-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLY9KoUpu0l0TulRIVSPXasbMAObZoDzWtzMrKrW+zoUKKF+ZU311mPt/Vz83iAG 1XXGD2+49iv3e5EmXfX4Yg== 0000909654-04-002140.txt : 20040813 0000909654-04-002140.hdr.sgml : 20040813 20040813150246 ACCESSION NUMBER: 0000909654-04-002140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL BANCORP INC /MA/ CENTRAL INDEX KEY: 0001076394 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 043447594 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25251 FILM NUMBER: 04973790 BUSINESS ADDRESS: STREET 1: 399 HIGHLAND AVENUE CITY: SOMERVILLE STATE: MA ZIP: 02144 BUSINESS PHONE: 6176284000 MAIL ADDRESS: STREET 1: 399 HIGHLAND AVENUE CITY: SOMERVILLE STATE: MA ZIP: 02144 10-Q 1 cent10qaugust.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission file number: 0-25251 ------- CENTRAL BANCORP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) MASSACHUSETTS 04-3447594 - ------------------------------------------------ -------------------- (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) 399 HIGHLAND AVENUE SOMERVILLE, MASSACHUSETTS 02144 - ------------------------------------------- -------------------- (Address of Principal Executive Offices) (Zip Code) (617) 628-4000 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) N/A - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------- ---------- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------------- ---------- Common Stock, $1.00 par value 1,665,732 ----------------------------- ------------------------------ Class Outstanding at August 13, 2004 CENTRAL BANCORP, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition at June 30, 2004 and 1 March 31, 2004 Consolidated Statements of Income for the three months ended 2 June 30, 2004 and 2003 Consolidated Statements of Changes in Stockholders' Equity for the three 3 months ended June 30, 2004 and 2003 Consolidated Statements of Cash Flows for the three months ended 4 June 30, 2004 and 2003 Notes to Unaudited Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results 8 of Operations Liquidity and Capital Resources 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 Item 4. Controls and Procedures 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES
Item 1. Financial Statements CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited)
June 30, March 31, (Dollars in Thousands) 2004 2004 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 6,153 $ 7,113 Short-term investments 23,856 27,224 --------- -------- Cash and cash equivalents 30,009 34,337 --------- -------- Certificate of deposit 1,217 1,211 Investment securities available for sale (amortized cost of $105,019 at June 30, 2004 and $80,201 at March 31, 2004) 106,700 83,771 Stock in Federal Home Loan Bank of Boston, at cost 8,300 8,300 The Co-operative Central Bank Reserve Fund 1,576 1,576 --------- -------- Total investments 116,576 93,647 --------- -------- Loans held for sale 925 799 Loans (Note 2) 354,868 356,625 Less allowance for loan losses 3,599 3,537 --------- -------- Net loans 351,269 353,088 --------- -------- Accrued interest receivable 2,108 2,203 Banking premises and equipment, net 2,146 2,113 Deferred tax asset, net 920 243 Goodwill, net 2,232 2,232 Other assets 932 1,024 --------- -------- Total assets $ 508,334 $490,897 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 3) $ 314,167 $295,920 Short-term borrowings 928 845 Federal Home Loan Bank advances 138,100 141,100 ESOP Loan 3,214 3,311 Advance payments by borrowers for taxes and insurance 1,095 1,182 Accrued expenses and other liabilities 8,196 5,085 --------- -------- Total liabilities 465,700 447,443 --------- -------- Commitments and Contingencies (Note 5) Stockholders' equity (Note 6): Preferred stock $1.00 par value; authorized 5,000,000 shares; none issued or outstanding -- -- Common stock $1.00 par value; authorized 15,000,000 shares; 2,027,727 shares issued at June 30, 2004 and March 31, 2004 2,030 2,030 Additional paid-in capital 12,947 12,920 Retained income 37,123 36,855 Treasury stock (365,294 shares at June 30, 2004 and March 31, 2004), at cost (7,312) (7,311) Accumulated other comprehensive income (Note 4) 1,082 2,293 Unearned compensation - ESOP (3,236) (3,333) --------- -------- Total stockholders' equity 42,634 43,454 --------- -------- Total liabilities and stockholders' equity $ 508,334 $490,897 ========= ========
See accompanying notes to unaudited consolidated financial statements. 1 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income (In Thousands, Except Per Share Data) (Unaudited)
