) ===== ===== ===== ===== Reconciliation of (accrual) prepaid: (Accrued) prepaid pension cost at beginning of year $(211) $(343) $(186) $(305) Minus net periodic cost (18) (78) (26) (76) Plus employee contributions 10 50 1 38 ----- ----- ----- ----- (Accrued) prepaid cost at end of year $(219) $(371) $(211) $(343) ===== ===== ===== ===== Benefit obligation weighted average assumption as of fiscal year-end: Discount rate 7.00% 7.00% 7.25% 7.25% Expected return on plan assets 7.00% 7.00% 7.25% 7.25% Rate of compensation increase -- -- -- --
1 PERCENTAGE POINT INCREASE ----------------------------------------- 2002 2001 ---- ---- Impact of 1% change in health care trend rates: Effect on total service and interest cost components N/A $ (4) N/A $ (5) Effect on the post retirement benefit obligations N/A 55 N/A 63 Components of net periodic benefit obligations: Service cost $ -- $ -- $ -- $ -- Interest cost 16 51 19 51 Expected return on plan assets -- -- -- -- Amortization of prior service cost 9 25 9 25 Recognized actuarial (gain) loss (6) 2 (1) -- ------- ------- ------- ------ Net periodic benefit cost for fiscal year ending $ 19 $ 78 $ 27 $ 76 ======= ======= ======= ====== Periodic benefit cost weighted average assumptions: Discount rate 7.25% 7.25% 7.75% 7.25% Expected return on plan assets 7.25% 7.25% 7.75% 7.25% Rate of compensation increase -- -- -- --
21 For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the fiscal year ended March 31, 2001. The rate was assumed to decrease to 5.5% for the fiscal year ending March 31, 2002 and remain at that level thereafter. NOTE 12. LEGAL PROCEEDINGS The Bank from time to time is involved as plaintiff or defendant in various legal actions incident to its business. Except as described herein, none of these actions are believed to be material, either individually or collectively, to the results of operations and financial condition of the Company or any subsidiary. The Bank has been named as defendant in a civil suit filed March 28, 2002 in Middlesex Superior Court under the caption Yi v. Central Bank in which it is alleged, inter alia, that the Bank committed an unfair or deceptive trade practice by failing to pay surplus foreclosure proceeds to a junior lien holder in 1994. Plaintiff seeks damages of $160,000 plus interest of approximately $150,000 and has applied for a multiple damage award under Chapter 93A of the Massachusetts General Laws which provides for up to treble damages if a violation is found to be willful or knowing. The Bank believes that it has meritorious defenses to all such claims and intends to vigorously defend against them. NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands) Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the intangible value inherent in deposit relationships (i.e. core deposits) and banking premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair values and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. The following methods and assumptions were used by the Bank in estimating fair values of its financial instruments: CASH AND DUE FROM BANKS The carrying values reported in the balance sheet for cash and due from banks approximate their fair value because of the short maturity of these instruments. SHORT-TERM INVESTMENTS The carrying values reported in the balance sheet for short-term investments approximate fair value because of the short maturity of these investments. INVESTMENT AND MORTGAGE-BACKED SECURITIES The fair values presented for investment and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS The fair values of loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The incremental credit risk for nonperforming loans has been considered in the determination of the fair value of loans. ACCRUED INTEREST RECEIVABLE The carrying value reported in the balance sheet for accrued interest receivable approximates its fair value because of the short maturity of these accounts. STOCK IN FHLB OF BOSTON The carrying amount reported in the balance sheet for FHLB stock approximates its fair value. If redeemed, the Bank will receive an amount equal to the par value of the stock. 22 THE CO-OPERATIVE CENTRAL BANK RESERVE FUND The carrying amount reported in the balance sheet for the Co-operative Central Bank Reserve Fund approximates its fair value. DEPOSITS The fair values of deposits (excluding term deposit certificates) are, by definition, equal to the amount payable on demand at the reporting date. Fair values for term deposit certificates are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities on time deposits with similar remaining maturities. ADVANCES FROM FHLB OF BOSTON Fair values of non-callable advances from the FHLB of Boston are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated monthly maturities on FHLB advances. Fair values of callable advances from the FHLB of Boston are estimated using the prepayment fee payable to the FHLB of Boston assuming all such advances were prepaid on the reporting date. ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE AND ACCRUED INTEREST PAYABLE The carrying values reported in the balance sheet for advance payments by borrowers for taxes and insurance and accrued interest payable approximate their fair value because of the short maturity of these accounts. OFF-BALANCE SHEET INSTRUMENTS The Bank's commitments for unused lines of credit and unadvanced portions of loans are at floating rates, which approximate current market rates, and, therefore, no fair value adjustment has been made. The estimated carrying amounts and fair values of the Bank's financial instruments are as follows:
MARCH 31, 2002 MARCH 31, 2001 --------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- ASSETS Cash and due from banks $ 5,109 $ 5,109 $ 5,351 $ 5,351 Short-term investments 2,455 2,455 35,718 35,718 Investment securities 73,884 73,884 49,388 49,388 Net loans 368,415 367,893 342,687 350,028 Accrued interest receivable 2,530 2,530 2,426 2,426 Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300 6,150 6,150 The Co-operative Central Bank Reserve Fund 1,576 1,576 1,576 1,576 LIABILITIES Deposits $261,907 $262,810 $287,167 $288,297 Advances from Federal Home Loan Bank of Boston 164,000 169,896 121,000 119,965 Advance payments by borrowers for taxes and insurance 1,111 1,111 1,220 1,220 Accrued interest payable 618 618 608 608
23 NOTE 14. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands) The following are the condensed financial statements for Central Bancorp, Inc. (the "Parent Company") only: MARCH 31, ----------------- BALANCE SHEETS 2002 2001 ---------------------------------------------------------------- ASSETS Cash deposit in subsidiary bank $ 1,970 $ 2,153 Investment in subsidiary 36,785 36,129 ESOP loan 199 -- ------- ------- Total assets $38,954 $38,282 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accrued taxes and other liabilities $ -- $ 70 Total stockholders' equity 38,954 38,212 ------- ------- Total liabilities and stockholders' equity $38,954 $38,282 ======= =======
YEARS ENDED MARCH 31, ------------------------------- STATEMENTS OF INCOME 2002 2001 2000 --------------------------------------------------------------------------------------- Dividend from subsidiary $ 2,500 $ 4,000 $ 3,012 Non-interest expenses 466 266 331 ------- ------- ------- Income before income taxes 2,034 3,734 2,681 Income tax benefit (154) (87) (109) ------- ------- ------- Income before cumulative effect of change in accounting principle 2,188 3,821 2,790 Cumulative effect of change in accounting principle -- -- (234) ------- ------- ------- Income before equity in undistributed net income of subsidiary 2,188 3,821 2,556 Equity in undistributed net income of subsidiary 672 (712) 777 ------- ------- ------- Net income $ 2,860 $ 3,109 $ 3,333 ======= ======= =======
YEARS ENDED MARCH 31, ------------------------------- STATEMENTS OF CASH FLOWS 2002 2001 2000 ------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income $ 2,860 $ 3,109 $ 3,333 Adjustment to reconcile net income to net cash provided by operating activities Equity in undistributed net income of subsidiary (672) 712 (777) Decrease (increase) in other assets -- 100 (100) Increase (decrease) in accrued taxes and other liabilities (71) 70 (15) Cumulative effect of change in accounting principle -- -- 234 ------- ------- ------- Net cash provided by operating activities 2,117 3,991 2,675 ------- ------- ------- Cash flows from investing activities: ESOP loan (199) -- -- ------- ------- ------- Cash flows from financing activities: Proceeds from exercise of stock options 492 -- 22 Purchase of treasury stock (1,924) (2,187) (3,043) Cash dividends paid (669) (697) (689) ------- ------- ------- Net cash used by financing activities (2,101) (2,884) (3,710) ------- ------- ------- Net increase (decrease) in cash in subsidiary bank (183) 1,107 (1,035) Cash in subsidiary bank at beginning of year 2,153 1,046 2,081 ------- ------- ------- Cash in subsidiary bank at end of year $ 1,970 $ 2,153 $ 1,046 ======= ======= =======
24 NOTE 15. QUARTERLY RESULTS OF OPERATIONS (Unaudited) (In Thousands, Except Per Share Data) The following tables summarize the operating results on a quarterly basis for the years ended March 31, 2002 and 2001.
