-----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, LPHeLPYqDW0aRnL82q97so+PJUvNkIOd2rf+0aAbZAmIh6Zf9PtPLVH+32lnoryq Vky7xK+weEHmAVDAaARi8g== /in/edgar/work/20000628/0000928385-00-001816/0000928385-00-001816.txt : 20000920 0000928385-00-001816.hdr.sgml : 20000920 ACCESSION NUMBER: 0000928385-00-001816 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL BANCORP INC /MA/ CENTRAL INDEX KEY: 0001076394 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 043447594 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25251 FILM NUMBER: 663126 BUSINESS ADDRESS: STREET 1: 399 HIGHLAND AVENUE CITY: SOMERVILLE STATE: MA ZIP: 01144 BUSINESS PHONE: 6176284000 MAIL ADDRESS: STREET 1: 399 HIGHLAND AVENUE CITY: SOMERVILLE STATE: MA ZIP: 01144 10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K 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, 2000 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 office) (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) 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 $24,502,067 based on the closing sales price of the registrant's common stock as quoted on the Nasdaq National Market System which on June 20, 2000 was $16.75 per share. As of June 20, 2000, there were issued and outstanding 1,776,867 shares of the registrant's common stock, par value $1.00 per share (of which 314,057 shares were held by affiliates). DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended March 31, 2000 (the "Annual Report to Stockholders") are incorporated by reference into Parts I and II of this Form 10-K. 2. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part III of this Form 10-K. PART I Item. Business - --------------- General The Company. Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, was organized by Central Co-operative Bank (the "Bank") to be a bank holding company. The Company was organized at the direction of the Bank on September 30, 1998, to acquire all of the capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding company form of ownership (the "Reorganization"), which was completed on January 8, 1999. The Company's common stock, par value $1.00 per share (the "Common Stock") became registered under the Securities Exchange Act of 1934 on January 8, 1999. The Company qualifies under Section 38B of Chapter 63 of the Massachusetts General Laws as a Massachusetts security corporation. The Company has no significant assets other than the Common Stock of the Bank and various other liquid assets which it invests in the ordinary course of business. For that reason, substantially all of the discussion in this Form 10-K relates to the operations of the Bank and its subsidiaries. The executive offices of the Company are located at 399 Highland Avenue, Somerville, Massachusetts 02144. The telephone number is (617) 628-4000. The Bank. Central Co-operative Bank ("Central" or the "Bank") was organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock form in 1986. The primary business of the Bank is to acquire funds in the form of deposits and use the funds to make mortgage loans for the construction, purchase and refinancing of residential properties, and to a lesser extent, to make loans on commercial real estate in its market area. The Bank also makes a limited amount of consumer loans including home improvement and secured and unsecured personal loans. In recent years, the Bank has engaged in increased commercial lending and has used excess funds to purchase investment and mortgage-backed securities. The Bank's operations are conducted through eight full service office facilities located in Somerville, Arlington, Burlington, Chestnut Hill, Malden, Melrose and Woburn, Massachusetts. The Bank's main office is located at 399 Highland Avenue, Somerville, Massachusetts and its telephone number is (617) 628-4000. The operations of the Bank and savings institutions are generally influenced by overall economic conditions, the related monetary and fiscal policies of the federal government, and the regulatory policies of financial institution regulatory authorities, including the Massachusetts Commissioner of Banks (the "Commissioner"), the Federal Reserve Board and the FDIC. The Bank monitors its exposure to earnings fluctuations resulting from market interest rate changes. At March 31, 2000, the Bank's earnings are vulnerable to increasing interest rates due to its present one year asset- liability mismatch, which resulted in an excess of maturing or repricing interest-bearing liabilities over interest-earning assets of $46.4 million, or 11.3%, of total assets at March 31, 2000. Therefore, in a rising interest rate environment, the Bank's net interest income and net income would be negatively affected as the larger amount of interest-sensitive liabilities (deposits and borrowings) would adjust more quickly to rising interest rates than the Bank's interest-sensitive assets (loans and investments). The Bank 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). Investments, which generally are easily saleable compared to individual loans, made up 19.5% of interest- earning assets at March 31, 2000 compared to 21.0% of interest-earning assets at March 31, 1999 and 22.5% of interest-earning assets at March 31, 1998. For further information regarding the Bank's asset-liability management, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Stockholders, attached hereto as Exhibit 13. 2 Financial Modernization Legislation On November 12, 1999, President Clinton signed legislation which could have a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking, securities and insurance firms and authorizes bank holding companies and national banks to engage in a variety of new financial activities. Among the new activities that will be permitted to bank holding companies are securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Federal Reserve Board, in consultation with the Secretary of the Treasury, may approve additional financial activities. The G-L-B Act, however, prohibits future acquisitions of existing unitary savings and loan holding companies, like the Company, by firms which are engaged in commercial activities and limits the permissible activities of unitary holding companies formed after May 4, 1999. The G-L-B Act imposes new requirements on financial institutions with respect to customer privacy. The G-L-B Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the G-L- B Act. The G-L-B Act directs the federal banking agencies, the National Credit Union Administration, the Secretary of the Treasury, the Securities and Exchange Commission and the Federal Trade Commission, after consultation with the National Association of Insurance Commissioners, to promulgate implementing regulations within six months of enactment. The privacy provisions will become effective in November 2000, with full compliance required by July 1, 2001. The G-L-B Act contains significant revisions to the FHLB System. The G-L-B Act imposes new capital requirements on the FHLBs and authorizes them to issue two classes of stock with differing dividend rates and redemption requirements. The G-L-B Act deletes the current requirement that the FHLBs annually contribute $300 million to pay interest on certain government obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the permissible uses of FHLB advances by community financial institutions (under $500 million in assets) to include funding loans to small businesses, small farms and small agri- businesses. The G-L-B Act makes membership in the FHLB voluntary for federal savings associations. The G-L-B Act contains a variety of other provisions including a prohibition against ATM surcharges unless the customer has first been provided notice of the imposition and amount of the fee. The G-L-B Act reduces the frequency of Community Reinvestment Act examinations for smaller institutions and imposes certain reporting requirements on depository institutions that make payments to non-governmental entities in connection with the Community Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and authorizes a federal savings association that converts to a national or state bank charter to continue to use the term "federal" in its name and to retain any interstate branches. The Company is unable to predict the impact of the G-L-B Act on its operations at this time. Although the G-L-B Act reduces the range of companies with which may acquire control of the Company, it may facilitate affiliations with companies in the financial services industry. Market Area The Bank faces strong competition from commercial banks, mortgage banking companies, diversified financial services companies and other thrift institutions. See "Business -- Competition." Although legislation and regulations have expanded the activities in which the Bank may engage, the Bank's ability to remain competitive in its industry will depend upon how successfully it can respond to the rapidly evolving competitive, regulatory, technological and demographic developments affecting its operations. Weakness in the New England real estate market caused many financial institutions in the region to experience significant losses in the early 1990s due to increases in problem real estate loans, primarily loans on commercial real estate. Such deterioration was due to a severe downturn in the New England economy which, generally beginning in fiscal 1990 and continuing through fiscal 1993, severely affected the Bank's real estate market. The weakness in the Bank's real estate market stabilized during fiscal 1994, and since that time the Bank's 3 asset quality has improved with the recovery of the local economy. Any reversal of the apparent improvement of the economy, however, could result in the Bank experiencing increases in problem assets which would likely negatively affect the Bank's results of operations. While the Bank believes it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio in the future, will not request that the Bank further increase its allowance for loan losses, thereby negatively impacting the Bank's financial condition and earnings. The Security Committee of the Board of Directors of the Bank reviews the status of problem assets on a monthly basis. Average Balance Sheet The following table shows the Bank's average balances of assets, liabilities and stockholders' equity for the periods indicated. All average balances disclosed herein are based on average daily balances.
Years Ended March 31, ----------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (In thousands) Assets: Cash and due from banks........................ $ 5,341 $ 4,861 $ 4,035 $ 3,396 $ 4,658 Short-term investments......................... 8,197 13,128 4,495 4,851 6,993 Investment securities.......................... 32,632 23,375 38,836 52,907 69,164 Mortgage-backed securities..................... 25,035 37,676 44,073 17,382 11,065 Loans.......................................... 300,089 287,513 250,329 231,006 215,765 Less allowance for loan losses............... (2,946) (2,912) (2,877) (2,922) (3,010) -------- -------- -------- -------- -------- Net loans.................................. 297,143 284,601 247,452 228,084 212,755 The Co-operative Central Bank Reserve Fund..... 1,576 1,576 1,576 1,576 1,576 Real estate acquired by foreclosure, net....... -- -- 32 870 2,058 Office properties and equipment, net........... 2,385 2,885 3,027 2,882 2,843 Other assets................................... 3,420 4,132 3,473 3,874 3,330 Goodwill, net.................................. 2,963 3,240 3,528 3,818 4,104 ------- -------- -------- -------- -------- Total assets................................ $378,692 $375,474 $350,527 $319,640 $318,546 ======== ======== ======== ======== ======== Liabilities and Stockholders' Equity: Liabilities: Deposits...................................... $257,536 $275,135 $270,650 $258,017 $262,901 Advances from FHLB of Boston.................. 80,907 59,901 42,130 25,330 21,984 Advance payments by borrowers for taxes and insurance......................... 889 1,329 837 773 784 Other liabilities............................. 1,769 1,424 1,662 2,938 1,726 -------- -------- -------- -------- -------- Total liabilities........................... 341,101 337,789 315,279 287,058 287,395 -------- -------- -------- -------- -------- Stockholders' equity: Common stock.................................. 1,967 1,966 1,965 1,965 1,937 Additional paid-in capital.................... 11,171 11,164 11,159 11,159 10,976 Retained income............................... 26,454 24,825 22,900 20,505 18,829 Treasury stock................................ (1,268) -- -- -- -- Accumulated other comprehensive income........ (176) 417 2 (153) 161 Unearned compensation - ESOP.................. (557) (687) (778) (894) (752) -------- -------- -------- -------- -------- Total stockholders' equity................ 37,591 37,685 35,248 32,582 31,151 -------- -------- -------- -------- -------- Total liabilities and stockholders' equity $378,692 $375,474 $350,527 $319,640 $318,546 ======== ======== ======== ======== ========
4 Lending Activities The Bank offers residential mortgage and home equity loans, commercial real estate loans, construction loans, commerce and industry loans, personal, home improvement, and various other types of consumer loans. Commerce and industry loans represent loans to commercial enterprises which are either unsecured or are secured by property other than real estate. For the fiscal year ended March 31, 2000, the Bank originated loans totaling $108.4 million, of which $29.9 million, or 27.6%, were fixed rate loans and $78.5 million, or 72.4%, were adjustable rate loans. Of the total loans originated during fiscal 2000, $73.8 million, or 68.2%, were residential mortgage loans and $28.9 million, or 26.6%, were commercial mortgage loans. At March 31, 2000, the Bank's residential mortgage loans providing for periodic interest rate adjustments totaled $177.8 million, or 56.4%, of the total mortgage loan portfolio. No loans were sold during fiscal 2000 and 1999 and loans amounting to $193,000 were sold during fiscal 1998, in the secondary market. Servicing of fixed-rate loans sold in the secondary market is retained by the Bank. The sale of loans in the secondary market allows the Bank to continue to make loans during periods when savings flows decline or funds are not otherwise available for lending purposes and to manage interest rate risk. The Bank's net loan portfolio increased by $39.6 million, or 14.3%, to $317.0 million at March 31, 2000 from $280.3 million at March 31, 1999. The increase was due to a slowing of pay-offs of residential mortgages as interest rates increased as well as a decision by management to increase originations of hybrid adjustable rate residential mortgages as part of the Bank's asset and liability management strategies. 5 The following table shows the composition of the Bank's loan portfolio by type of loan and the percentage each type represents of the total loan portfolio at the dates indicated.
At March 31, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ ------------------------- Amount % Amount % Amount % ------- --- ------ --- ------- ------- (Dollars in thousands) Mortgage Loans: Residential...................... $243,563 76.1% $212,638 75.8% $207,860 73.8% Commercial....................... 54,228 17.0 48,756 17.4 52,491 18.6 Construction..................... 9,765 3.0 5,269 1.9 8,256 2.9 Second mortgage and home equity.. 7,403 2.3 7,462 2.7 8,369 3.0 FHA and VA....................... 7 0.0 21 0.0 49 0.0 -------- ----- -------- ----- -------- ----- Total mortgage loans........... 314,966 98.4 274,146 97.8 277,025 98.3 -------- ----- -------- ----- -------- ----- Other Loans: Commerce and Industry(1)......... 3,349 1.1 4,391 1.6 2,530 0.9 Education........................ -- 0.0 -- 0.0 31 0.0 Secured by deposits.............. 1,023 .3 1,225 .4 1,357 0.5 Consumer......................... 38 0.0 40 0.0 48 0.0 Unsecured........................ 637 0.2 544 .2 733 0.3 -------- ----- -------- ----- -------- ----- Total other loans.............. 5,047 1.6 6,200 2.2 4,699 1.7 -------- ----- -------- ----- -------- ----- Total loans.................... 320,013 100.0% 280,346 100.0% 281,724 100.0% ===== ===== ===== Less: Allowance for possible loan losses..................... 2,993 2,913 2,886 -------- --------- -------- Loans, net..................... $317,020 $277,433 $278,838 ======== ======== ======== At March 31, -------------------------------------------------- 1997 1996 ----------------- --------------------- Amount % Amount % ----------- ----- --------- ----- (Dollars in thousands) Mortgage Loans: Residential...................... $176,317 75.1% $161,142 75.1% Commercial....................... 41,822 17.8 38,308 17.9 Construction..................... 3,095 1.3 994 0.4 Second mortgage and home equity.. 8,397 3.6 8,740 4.1 FHA and VA....................... 85 0.0 150 0.1 -------- ----- -------- ----- Total mortgage loans........... 229,716 97.8 209,334 97.6 -------- ----- -------- ----- Other Loans: Commerce and Industry(1)......... 2,431 1.0 2,735 1.3 Education........................ 28 -- 35 0.0 Secured by deposits.............. 1,063 0.5 951 0.4 Consumer......................... 579 0.2 574 0.3 Unsecured........................ 1,118 0.5 792 0.4 -------- ----- -------- ----- Total other loans.............. 5,219 2.2 5,087 2.4 -------- ----- -------- ----- Total loans.................... 234,935 100.0% 214,421 100.0% ===== ===== Less: Allowance for possible loan losses..................... 2,900 3,032 -------- -------- Loans, net..................... $232,035 $211,389 ======== ========