Three Months Ended June 30, ------------------------------ 2004 2003 --------- ---------- Interest and dividend income: Mortgage loans $ 5,383 6,039 Other loans 79 126 Short-term investments 64 18 Investments 1,088 840 ---------- --------- Total interest and dividend income 6,614 7,023 ---------- --------- Interest expense: Deposits 1,150 1,157 Advances from Federal Home Loan Bank of Boston 1,718 1,756 Other borrowings 39 1 ---------- --------- Total interest expense 2,907 2,914 ---------- --------- Net interest and dividend income 3,707 4,109 Provision for loan losses 50 50 ---------- --------- Net interest and dividend income after provision for loan losses 3,657 4,059 ---------- --------- Non-interest income: Deposit service charges 145 161 Net gains (losses) from sales of investment securities 134 (5) Gain on sales of loans 63 141 Other income 106 117 ---------- --------- Total non-interest income 448 414 ---------- --------- Non-interest expenses: Salaries and employee benefits 1,903 1,800 Occupancy and equipment 322 270 Data processing service fees 280 281 Professional fees 268 130 Marketing 138 121 Other expenses 483 401 ---------- --------- Total non-interest expenses 3,394 3,003 ---------- --------- Income before income taxes 711 1,470 Provision for income taxes (Note 5) 257 182 ---------- --------- Net income $ 454 $ 1,288 ========== ========= Earnings per common share - basic (Note 7) $ 0.29 $ 0.83 ========== ========= Earnings per common share - diluted (Note 7) $ 0.29 $ 0.83 ========== ========= Weighted average common shares outstanding - basic 1,559 1,546 Weighted average common and equivalent shares outstanding - diluted 1,573 1,559
See accompanying notes to unaudited consolidated financial statements. 2 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Accumulated Additional Other Common Paid-In Retained Treasury Comprehensive (In Thousands) Stock Capital Income Stock Income - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30, 2004 - -------------------------------- Balance at March 31, 2004 $ 2,030 $ 12,920 $ 36,855 $ (7,311) $ 2,293 Net income -- -- 454 -- -- Other comprehensive income net of tax: Unrealized loss on securities, net of reclassification adjustment -- -- -- -- (1,211) Comprehensive income (loss) Director deferred compensation transactions -- 12 -- (1) -- Dividends paid ($.12 per share) -- -- (186) -- -- Amortization of unearned compensation - ESOP -- 15 -- -- -- --------- ----------- ----------- ---------- ----------- Balance at June 30, 2004 $ 2,030 $ 12,947 $ 37,123 $ (7,312) $ 1,082 ========= =========== =========== ========== =========== Three Months Ended June 30, 2003 - -------------------------------- Balance at March 31, 2003 $ 2,028 $ 12,751 $ 34,601 $ (7,249) $ 1,002 Net income -- -- 1,288 -- -- Other comprehensive income net of tax: Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 1,005 Comprehensive income Proceeds from exercise of stock options -- 13 -- -- -- Tax benefit of stock options -- 4 -- -- -- Director deferred compensation transactions -- 23 -- -- -- Dividends paid ($.12 per share) -- -- (126) -- -- Amortization of unearned compensation - ESOP -- 14 -- -- -- --------- ----------- ----------- ---------- ----------- Balance at June 30, 2003 $ 2,028 $ 12,805 $ 35,763 $ (7,249) $ 2,007 ========= =========== =========== =========== =========== Unearned Total Compensation Stockholders' ESOP Equity --------------------------------- Three Months Ended June 30, 2004 - -------------------------------- Balance at March 31, 2004 $ (3,333) $ 43,454 Net income -- 454 Other comprehensive income net of tax: Unrealized loss on securities, net of reclassification adjustment -- (1,211) ----------- Comprehensive income (loss) (757) ----------- Director deferred compensation transactions -- 11 Dividends paid ($.12 per share) -- (186) Amortization of unearned compensation - ESOP 97 112 ---------- ----------- $ (3,236) $ 42,634 Balance at June 30, 2004 ========== =========== Three Months Ended June 30, 2003 - -------------------------------- Balance at March 31, 2003 $ (3,690) $ 39,443 Net income -- 1,288 Other comprehensive income net of tax: Unrealized gain on securities, net of reclassification adjustment -- 1,005 ----------- Comprehensive income 2,293 ----------- Proceeds from exercise of stock options -- 13 Tax benefit of stock options -- 4 Director deferred compensation transactions -- 23 Dividends paid ($.12 per share) -- (126) Amortization of unearned compensation - ESOP 97 111 ---------- ----------- Balance at June 30, 2003 $ (3,593) $ 41,761 ========== ===========
See accompanying notes to unaudited consolidated financial statements. 