2002 ----------------------------------------------------- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Interest and dividend income....................... $ 7,599 $ 7,180 $ 7,052 $ 7,442 Interest expense................................... 4,364 3,820 3,344 3,332 ----------------------------------------------------- Net interest and dividend income.............. 3,235 3,360 3,708 4,110 Non-interest income................................ 409 337 244 (302) Non-interest expenses.............................. 2,811 2,806 2,467 2,380 ----------------------------------------------------- Income before income taxes.................... 833 891 1,485 1,428 Income tax......................................... 303 327 536 611 ----------------------------------------------------- Net income.................................... $ 530 $ 564 $ 949 $ 817 ===================================================== Earnings per common share-- basic.................. $ 0.32 $ 0.34 $ 0.57 $ 0.50 ===================================================== Earnings per common share-- diluted................ $ 0.32 $ 0.34 $ 0.57 $ 0.50 ===================================================== 2001 ----------------------------------------------------- FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Interest and dividend income....................... $ 7,230 $ 7,759 $ 8,122 $ 7,805 Interest expense................................... 3,793 4,297 4,472 4,440 ----------------------------------------------------- Net interest and dividend income.............. 3,437 3,462 3,650 3,365 Non-interest income................................ 338 354 444 152 Non-interest expenses.............................. 2,576 2,440 2,685 2,629 ----------------------------------------------------- Income before income taxes.................... 1,199 1,376 1,409 888 Income tax......................................... 434 499 509 321 ----------------------------------------------------- Net income.................................... $ 765 $ 877 $ 900 $ 567 ===================================================== Earnings per common share-- basic.................. $ 0.43 $ 0.51 $ 0.53 $ 0.34 ===================================================== Earnings per common share-- diluted................ $ 0.43 $ 0.51 $ 0.53 $ 0.34 =====================================================
During the quarter ended March 31, 2002, the Bank recognized write-downs of $457 for certain marketable equity securities which had experienced a decline in fair value which was judged to be other than temporary. 25 Independent Auditors' Report The Board of Directors and Stockholders Central Bancorp, Inc.: We have audited the consolidated balance sheets of Central Bancorp, Inc. and subsidiary as of March 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended March 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Bancorp, Inc. and subsidiary as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts April 25, 2002 26 * * * * * PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -------------------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K. (1) FINANCIAL STATEMENTS -------------------- For the Financial Statements filed as part of this Annual Report on Form 10-K, reference is made to "Item 8 -- Financial Statements and Supplementary Data" (2) FINANCIAL STATEMENT SCHEDULES ----------------------------- All financial statement schedules have been omitted as not applicable or not required or because they are included in the financial statements appearing at Item 8. (3) EXHIBITS REQUIRED BY PARAGRAPH (C) OF ITEM 14 --------------------------------------------- See "Item 14(c) -- Exhibits" (b) REPORTS ON FORM 8-K -- The Registrant did not file any Current Reports on ------------------- Form 8-K during the fourth quarter of the fiscal year ended March 31, 2002. (c) EXHIBITS -------- The following exhibits are filed as exhibits to this report.
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1* Articles of Organization of Central Bancorp, Inc. 3.2* Bylaws of Central Bancorp, Inc. 4.1** Shareholder Rights Agreement, dated as of October 11, 2001, by and between the Central Bancorp, Inc. and EquiServe Trust Company, as Rights Agent 10.1* Employment Agreement between the Bank and John D. Doherty, dated October 24, 1986 + 10.2* First Amendment to Employment Agreement between the Bank and John D. Doherty, dated March 31, 1992 + 10.3* Second Amendment to Employment Agreement between the Bank and John D. Doherty, dated June 8, 1995 + 10.4* Third Amendment to the Employment Agreement between the Bank and John D. Doherty, dated January 8, 1999 + 10.5* Severance Agreement between the Bank and William P. Morrissey, dated December 14, 1994 + 10.6* Severance Agreement between the Bank and David W. Kearn, dated December 14, 1994 + 10.7* Severance Agreement between the Bank and Paul S. Feeley, dated May 14, 1998 + 10.8* Amendments to Severance Agreements between the Bank and Messrs. Feeley, Kearn and Morrissey, dated January 8, 1999. + 27 10.9*** 1999 Stock Option and Incentive Plan + 10.10**** Deferred Compensation Plan for Non-Employee Directors + 10.11***** Management Incentive Plan + 10.12***** Severance Agreement between the Bank and Michael K. Devlin, dated February 25, 2002. + 21***** Subsidiaries of Registrant 23 Consent of KPMG LLP 99 Certification under Section 906 of Sarbanes-Oxley Act of 2002 ____________ + Management contract or compensatory plan required to be filed pursuant to Item 14(c). * Incorporated herein by reference to the Form 10-K for the fiscal year ended March 31, 1999, filed with the SEC on June 28, 1999. ** Incorporated by reference to the Form 8-A filed with the SEC on October 12, 2001. *** Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-49264) filed on November 3, 2000. **** Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-87005) filed on September 13, 1999. *****Previously filed.
28 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL BANCORP, INC. Date: March 20, 2003 By:/s/ John D. Doherty ---------------------------------------------- John D. Doherty President and Chief Executive Officer Duly Authorized Representative CERTIFICATION I, John D. Doherty, President and Chief Executive Officer of Central Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A of Central Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: March 20, 2003 /s/ John D. Doherty ---------------------------------------------- John D. Doherty President and Chief Executive Officer CERTIFICATION I, Michael K. Devlin, Senior Vice President, Treasurer and Chief Financial Officer of Central Bancorp, Inc., certify that: 1. I have reviewed this annual report on Form 10-K/A of Central Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: March 20, 2003 /s/ Michael K. Devlin ------------------------------------------ Michael K. Devlin Senior Vice President, Treasurer and Chief Financial Officer