- ---------- (1) Represents loans to commercial enterprises which are either unsecured or secured by property other than real estate. 6 Residential Lending. The Bank's residential mortgage loan programs currently are focused on the origination of adjustable rate mortgages and fixed rate mortgages. At March 31, 2000, adjustable rate residential mortgage loans totaled $177.8 million, or 55.6%, of the total loan portfolio. Fixed rate residential mortgages totaled $65.8 million, or 20.5%, of the total loan portfolio. The Bank's adjustable rate residential mortgage loans have a maximum term of 30 years, and allow for periodic interest rate adjustments. The Bank prices the initial rate competitively but avoids initial deep discounts from contracted indices and margins. The Bank has adopted the U.S. Treasury Securities Index, adjusted to a constant maturity of one to five years. The margin at which adjustable rate loans are set is a minimum of 2.50% over the stated index. Interest rate adjustments are capped on adjustable mortgage loans at 2% per adjustment and 6% over the life of the loan. Residential loans may be granted as construction loans or permanent loans on residential properties. Construction loans on owner occupied residential properties may convert to residential loans at fixed or adjustable rates upon completion of construction. Loans secured by one- to four-family residential properties are typically written in amounts up to 90% of the property value. The Bank generally requires private mortgage insurance for loans in excess of 80% of property value. The maximum loan-to-value ratio on owner occupied residential properties is 95%. The maximum loan-to-value ratio on non-owner occupied residential properties is 80%. Commercial Real Estate and Construction Lending. The Bank originates permanent and construction loans on commercial real estate. These loans are typically secured by income producing apartment buildings, office buildings, industrial buildings and various retail properties. As of March 31, 2000, commercial real estate loans totaled $54.2 million and constituted 17.0% of the total loan portfolio. Commercial real estate loans have been made for up to 80% of the appraised value of the property and have generally been made for amounts up to $5.0 million. Commercial real estate loans currently offered by the Bank have terms of one to 20 years. Title insurance, fire, casualty insurance and flood insurance are required in amounts sufficient to protect the Bank's interest, where applicable. In some cases, commercial real estate loans were granted in participation with other lenders. The Bank's construction loans totaled $9.8 million, or 3.0%, of the Bank's loan portfolio at March 31, 2000. Construction loans are short term in nature and have maturities ranging from six months to two years. The Bank grants loans to construct residential and commercial real estate, as well as land development for individual residential lots. Currently, construction loans are made for up to 80% of the completed value of the property, based on independent appraisals. The Bank analyzes the construction budget and reviews the developer's past projects in addition to conducting responsible commercial real estate underwriting practices. Funds are disbursed based on a schedule of completed work presented to the Bank and confirmed by physical inspection of the property by a designated Bank officer or construction consultant and, in general, after receipt of title updates. The Bank determines aggregate loan limitations for individual borrowers based upon market conditions and the financial capacity of that borrower or guarantor. During the past five years, such aggregate limits have not exceeded $6.0 million per borrower. The Bank also originates loans for the construction of single family homes for resale by professional builders. The Bank also lends to individuals for construction of one to four family homes which they intend to occupy. Borrowers are required to have a firm contract with a qualified builder or developer or to have demonstrated prior home building experience. The borrower must be approved for permanent financing by the Bank prior to a construction loan being granted. Such construction loans are normally made for a term of not more than one year and based on a completed value of not more than 80%, as determined by an independent certified or licensed appraiser. Second Mortgages and Home Equity Lines of Credit. The Bank offers home equity lines of credit that are secured by the borrower's equity in their primary residence and may take the form of a first or second mortgage. Equity loans are made in amounts up to 90% of the appraised value less any first mortgage. Payment of interest is 7 required monthly and the rate is adjusted monthly based on changes in the Prime Rate, as quoted in the Wall Street Journal. Loans are not contingent upon proceeds being used for home improvement. The Bank's home equity loans outstanding, and amortizing second mortgages totaled $7.4 million, or 2.3%, of the Bank's loan portfolio at March 31, 2000. Commerce and Industry, Consumer and Other Loans. The Bank's commerce and industry, consumer and other loans totaled $5.0 million, or 1.6%, of the total loan portfolio on March 31, 2000. The Bank entered the commerce and industry lending business in fiscal 1995 with its acquisition of Metro Bancorp, Inc. The commerce and industry loan portfolio consists of time, demand and line-of-credit loans to a variety of local small businesses. Risks of Commercial Real Estate, Construction, Commerce and Industry, and Consumer Lending. Commercial real estate, construction, commerce and industry and consumer lending entail significant additional risks compared to residential mortgage lending. In addition, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of the properties and thus may be subject to a greater extent to adverse conditions in the local real estate market or in the economy generally. Construction loans involve additional risks, because of the uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies, which make it relatively difficult to evaluate accurately the total loan funds required to complete a project, and related loan-to-value ratios. Commerce and industry loans are not secured by real estate and may involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment of such loans may be subject to a greater extent to adverse conditions in the economy. Consumer loans and particularly unsecured personal loans may involve additional risks, and it may be expensive and time consuming to recover the money lent in the event of a default. The Bank has attempted to limit the risk of loss on its commercial real estate, construction and consumer loans, and has established provisions for loan losses. For more information see "-- Non-Performing Assets" and "-- Impaired Loans". Any reversal of the apparent stabilization in the New England real estate market and economy would likely negatively affect the Bank's commercial real estate, construction and consumer loan portfolios, which would thereby negatively affect the Bank's results of operations. Origination Fees and Other Fees. The Bank currently collects origination fees on some of the real estate loan products offered. Fees to cover the cost of appraisals, credit reports, and other direct costs are also collected. Loan origination fees collected vary in proportion to the level of lending activity as well as competitive and economic conditions. The Bank imposes late charges on all loans with the exception of equity lines of credit and loans secured by deposits. The Bank also collects prepayment premiums and partial release fees on commercial real estate and construction loans where such items are negotiated as part of the loan agreement. Loan Solicitation and Processing. Loan originations come from a number of sources. Most real estate loans are attributable to walk-in customers, existing customers, real estate brokers, third party originators and builders. Consumer loans result from walk-in customers and depositors. Each loan originated by the Bank is underwritten by lending personnel of the Bank, and qualified independent contract underwriters. Individual lending officers, a committee of loan officers and the Bank's Security Committee have the authority to approve loans up to various limits. Applications are received in each of the offices of the Bank. Independent certified or licensed appraisers are used to appraise the property intended to secure real estate loans. The Bank's underwriting criteria are designed to minimize the risks of each loan. There are detailed guidelines concerning the types of loans that may be made, the nature of the collateral, the information that must be obtained concerning the loan applicant and follow-up inspections of collateral after the loan is made. Non-Performing Assets. The Bank notifies a borrower of a delinquency when any payment becomes 15 days past due. Repeated contacts are made if the loan remains delinquent for 30 days or more. The Bank will consider working out a payment schedule with a borrower to clear a delinquency, if necessary. If, however, a borrower is unwilling or unable to resolve such a default after 90 days, the Bank will generally proceed to foreclose and liquidate the property to satisfy the debt. Real estate acquired through foreclosure is classified as "real estate acquired by foreclosure" until it is sold or otherwise disposed of by the Bank. 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. 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 collectable as to both principal and interest. The Bank has instituted additional procedures to closely monitor loans and bring potential problems to management's attention early in the collection process. The Bank prepares a monthly watch list of potential problem loans including currently performing loans. The Senior Loan Officer reviews delinquencies with the Security Committee of the Board of Directors at least monthly. Due to the high priority given to monitoring asset quality, Senior Management is involved in the early detection and resolution of problem loans. As of March 31, 2000, the Bank had two non-performing loans, with outstanding balances ranging from less than $28,000 to $207,000, and totaling $235,000. At March 31, 2000, the Bank did not have any real estate acquired by foreclosure. Impaired Loans. At March 31, 2000, there were no impaired loans. The following table sets forth information with respect to the Bank's non- performing assets at the dates indicated.
At March 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis, non-performing loans............. $ 235 $ 419 $ 357 $2,145 $ 758 Restructured loans................................... -- -- -- -- 3,815 Real estate acquired by foreclosure.................. -- -- -- 13 1,538 ----- ----- ------ ------ ------ Non-performing assets.............................. $ 235 $ 419 $ 357 $2,158 $6,111 ===== ===== ====== ====== ====== Impaired loans, accruing............................. -- -- 1,306 664 -- Non-performing loans to total loans.................. 0.07% 0.15% 0.13% 0.91% 0.35% Non-performing assets to total assets................ 0.06% 0.12% 0.09% 0.67% 1.97%
Allowance for Loan Losses. The allowance for loan losses is maintained at a level which management considers adequate to provide for potential losses based on an evaluation of known and inherent risks in the portfolio. Such evaluation for each of the periods reported includes identification of adverse situations which may affect the ability of certain borrowers to repay, a review of overall portfolio size, quality, composition and an assessment of existing and anticipated economic conditions. Regular reviews of the loan portfolio are performed to identify loans for which specific allowance allocations are considered prudent. Specific allocations are made based on the risk classification assigned to individual loans. Additionally, general risk allocations are determined by formula whereby the loan portfolio is stratified by loan type and by risk rating category. Loss factors are then applied to each strata based on various considerations including historical loss experience, delinquency trends, current economic conditions, industry standards and regulatory guidelines. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Additions to the allowance are charged to earnings and realized losses, net of recoveries, are charged to the allowance. 9 Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgment of information available to them at their examination date. The following table presents activity in the allowance for loan losses during the years indicated.
At March 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars in thousands) Balance at beginning of year................... $ 2,913 $ 2,886 $ 2,900 $ 3,032 $ 2,954 -------- -------- -------- -------- -------- Loans charged-off: Residential mortgage.......................... -- (88) -- (160) (73) Commercial mortgage........................... -- -- (83) (57) (70) Other loans................................... (9) (11) (14) (7) (23) -------- -------- -------- -------- -------- Total loans charged-off...................... (9) (99) (97) (224) (166) -------- -------- -------- -------- -------- Recoveries: Residential mortgage.......................... 9 78 16 43 20 Commercial mortgage........................... 36 36 46 -- 71 Other loans................................... 44 12 21 49 33 -------- -------- -------- -------- -------- Total recoveries............................. 89 126 83 92 124 -------- -------- -------- -------- -------- Net loans recovered (charged-off).............. 80 27 (14) (132) (42) Provision...................................... -- -- -- -- 120 -------- -------- -------- -------- -------- Balance at end of year......................... $ 2,993 $ 2,913 $ 2,886 $ 2,900 $ 3,032 ======== ======== ======== ======== ======== Average loans outstanding during the year...... $300,089 $287,513 $250,329 $231,006 $215,765 Ratio of net charge-offs to average loans...... --% --% 0.01% 0.06% -- Total loans outstanding at end of year......... $320,013 $280,346 $281,724 $234,935 $214,421 Ratio of allowance for loan losses to loans at end of year................................... 0.94% 1.04% 1.02% 1.23% 1.41%
10 The following table presents the allocation of the Bank's allowance for loan losses, by type of loan, at the dates indicated.
At March 31, ----------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------- -------------------- % of % of % of Loans to Loans to Loans to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Mortgage Loans: Residential mortgage....... $1,333 76.1% $1,120 75.8% $1,104 73.8% Commercial mortgage........ 1,202 16.9 1,556 17.4 1,578 18.6 Construction............... 198 3.1 92 1.9 105 2.9 Second mortgage and home equity............... 178 2.3 58 2.7 48 3.0 ------ ----- ------ ----- ------ ----- Total mortgages.......... 2,911 98.4 2,826 97.8 2,835 98.3 Other loans................. 82 1.6 87 2.2 51 1.7 ------ ----- ------ ----- ------ ----- Total..................... $2,993 100.0% $2,913 100.0% $2,886 100.0% ====== ===== ====== ===== ====== =====
At March 31, ---------------------------------------------- 1997 1996 ---------------------- ---------------------- % of % of Loans to Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in thousands) Mortgage Loans: Residential mortgage....... $ 964 75.1% $1,077 75.2% Commercial mortgage........ 1,808 17.8 1,837 17.9 Construction............... 36 1.3 13 0.4 Second mortgage and home equity............... 44 3.6 51 4.1 ------ ----- ------ ----- Total mortgages........... 2,852 97.8 2,978 97.6 Other loans................. 48 2.2 54 2.4 ------ ----- ------ ----- Total..................... $2,900 100.0% $3,032 100.0% ====== ===== ====== =====
Investment Activities The Bank's management believes it prudent to maintain an investment portfolio that provides not only a source of income but also a source of liquidity to meet lending demands and fluctuations in deposit flows. 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 a separate component of stockholders' equity. Securities held to maturity continue to be carried at amortized cost. 11 The following table sets forth the composition of the Bank's investment portfolio (at amortized cost), as well as the percentage such investments comprise of the Bank's total assets, at the dates indicated.
At March 31, ---------------------------- 2000 1999 1998 ------- ------- -------- (Dollars in thousands) Short-term investments: Interest bearing deposits in other banks.. $ 177 $ 177 $ 177 Federal funds sold overnight.............. 14,625 16,762 3,144 ------- ------- ------- Total short-term investments............ 14,802 16,939 3,321 ======= ======= ======= Percent of total assets.................. 3.6% 4.7% 0.9% ======= ======= ======= Investment securities: U. S. Government and federal agency obligations....................... $23,962 $15,500 $22,510 Other bonds and obligations............... 2,030 -- -- Common and preferred stocks............... 6,847 5,682 5,026 Mortgage-backed securities................ 23,862 30,190 45,263 ------- ------- ------- 56,701 51,372 72,799 Unrealized gain (loss) on securities available for sale....................... (1,258) 570 907 ------- ------- ------- Total investment securities............. $55,443 $51,942 $73,706 ======= ======= ======= Percent of total assets................. 13.5% 18.9% 19.6% ======= ======= =======
12 The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Bank's investment securities at March 31, 2000.
One Year or Less One to Five Years Five to Ten Years More than Ten Years ---------------- ----------------- ----------------- ------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Securities available for sale: U.S. government and agency securities............... $994 6.15% $4,832 6.46% $17,127 6.48% $ -- -- % Common and preferred stocks................... -- -- -- -- -- -- -- -- Other bonds................ -- -- 2,037 7.64 -- -- -- -- Mortgage-backed securities -- -- 410 6.56 6,376 7.00 16,522 6.26 ---- ------ ------- ------- Total.................... $994 $7,279 $23,503 $16,522 ==== ====== ======= ======= Common Stock Total Investment Portfolio -------- ---------------------------------- Carrying Carrying Market Average Value Value Value Yield ------- --------- --------- -------- Securities available for sale: U.S. government and agency securities............... $ -- $22,953 $22,953 6.46% Common and preferred stocks................... 7,145 7,145 7,145 -- Other bonds................ -- 2,037 2,037 7.64 Mortgage-backed securities -- 23,308 23,308 6.47 ------- ------- ------- Total.................... $ 7,145 $55,443 $55,443 ======= ======= =======
13 Savings Activities, Borrowings and Other Sources of Funds General. Savings accounts and other types of deposits have traditionally been an important source of the Bank's funds for use in lending and for other general business purposes. In addition to deposits, the Bank derives funds from loan repayments, loan sales, borrowings and from other operations. The availability of funds is influenced by the general level of interest rates and other market conditions. Scheduled loan repayments are a relatively stable source of funds while deposit inflows and outflows vary widely and are influenced by prevailing interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels and may be used on a longer term basis to support expanded lending activities. Deposits. Consumer deposits are attracted principally from within the Bank's market area through the offering of a broad selection of deposit instruments including demand deposit accounts, NOW and Preferred NOW accounts, money market deposit accounts, regular savings accounts, term deposit accounts and retirement savings plans. The Bank does not actively solicit or advertise for deposits outside of its market area or solicit brokered deposits. The Bank attracts deposits through its branch office network, automated teller machines and by paying rates competitive with other Massachusetts financial institutions. The Bank follows a policy of controlled deposit growth, by pricing its savings products based on the Bank's need for additional funds and rates being paid by other Massachusetts financial institutions. The Bank's efforts to reduce the overall cost of deposits has resulted in a decline in total deposits of $8.1 million during fiscal 2000. As a result, the cost of deposits declined 59 basis points for fiscal 2000. The deposit outflow was primarily funded by increased borrowings from the FHLB of Boston. 14 Deposit Accounts. The following table shows the distribution of the Bank's deposit accounts at the dates indicated and the weighted average rate paid for each category of account for the years indicated.