3 CENTRAL BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30, ---------------------------------- (In thousands) 2004 2003 - --------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 454 $ 1,288 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 92 79 Amortization of premiums 51 65 Provision for loan losses 50 50 Stock-based compensation 112 111 Net (gains) losses from sales of investment securities (134) 5 Gain on sales of loans held for sale (63) (141) Originations of loans held for sale (5,818) (10,984) Proceeds from sale of loans originated for sale 5,755 6,721 Decrease in accrued interest receivable 95 16 Decrease (increase) in other assets, net 87 (2,028) Decrease in advance payments by borrowers for taxes and insurance (87) (61) Increase in accrued expenses and other liabilities, net 140 40 ----------- ----------- Net cash provided by (used in) operating activities 734 (4,839) ----------- ----------- Cash flows from investing activities: Net decrease in loans 1,769 16,939 Principal payments on mortgage-backed securities 1,516 1,365 Proceeds from sales of investment securities 593 482 Purchases of investment securities (26,844) -- Increase in due to brokers 2,971 -- Purchase of banking premises and equipment (125) (61) ------------ ----------- Net cash provided by (used in) investing activities (20,120) 18,725 ----------- ----------- Cash flows from financing activities: Increase (decrease) in deposits 18,247 (1,104) Repayment of advances from FHLB of Boston (3,000) -- Increase (decrease) in short-term borrowings 83 (176) Repayment of ESOP loan (97) -- Proceeds from exercise of stock options -- 13 Dividends paid, net (186) (126) Net directors deferred compensation 11 23 ----------- ----------- Net cash provided by (used in) financing activities 15,058 (1,370) ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,328) 12,516 Cash and cash equivalents at beginning of year 34,337 11,222 ----------- ----------- Cash and cash equivalents at end of period $ 30,009 $ 23,738 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,901 $ 2,919 Income taxes $ 25 $ 546
See accompanying notes to unaudited consolidated financial statements. 4 CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements June 30, 2004 (1) BASIS OF PRESENTATION The unaudited consolidated financial statements of Central Bancorp, Inc. and its wholly-owned subsidiary Central Co-operative Bank (collectively referred to as "the Company") presented herein should be read in conjunction with the consolidated financial statements of the Company as of and for the year ended March 31, 2004, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year. The Company's significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in its Form 10-K for the year ended March 31, 2004. For interim reporting purposes, the Company follows the same significant accounting policies. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. Such reclassifications have no effect on previously reported net income. (2) LOANS Loans, excluding loans held for sale, as of June 30, 2004 and March 31, 2004 are summarized below (in thousands):
June 30, March 31, 2004 2004 ------------- -------------- Real estate loans: Residential real estate $ 162,853 171,682 Commercial real estate 159,510 146,107 Construction 18,178 25,112 Home equity lines of credit 8,801 9,397 ---------- ---------- Total real estate loans 349,342 352,298 ---------- ---------- Commercial loans 4,500 3,198 Consumer loans 1,026 1,129 ---------- ---------- Total loans 354,868 356,625 Less: allowance for loan losses (3,599) (3,537) ---------- ---------- Total loans, net $ 351,269 $ 353,088 ========== ==========
There were no non-accrual loans at June 30, 2004 and March 31, 2004. 5 CENTRAL BANCORP, INC. AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements June 30, 2004 (3) DEPOSITS Deposits at June 30, 2004 and March 31, 2004 are summarized as follows (in thousands):
June 30, March 31, 2004 2004 -------------- ----------- Demand deposit accounts $ 31,027 $ 27,881 NOW accounts 35,876 37,106 Passbook and other savings accounts 74,840 73,737 Money market deposit accounts 62,732 56,084 ----------- ----------- Total non certificate accounts 204,475 194,808 ----------- ----------- Term deposit certificates Certificates of $100 and above 31,098 27,607 Certificates less than $100 78,594 73,505 ----------- ------------ Total term deposit certificates 109,692 101,112 ----------- ----------- Total deposits $ 314,167 $ 295,920 =========== ===========
(4) OTHER COMPREHENSIVE INCOME (LOSS) The Company has established standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by, and distributions to, shareholders. Net income is a component of comprehensive income, with all other components referred to, in the aggregate, as other comprehensive income. The Company's other comprehensive income (loss) and related tax effect for the three months ended June 30, 2004 and 2003 are as follows (in thousands):
For the Three Months Ended June 30, 2004 ------------------------------------ Before- Tax Tax After-Tax Amount Effect Amount ------- ------ --------- Unrealized gains on securities: Unrealized net holding losses during period $(1,755) $ 632 $(1,123) Add: reclassification adjustment for net gains included in net income 134 46 88 ------- ------- ------- Other comprehensive loss $(1,889) $ 678 $(1,211) ======= ======= =======
6 CENTRAL BANCORP, INC. AND SUBSIDIARY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 (4) OTHER COMPREHENSIVE INCOME (LOSS) (CONTINUED)