Years Ended March 31, ---------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ ------------------------------ ----------------------------- Average Average Average Average % of Rate Average % of Rate Average % of Rate Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid -------- -------- ------- -------- -------- ------- -------- -------- ------- (Dollars in thousands) Demand............................. $ 18,742 7.3% 0.00% $ 15,219 5.5% 0.00% $ 13,608 5.0% 0.00% NOW accounts....................... 30,885 12.0 1.19 26,917 9.8 1.28 25,924 9.6 1.27 Regular, club and 90-day notice accounts................... 61,423 23.8 2.05 61,572 22.4 2.34 59,146 21.9 2.53 Money market deposit accounts...... 21,417 8.3 2.22 22,375 8.1 2.64 22,253 8.2 2.87 Term deposit certificates: Six-month money market............ 18,531 7.2 4.25 14,274 5.2 4.80 13,569 5.0 5.06 Other............................. 106,537 41.4 5.31 134,778 49.0 5.72 136,150 50.3 5.85 -------- ----- -------- ----- -------- ----- Total term deposit certificates.. 125,068 48.6 5.16 149,052 54.2 5.63 149,719 55.3 5.77 -------- ----- -------- ----- -------- ----- Total deposits................... $257,536 100.0% 3.32 $275,135 100.0% 3.91% $270,650 100.0% 4.10% ======== ===== ======== ===== ======== =====
15 Time Deposits in Excess of $100,000. The following table indicates the amount of the Bank's time deposits of $100,000 or more by time remaining until maturity as of March 31, 2000. Time Deposits -------------- (In thousands) Maturity Period of Deposits: Three months or less......................... $ 3,283 Three through six months..................... 7,008 Six through twelve months.................... 5,333 Over twelve months........................... 9,313 ------- Total..................................... $24,937 ======= Borrowings. From time to time the Bank borrows funds from the FHLB of Boston on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels. Such funds may also be used on a longer term basis to support expanded lending or investment activities to increase yields or improve asset-liability management. All advances from the FHLB of Boston are secured by a blanket lien on residential first mortgage loans, investment securities and all stock in the FHLB of Boston. At March 31, 2000, the Bank had advances outstanding from the FHLB of Boston of $111.0 million. Funds from these advances were used to fund the Bank's growth in loans and investments and the decline in deposits. Additional sources of funds include The Co-operative Central Bank Reserve Fund and the Federal Reserve System. Subsidiary Activities In July, 1999 the Bank established Central Preferred Capital Corporation ("CPCC"), a Massachusetts corporation which has elected to be taxed as a real estate investment trust for federal and Massachusetts tax purposes. CPCC holds mortgage loans which were previously originated by the Bank. In April 1998, the Bank established Central Securities Corporation, a Massachusetts corporation, as a wholly owned subsidiary of the Bank for the purpose of engaging exclusively in buying, selling and holding, on its own behalf, securities that may be held directly by the Bank. This subsidiary corporation holds U.S. Treasury notes and Government agency obligations and mortgage-backed securities and qualifies under Section 38B of Chapter 63 of the Massachusetts General Laws as a Massachusetts security corporation. Regulation and Supervision of the Company Regulation of the Company. The Company is a bank holding company subject to regulation by the Federal Reserve Board under the Bank Holding Company Act (the "BHCA"). As a result, the activities of the Company are subject to certain limitations, which are described below. In addition, as a bank holding company, the Company is required to file annual and quarterly reports with the Federal Reserve Board and to furnish such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Company is also subject to regular examination by the Federal Reserve Board. With certain exceptions, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the related Federal Reserve Board regulations. Notwithstanding the Federal Reserve Board's prior approval of specific nonbanking activities, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of 16 any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company. Under the BHCA, a bank holding company must obtain the prior approval of the Federal Reserve Board before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory Community Reinvestment Act ("CRA") ratings generally are prerequisites to obtaining federal regulatory approval to make acquisitions. The BHCA prohibits the Federal Reserve Board from approving an application by a bank holding company to acquire voting shares of a bank located outside the state in which the operations of the holding company's bank subsidiaries are principally conducted, unless such an acquisition is specifically authorized by state law. See " -- Interstate Banking." The BHCA does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to acquiring control of the Company or the Bank. For purposes of the BHCA, "control" is defined as ownership of more than 25% of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank. In addition, the Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before such person or persons may acquire control of the Company or the Bank. The Change in Bank Control Act defines "control" as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank. Under Massachusetts banking law, prior approval of the Division is also required before any person may acquire a Massachusetts bank holding company. The Federal Reserve Board has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. See "-- Capital Requirements." Holding Company Dividends And Stock Repurchases. The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company's capital needs, asset quality, and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." See "-- Prompt Corrective Regulatory Action." As a bank holding company, the Company is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. This requirement does not apply to bank holding companies that are "well- capitalized," 17 received one of the two highest examination ratings at their last examination and are not the subject of any unresolved supervisory issues. Regulation and Supervision of the Bank General. The Bank is subject to extensive regulation by the Commissioner and the FDIC. The lending activities and other investments of the Bank must comply with various regulatory requirements. The Commissioner and FDIC periodically examine the Bank for compliance with various regulatory requirements. The Bank must file reports with the Commissioner and the FDIC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). This supervision and regulation is intended primarily for the protection of depositors. Certain of these regulatory requirements are referred to below or appear elsewhere herein. Capital Requirements. Under FDIC regulations, state-chartered banks that are not members of the Federal Reserve System are required to maintain a minimum leverage capital requirement consisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the CAMELS rating system) established by the Federal Financial Institutions Examination Council. For all but the most highly rated institutions meeting the conditions set forth above, the minimum leverage capital ratio is 3% plus an additional "cushion" amount of at least 100 to 200 basis points with a minimum leverage capital requirement of not less than 4%. Tier 1 capital is the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than certain mortgage servicing rights, purchased credit card relationships and qualifying supervisory goodwill) minus identified losses and minus investments in certain subsidiaries. In addition to the leverage ratio (the ratio of Tier I capital to total assets), state-chartered nonmember banks must maintain a minimum ratio of qualifying total capital to risk-weighted assets of at least 8% of which at least four percentage points must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2 capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and preferred stock with a maturity of over 20 years, certain other capital instruments and up to 45% of pretax net unrealized savings on equity securities. The includable amount of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying total capital is further reduced by the amount of the bank's investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings of capital securities issued by other banks, most intangible assets and certain other deductions. Under the FDIC risk- weighted system, all of a bank's balance sheet assets and the credit equivalent amounts of certain off-balance sheet items are assigned to one of four broad risk weight categories from 0% to 100%, based on the risks inherent in the type of assets or item. The aggregate dollar amount of each category is multiplied by risk weight assigned to that category. The sum of these weighted values equals the bank's risk-weighted assets. At March 31, 2000, the Bank's ratio of core Tier 1 capital to total assets was 8.85%, its ratio of Tier 1 capital to risk-weighted assets was 13.31% and its ratio of total risk-based capital to risk-weighted assets was 14.52%. The Federal banking regulators, including the Federal Reserve Board and the FDIC, have proposed to revise their risk-based capital requirements to ensure that such requirements provide for explicit consideration of interest rate risk. Under the proposed rule, a bank's interest rate risk exposure would be quantified using either the measurement system set forth in the rule or the bank's internal model for measuring such exposure, if such model is determined to be adequate by the bank's examiner. If the dollar amount of a bank's interest rate risk exposure, as measured under either measurement system, exceeds 1% of the bank's total assets, the bank is required under the rule to hold additional capital equal to the dollar amount of the excess. Management of the Bank has not determined what effect, if any, the FDIC's proposed interest rate risk component would have on the Bank's capital if adopted as 18 proposed. The FDIC has adopted a regulation that provides that the FDIC may take into account whether a bank has significant risks from concentrations of credit or nontraditional activities in determining the adequacy of its capital. The Bank has not been advised that it will be required to maintain any additional capital under this regulation. Dividend Limitations. The Bank may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of its conversion to stock form. Earnings of the Bank appropriated to bad debt reserves and deducted for Federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See "Federal and State Taxation." The Bank intends to make full use of this favorable tax treatment and does not contemplate use of any earnings in a manner which would limit the Bank's bad debt deduction or create federal tax liabilities. Under FDIC regulations, the Bank is prohibited from making any capital distributions if after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. Deposit Insurance. The Bank is charged a premium by the FDIC for Bank Insurance Fund ("BIF") insurance of its insurable deposit accounts. The FDIC is required to establish an assessment rate for deposit insurance premiums that protects the insurance fund and considers the fund's operating expenses, case resolution expenditures, income and the effect of the assessment rate on the earnings and capital of BIF members. As required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC has established a risk-based assessment system for insured depository institutions. Under the system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period. Well capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well capitalized institutions but which satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized institutions consist of institutions that do not qualify as either "well capitalized" or "adequately capitalized." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The BIF deposit insurance assessment rates are determined by the FDIC based on a number of factors to maintain a statutory designated reserve ratio for the BIF of 1.25% of insured deposits. In March 2000, the reserve ratio was above the target ratio. As a result, the BIF assessment rates of "well-capitalized" institutions in Subgroup A, numbering 95% of BIF-insured institutions, including the Bank, pay no federal deposit insurance premiums, with the remaining 5% of institutions paying a graduated range of rates up to 0.27% of insured deposits for the highest risk-based premium category. These rates will be effective for the 1999 calendar year and indefinitely thereafter until the FDIC takes further action. 19 In 1996, the FDIC issued a separate levy for the bonds of the Financing Corporation ("FICO"), a federally chartered corporation which provided some of the financing required to resolve the thrift crisis in the 1980s. All FDIC- insured institutions must make FICO payments, but BIF-insured deposits are assessed at only one-fifth of the rate of SAIF-insured deposits until January 1, 2000 (or sooner, if the two funds are merged). All Massachusetts chartered co-operative banks are required to be members of the Share Insurance Fund. The Share Insurance Fund maintains a deposit insurance fund which insures all deposits in member banks which are not covered by federal insurance, which in the case of the Bank are its deposits in excess of $100,000 per insured account. In past years, a premium of 1/24 of 1% of insured deposits has been assessed annually on member banks such as the Bank for this deposit insurance. However, no premium has been assessed in recent years. Prompt Corrective Regulatory Action. Under FDICIA, the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A "significantly undercapitalized" institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective provisions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution will be subject to conservatorship or receivership within specified time periods. Under the implementing regulations, the federal banking regulators, including the OTS, generally measure an institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). The following table shows the capital ratios required for the various prompt corrective action categories.
Adequately Significantly Well Capitalized Capitalized Undercapitalized Undercapitalized ---------------- -------------- ----------------- ----------------- Total risk-based capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0% Tier 1 risk-based capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0% Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
- ------------ * 3.0% if institution has a composite 1 CAMELS rating. 20 A "critically undercapitalized" savings institution is defined as an institution that has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"), each federal banking agency is required to establish safety and soundness standards for institutions under its authority. In 1995, these agencies, including the FDIC, released interagency guidelines establishing such standards and adopted rules with respect to safety and soundness compliance plans. The guidelines require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the agency determines that a savings institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution must submit an acceptable compliance plan to the agency within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Bank has met substantially all the standards adopted in the interagency guidelines. Additionally under FDICIA, as amended by the CDRI Act, the federal banking agencies established standards relating to asset quality and earnings. Under the guidelines a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the asset quality and earnings standards do not have a material effect on the operations of the Bank. Uniform Lending Standards. As required by FDICIA, the federal banking agencies have adopted regulations that require banks to adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits, that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. A bank's real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Real Estate Lending Guidelines") that have been adopted by the banking agencies. The Real Estate Lending Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits for real estate loans that should not exceed supervisory loan-to-value limits for the various types of real estate loans. The Real Estate Lending Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to- value ratios in excess of the supervisory loan-to-value limits. The Bank does not believe that the Real Estate Lending Guidelines will materially affect its lending activities. Federal Reserve Board Regulations. Under FRB regulations, the Bank currently must maintain average daily reserves equal to 3% of net transaction accounts between $5.0 million and $44.3 million plus 10% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non- interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. At March 31, 2000, the Bank met applicable FRB reserve requirements. 21 Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System ("FHLBS") which consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board ("FHFB") of the Federal Home Loan Bank Board. As a member, the Bank is required to purchase and hold stock in the FHLB of Boston in an amount equal to the greater of 1% of their aggregate unpaid home loan balances at the beginning of the year or an amount equal to 5% of FHLB advances outstanding, whichever is greater. As of March 31, 2000, the Bank held stock in the FHLB of Boston in the amount $5.8 million and was in compliance with the above requirement. The FHLB of Boston serves as a reserve or central bank for the member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of FHLBS. It makes loans (i.e., advances) to members in accordance with policies and procedures established by the FHLBS and the Board of Directors of the FHLB of Boston. Loans to Insiders. Massachusetts-chartered co-operative banks are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers, directors and principal stockholders, with limited exceptions. Under Section 22(h), loans to a director, executive officer and to a greater than 10% stockholder of an institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's loans-to-one-borrower limit (generally equal to 20% of the institution's unimpaired capital and surplus). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of an institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as those offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Section 22(g) of the Federal Reserve Act requires that loans to executive officers of depository institutions not be made on terms more favorable than those afforded to other borrowers, requires approval for such extensions of credit by the board of directors of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. In addition, Section 106 of the Bank Holding Company Act of 1956, as amended ("BHCA") prohibits extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Massachusetts State Law. As a Massachusetts-chartered co-operative bank, the Bank is subject to the applicable provisions of Massachusetts law and the regulations of the Commissioner adopted thereunder. The Bank derives its lending and investment powers from these laws, and is subject to periodic examination and reporting requirements by and of the Commissioner. In addition, the Bank is required to make periodic reports to the Co-operative Central Bank. In 1990, legislation was enacted permitting banks nationwide to enter the Bank's market area and compete for deposits and loan originations. The approval of the Massachusetts Commissioner of Banks is required prior to any merger or consolidation, or the establishment or relocation of any office facility. Federal and State Taxation For taxable years beginning after June 30, 1986, the Internal Revenue Code imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax generally applies to a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI") and is payable to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code provides for items of tax preference that include (a) tax-exempt interest on newly-issued (generally, issued on or after August 8, 1986) private activity bonds other 22 than certain qualified bonds and (b) for taxable years beginning after 1989, this preference of 75% of the excess (if any) of (i) adjusted current earnings as defined in the Internal Revenue Code, over (ii) AMTI (determined without regard to this preference and prior to reduction by net operating losses). For any taxable year beginning after 1986, net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum taxes may be used as credits against regular tax liabilities in future years. The Bank is not currently paying any amount of alternative minimum tax but may, depending on future results of operations, become subject to this tax. The Massachusetts excise tax rate for co-operative banks is currently 10.5% of federal taxable income, adjusted for certain items. Taxable income includes income from all sources, without exclusion, less deductions, but not the credits, allowable under the provisions of the Code, as amended. Beginning April 1, 1999, the Bank is allowed a 95% dividend received deduction. However, carryforwards and carrybacks of net operating losses are not allowed. The Bank's federal income tax returns for years ended March 31, 1996 and 1997 were examined and finalized in 1998. Competition The Bank's competition for savings deposits has historically come from other co-operative banks, savings banks, savings and loan associations and commercial banks located in Massachusetts generally, and in the Boston metropolitan area, specifically. In the past, during times of high interest rates, the Bank has also experienced additional significant competition for investor's funds from short-term money market funds and other corporate and government securities. The Bank has faced continuing competition from other financial intermediaries for deposits. The Bank competes for deposits principally by offering depositors a wide variety of savings programs, convenient branch locations, 24-hour automated teller machines, preauthorized payment and withdrawal systems, tax-deferred retirement programs, and other miscellaneous services such as money orders and travelers' checks. The Bank does not rely upon any individual, group or entity for a material portion of its deposits. The Bank's competition for real estate loans comes principally from mortgage banking companies, co-operative banks and savings banks, savings and loan associations, commercial banks, insurance companies and other institutional lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers and builders. The competition for loans encountered by the Bank, as well as the types of institutions with which the Bank competes, varies from time to time depending upon certain factors including the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, volatility in the mortgage markets and other factors which are not readily predictable. In addition to competing with other savings banks and financial services organizations based in Massachusetts, the Bank has and is expected to face increased competition from major commercial banks headquartered outside of Massachusetts as a result of regional interstate banking laws which currently permit banks located in New England to enter the bank's market are and compete with it for deposits and loan originations. The Bank may also face increased competition as a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 which, as of September 29, 1995, allowed the Federal Reserve Board to approve a bank holding company's application to acquire control of, or substantially all of the assets of, a Massachusetts bank without regard to Massachusetts law. Bank regulation is undergoing significant change with an increased number of bank mergers and acquisitions, changes in the products and services banks can offer, and involvement in non-banking activities by bank holding companies. Recent legislation and regulations have expanded the activities in which depository institutions may engage and reduced or eliminated some of the competitive advantages which thrift institutions formerly held over commercial banks, such as interest rate differentials which permitted thrift institutions to offer a higher rate of interest to attract deposits. There are a number of pending legislative and regulatory proposals that may further alter the structure, regulation and competitive relationships of financial institutions. The ability of the 23 Bank to remain competitively viable will depend upon how successfully it can respond to the rapidly evolving competitive, regulatory, technological and demographic developments affecting its operations. The Bank is headquartered in Somerville, Massachusetts and operates a network of eight full service offices located in Somerville, Arlington, Burlington, Chestnut Hill, Malden, Melrose and Woburn, as well as an operations center located in Somerville. All offices are located in Massachusetts, within the Boston metropolitan area. The majority of the properties securing loans originated by the Bank are located within the Bank's primary market area which encompasses Suffolk, Norfolk and Middlesex Counties, including the City of Boston. As to the principal services rendered by the Bank, "Item 1 - Business - General" is incorporated herein by reference. The Bank does not believe that the nature of its business is seasonal. Further, the Bank has not, within the last five fiscal years, been engaged in any line of business in addition to its normal thrift banking activities. Employees At March 31, 2000, the Bank employed 78 full-time and 26 part-time employees. The Bank's employees are not represented by any collective bargaining agreement. Management of the Bank considers its relations with its employees to be good. Executive Officers The executive officers of the Bank at March 31, 2000 were as follows:
Age Position --- -------- Joseph R. Doherty 76 Chairman of the Board John D. Doherty 42 President and Chief Executive Officer Paul S. Feeley 53 Senior Vice President - Treasurer and Chief Financial Officer David W. Kearn 58 Senior Vice President - Retail Banking and Senior Loan Officer William P. Morrissey 72 Senior Vice President Gladys N. Partamian 61 Vice President - Investor Relations and Clerk
The following is a description of the principal occupation and employment of the executive officers of the Bank during the past five years: Joseph R. Doherty served as President of the Bank since prior to 1986. Effective April 1, 1992 he retired as Chief Executive Officer, a position he held since April 1986. Mr. Doherty remains as Chairman of the Board of Directors, and as a consultant to the Bank. However, he did not serve as a consultant, and he received no additional income as a consultant in fiscal 2000. Mr. Doherty is the father of Bank President John D. Doherty. John D. Doherty was elected President of the Bank in April 1986 and Chief Executive Officer effective April 1, 1992. Mr. Doherty is responsible for guiding the overall operations of the Bank and reports on the Bank's operations directly to the Board of Directors. Mr. Doherty has been employed by the Bank in various capacities since prior to 1986 and is the son of Chairman of the Board Joseph R. Doherty. Paul S. Feeley joined the Bank in July 1997 as Senior Vice President and Treasurer/Chief Financial Officer. From 1993 to 1997, Mr. Feeley was Senior Vice President and Treasurer of Bridgewater Credit Union. Prior to 1993 Mr. Feeley was Senior Vice President, Chief Financial Officer and Clerk of the Corporation at The Cooperative Bank of Concord, Acton, Massachusetts. David W. Kearn joined the Bank in June 1993 as Senior Vice President - Retail Banking. From 1990 to 1993, Mr. Kearn was a Vice President of Loan Administration at Somerset Savings Bank, Somerville, 24 Massachusetts. Mr. Kearn was Senior Vice President/Branch Administration at United States Trust Company from 1987 to 1990. William P. Morrissey joined the Bank on November 1, 1992 as Senior Vice President of public affairs who represents the Bank in outside banking and business organizations. Prior to 1986, Mr. Morrissey served as Executive Vice President for Corporate Affairs at the Boston Five Cents Savings Bank, and as Deputy Commissioner of Banks for the Commonwealth of Massachusetts. Gladys N. Partamian joined the Bank in 1979 as an executive secretary. In 1985, Ms. Partamian became Vice President - Corporate Affairs, in which capacity she manages the Bank's corporate affairs. In connection with the Bank's conversion to stock form in 1986, Ms. Partamian became Vice President - Investor Relations. Ms. Partamian has served as Clerk of the Bank since 1992. Item 2. Properties. - ------------------- The Bank owns all its offices, except the Burlington and Malden branch offices, and the operations center located in Somerville (Inner Belt Road). Net book value includes the cost of land, buildings and improvements as well as leasehold improvements, net of depreciation and/or amortization. At March 31, 2000, all of the Bank's offices were in reasonable condition and met the business needs of the Bank. The following table sets forth the location of the Bank's offices, as well as certain information relating to these offices as of March 31, 2000:
Net Book Year Value at Office Location Opened March 31, 2000 --------------- ------ -------------- Main Office.................. 1974 $268,000 399 Highland Avenue Somerville, MA 175 Broadway................. 1982 $132,000 Arlington, MA 85 Wilmington Road........... 1978(a) $ 5,000 Burlington, MA 1192 Boylston Street......... 1954 $143,000 Chestnut Hill (Brookline), MA 137 Pleasant Street.......... 1975(b) $ 37,000 Malden, MA 846 Main Street.............. 1994(c) $204,000 Melrose, MA 275 Main Street.............. 1980 $480,000 Woburn, MA 198 Lexington Street......... 1974 $192,000 Woburn, MA Operations Center............ 1994 (c) $ 37,000 17 Inner Belt Road Somerville, MA
- ---------- (a) The lease for the Burlington branch expires in 2002 with an option to extend the lease for one five-year term. (b) The lease for the Pleasant Street branch expires in 2005 with an option to extend the lease for one ten-year term. 25 (c) The Melrose and Somerville (Inner Belt Road) offices were obtained as part of the Bank's acquisition of Metro Bancorp, Inc. The lease for the operations center (Inner Belt Road) expires in 2004 with no renewal option. At March 31, 2000, the total net book value of the Bank's premises and equipment was $2.2 million. Item 3. Legal Proceedings - -------------------------- The Bank 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 or any subsidiary. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters - ------- The information contained under the section captioned "Stockholder Information" in the Annual Report to Stockholders is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The information contained under the section captioned "Financial Highlights" in the Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Annual Report to Stockholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Issues - --------------------------------------------------------------------- The tabular and narrative information set forth in "Item 1. Business" in Part I of this report and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this report discloses detailed quantitative and qualitative information about market risks and their effects on the Company and its subsidiaries, particularly with respect to changes in market interest rates on interest-earning assets and interest- bearing liabilities. 26 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The financial statements contained in the Annual Report to Stockholders which are listed below are incorporated herein by reference: Independent Auditors' Report Consolidated Balance Sheets as of March 31, 2000 and 1999 Consolidated Statements of Income for the Fiscal Years Ended March 31, 2000, 1999 and 1998 Consolidated Statement of Changes in Stockholders' Equity for the Fiscal Years Ended March 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Item 9. Changes in and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None. PART III Item 10. Directors and Principal Officers of the Registrant - ------------------------------------------------------------ Information concerning directors of the Company is incorporated herein by reference to the sections titled "Proposal I -- Election of Directors" and "Voting Securities and Principle Holders Thereof" in the Proxy Statement. Information concerning executive officers of the Company is incorporated herein by reference to the section titled "Item 1. Business -- Executive Officers" in Part I of this report. Item 11. Executive Compensation - -------------------------------- The information required by this item is incorporated herein by reference to the section titled "Executive Compensation and Other Matters" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners The information required by this item is incorporated herein by reference to the sections captioned "Proposal I -- Election of Directors" and "Voting Securities and Security Ownership" in the Proxy Statement. (b) Security Ownership of Management 27 The information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Security Ownership" and "Proposal I -- Election of Directors" in the Proxy Statement. (c) Changes in Control The information required by this item is incorporated by reference to the Current Report on Form 8-K filed by the Company on January 8, 1999 that reported the reorganization of the Bank to a bank holding company form of ownership. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section titled "Transactions with Management" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10- K. (1) Financial Statements -------------------- For the Financial Statements filed as part of this Annual Report on Form 10-K, reference is made to "Item 8 -- Financial Statements and Supplementary Data" (2) Financial Statement Schedules ----------------------------- All financial statement schedules have been omitted as not applicable or not required or because they are included in the financial statements appearing at Item 8. (3) Exhibits Required by Paragraph (c) of Item 14 --------------------------------------------- See "Item 14(c) -- Exhibits" (b) Reports on Form 8-K -- No reports on Form 8-K were filed during the last ------------------- quarter of the fiscal year covered by this report. (c) Exhibits -------- The following exhibits are filed as exhibits to this report.
Exhibit No. Exhibit ----------- ------- 2.1* Plan of Reorganization and Acquisition dated as of August 13, 1998. 3.1** Articles of Organization of Central Bancorp, Inc. 3.2** Bylaws of Central Bancorp, Inc. 4* Stock Certificate of Central Bancorp, Inc. 10.1** Employment Agreement between the Bank and John D. Doherty dated October 24, 1986
28 10.2** First Amendment to Employment Agreement between the Bank and John D. Doherty dated March 31, 1992 10.3** Second Amendment to Employment Agreement between the Bank and John D. Doherty dated June 8, 1995 10.4** Third Amendment to the Employment Agreement between the Bank and John D. Doherty dated January 8, 1999. 10.5** Termination Agreement dated March 31, 1992 by and between the Bank and Joseph R. Doherty 10.6** Consulting Agreement dated March 31, 1992 by and between the Bank and Joseph R. Doherty 10.7** Amendment to Consulting Agreement between the Bank and Joseph R. Doherty dated August 11, 1994 10.8*** 1986 Stock Option Plan, as amended 10.9**** Rights Agreement dated as of January 8, 1999 by and between the Company and State Street Bank & Trust Company as Right Agent 10.10*** Severance Agreement between the Bank and William P. Morrissey dated December 14, 1994 10.11*** Severance Agreement between the Bank and David W. Kearn dated December 14, 1994 10.12*** Severance Agreement between the Bank and Paul S. Feeley dated May 14, 1998 10.13*** Amendments to Severance Agreements between the Bank and Messrs. Feeley, Kearn and Morrissey dated January 8, 1999. 13 2000 Annual Report to Stockholders 21 Subsidiaries of Registrant 23 Consent of KPMG LLP 27 Financial Data Schedule
- -------------- * Incorporated herein by reference to the Current Report on Form 8-K filed on January 8, 1999 with the SEC. ** 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 herein by reference to the Registration Statement on Form S-8 filed with the SEC on January 26, 1999. **** Incorporated by reference to the Form 8-A12(g) filed with the SEC on January 8, 1999. 29 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CENTRAL BANCORP, INC. Date: June 27, 2000 By: /s/ John D. Doherty ------------------------- John D. Doherty President, Chief Executive Officer and Duly Authorized Representative In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ John D. Doherty Date: June 27, 2000 -------------------------------- John D. Doherty President, Chief Executive Officer and Director By: /s/ Paul S. Feeley Date: June 27, 2000 -------------------------------- Paul S. Feeley Senior Vice President - Treasurer and Chief Financial and Accounting Officer By: /s/ Joseph R. Doherty Date: June 27, 2000 -------------------------------- Joseph R. Doherty Chairman of the Board By: /s/ Terence D. Kenney Date: June 27, 2000 -------------------------------- Terence D. Kenney Director By: /s/ John G. Quinn Date: June 27, 2000 -------------------------------- John G. Quinn Director By: /s/ John F. Gilgun, Jr. Date: June 27, 2000 -------------------------------- John F. Gilgun, Jr. Director By: /s/ Marat E. Santini Date: June 27, 2000 -------------------------------- Marat E. Santini Director By: /s/ Nancy D. Neri Date: June 27, 2000 -------------------------------- Nancy D. Neri Director By: /s/ Gregory W. Boulos Date: June 27, 2000 -------------------------------- Gregory W. Boulos Director EX-13 2 0002.txt ANNUAL REPORT 2000 Central annual report 2000 Bancorp, Inc. [PHOTO ILLUSTRATION] "My parents financed their first home in the 1950s using a Central Bank Loan... My wife and I are going to maintain the family tradition by also financing our first home through Central Bank." Profile In 1999, Central Bancorp, Inc. became the holding company for Central Bank, whose legal name is Central Co-operative Bank. The Bank was founded in 1915 as a Massachusetts chartered co-operative bank to provide savings deposits and originate mortgage loans. Between 1970 and 1982, the Bank grew through mergers with six other Massachusetts co-operative banks. In 1994, Central Bank acquired Metro Bancorp, Inc., the parent company of Metropolitan Bank and Trust Company. In October 1986, Central Bank became a public company by converting to a capital stock co-operative bank. Central Bank is a full-service community banking operation that provides a variety of deposit and lending services -- including savings and checking accounts for retail and business customers, mortgage loans for constructing, purchasing and refinancing residential and commercial properties, and loans for home improvement and other purposes. The Bank operates eight full-service offices in the Massachusetts communities of Somerville, Arlington, Burlington, Chestnut Hill, Malden, Melrose, and Woburn (two branches). [FOOTER APPEARS BELOW] Making a Difference Somerville Arlington Central Bancorp, Inc. Our Mission To The Communities annual report 2000 We Serve As the pace of mergers and consolidations of large banking institutions intensifies, the management and board of directors of Central Bancorp want to reaffirm their commitment to serve the long-term interests of our stockholders, employees and communities. Many people are frustrated and angry by the changes that oftentimes result from large bank mergers, including higher fees and less accessibility to decision makers. Community banks like ours have the flexibility and the motivation to consistently provide the service that customers want and expect. We have always believed community banks make a tremendous difference in terms of providing customers with higher quality services at lower costs. We pride ourselves at having established excellent relationships in the communities we serve - relationships that have endured for decades. We have many customers who have been banking with us for their entire lives. We don't ever want to lose this personal touch. To that end, we will continue to do what we do best -- respond to the needs of our customers by offering competitive, value-based products and personalized service. [FOOTER APPEARS BELOW] Burlington Chestnut Hill Malden Melrose Woburn Central Bancorp real estate lending 2000 Central Bank has served the real estate needs of our community for more than 100 years. Central BankEand We lent over $100 million to homeowners, investors and business owners in the year ended March 31, 2000. We have cautiously expanded our lending for development projects and resolve whatever I permanent commercial real estate activities. The Bank believes a balanced mix of wholesale, retail, commercial and construction mortgage lending is a winning need very quicklyE combination for the community and our stockholders. [PHOTO ILLUSTRATIONS] Making a Difference Somerville Arlington Dear Stockholder Central Bancorp had another year of improved financial performance. Since I've been reporting positive news to you about our Company for some time now, this may sound like a broken record. I must admit, however, that I enjoy sharing good news with you. Our net income of $3,333,000 for the fiscal year ended March 31, 2000, represented Central Bancorp's best performance since becoming a public company in 1986. Earnings for the year increased by $651,000, up more than 24% over the prior fiscal year - fueled by increases in loan income and lower interest expense resulting from an asset-liability strategy to fund some of fiscal year 2000's growth with additional levels of borrowing. The Company's net income for the fiscal year ended March 31, 2000, would have been $234,000 higher had accounting rules not changed requiring the Company to incur a one-time charge for unamortized organization costs associated with the establishment of Central Bancorp, Inc., as the holding company for Central Bank in January 1999. small business activity Central Bank's lending activity to the small business community has expanded over the past few years as the healthy local economy has created greater opportunities for companies to grow and prosper. Our market is broad-based, encompassing distributors, the service industry, manufacturers and a multitude of other commercial establishments. Because of our excellent reputation for personalized service and our many years of experience, the Bank is viewed as a very viable option for businesses seeking loans for working capital and other purposes. Moving forward, we will expand our commercial product base to include related cash management products and services. [PHOTO ILLUSTRATIONS] "Whenever I have a question or a problem, I know I can go into Central Bank's Woburn office and resolve whatever I need to very quickly. The Customer Service Representative, Florence Daley, has been working there for 20 years and always greets me with a smile, making me feel welcome and special. It's nice to know there is someone who truly cares about helping people. Burlington Chestnut Hill Malden Melrose Woburn [STOCKHOLDERS LETTER CONTINUES BELOW] For the fiscal year ended March 31, 2000, our return on average assets of 0.93% and our return on average stockholders' equity of 9.53% were significantly above the prior year's levels and also represented their best performances in more than five years. Central Bancorp's overall financial position strengthened between March 31, 1999 and March 31, 2000, as total loans grew more than 14% to $320,013,000, primarily reflecting higher residential, commercial and construction mortgage loans, and assets rose over 12% to $409,557,000. Total loans and assets both ended the fiscal year at record levels. Additionally, our capital-to-assets ratio continued to remain well above regulatory guidelines. In May 2000, we announced our intention to repurchase another 5% of Central Bancorp's outstanding common stock following the completion of our second repurchase program. Through June 7, 2000, the Company had repurchased 191,933, or 9.7%, of the 1.9 million shares of common stock outstanding prior to the implementation of our first stock repurchase program in April 1999. central community package Our Central Community Package is considerably more attractive and less restrictive than personal account products offered by many other banks, especially the larger institutions. It features a no-fee checking account, a premium savings account, a MasterMoney(TM) debt/ATM card permitting unlimited free ATM withdrawals, and a Reserve Line of Credit. The minimum balance required to avoid fees is only $1,000. Customers are also eligible for premium rates on certificates of deposit, free telephone banking and discounts on safe deposit boxes. Based on feedback from our depositors, the Central Community Package is certainly meeting their everyday banking needs. [PHOTO ILLUSTRATION] "As the parent of a nine-year old child, I'm thrilled that Central Bank offers the Savings Makes Cents program. My son has learned so much about handling money and already has his own savings account." [STOCKHOLDERS LETTER CONTINUES BELOW] The board of directors of Central Bancorp initiated the three repurchase programs because it believed the common stock represented an attractive investment. The reduction in the number of outstanding shares is expected to benefit our stockholders by increasing Central Bancorp's earnings per share and book value per share. As you know, the stock market has been very volatile over the past year, with technology stocks experiencing unprecedented price increases and more traditional stocks, especially those perceived to be sensitive to rate changes such as banks, performing weakly despite excellent fundamentals. This uncertainty surrounding interest rates also has put a damper on the prices of bank stocks, which impacted Central Bancorp's stock price. As of March 31, 2000, the closing price of Central Bancorp was $14.88 per share, below its book value of $20.66 per share. These developments occurred even though our earnings and financial position have remained strong for many years, and we achieved record earnings for our most recent fiscal year. We are very good at what we do, we have an excellent reputation within the communities we serve, and we are well positioned for future growth and profitability. The members of your board of directors and management continue to believe the Company's common stock is undervalued. When the interest-rate situation stabilizes and the financial markets reexamine the fundamental values of those companies that are now out of favor, our stock price should respond positively. Our board of directors and management remain very optimistic about the Company's prospects, based in part on our solid customer base, strong community presence and competitive position. The board's decision to raise our cash dividend by 25% to 10 cents a share in November 1999 reflected its confidence in Central Bancorp's future. Moving forward, we will continue to responsibly manage your Company and provide first-rate service to our customers. We look forward to serving you in the months and years ahead. Sincerely, /s/ John D. Doherty John D. Doherty President & Chief Executive Officer financial highlights