For the Three Months Ended June 30, 2003 ------------------------------------ Before- Tax Tax After-Tax Amount Effect Amount ------- ------ --------- Unrealized gains on securities: Unrealized net holding gains during period $ 1,623 $ 621 $ 1,002 Add: reclassification adjustment for net losses included in net income 5 2 3 ------- ------- ------- Other comprehensive income $ 1,628 $ 623 $ 1,005 ======= ======= =======
(5) CONTINGENCIES LEGAL PROCEEDINGS The Company from time to time is involved as plaintiff or defendant in various legal actions incident to its business. None of these actions are believed to be material, either individually or collectively, to the results of operations and financial condition of the Company. TAX SETTLEMENT During 2003, the Massachusetts Department of Revenue ("DOR") issued notices of intent to assess additional state excise taxes to numerous financial institutions in Massachusetts that had received dividends from a real estate investment trust (REIT) subsidiary. The DOR contended that dividends received by the banks from such subsidiaries were fully taxable in Massachusetts. In June 2003, a settlement of this matter was reached between the DOR and the majority of affected financial institutions. The settlement provided that 50% of all dividends received from REIT subsidiaries from 1999 through 2002 were subject to state taxation. Interest on such additional taxes was also assessed. Payment of such taxes and interest totaling $431,000 was made in June 2003. As a result of this settlement, the Company recognized a recovery of $374,000 in income taxes, which increased net income by the same amount in the quarter ended June 30, 2003. (6) SUBSEQUENT EVENT On July 8, 2004, the Board of Directors voted the payment of a quarterly cash dividend of $0.12 per share. The dividend is payable on August 13, 2004 to stockholders of record on July 30, 2004. (7) EARNINGS PER SHARE (EPS) Unallocated ESOP shares are not treated as being outstanding in the computation of either basic or diluted EPS. At June 30, 2004 and March 31, 2004, there were approximately 104,000 and 107,000 unallocated ESOP shares, respectively. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words or phrases "will likely result," "are expected to." "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including changes in regional and national economic conditions, unfavorable judicial decisions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. CRITICAL ACCOUNTING POLICIES Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers the allowance for loan losses to be its critical accounting policy. There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, delinquency trends, nonperforming loans trends, charge-off experience and other asset quality factors. The Company evaluates specific loan status reports on certain commercial and commercial real estate loans rated "substandard" or worse in excess of a specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category. Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND MARCH 31, 2004 Total assets increased by $17.4 million from $490.9 million at March 31, 2004 to $508.3 million at June 30, 2004. During the quarter ended June 30, 2004, loans (excluding loans held for sale) decreased by $1.8 million due primarily to $8.8 million decrease in residential mortgage loans and a $6.9 million decrease in construction loans, partially offset by a $13.4 million increase in commercial real estate loans. During the current quarter, prepayments of residential mortgage loans were significant amounting to $18.8 million. Management regularly assesses the desirability of holding newly originated long-term, fixed-rate residential mortgage loans in portfolio or selling such loans in the secondary market. A number of factors are evaluated to determine whether or not to hold such loans in portfolio including, current and projected liquidity, current and projected interest rates, projected growth in other interest-earning assets and the current and projected interest rate risk profile. Based on its consideration of these factors, management determined that fixed-rate residential mortgage loans originated during 8 the current quarter should be sold in the secondary market. This decision contributed to the aforementioned decrease in residential mortgage loans and a $22.9 million increase in investments during the quarter ended June 30, 2004. The Company experienced growth of $9.7 million in core deposits and $8.6 million in term deposits resulting in an increase in total deposits of $18.3 million. The growth in core deposits was principally related to the increase of $6.6 million in money market deposit accounts. Because of the continuation of the low interest rates for deposits in recent years and the tiered pricing used with this type of account, money market accounts have attracted large average balances. The growth in core deposits was also aided by growth in most other types of accounts. The Company began a major marketing initiative in March 2004 to promote a new free checking account product which contributed to this growth. During the