March 31, -------------------------------------------------------------------- (In Thousands, Except Per Share Data and Selected Ratios) 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Balance Sheets Total assets ............................................. $409,557 $364,696 $375,233 $320,950 $310,949 Total loans .............................................. 320,013 280,346 281,724 234,935 214,421 Investments: Available for sale .................................... 70,245 68,881 73,027 63,839 64,796 Held to maturity ...................................... -- -- 4,000 4,000 5,651 Deposits ................................................. 258,339 266,463 276,364 259,093 257,096 Borrowings ............................................... 111,000 57,000 59,000 25,000 18,000 Total stockholders' equity ............................... 37,397 38,742 36,786 33,545 31,084 Shares outstanding ....................................... 1,810 1,967 1,965 1,965 1,965 Statements of Operations Net interest and dividend income ......................... $ 13,375 $ 11,947 $ 11,698 $ 11,623 $ 11,075 Provision for loan losses ................................ -- -- -- -- 120 Total non-interest income ................................ 1,669 1,368 1,814 888 1,347 Total operating expenses ................................. 9,345 8,773 8,471 8,986 10,666 Net income before cumulative effect of accounting change ..................................... 3,567 2,682 3,047 2,837 1,226 Net income ............................................... 3,333 2,682 3,047 2,837 1,226 Earnings per common share - assuming dilution: Before cumulative effect of accounting change ......... 1.89 1.38 1.56 1.46 0.64 After cumulative effect of accounting change .......... 1.77 1.38 1.56 1.46 0.64 Selected Ratios Interest rate spread ..................................... 3.33% 2.97% 3.11% 3.45% 3.37% Net yield on interest-earning assets ..................... 3.64 3.29 3.45 3.78 3.64 Equity-to-assets ......................................... 9.13 10.62 9.80 10.45 10.00 Return on average assets ................................. 0.93 0.72 0.88 0.89 0.39 Return on average stockholders' equity ................... 9.53 7.12 8.64 8.67 3.96
5 Central Bancorp 2000 Annual Report management's discussion and analysis of financial condition and results of operations General Central Bancorp, Inc. (the "Company") is a bank holding company headquartered in Somerville, Massachusetts. The Company is the holding company for its wholly owned subsidiary, Central Bank (the "Bank"), a state chartered co-operative bank with the legal name of Central Co-operative Bank. Substantially all of the Company's operations are the operations of the Bank. Therefore, the majority of the discussion that follows is a discussion of the Bank's operations. Through the Bank, the Company acquires funds in the form of deposits and borrowings, and uses the funds to make mortgage loans for the construction, purchase and refinancing of residential properties, and to make loans on commercial real estate and business loans in its market area. The Bank also makes a limited amount of consumer loans including home improvement and secured and unsecured personal loans. The Bank has used excess funds to purchase investment and mortgage-backed securities. The operations of the Bank are generally influenced by overall economic conditions, the related monetary and fiscal policies of the federal government and the regulatory policies of financial institution regulatory authorities, including the Banking Commissioner of Massachusetts, the Federal Reserve Board and the Federal Deposit Insurance Corporation ("FDIC"). The Bank monitors its exposure to earnings fluctuations resulting from market interest rate changes. Historically the Bank's earnings have been vulnerable to changing interest rates due to differences in the terms to maturity or repricing of its assets and liabilities. For example, in a rising interest rate environment, the Bank's net interest income and net income could be negatively affected as interest-sensitive liabilities (deposits and borrowings) could adjust more quickly to rising interest rates than the Bank's interest-sensitive assets (loans and investments). The following is a discussion and analysis of the Bank's results of operations for the last three fiscal years and its financial condition at the end of fiscal years 2000 and 1999. Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes. Results of Operations The Company reported net income of $3.3 million or $1.77 per diluted share after cumulative effect of change in accounting principle for fiscal 2000, as compared to $2.7 million or $1.38 per diluted share for fiscal 1999 and $3.0 million or $1.56 per diluted share for fiscal 1998. The earnings increase for fiscal 2000 was primarily the result of higher net interest income and sales of investment securities, partially offset by an increase in operating expenses. The Company was able to increase net interest and dividend income during this period despite a fiercely competitive market for loans and deposits. The decrease in the cost of deposits resulted from management's decision to not aggressively price deposits in a declining interest rate environment, which caused the overall cost of funds to decrease. Fiscal 2000 results were reduced by a one-time charge of $234,000, net of taxes, for costs associated with establishing, on January 8, 1999, Central Bancorp, Inc. as the holding company for Central Bank. This charge represented the balance of unamortized organization costs outstanding as of April 1, 1999, that were required to be written off in accordance with a new accounting rule regarding reporting costs of organization activities. Excluding this cumulative effect of a change in accounting principle, the Company's net income for the fiscal year ended March 31, 2000, was $3.6 million or $1.89 per diluted share. Interest Rate Spread The Bank's operating results are significantly affected by its net interest spread, which is the difference between the yield on loans and investments and the interest cost of deposits and borrowings. The interest spread is affected by economic conditions and market factors that influence interest rates, loan demand and deposit flows. 6 Central Bancorp 2000 Annual Report The following table presents the Bank's income yield and cost of funds by their primary components for the fiscal years ended March 31:
2000 1999 1998 -------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars In Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Mortgage loans ........... $293,126 $ 21,806 7.44% $282,631 $ 21,250 7.52% $245,339 $ 19,326 7.88% Other loans .............. 6,963 599 8.60 4,882 423 8.66 4,990 444 8.90 Short-term investments ... 8,197 421 5.14 13,128 650 4.95 4,495 251 5.58 Investment securities ....... 32,632 2,039 6.25 23,375 1,481 6.34 38,836 2,443 6.29 Mortgage-backed securities ............. 25,035 1,465 5.85 37,676 2,097 5.57 44,073 2,659 6.03 The Cooperative Central Bank Reserve Fund ...... 1,576 94 5.96 1,576 95 6.03 1,576 99 6.28 -------- ------- -------- -------- -------- -------- Total interest-earning assets ................ $367,529 26,424 7.19 $363,268 25,996 7.16 $339,309 25,222 7.43 ======== ------- ======== -------- ======== -------- Interest-bearing liabilities: Deposits ................. $257,536 8,553 3.32 $275,135 10,770 3.91 $270,650 11,084 4.10 Advances from Federal Home Loan Bank of Boston ... 80,907 4,496 5.56 59,901 3,279 5.47 42,130 2,440 5.79 -------- ------- -------- -------- -------- -------- Total interest-bearing liabilities ........ $338,443 13,049 3.86 $335,036 14,049 4.19 $312,780 13,524 4.32 ======== ------- ======== -------- ======== -------- Net interest and dividend income .................... $ 13,375 $ 11,947 $ 11,698 ======== ======== ======== Interest rate spread ........ 3.33% 2.97% 3.11% ==== ==== ==== Net yield on interest- earning assets ........... 3.64% 3.29% 3.45% ==== ==== ====
Rate/Volume Analysis The effect on net interest income of changes in interest rates and changes in the amounts of interest-earning assets and interest-bearing liabilities is shown in the following table. Information is provided on changes for the fiscal years indicated attributable to (i) changes in the interest rates; (ii) changes in volume; and (iii) the combined changes in interest rates and volume.
2000 vs. 1999 1999 vs. 1998 ------------------------------------------------------------------------------------------- Change due to Increase (Decrease) in: Change due to Increase (Decrease) in: ------------------------------------------------------------------------------------------- Rate/ Rate/ (In Thousands) Volume Rate Volume Total Volume Rate Volume Total - ----------------------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Mortgage loans ................... $ 789 $ (226) $ (7) $ 556 $ 2,939 $ (883) $ (132) $ 1,924 Other loans ...................... 180 (3) (1) 176 (10) (12) 1 (21) ------- ------- ------- ------- ------- ------- ------- ------- Total income from loans ........ 969 (229) (8) 732 2,929 (895) (131) 1,903 ------- ------- ------- ------- ------- ------- ------- ------- Short-term investments .............. (244) 25 (10) (229) 482 (28) (55) 399 Investment securities ............... 587 (21) (8) 558 (972) 19 (9) (962) Mortgage-backed securities .......... (704) 105 (33) (632) (386) (203) 27 (562) The Co-operative Central Bank Reserve Fund ................. -- (1) -- (1) -- (4) -- (4) ------- ------- ------- ------- ------- ------- ------- ------- Total income from investments .... (361) 108 (51) (304) (876) (216) (37) (1,129) ------- ------- ------- ------- ------- ------- ------- ------- Total interest and dividend income ......................... 608 (121) (59) 428 2,053 (1,111) (168) 774 ------- ------- ------- ------- ------- ------- ------- ------- Interest expense: Deposits ......................... (688) (1,623) 94 (2,217) 184 (514) 16 (314) Advances from Federal Home Loan Bank of Boston ............... 1,149 54 14 1,217 1,029 (135) (55) 839 ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense ........... 461 (1,569) 108 (1,000) 1,213 (649) (39) 525 ------- ------- ------- ------- ------- ------- ------- ------- Net interest and dividend income .... $ 147 $ 1,448 $ (167) $ 1,428 $ 840 $ (462) $ (129) $ 249 ======= ======= ======= ======= ======= ======= ======= =======
7 Central Bancorp 2000 Annual Report Interest and Dividend Income The Bank experienced a $428 thousand overall increase in interest and dividend income for the fiscal year ended March 31, 2000 compared to fiscal 1999. Interest income on loans increased by $732 thousand to $22.4 million due to a $12.6 million increase in average loan balances. Total loans increased by $39.7 million from March 31, 1999 to March 31, 2000 and the yield on these loans decreased by 7 basis points. The Bank originated new loans amounting to $108.4 million, of which $78.5 million were adjustable-rate loans. Additionally, interest and dividend income on investments decreased by $304 thousand due primarily to an $8.3 million decrease in average total balances of investments, partly offset by a 25 basis point increase in the rate earned on investments during fiscal 2000. The overall total average balance of interest-earning assets increased by $4.3 million from fiscal 1999 to fiscal 2000, and the average yield on all interest-earning assets increased by 3 basis points between the two fiscal years. The Bank experienced a $774 thousand overall increase in interest and dividend income for the fiscal year ended March 31, 1999 compared to fiscal 1998. Interest income on loans increased by $1.9 million to $21.7 million due to a $37.2 million increase in average loan balances, although total loans decreased by $1.4 million from March 31, 1998 to March 31, 1999. Partly offsetting the increase in average loans outstanding was a 36 basis point decrease in the average yield on these loans. The Bank originated new loans amounting to $111.2 million, of which $51.1 million were adjustable-rate loans. Additionally, interest and dividend income on investments decreased by $1.1 million due primarily to a $13.2 million decrease in average total balances of investments and by a 42 basis point decrease in the rate earned on investments during fiscal 1999. The overall total average balance of interest-earning assets increased by $24.0 million from fiscal 1998 to fiscal 1999, while the average yield on all interest-earning assets decreased by 27 basis points between the two fiscal years. Interest Expense Interest expense on deposits decreased during the fiscal year ended March 31, 2000 by $2.2 million, from $10.8 million in fiscal 1999 to $8.6 million in fiscal 2000. The decrease can be attributed to a decrease of 59 basis points in the interest rate paid on deposits, from 3.91% during fiscal 1999 to 3.32 % during fiscal 2000, as well as a decrease in the average balance of deposits to $257.5 million during fiscal 2000 from $275.1 million during fiscal 1999. Interest expense on borrowings increased as the average balance of borrowings rose to $80.9 million during fiscal 2000 from $59.9 million during fiscal 1999 and the average rate paid on borrowed funds increased 9 basis points from 5.47% in fiscal 1999 to 5.56% in fiscal 2000. Both factors combined to cause a $1.2 million increase in interest expense on borrowings during fiscal 2000. There was an overall increase in the average balance of interest-bearing liabilities of $3.4 million during fiscal 2000 compared to fiscal 1999 while the cost of those liabilities declined by 33 basis points, to 3.86% in fiscal 2000. For fiscal 1999, interest expense on deposits decreased by $314 thousand from $11.1 million in fiscal 1998 to $10.8 million in fiscal 1999. The decrease can be attributed primarily to a decrease of 19 basis points in the interest rate paid on deposits from 4.10% during fiscal 1998 to 3.91% in fiscal 1999, which was partly offset by an increase in the average total balance of deposits to $275.1 million during fiscal 1999 from $270.7 million in the prior period. Interest expense on borrowings increased as the average balance of borrowings rose to $59.9 million during fiscal 1999 from $42.1 million during fiscal 1998. Partly offsetting the increase in the average balance was a 32 basis point decrease in the rate paid on these borrowings to 5.47% in fiscal 1999 from 5.79% in fiscal 1998. Both factors combined to cause an $839 thousand increase in interest expense on borrowings during fiscal 1999. There was an overall increase in the average balance of interest-bearing liabilities of $22.3 million during fiscal 1999 compared to fiscal 1998. Provision for Loan Losses Due to the Bank's stable and relatively high level of asset quality, there was no provision for loan losses during fiscal 2000, 1999 and 1998. At March 31, 2000, 1999 and 1998, problem assets totaled $235 thousand, $420 thousand and $1.7 million, representing 0.1%, 0.1% and 0.4% of total assets, respectively. Problem assets are loans 90 days or more past due, real estate acquired by foreclosure and impaired loans. Loans 90 days or more past due amounted to $235 thousand at March 31, 2000, a decrease of $184 thousand from $419 thousand at March 31, 1999. There were no impaired loans at March 31, 2000 and March 31, 1999. At March 31, 1998, impaired loans amounted to $1.3 million, all performing within the term of the current agreements. There was no real estate acquired by foreclosure at March 31, 2000, 1999 or 1998. 8 Central Bancorp 2000 Annual Report Non-interest Income Total non-interest income for fiscal 2000 was $1.7 million, compared to $1.4 million during fiscal 1999. The primary reason for the $301 thousand increase was an increase in gains from the sales of investment and mortgage-backed securities during fiscal 2000 of $1.0 million compared to $580 thousand during fiscal 1999. Total non-interest income for fiscal 1999 was $1.4 million, compared to $1.8 million during fiscal 1998. The primary reason for the $446 thousand decline was a decrease in gains from the sale of investments and mortgage-backed securities during fiscal 1999 of $580 thousand compared to $1.1 million during fiscal 1998. In addition, during fiscal 1999, the Bank sold a non-banking facility, realizing a net gain on sale of $105 thousand. Operating Expenses Operating expenses increased $572 thousand during the fiscal year ended March 31, 2000, as compared to the fiscal year ended March 31, 1999. This increase was primarily attributable to increases in salaries and benefits of $638 thousand, in professional fees of $119 thousand and other expenses of $132 thousand. These increases were partially offset by a reduction in occupancy and equipment expenses during fiscal 2000 of $301 thousand. Operating expenses increased $302 thousand during the fiscal year ended March 31, 1999, as compared to the fiscal year ended March 31, 1998. This increase was primarily attributable to increases in salaries and benefits of $179 thousand, in occupancy and equipment of $273 thousand and in data processing service fees of $146 thousand. These increases were partially offset by a reduction in professional fees during fiscal 1999 of $144 thousand due to consulting fees incurred during fiscal 1998 relating to a change in computer processing systems. Other expenses decreased during fiscal 1999 by $151 thousand due to decreased advertising and promotional activities as compared to fiscal 1998. Income Taxes The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Bank's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. During fiscal 1999 and 1998, the Bank's effective income tax expense increased substantially to approximately the statutory rate. The Company implemented certain tax-saving strategies in fiscal 2000 that resulted in a decline in the effective tax rate. The effective rates of income tax expense for the fiscal years ended March 31, 2000, 1999 and 1998 were 37.4%, 41.0% and 39.6%, respectively. Financial Condition Total assets at March 31, 2000 amounted to $409.6 million, an increase of $44.9 million from $364.7 million at March 31, 1999. Total assets at March 31, 1999 decreased $10.5 million from $375.2 million at March 31, 1998. During fiscal 2000, increased borrowed funds were used to fund the increase in loans and investments and the decline in the Bank's deposits. Net loans increased $39.6 million to $317.0 million at March 31, 2000 from $277.4 million at March 31, 1999. At March 31, 2000, mortgage loans were $315.0 million, a $40.8 million increase from March 31, 1999. During the fiscal year ended March 31, 2000, the Bank originated loans totaling $108.4 million, of which $29.9 million were fixed-rate loans and $78.5 million were adjustable-rate loans. Total loans originated during the fiscal year ended March 31, 1999, totaled $111.2 million, of which $60.1 million were fixed-rate loans and $51.1 million were adjustable-rate loans. Risk Elements The improvement in the Bank's real estate portfolio continued through fiscal 2000, which resulted in a $184 thousand overall decrease in its problem assets to $235 thousand at March 31, 2000 as compared to $420 thousand at March 31, 1999. Any reversal of the favorable economic conditions experienced during fiscal 2000 could result in the Bank experiencing increases in problem assets that would negatively affect the Bank's results of operations. The allowance for loan losses is maintained at a level which management considers adequate to provide for inherent probable losses based on an evaluation of known and inherent risks in the portfolio. Such evaluation includes identification of adverse situations that may affect the ability of certain borrowers to repay, a review of overall portfolio size, quality, composition and an assessment of existing and anticipated economic conditions. 9 Central Bancorp 2000 Annual Report While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making current evaluations. Any such adjustments to the allowance could negatively affect the Bank's net income. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged to the allowance. Investment Activities The Bank's management believes it prudent to maintain an investment portfolio that provides not only a source of income but also a source of liquidity to meet lending demands and fluctuations in deposit flows. Deposits Total deposits at March 31, 2000 were $258.3 million, an $8.1 million decrease from $266.5 million one year earlier. Savings accounts and other types of deposits have traditionally been an important source of funds for lending, investment purchases, and for other general business purposes. The decrease in deposits resulted from management's decision to not aggressively price deposits in a declining interest rate environment, which caused the overall cost of funds to decrease. Advances from the Federal Home Loan Bank of Boston Advances from the Federal Home Loan Bank of Boston increased to $111.0 million at March 31, 2000 from $57.0 million at March 31, 1999. This was the result of an asset-liability strategy to fund some of fiscal year 2000's growth with additional levels of borrowing. Asset/Liability Management and Market Risk The Bank'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 Bank 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 policies 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 Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The main objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Bank's net interest income and preserve capital, while adjusting the Bank's 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 following two tables reflect different methods of disclosing the Bank's exposure to a change in interest rates and its potential impact on the Bank's net interest income. The gap analysis uses contractual maturities and next repricing dates, while the market risk simulation measures changes in net interest income as a result of changes in market interest rates. The interest rate sensitivity of the Bank's assets and liabilities in both tables would vary substantially if different assumptions were used or if actual experience differs from the assumptions provided. The following table sets forth maturity and repricing information concerning the Bank's interest-sensitive assets and liabilities at March 31, 2000. The table does not reflect partial or full prepayment of loans or mortgage-backed securities prior to contractual maturity. 10 Central Bancorp 2000 Annual Report
(Dollars In Thousands) Time Interval from March 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 0-30 31-90 91-180 181-365 1-3 3-5 Days Days Days Days Years Years Thereafter Total --------------------------------------------------------------------------------------------------- Interest-sensitive assets: Short-term investments ............... $ 14,802 $ -- $ -- $ -- $ -- $ -- $ -- $ 14,802 Investment securities (including stock in the Federal Home Loan Bank of Boston) ........... 7,145 5,800 -- 994 -- 6,869 17,127 37,935 Adjustable-rate loans (a) .... 11,233 2,423 10,807 16,756 41,942 126,408 10,212 219,781 Fixed-rate loan amortization (b) .......... 8,086 159 464 1,002 7,914 10,267 72,340 100,232 Mortgage-backed securities amortization (b) .......... 6,969 1,791 1,988 1,403 896 7,263 2,998 23,308 The Co-Operative Central Bank Reserve Fund ......... -- -- 1,576 -- -- -- -- 1,576 -------- --------- --------- --------- --------- --------- --------- ---------- Total interest- sensitive assets .......... 48,235 10,173 14,835 20,155 50,752 150,807 102,677 397,634 -------- --------- --------- --------- --------- --------- --------- ---------- Interest-sensitive liabilities: NOW accounts (c) ............ 8,054 -- -- -- -- -- 24,164 32,218 Regular, club, and 90-day notice accounts (c) ....... 15,369 6 -- -- -- -- 46,100 61,475 Money market deposit accounts .......... 19,045 -- -- -- -- -- -- 19,045 Term deposit certificates ... 5,388 14,311 33,782 25,891 44,207 3,388 -- 126,967 Advances from FHLB of Boston ............ 10,000 7,000 -- 1,000 4,000 5,000 84,000 111,000 -------- --------- --------- --------- --------- --------- --------- ---------- Total interest-sensitive liabilities .............. 57,856 21,317 33,782 26,891 48,207 8,388 154,264 350,705 -------- --------- --------- --------- --------- --------- --------- ---------- Interest-sensitivity gap (assets minus liabilities) ............... $ (9,621) $ (11,144) $ (18,947) $ (6,736) $ 2,545 $ 142,419 $ (51,587) $ 46,929 ======== ========= ========= ========= ========= ========= ========= ========== Cumulative gap .............. $ (9,621) $ (20,765) $ (39,712) $ (46,448) $ (43,903) $ 98,516 $ 46,929 ======== ========= ========= ========= ========= ========= ========= Cumulative interest- sensitive assets as a percent of cumulative interest-sensitive liabilities ................ 83.4% 73.8% 64.8% 66.8% 76.7% 150.1% 113.4% Cumulative gap as a percent of total assets ............... (2.3)% (5.1)% (9.7)% (11.3)% (10.7)% 24.1% 11.5%
(a) Adjustable-rate mortgage loan amounts and other loans subject to repricing are accumulated as if the entire balance came due on the repricing date. (b) Amortization is shown in the time period corresponding to the contractual amortization or, when such information was not available, the computed principal amortization based on weighted average maturities and weighted average rates. Fixed-rate demand loans are shown in the "0-30 Days" category and are usually amortized over longer periods and can be repriced at the option of the Bank. (c) Although NOW and regular accounts are subject to immediate withdrawal and repricing, management considers these accounts to have significantly longer effective maturities and repricing terms; therefore, the majority of such accounts have been included in the "Thereafter" category. If NOW and regular accounts had been assumed to be subject to repricing within one year, the cumulative excess of interest-sensitive liabilities over interest-sensitive assets would have been $116,714 or 28.5% of total assets. The Bank 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. 11 Central Bancorp 2000 Annual Report Simulation analysis involves projecting future interest income and expense under various rate scenarios. The simulation is based on actual 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 cash flows and management's assumptions is compared to net interest income projections based on an immediate shift of 300 basis points upward and 200 basis points downward in the first year of the model. The following table indicates the estimated exposure as a percentage of estimated net interest income for the next twelve and twenty-four month periods: Percentage Change in Estimated Net Interest Income Over ------------------------------ 12 months 24 months ------------------------------ 300 basis point increase in rates ............. (13.8)% (14.8)% 200 basis point decrease in rates ............. (0.9) (3.2) Based on the scenario above, net interest income of the Company would be adversely affected in both the twelve and twenty-four month periods, although the negative impact would likely be substantially greater in a rising interest rate environment. Liquidity The Bank's principal sources of liquidity are customer deposits, amortization and repayments of loan and mortgage-backed security principal, FHLB of Boston advances and maturities of various other investments. These various sources of liquidity, as well as the Bank's ability to sell residential mortgage loans in the secondary market, are used to fund deposit withdrawals, loan originations and investments. Deposits have been a relatively stable source of funds for the Bank despite the continued competition in recent years. During fiscal 2000, deposit balances decreased by $8.2 million to $258.3 million from $266.5 million at March 31, 1999. The Bank is a member of the FHLB of Boston and has the ability to borrow from the FHLB of Boston for any sound business purpose for which the Bank has legal authority, subject to such regulations and limitations as may be prescribed. At March 31, 2000 and 1999, the Bank had outstanding FHLB of Boston advances of $111.0 million and $57.0 million, respectively. The deposits and FHLB advances were used to fund the Bank's lending and investing activities during the year. The FHLB of Boston advances are secured by a blanket lien on residential first mortgage loans, investment securities and all stock in the FHLB of Boston. As a member of The Co-operative Central Bank, the Bank also has the right to borrow from that organization for short-term cash needs, by pledging certain assets. The Bank also may obtain funds from the Federal Reserve Bank of Boston by pledging certain of the Bank's notes and drafts. The Bank has not exercised these rights. Loan originations, including purchases, totaled $108.4 million, $111.2 million, and $109.7 million for the fiscal years ended March 31, 2000, 1999 and 1998, respectively. At March 31, 2000, outstanding commitments to originate mortgage loans totaled $21.6 million, and commitments for unadvanced funds on home equity, commercial and construction loans totaled $17.5 million. Currently, the Bank does not have any mortgage loans available for sale in the secondary market. Management believes that the Bank has adequate sources of liquidity to fund these commitments. Capital Resources Massachusetts chartered co-operative banks that are insured by the FDIC, such as the Bank, are required to maintain minimum capital ratios pursuant to banking regulations. The first standard establishes a risk-adjusted ratio relating capital to different categories of balance sheet assets and off-balance sheet obligations. Two categories of capital are defined: Tier 1 or core capital (stockholders' equity) and Tier 2 or supplementary capital. Total capital is the sum of both Tier 1 and Tier 2. According to the standards, Tier 1 capital must represent at least 50% of qualifying total capital. At March 31, 2000, the minimum total risk-based capital ratio required was 8.00%. The Bank's risk-based total capital ratio at March 31, 2000, was 14.52%. To complement the risk-based standards, the FDIC adopted a leverage ratio (stockholders' equity divided by total assets) of 3% for the most highly rated banks and 4%-5% for all others. The leverage ratio is to be used in tandem with the risk-based capital ratios as the minimum standards for banks. The Bank's leverage ratio was 8.85% at March 31, 2000. 12 Central Bancorp 2000 Annual Report 12 consolidated balance sheets
March 31, ------------------------ (Dollars in Thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks .............................................................................. $ 6,588 $ 4,964 Short-term investments ............................................................................... 14,802 16,939 Investments available for sale: Investment securities (amortized cost of $32,839 in 2000 and $21,182 in 1999) (notes 2 and 11) .... 32,135 21,943 Mortgage-backed securities (amortized cost of $23,862 in 2000 and $30,190 in 1999) (note 2) ....... 23,308 29,999 Stock in Federal Home Loan Bank of Boston, at cost (note 7) .......................................... 5,800 3,350 The Co-operative Central Bank Reserve Fund (note 8) .................................................. 1,576 1,576 --------- --------- Total investments .............................................................................. 77,621 73,807 --------- --------- Loans: Mortgage loans (notes 3, 5 and 11) ................................................................ 314,966 274,146 Other loans (notes 4 and 5) ....................................................................... 5,047 6,200 --------- --------- 320,013 280,346 Less allowance for loan losses (note 6) ........................................................... 2,993 2,913 --------- --------- Net loans ...................................................................................... 317,020 277,433 --------- --------- Accrued interest receivable .......................................................................... 2,036 1,614 Office properties and equipment, net (note 9) ........................................................ 2,218 2,550 Deferred tax asset, net (note 12) .................................................................... 1,071 744 Goodwill, net ........................................................................................ 2,808 3,096 Other assets ......................................................................................... 195 488 --------- --------- Total assets ................................................................................... $ 409,557 $ 364,696 ========= ========= Liabilities and Stockholders' Equity Liabilities: Deposits (note 10) ................................................................................ $ 258,339 $ 266,463 Advances from Federal Home Loan Bank of Boston (note 11) .......................................... 111,000 57,000 Advance payments by borrowers for taxes and insurance ............................................. 1,053 1,389 Accrued interest payable .......................................................................... 542 291 Accrued expenses and other liabilities ............................................................ 1,226 811 --------- --------- Total liabilities .............................................................................. 372,160 325,954 ========= ========= Commitments and contingencies (notes 9, 13 and 16) Stockholders' equity (note 14): Preferred stock $1.00 par value, authorized 5,000,000 shares; none issued or outstanding .......... -- -- Common stock $1.00 par value, authorized 15,000,000 shares; issued 1,970,000 and 1,967,000 shares (outstanding 1,810,450 and 1,967,000) at March 31, 2000 and 1999, respectively ............................................................................. 1,970 1,967 Additional paid-in capital ........................................................................ 11,190 11,171 Retained income ................................................................................... 28,538 25,894 Treasury stock (159,550 and 0 shares of common at March 31, 2000 and 1999, respectively), at cost ........................................................................................ (3,043) -- Accumulated other comprehensive (loss) income ..................................................... (825) 327 Unearned compensation - ESOP (note 15) ............................................................ (433) (617) --------- --------- Total stockholders' equity ..................................................................... 37,397 38,742 --------- --------- Total liabilities and stockholders' equity ..................................................... $ 409,557 $ 364,696 ========= =========
See accompanying notes to consolidated financial statements. 13 Central Bancorp 2000 Annual Report consolidated statements of income
Fiscal Years Ended March 31, ------------------------------------- (In Thousands, Except Per Share Data) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Interest and dividend income: Mortgage loans ....................................................................... $ 21,806 $ 21,250 $ 19,326 Other loans .......................................................................... 599 423 444 Short-term investments ............................................................... 421 650 251 Investment securities ................................................................ 2,039 1,481 2,443 Mortgage-backed securities ........................................................... 1,465 2,097 2,659 The Co-operative Central Bank Reserve Fund ........................................... 94 95 99 -------- -------- -------- Total interest and dividend income ................................................ 26,424 25,996 25,222 -------- -------- -------- Interest expense: Deposits ............................................................................. 8,553 10,770 11,084 Advances from Federal Home Loan Bank of Boston ....................................... 4,496 3,279 2,440 -------- -------- -------- Total interest expense ............................................................ 13,049 14,049 13,524 -------- -------- -------- Net interest and dividend income .................................................. 13,375 11,947 11,698 Provision for loan losses (note 6) ...................................................... -- -- -- -------- -------- -------- Net interest and dividend income after provision for loan losses .................. 13,375 11,947 11,698 -------- -------- -------- Non-interest income: Deposit service charges .............................................................. 414 431 493 Net gain from sales of investment securities (note 2) ................................ 1,013 580 1,051 Gain on sale of building ............................................................. -- 105 -- Other income ......................................................................... 242 252 270 -------- -------- -------- Total non-interest income ......................................................... 1,669 1,368 1,814 -------- -------- -------- Operating expenses: Salaries and employee benefits ....................................................... 5,017 4,379 4,200 Occupancy and equipment (note 9) ..................................................... 1,167 1,468 1,195 Data processing service fees ......................................................... 534 543 397 Professional fees .................................................................... 875 756 900 Foreclosure expenses, net ............................................................ (6) 1 2 Goodwill amortization ................................................................ 288 288 288 Other expenses ....................................................................... 1,470 1,338 1,489 -------- -------- -------- Total operating expenses .......................................................... 9,345 8,773 8,471 -------- -------- -------- Income before income taxes ........................................................ 5,699 4,542 5,041 Income tax expense (note 12) ............................................................ 2,132 1,860 1,994 -------- -------- -------- Net income before cumulative effect of change in accounting principle ............. 3,567 2,682 3,047 Cumulative effect of change in accounting principle, net of taxes........................ (234) -- -- -------- -------- -------- Net income ........................................................................ $ 3,333 $ 2,682 $ 3,047 ======== ======== ======== Earnings per common share (note 1): Before cumulative effect of change in accounting principle ........................... $ 1.90 $ 1.38 $ 1.57 ======== ======== ======== Before cumulative effect of change in accounting principle - assuming dilution ....... $ 1.89 $ 1.38 $ 1.56 ======== ======== ======== After cumulative effect of change in accounting principle ............................ $ 1.77 $ 1.38 $ 1.57 ======== ======== ======== After cumulative effect of change in accounting principle - assuming dilution ........ $ 1.77 $ 1.38 $ 1.56 ======== ======== ======== Weighted average common shares outstanding .............................................. 1,882 1,938 1,937 ======== ======== ======== Weighted average common shares outstanding, diluted ..................................... 1,885 1,946 1,948 ======== ======== ========
See accompanying notes to consolidated financial statements. 14 Central Bancorp 2000 Annual Report 14 consolidated statements of changes in stockholders' equity
Accumulated Additional Other Unearned Total Common Paid-in Retained Treasury Comprehensive Compensation Stockholders' (In Thousands, Except Per Share Data) Stock Capital Income Stock (Loss) Income ESOP Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1997 ................ $ 1,965 $ 11,159 $ 21,423 $ -- $ (156) $ (846) $ 33,545 Net income ............................... -- -- 3,047 -- -- -- 3,047 Other comprehensive income, net of tax: Unrealized gain on securities, net of reclassification adjustment ......... -- -- -- -- 700 -- 700 Comprehensive income ................ 3,747 -------- Dividends paid ($0.32 per share) ......... -- -- (629) -- -- -- (629) Amortization of unearned compensation - ESOP ................... -- -- -- -- -- 123 123 -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 1998 ................ 1,965 11,159 23,841 -- 544 (723) 36,786 Net income ............................... -- -- 2,682 -- -- -- 2,682 Other comprehensive income, net of tax: Unrealized (loss) on securities, net of reclassification adjustment ......... -- -- -- -- (217) -- (217) -------- Comprehensive income ................ 2,465 -------- Proceeds from exercise of stock options .. 2 12 -- -- -- -- 14 Dividends paid ($0.32 per share) ......... -- -- (629) -- -- -- (629) Amortization of unearned compensation - ESOP ................. -- -- -- -- -- 106 106 -------- -------- -------- -------- -------- -------- -------- Balance at March 31, 1999 ................ 1,967 11,171 25,894 -- 327 (617) 38,742 Net income ............................... -- -- 3,333 -- -- -- 3,333 Other comprehensive income, net of tax: Unrealized (loss) on securities, net of reclassification adjustment ......... -- -- -- -- (1,152) -- (1,152) -------- Comprehensive income ................ 2,181 -------- Proceeds from exercise of stock options .. 3 19 -- -- -- -- 22 Purchase of treasury stock ............... -- -- -- (3,043) -- -- (3,043) 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 ======== ======== ======== ======== ======== ======== ========
The Bank's other comprehensive income (loss) and related tax effect for the fiscal years ending March 31 are as follows:
2000 ---------------------------------------- Before-tax Tax (Benefit) After-Tax (In Thousands) Amount Expense Amount - --------------------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding (losses) during period ....................................... $ (815) $ (297) $ (518) Less: reclassification adjustment for (gains) realized in net income ............ (1,013) (379) (634) ------- ------- ------- Other comprehensive loss ...................................................... $(1,828) $ (676) $(1,152) ======= ======= =======
1999 ---------------------------------------- Before-tax Tax (Benefit) After-Tax (In Thousands) Amount Expense Amount - --------------------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized holding gains during period .......................................... $ 199 $ 85 $ 114 Less: reclassification adjustment for (gains) realized in net income ............ (580) (249) (331) ------- ------- ------- Other comprehensive loss ...................................................... $ (381) $ (164) $ (217) ======= ======= =======
See accompanying notes to consolidated financial statements. 15 Central Bancorp 2000 Annual Report 15 consolidated statements of cash flows
Fiscal Years Ended March 31, --------------------------------------- (In Thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ......................................................................... $ 3,333 $ 2,682 $ 3,047 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................... 462 729 447 Amortization of premiums and discounts .......................................... 132 461 209 Amortization of goodwill ........................................................ 288 288 288 Increase in deferred tax assets ................................................. (327) (175) (388) Net gains from sales of investment and mortgage-backed securities ............... (1,013) (580) (1,051) Net gain from sale of building .................................................. -- (105) -- Cumulative effect of change in accounting principle ................................ 234 -- -- Proceeds from sales of loans ....................................................... -- -- 193 Proceeds from sales of real estate acquired by foreclosure ......................... -- -- 141 (Increase) decrease in accrued interest receivable ................................. (422) 296 (1) Decrease (increase) in other assets ................................................ 59 (256) 175 (Decrease) increase in advance payments by borrowers for taxes and insurance ....... (336) 160 105 Increase (decrease) in accrued interest payable .................................... 251 (192) 167 Increase (decrease) in accrued expenses and other liabilties ....................... 415 (560) 329 --------- --------- --------- Net cash provided by operating activities ....................................... 3,076 2,748 3,661 ========= ========= ========= Cash flows from investing: Principal collected on loans ....................................................... 68,641 112,825 62,384 Loan originations .................................................................. (108,363) (111,231) (109,736) Principal payments on mortgage-backed securities available for sale ................ 9,420 14,942 12,454 Purchase of mortgage-backed securities available for sale .......................... (3,216) -- (29,528) Purchase of investment securities available for sale ............................... (18,500) (16,622) (3,915) Proceeds from sales of investment securities available for sale .................... 6,159 4,049 3,955 Maturities of investment securities held to maturity ............................... -- 4,000 -- Maturities of investment securities available for sale ............................. 2,500 15,100 13,300 Net decrease (increase) in short-term investments .................................. 2,137 (13,618) (283) Purchase of stock in Federal Home Loan Bank of Boston .............................. (2,450) (200) (818) Proceeds from sale of land and building ............................................ -- 239 -- Purchase of office properties and equipment, net ................................... (130) (576) (516) --------- --------- --------- Net cash (used) provided by investing activities ................................ (43,802) 8,908 (52,703) --------- --------- ---------
Continued 16 Central Bancorp 2000 Annual Report 16 Continued
Fiscal Years Ended March 31, --------------------------------------- (In Thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net (decrease) increase in deposits ................................................ (8,124) (9,901) 17,271 Proceeds from advances from FHLB of Boston ......................................... 155,500 43,495 95,000 Payments on advances from FHLB of Boston ........................................... (101,500) (45,495) (61,000) Proceeds from exercise of stock options ............................................ 22 14 -- Purchase of Treasury stock ......................................................... (3,043) -- -- Payments of dividends on common stock .............................................. (689) (629) (629) Payments on ESOP note payable ...................................................... 184 106 123 --------- --------- --------- Net cash provided (used) by financing activities ................................ 42,350 (12,410) 50,765 --------- --------- --------- Net increase (decrease) in cash and due from banks .............................. 1,624 (754) 1,723 Cash and due from banks at beginning of year .................................... 4,964 5,718 3,995 --------- --------- --------- Cash and due from banks at end of year .......................................... $ 6,588 $ 4,964 $ 5,718 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ........................................................................ $ 12,798 $ 14,241 $ 13,357 Income taxes .................................................................... 2,094 2,413 2,100 Schedule of non-cash investing activities: Transfer from mortgage loans to real estate acquired by foreclosure ................ $ -- $ -- $ 128
See accompanying notes to consolidated financial statements. 17 Central Bancorp 2000 Annual Report notes to consolidated financial statements March 31, 2000 1 Summary of Significant Accounting Policies Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, was organized by Central Bank (the "Bank") to be a bank holding company. The Company was organized at the direction of the Bank on September 30, 1998, to acquire all of the capital stock of the Bank upon the consummation of the reorganization of the Bank into the holding company form of ownership, which was completed on January 8, 1999. The Company's common stock, par value $1.00 per share (the "Common Stock"), became registered under the Securities Exchange Act of 1934 on January 8, 1999. The Company has no significant assets other than the common stock of the Bank and various other liquid assets that it invests in the ordinary course of business. For that reason, substantially all of the discussion in these consolidated financial statements relates to the operations of the Bank and its subsidiaries. Central Bank (the "Bank") was organized as a Massachusetts chartered co-operative bank in 1915 and converted from mutual to stock form in 1986. The primary business of the Bank is to acquire funds in the form of deposits and use the funds to make mortgage loans for the construction, purchase and refinancing of residential properties, and to a lesser extent, to make loans on commercial real estate in its market area. The Bank also makes a limited amount of consumer loans, including home improvement and secured and unsecured personal loans. The Bank is subject to competition from other financial institutions. The Company is subject to the regulations of, and periodic examinations by, the Federal Reserve Bank ("FRB"). The Bank is also subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC") and the Massachusetts Division of Banks. The Bank's deposits are insured by the Bank Insurance Fund of the FDIC for deposits up to $100,000 and the Share Insurance Fund (SIF) for deposits in excess of $100,000. The Company conducts its business through one operating segment, the Bank. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. 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, if the conditions change. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses and the valuation of real estate acquired by foreclosure, management obtains independent appraisals for significant properties. Certain prior fiscal year amounts have been reclassified to conform to the current year's presentation. The following is a summary of the significant accounting policies adopted by the Bank. Cash and Due from Banks The Bank is required to maintain cash and reserve balances with the Federal Reserve Bank. Such reserves are calculated based upon deposit levels and amounted to approximately $1,891,000 at March 31, 2000. Investment Investments are classified as either held to maturity, available for sale or trading. Investments classified as trading securities are reported at fair value, with unrealized gains and losses included in earnings. Investments classified as available for sale are reported at fair value, with unrealized gains and losses reported as other comprehensive income within stockholders' equity. Securities that the Bank has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Gains and losses on sales of securities are recognized when realized with the cost basis of investments sold determined on a specific-identification basis. Premiums and discounts on investment and mortgage-backed securities are amortized or accreted to interest income over the actual or expected lives of the securities using the level-yield method. 18 Central Bancorp 2000 Annual Report If a decline in fair value below the amortized cost basis of an investment or mortgage-backed security is judged to be other than temporary, the cost basis of the investment is written down to fair value as a new cost basis and the amount of the write-down is included as a charge against gain on sale of investment and mortgage-backed securities. Loans Loans are reported at the principal amount outstanding, adjusted by unamortized discounts, premiums, and net deferred loan origination fees. Loans classified as held for sale in the secondary market are stated at the lower of aggregate cost or market value. Market value is estimated based on outstanding investor commitments or, in the absence of cash commitments, current investor yield requirements. Net unrealized losses, if any, are provided for in a valuation allowance by charges to operations. Loans on which the accrual of interest has been discontinued are designated as nonaccrual 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 nonaccrual 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 nonaccrual and impaired loans on the cash basis of accounting. Loan origination fees, net of certain direct loan origination costs, are considered adjustments of interest-rate yield and are amortized into interest income over the loan term using the level-yield method. When loans are sold in the secondary market, the remaining balance of the amount deferred is included in determining the gain or loss on the sale. Impaired loans are commercial and commercial real estate loans for which it is probable that the Bank will not be able to collect all amounts due in accordance with the contractual terms of the loan agreement. Impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, are accounted for at the present value of the expected future cash flows discounted at the loan's effective interest rate or as a practical expedient in the case of collateral dependent loans, the lower of the fair value of the collateral or the recorded amount of the loan. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged off when management believes that the collectiblity of the loan's principal is remote. Allowance for Loan Losses The allowance for loan losses is maintained at a level which management considers adequate to provide for inherent probable losses based on an evaluation of known and inherent risks in the portfolio. Such evaluation includes identification of adverse situations that may affect the ability of certain borrowers to repay, a review of overall portfolio size, quality and composition, and an assessment of existing and anticipated economic conditions. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Additions to the allowance are charged to earnings; realized losses, net of recoveries, are charged to the allowance. Management believes that the allowance for loan losses is adequate. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at their examination date. 19 Central Bancorp 2000 Annual Report Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the accounting basis and the tax basis of the Bank's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The Bank's deferred tax asset is reviewed periodically and adjustments to such asset are recognized as deferred income tax expense or benefit based on management's judgments relating to the realizability of such asset. Office Properties and Equipment Office properties and equipment are stated at cost, less allowances for depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets or terms of the leases, if shorter. Goodwill Goodwill arising from acquisitions is amortized on a straight-line basis over 15 years. On an ongoing basis, management evaluates the valuation of the remaining balance of goodwill. Pension and Other Benefits The Bank provides pension benefits for its employees in a multi-employer pension plan through membership in the Co-operative Banks Employees Retirement Association. Pension costs are funded as accrued. Earnings Per Share Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. New Accounting Pronouncements During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Position ("SOP") 98-5, Accounting for Costs of a Start-Up Entity. SOP 98-5 requires organizational costs, which were being amortized, to be expensed and accounted for as a cumulative effect of a change in accounting principle. On April 1, 1999, the Bank expensed unamortized organizational costs resulting in a charge to earnings, net of taxes, of $234 thousand. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 also provides for matching the timing of gain or loss recognition on the hedged asset or liability that is attributable to the hedged risk or the earnings effect of the hedged forecasted transaction. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which defers the effective date of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of this Statement is not expected to have a material impact on the Company's financial position. 20 Central Bancorp 2000 Annual Report 2 Investments and Mortgage-Backed Securities (Dollars in Thousands) The amortized cost and fair value of investments and mortgage-backed securities available for sale are summarized as follows:
March 31, 2000 --------------------------------------------------------- Gross Unrealized Amortized ------------------------ Fair Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Common and preferred stocks ................................... $ 6,847 $ 929 $ (631) $ 7,145 U.S. Government and federal agency obligations ................ 23,962 -- (1,009) 22,953 Other bonds and obligations ................................... 2,030 7 -- 2,037 ------- ------- ------- ------- Total ................................................... $32,839 $ 936 $(1,640) $32,135 ======= ======= ======= ======= Mortgage-backed securities: GNMA ....................................................... $ 434 $ -- $ (14) $ 420 FNMA ....................................................... 17,091 5 (400) 16,696 FHLMC ...................................................... 4,185 -- (50) 4,135 CMOs ....................................................... 2,152 -- (95) 2,057 ------- ------- ------- ------- Total ................................................... $23,862 $ 5 $ (559) $23,308 ======= ======= ======= =======
March 31, 1999 --------------------------------------------------------- Gross Unrealized Amortized ------------------------ Fair Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Common and preferred stocks ................................... $ 5,682 $ 844 $ (105) $ 6,421 U.S. Government and federal agency obligations ................ 15,500 22 -- 15,522 ------- ------- ------- ------- Total ................................................... $21,182 $ 866 $ (105) $21,943 ======= ======= ======= ======= Mortgage-backed securities: GNMA ....................................................... $ 698 $ 2 $ (7) $ 693 FNMA ....................................................... 19,988 99 (194) 19,893 FHLMC ...................................................... 4,588 10 (73) 4,525 CMOs ....................................................... 4,916 1 (29) 4,888 ------- ------- ------- ------- Total ................................................... $30,190 $ 112 $ (303) $29,999 ======= ======= ======= =======
The maturity distribution (based on contractual maturities) and annual yields of mortgage-backed securities at March 31, 2000 and 1999 are as follows:
March 31, 2000 -------------------------------------------- Amortized Fair Annual Cost Value Yield - ----------------------------------------------------------------------------------------------------------------------- Due within one year .................................................. $ -- $ -- --% Due after one year but within five years ............................. 687 410 6.56 Due after five years but within ten years ............................ 6,469 6,376 7.01 Due after ten years .................................................. 16,706 16,522 6.26 ------- ------- Total .......................................................... $23,862 $23,308 5.57% ======= ======= Weighted average remaining life (in years) ........................... 18.33
March 31, 1999 -------------------------------------------- Amortized Fair Annual Cost Value Yield - ----------------------------------------------------------------------------------------------------------------------- Due within one year .................................................. $ 942 $ 925 6.13% Due after one year but within five years ............................. 943 946 6.57 Due after five years but within ten years ............................ 4,656 4,687 7.19 Due after ten years .................................................. 23,649 23,441 6.87 ------- ------- Total .......................................................... $30,190 $29,999 6.80% ======= ======= Weighted average remaining life (in years) ........................... 17.90
21 Central Bancorp 2000 Annual Report Maturities on mortgage-backed securities are based on contractual maturities and do not take into consideration scheduled amortization or prepayments. Actual maturities will differ from contractual maturities due to scheduled amortization and prepayments. The amortized cost and fair value of adjustable-rate federal agency obligations and mortgage-backed securities classified as available for sale amounted to $12,809 and $12,467, respectively, in 2000. The amortized cost and fair value of adjustable-rate federal agency obligations and mortgage-backed securities classified as available for sale amounted to $16,309 and $16,072, respectively, in 1999. The Bank had securities classified as available for sale with callable features that can be called prior to final maturity with an amortized cost of $22,962 and a fair value of $21,959 at March 31, 2000. Net realized gains on sales of investment securities classified as available for sale for the fiscal years ended March 31, 2000, 1999 and 1998 amounted to $1,013, $580 and $1,051, respectively. There were no sales of mortgage-backed securities classified as available for sale during the fiscal years ended March 31, 2000 and 1999. The maturity distribution (based on contractual maturities) and annual yields of investment securities (excluding common and preferred stocks) at March 31, 2000 and 1999 were as follows:
March 31, 2000 -------------------------------------------- Amortized Fair Annual Cost Value Yield - ----------------------------------------------------------------------------------------------------------------------- Due within one year ................................................ $ 1,000 $ 994 6.15% Due after one year but within five years ........................... 9,056 6,869 6.80 Due after five years but within ten years .......................... 15,936 17,127 6.48 ------- ------- Total ........................................................ $25,992 $24,990 6.57% ======= ======= Weighted average remaining life (in years) ......................... 5.93
March 31, 1999 -------------------------------------------- Amortized Fair Annual Cost Value Yield - ----------------------------------------------------------------------------------------------------------------------- Due within one year ................................................ $ 505 $ 511 7.75% Due after one year but within five years ........................... 3,001 3,017 6.39 Due after five years but within ten years .......................... 11,994 11,994 6.22 ------- ------- Total ....................................................... $15,500 $15,522 6.30% ======= ======= Weighted average remaining life (in years) ......................... 6.20