current quarter, the Company promoted a 15-month certificate of deposit which resulted in new funds of approximately $12.0 million as of June 30, 2004. Exclusive of this special promotion, the Company continued to experience a decline in certificates of deposit due primarily to the current low rate environment. The decrease in stockholders' equity of $820 thousand to $42.6 million at June 30, 2004 resulted primarily from net income of $454 thousand offset by a net decrease of $1.2 million in the unrealized gain on investment securities. This decrease is due to the increase in longer term rates which occurred subsequent to March 31, 2004. COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2004 AND 2003 Net income decreased by $834 thousand to $454 thousand for the quarter ended June 30, 2004, compared to the same quarter in the prior year. Included in net income in the prior year quarter, was a recovery of income taxes of $374,000 resulting from the settlement of the REIT tax dispute among Massachusetts banks and the Massachusetts Department of Revenue (DOR). Exclusive of this item, net income for the quarter ended June 30, 2004 decreased $460 thousand, or 50.3%, compared to the corresponding quarter in the prior year. This decline was primarily attributable to the reduction in net interest income and margin in the current quarter. The Company's net interest margin decreased 47 basis points from 3.57% in the prior year quarter to 3.10% in the current quarter. The unfavorable trend in the net interest margin is primarily reflective of the limitations the Company has in reducing its overall cost of funds. This limitation is due to two factors. First, the Company's utilization of long-term FHLB advances, which represented 33.8% of interest-bearing liabilities in the current quarter, has provided for limited repricing opportunities during the period of declining rates. These advances can not be prepaid without a substantial penalty, which management has elected not to pay. Second, the ability to reduce deposit rates continues to be limited after the past several years of rate reductions as well as competitive market factors. The reduction in the net interest margin is also partially attributable to the shift in the mix of interest-earning assets from loans to short-term investments and investment securities. During the current quarter, loans represented 74.6% of the average balance of total interest-earning assets compared to 84.0% in the prior year quarter. This shift to shorter-term, lower yielding assets results from the Company's decision to sell most long-term fixed-rate residential mortgages loans originated during the past two years due to the historically low rates which existed during much of this period. Interest Income. Interest income for the quarter ended June 30, 2004 was $6.6 million compared to $7.0 million in the prior year quarter. This decrease occurred due to the continuing decline in interest rates experienced over the past year, which has caused an unprecedented level of loan refinancing and loan modification activity. As a result, the yield on interest-earning assets decreased from 6.11% in the quarter ended June 30, 2003 to 5.54% in the current quarter. This decrease was partially offset by an increase in average interest-earning assets of $17.5 million in the current year period. 9 Interest Expense. Interest expense for the quarter ended June 30, 2004 was unchanged at $2.9 million compared to the quarter ended June 30, 2003. A decrease of 13 basis points in the cost of funds from 2.92% in the quarter ended June 30, 2003 to 2.79% in the quarter ended June 30, 2004 was offset by an increase in average interest-bearing liabilities of $17.7 million in the current year period. The factors contributing to the modest decrease in the rate paid on interest-bearing liabilities were set forth on the prior page. The following table presents average balances and average rates earned/paid by the Company for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003:
Three Months Ended June 30, ------------------------------------------------------------------------------- 2004 2003 ----------------------------------- ------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ---------- ---------- --------- ------- -------- -------- (Dollars in thousands) Interest-earning assets: Mortgage loans $ 351,421 $5,383 6.13% $ 378,812 $ 6,039 6.38% Other loans 4,949 79 6.39 7,699 126 6.55 Investment securities 94,092 1,088 4.63 68,601 840 4.90 Short-term investments 27,217 64 0.94 5,026 18 1.43 ---------- ------ ---------- -------- Total interest-earning assets 477,679 6,614 5.54 460,138 7,023 6.11 ---------- ------ ---------- -------- Allowance for loan losses (3,557) (3,301) Noninterest-earning assets 19,000 18,791 ---------- ---------- Total assets $ 493,122 $ 475,628 ========== ========== Interest-bearing liabilities: Deposits $ 272,264 1,150 1.69 $ 254,835 1,157 1.82 Advances from FHLB of Boston 141,067 1,718 4.87 144,400 1,756 4.87 Other borrowings 3,955 39 3.94 392 1 1.02 ---------- ------ ---------- -------- Total interest-bearing liabilities 417,286 2,907 2.79 399,627 2,914 2.92 ------ -------- Noninterest-bearing liabilities 32,803 35,399 ---------- ---------- Total liabilities 450,089 435,026 Stockholders' equity 43,033 40,602 ---------- ---------- Total liabilities and stockholders' equity $ 493,122 $ 475,628 ========== ========== Net interest and dividend income $3,707 $ 4,109 ====== ======== Net interest spread 2.75% 3.19% ==== ==== Net interest margin 3.10% 3.57% ==== ====
Provisions for Loan Losses. The Company provides for loan losses in order to maintain the allowance for loan losses at a level that management estimates is adequate to absorb probable losses based on an evaluation of known and inherent risks in the portfolio. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of underlying collateral, prevailing economic conditions, the nature and volume of the loan portfolio and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and ultimate losses may vary from such estimates. Management assesses the allowance for loan losses on a quarterly basis and provides for loan losses monthly in order to maintain the adequacy of the allowance. During the quarter ended June 30, 2004 and 2003, the Company provided $50 thousand for loan losses. The Company's asset quality, as measured principally by delinquency rates, charge-offs and loan classifications, continues to be outstanding. 10 Non-interest Income. Total non-interest income was $448 thousand for the quarter ended June 30, 2004 compared to $414 thousand in the same period of 2003. The primary reason for the $34 thousand increase in the current year was the gain on sales of securities which amounted to $134 thousand. This additional non-interest income was partially offset by a decline in loan sale gains of $78 thousand in the current quarter. Overall, residential loan origination activity has declined in the current quarter compared to the same quarter last year, especially fixed rate loan originations, resulting in fewer loans being sold. Non-interest Expenses. Non-interest expenses increased $391 thousand, or 13.0%, during the quarter ended June 30, 2004 as compared to the same quarter in 2003 due principally to increases in professional fees ($138 thousand), salaries and employee benefits ($103 thousand) and other non-interest expenses ($82 thousand). The increase in salaries and employee benefits of $103 thousand, or 5.7%, during the quarter ended June 30, 2004, was due to overall salary increases averaging 3.5%, increases in staffing, as well as increases in pension and health care costs. Professional fees increased $138 thousand during the current quarter due to the recognition of a partial reimbursement of legal defense costs from the Company's insurance carrier in the prior year quarter, which reduced expense in that period by $145 thousand. The legal defense costs were incurred in connection with shareholder litigation, which was settled in August 2003. Other non-interest expenses increased $82 thousand in the current quarter due principally to increases in various insurance costs as well as smaller increases in several categories of expense. Income Taxes. The effective tax rates for the quarters ended June 30, 2004 and 2003 were 36.1% and 12.4%, respectively. As previously noted, the Company recovered $374,000 in taxes during the prior year as a result of the settlement of the REIT tax dispute with the DOR. Exclusive of this item, the effective tax rate for the quarter ended June 30, 2003 would have been 37.8%. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are customer deposits, short-term investments, loan repayments, advances from the Federal Home Loan Bank (FHLB) of Boston and funds from operations. The Bank is a voluntary member of the FHLB of Boston and, as such, is entitled to borrow up to the value of its qualified collateral that has not been pledged to others. Qualified collateral generally consists of residential first mortgage loans, U. S. Government and agencies securities, mortgage-backed securities and funds on deposit at the FHLB of Boston. At June 30, 2004, the Company had approximately $29.8 million in unused borrowing capacity at the FHLB of Boston. At June 30, 2004, the Company had commitments to originate loans, unused outstanding lines of credit and undisbursed proceeds of loans totaling $52.8 million. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. The Company's and the Bank's capital ratios at June 30, 2004 were as follows: Company Bank ------- ---- Tier 1 Capital (to average assets) 8.01% 7.73% Tier 1 Capital (to risk-weighted assets) 11.25 10.85 Total Capital (to risk-weighted assets) 12.30 11.90 These ratios placed the Company in excess of regulatory standards and the Bank in the "well capitalized" category as set forth by the FDIC. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings are largely dependent on its net interest income, which is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. The Company seeks to reduce its exposure to changes in interest rate, or market risk, through active monitoring and management of its interest-rate risk exposure. The policies and procedures for managing both on- and off-balance sheet activities are established by the Bank's asset/liability management committee ("ALCO"). The Board of Directors reviews and approves the ALCO policy annually and monitors related activities on an ongoing basis. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, borrowing and deposit taking activities. The main objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income and preserve capital, while adjusting the asset/liability structure to control interest-rate risk. However, a sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company quantifies its interest-rate risk exposure using a sophisticated simulation model. Simulation analysis is used to measure the exposure of net interest income to changes in interest rates over a specific time horizon. Simulation analysis involves projecting future interest income and expense under various rate scenarios. The simulation is based on both actual and forecasted cash flows and assumptions of management about the future changes in interest rates and levels of activity (loan originations, loan prepayments, deposit flows, etc). The assumptions are inherently uncertain and, therefore, actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and strategies. The net interest income projection resulting from use of actual and forecasted cash flows and management's assumptions is compared to net interest income projections based on an immediate shift of 300 basis points upward and 75 basis points downward. Internal guidelines on interest rate risk state that for every 100 basis points immediate shift in interest rates, estimated net interest income over the next twelve months should decline by no more than 5%. The following table indicates the estimated exposure, as a percentage of estimated net interest income, for the twelve month period following the date indicated assuming an immediate shift in interest rates as set forth below (dollars in thousands):
June 30, March 31, 2004 2004 -------------------- --------------------- Amount % Change Amount % Change ------ -------- ------ -------- 300 basis point increase in rates......... $(1,976) (12.3)% $ (1,236) (8.1)% 75 basis point decrease in rates........... (60) (0.4) (315) (2.1)
ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. 12 In addition, there have been no changes in the Company's internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company's last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32 Section 1350 Certification (b) Reports on Form 8-K DATE OF REPORT ITEM(S) REPORTED FINANCIAL STATEMENTS FILED -------------- ---------------- -------------------------- April 8, 2004 7,10 N/A April 30, 2004 7,12 N/A 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL BANCORP, INC. --------------------- Registrant August 13, 2004 /s/ John D. Doherty ---------------------- ------------------------------------- Date John D. Doherty Chairman, President and Chief Executive Officer August 13, 2004 /s/ Michael K. Devlin ------------------ -------------------------------------- Date Michael K. Devlin Senior Vice President, Treasurer and Chief Financial Officer EX-31 2 central10qauguste31-1.txt Exhibit 31.1 Certification I, John D. Doherty, Chairman, President and Chief Executive Officer of Central Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Bancorp, Inc.; 2. Based on my knowledge, this quarterly 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ John D. Doherty ------------------------------------------ John D. Doherty Chairman, President and Chief Executive Officer EX-31 3 central10qauguste31-2.txt Exhibit 31.2 Certification I, Michael K. Devlin, Senior Vice President, Treasurer and Chief Financial Officer of Central Bancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Central Bancorp, Inc.; 2. Based on my knowledge, this quarterly 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 /s/ Michael K. Devlin ---------------------------------------------- Michael K. Devlin Senior Vice President, Treasurer and Chief Financial Officer EX-32 4 central10qauguste32.txt Exhibit 32 CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003 To my knowledge, this Report on Form 10-Q for the three months ended June 30, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of Central Bancorp, Inc. By: /s/ John D. Doherty -------------------------------------------------- John D. Doherty Chairman, President and Chief Executive Officer By: /s/ Michael K. Devlin -------------------------------------------------- Michael K. Devlin Senior Vice President, Treasurer and Chief Financial Officer Date: August 13, 2004 --------------- -----END PRIVACY-ENHANCED MESSAGE-----