A Federal Home Loan Bank bond with an amortized cost of $1,999 and fair value of $1,999 at March 31, 1999, 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. No such bond was required at March 31, 2000. 22 Central Bancorp 2000 Annual Report 3 Mortgage Loans (In Thousands) Mortgage loans as of March 31 are summarized below: 2000 1999 - ------------------------------------------------------------------------------- Mortgage loans: Residential Fixed ......................................... $ 65,765 $ 72,115 Adjustable .................................... 177,798 140,523 Commercial ....................................... 54,228 48,756 Construction ..................................... 9,765 5,269 Second mortgages and home equity ................. 7,403 7,462 FHA and VA ....................................... 7 21 -------- -------- $314,966 $274,146 ========= ======== At March 31, 2000 and 1999, net deferred loan costs of $280 and $81, respectively, were reflected as an addition to the appropriate loan categories. Mortgage and other loans on which the accrual of interest had been discontinued at March 31, 2000, 1999 and 1998 were $235, $419, and $357, respectively. Interest income not recognized on such loans amounted to $7, $16, and $11 in fiscal 2000, 1999 and 1998, respectively. At March 31, 2000 and 1999, there were no impaired loans. Impaired loans are measured using the fair value of collateral. During fiscal 2000, there were no impaired loans and during fiscal 1999, the average recorded value of impaired loans was $761. The Bank follows the same policy for recognition of income on impaired loans as it does for all other loans. During fiscal 2000 and 1999, there was no interest forgone on impaired loans that were not non-accrual loans. Mortgage loans serviced by the Bank for others amounted to $5,790 and $8,676 at March 31, 2000 and 1999, respectively. The Bank's lending activities are conducted principally in communities in the suburban Boston area. The Bank grants mortgage loans on residential property, commercial real estate, construction of residential homes, second mortgages, home equity and other loans. Substantially all loans granted by the Bank are secured by real estate collateral. The ability and willingness of residential mortgage borrowers to honor their repayment commitments are generally impacted by the level of overall economic activity within the borrowers' geographic areas and real estate values. The ability and willingness of commercial real estate and construction loan borrowers to honor their repayment commitments are generally impacted by the health of the real estate market in the borrowers' geographic area and the general economy. 4 Other Loans (In Thousands) Other loans at March 31 are summarized below: 2000 1999 - ------------------------------------------------------------------------------- Other loans: Commercial ....................................... $3,349 $4,391 Secured by deposits .............................. 1,023 1,225 Consumer ......................................... 38 40 Unsecured ........................................ 637 544 ------ ------ $5,047 $6,200 ====== ====== 23 Central Bancorp 2000 Annual Report 5 Loans to Directors and Officers (In Thousands) The following summarizes the activity with respect to loans included in mortgage and other loans made to directors and officers and their related interests for the fiscal years ended March 31: 2000 1999 --------------- Balance at beginning of period ............................ $ 563 $ 900 New loans .............................................. 11 29 New officers with loans outstanding .................... -- 94 Repayment of principal ................................. (187) (165) No longer a director ................................... (144) (295) ----- ----- Balance at end of period .................................. $ 243 $ 563 ===== ===== 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. 6 Allowance for Loan Losses (In Thousands)
March 31, ------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------- Balance at beginning of period .......................... $ 2,913 $ 2,886 $ 2,900 Provision charged to expense ......................... -- -- -- Amounts charged-off .................................. (9) (99) (97) Recoveries on accounts previously charged-off ........ 89 126 83 ------- ------- ------- Balance at end of period ................................ $ 2,993 $ 2,913 $ 2,886 ======= ======= =======
7 Stock in Federal Home Loan Bank of Boston (In Thousands) As a member of the Federal Home Loan Bank of Boston ("FHLB of Boston"), the Bank is required to invest in $100 par value stock of the FHLB of Boston in an amount equal to 1% of its outstanding home loans or 1/20th of its outstanding advances from the FHLB of Boston, whichever is higher. The Bank's investment exceeded the required level by $250 and $500 at March 31, 2000 and 1999, respectively. If such stock is redeemed, the Bank will receive from the FHLB of Boston an amount equal to the par value of the stock. 8 The Co-operative Central Bank Reserve Fund The Co-operative Central Bank Reserve Fund was established for liquidity purposes and consists of deposits required of all insured co-operative banks in Massachusetts. The Fund is used by The Co-operative Central Bank to advance funds to member banks or to make other investments. 24 Central Bancorp 2000 Annual Report 9 Office Properties and Equipment (In Thousands) A summary of cost, accumulated depreciation and amortization of office properties and equipment at March 31 follows: 2000 1999 - ------------------------------------------------------------------------------- Land .................................................. $ 589 $ 589 Buildings ............................................. 2,287 2,270 Furniture ............................................. 5,376 5,301 Leasehold improvements ................................ 474 459 ------- ------- 8,726 8,619 Less accumulated depreciation and amortization ........ (6,508) (6,069) ------- ------- $ 2,218 $ 2,550 ======= ======= A summary of minimum rentals for future periods under non-cancelable operating leases follows: Minimum Rentals - ------------------------------------------------------------------------------- Years Ending March 31, 2001 ................................................................ $ 92 2002 ................................................................ 92 2003 ................................................................ 78 2004 ................................................................ 59 2005 ................................................................ 14 Thereafter .......................................................... 6 Rental expense for the fiscal years ended March 31, 2000, 1999 and 1998 was $123, $118 and $119, respectively 10 Deposits (Dollars in Thousands) Deposits at March 31 are summarized as follows:
2000 1999 -------------------------------------------------------- Amount Interest Rates Amount Interest Rates - ----------------------------------------------------------------------------------------------------------------------- Demand (non interest-bearing) ....................... $ 18,634 --% $ 14,949 --% NOW accounts ........................................ 32,218 1.01-1.52 28,657 1.00-1.50 Regular, club and 90-day notice ..................... 61,475 2.00 61,090 2.00 Money market deposit accounts ....................... 19,045 2.15-2.35 22,846 2.15-2.35 -------- -------- 131,372 127,542 -------- -------- Term deposit certificates: Six-month money market ........................... 16,469 4.00-6.00 16,293 4.00-5.00 Other ............................................ 110,498 4.00-7.00 122,628 2.00-6.81 -------- -------- Total term deposit certificates ............... 126,967 138,921 -------- -------- $258,339 $266,463 ======== ======== Weighted average interest rate ...................... 3.37% 3.45% ========= =========
25 Central Bancorp 2000 Annual Report Contractual maturities of term deposit certificates at March 31, 2000 are summarized as follows: - ------------------------------------------------------------------------------ Years Ending March 31, 2001 ............................................................ $ 79,372 2002 ............................................................ 35,120 2003 ............................................................ 9,087 2004 ............................................................ 879 2005 ............................................................ 2,509 --------- $ 126,967 ========= The aggregate amount of individual term deposit certificates with a minimum denomination of $100 or more was $24,937 and $22,367 at March 31, 2000 and 1999, respectively. Interest expense on these deposits was $795, $934 and $1,351 for fiscal years ended March 31, 2000, 1999 and 1998, respectively. 11 Advances from Federal Home Loan Bank of Boston (Dollars in Thousands) Advances from FHLB of Boston, by year of maturity, at March 31 consist of the following, 2000 1999 - ------------------------------------------------------------------------------ Interest Rate Due in Year Ending March 31, 6.05% 2000 ............................ $ -- $ 2,000 5.76% - 6.24% 2001 ............................ 18,000 1,000 6.34% - 6.67% 2002 ............................ 4,000 4,000 5.19% - 5.71% 2003 ............................ -- 4,000 4.99% - 5.69% 2004 ............................ 5,000 5,000 4.89% - 5.89% 2008 ............................ 26,000 14,000 4.49% - 5.52% 2009 ............................ 18,000 20,000 5.32% - 6.21% 2010 ............................ 33,000 -- 5.49% - 5.69% 2013 ............................ -- 7,000 5.49% 2014 ............................ 2,000 -- 5.25% 2015 ............................ 5,000 -- --------- --------- $ 111,000 $ 57,000 ========= ========= Weighted average interest rate ...................... 5.66% 5.34% ========= ========= The FHLB of Boston is authorized to make advances to its members subject to such regulations and limitations as the Federal Home Loan Bank Board may prescribe. The advances are secured by FHLB of Boston stock and a blanket lien on certain qualified collateral, defined principally as 90% of the fair value of U.S. Government and federal agency obligations and 75% of the carrying value of first mortgage loans on owner-occupied residential property. Applying these ratios, the Bank's overall borrowing capacity was approximately $202,400 and $174,500 at March 31, 2000 and 1999, respectively. Some of these advances have call features that allow the FHLB of Boston to require payment in full prior to the stated maturity. The highest month-end balance of FHLB of Boston advances outstanding was $113,000, $64,000, and $63,000 during the fiscal years ended March 31, 2000, 1999 and 1998, respectively. 26 Central Bancorp 2000 Annual Report 26 12 Income Taxes (Dollars in Thousands) The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Bank's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Income tax expense (benefit) was allocated as follows:
Fiscal Years ended March 31, ---------------------------------- 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Current income tax expense: Federal ............................................................. $ 1,745 $ 1,669 $ 1,101 State ............................................................... 44 366 451 -------- -------- -------- Total current tax expense ........................................ 1,789 2,035 1,552 Deferred income tax expense (benefit) .................................. 343 (175) 564 Change in valuation reserve ............................................ -- -- (122) -------- -------- -------- Total income tax expense ......................................... $ 2,132 $ 1,860 $ 1,994 ======== ======== ========
Income tax expense for the periods presented is different from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The differences between expected tax rates and effective tax rates are as follows:
Fiscal Years ended March 31, ------------------------------ 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Statutory Federal tax rate ............................................. 34.0% 34.0% 34.0% Items affecting Federal income tax rate: Dividends received deduction ........................................ (0.4) (0.6) (0.9) Goodwill amortization ............................................... 1.8 2.2 1.9 State income taxes, net of Federal income tax benefit ............... 1.6 4.7 8.0 Other ............................................................... 0.4 0.7 (1.0) Change in valuation reserve ......................................... -- -- (2.4) ---- ---- ---- 37.4% 41.0% 39.6% ==== ==== ====
The components of gross deferred tax assets and gross deferred tax liabilities that have been recognized as of March 31 are as follows: 2000 1999 - ------------------------------------------------------------------------------ Deferred tax assets: Loan losses .......................................... $ 547 $ 545 Deferred loan origination fees ....................... 74 274 Depreciation ......................................... 258 215 Post-employee retirement benefit accrual ............. 201 201 Unrealized depreciation on securities ................ 433 -- Other ................................................ 56 82 ------ ------ Gross deferred tax asset ................................ 1,569 1,317 Valuation reserve .................................... -- -- ------ ------ Net deferred tax asset ............................ 1,569 1,317 ------ ------ Deferred tax liabilities: Accrued dividend receivable .......................... 44 22 Deferred loan origination fees ....................... 454 308 Unrealized appreciation on securities ................ -- 243 ------ ------ Gross deferred tax liability ......................... 498 573 ------ ------ Net deferred tax asset ............................ $1,071 $ 744 ====== ====== 27 Central Bancorp 2000 Annual Report 27 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, 2000. Further, management believes the existing net deductible temporary differences will reverse during periods in which the Bank generates net taxable income. At March 31, 2000, recoverable income taxes, plus estimated taxes for fiscal 2001, 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 institution continues to carry on the business of banking. In addition, the balance of the pre-1988 bad debt reserves continues to be subject to provision of present law that requires recapture in the case of certain excess distributions to shareholders. The tax effect of pre-1988 bad debt reserves subject to recapture in the case of certain excess distributions is approximately $1,300. 13 Financial Instruments with Off-Balance Sheet Risk (In Thousands) The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unused lines of credit, unadvanced portions of commercial and construction loans, and commitments to originate loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to its financial instruments is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet risk as of March 31 follow: 2000 1999 - ------------------------------------------------------------------------------- Unused lines of credit .................................. $10,243 $ 9,873 Unadvanced portions of construction loans ............... 4,427 2,294 Unadvanced portions of commercial loans ................. 3,468 1,998 Commitments to originate commercial loans ............... 15,713 1,775 Commitments to originate residential mortgage loans: Fixed rate ........................................... 1,104 3,220 Adjustable rate ...................................... 1,270 3,221 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. 28 Central Bancorp 2000 Annual Report 14 Stockholders' Equity (Dollars in Thousands) The Company's ability to pay dividends to shareholders is largely dependent on the ability of the Bank to pay dividends to the Company. The Bank may not declare or pay cash dividends on its common stock if the effect thereof would cause its equity to be reduced below regulatory capital requirements, or if such declaration and payment would otherwise violate regulatory requirements. The Company has 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 expires on October 24, 2001. The Bank is subject to various regulatory capital requirements administered by the federal banking services. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulations that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of risk-weighted, core and tangible capital (as defined). Management represents that, as of March 31, 2000, the Bank met all capital adequacy requirements to which it is subject. The most recent notification from the FDIC categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum risk-weighted capital, core capital and tangible ratios as set forth in the table. As of March 31, 2000, the Bank was categorized as "well capitalized" based on its ratios of risk-weighted core and tangible capital. There are no conditions or events, since that notification, that management believes would cause a change in the Bank's categorization. The minimum core (leverage) capital ratio (stockholders' equity divided by total assets) required for banks with a CAMEL rating of 1 is 3.00% and 4.00%- 5.00% for all others. The Bank must have a minimum total risk-based capital ratio of 8.00% (of which 4.00% must be Tier I capital, consisting of common stockholders' equity). At March 31, 2000 and 1999, the Bank's capital ratios were in excess of all required standards. The Bank's actual capital amounts and ratios are presented in the table. No deduction was taken from capital for interest-rate risk. The Bank's core/leverage, Tier 1 risk-based and total risk-based capital together with related regulatory minimum requirements are summarized below: March 31, 2000 -------------------------------- Core Tier 1 Total Leverage Risk-based Risk-based Capital Capital Capital - ------------------------------------------------------------------------------- Regulatory capital measure: Amount ................................. $36,251 $34,268 $37,376 Ratio .................................. 8.85% 13.31% 14.52% Adequately capitalized requirement: Amount ................................. $16,382 $10,295 $20,591 Ratio .................................. 4.00% 4.00% 8.00% Well capitalized requirement: Amount ................................. $20,478 $15,443 $25,739 Ratio .................................. 5.00% 6.00% 10.00% 29 Central Bancorp 2000 Annual Report March 31, 2000 -------------------------------- Core Tier 1 Total Leverage Risk-based Risk-based Capital Capital Capital - ------------------------------------------------------------------------------- Regulatory capital measure: Amount ................................. $36,441 $33,115 $35,932 Ratio .................................. 10.00% 15.50% 16.82% Adequately capitalized requirement: Amount ................................. $14,578 $ 8,544 $17,088 Ratio .................................. 4.00% 4.00% 8.00% Well capitalized requirement: Amount ................................. $18,223 $12,816 $21,360 Ratio .................................. 5.00% 6.00% 10.00% 15 Employee Benefits (Dollars in Thousands, Except Per Share Data) Pension Plan As a participating employer in the Co-operative Banks Employees' Retirement Association ("CBERA"), a multi-employer plan, the Bank has in effect a noncontributory defined benefit plan ("Pension Plan") and a defined contribution plan ("Savings Plan") covering substantially all eligible officers and employees. Benefits under the Pension Plan are determined at the rate of 1% and 1.5%, respectively, of certain elements of final average pay times years of credited service and are generally provided at age 65 based on years of service and the average of the participants' three highest consecutive years of compensation from the Bank. Employee contributions are made to a revised Savings Plan which qualifies under section 401(k) of the Internal Revenue Code of 1986, as amended. Such contributions are matched on a one-half for-one basis by the Bank up to a maximum of 5% of each employee's salary. Pension benefits and employer contributions to the Savings Plan become vested over six years. Expenses for the Pension Plan and the Savings Plan were $363, $202 and $350 for the fiscal years ended March 31, 2000, 1999 and 1998, respectively. Forfeitures are used to reduce expenses of the plans. Stock Option Plan The Company has adopted two Stock Option Plans for the benefit of officers and other employees. Under the first plan, the Company reserved 184,000 shares of authorized but unissued common stock for issuance under the Plan. During fiscal 1999, 2,000 options were exercised resulting in an additional $14 of capital being recorded. During fiscal 2000, 3,000 shares were exercised resulting in an additional $22 of capital being recorded. Of the 25,000 options outstanding under the first plan at March 31, 2000, all were exercisable with an average exercise price per share of $16.25. Under the second plan, the Company reserved 97,500 shares of authorized but unissued common shares for issuance under the plan. During fiscal 2000, options to purchase 32,499 shares were granted at an average exercise price of $20.25 per share and none of these options were exercised. The exercise price of any option granted will not be less than the fair market value of the common stock on the date of grant of the option. 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 Company's employees. 30 Central Bancorp 2000 Annual Report During fiscal 1995 and fiscal 1996, the ESOP purchased 10,000 shares and 18,000 shares of the Bank's outstanding common stock, respectively. The ESOP is repaying its loan to the Bank with funds from the Bank's contributions to the plan and earnings from the ESOP's assets. Repayments of $183, $184 and $185 were made during fiscal 2000, 1999 and 1998, respectively. The scheduled repayment of the amount outstanding at March 31, 2000 is as follows: - --------------------------------------------------------------------------- 2001 ............................................................. $ 130 2002 ............................................................. 130 2003 ............................................................. 130 Thereafter ....................................................... 43 Compensation expense is recognized as the ESOP shares are allocated to participants in the plan and was $130, $51 and $68 for fiscal 2000, 1999 and 1998, respectively. The components of the life plan and medical plan for the years ended March 31, 2000 and 1999, respectively, follow:
2000 1999 ------------------------------------------------ Life Medical Life Medical Plan Plan Plan Plan - ---------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefits obligation: Retirees ................................................................ $(193) $(397) $(206) $(533) Fully eligible participants ............................................. (40) (283) (50) (248) Other plan participants ................................................. -- -- -- -- ----- ----- ----- ----- Total ................................................................ $(233) $(680) $(256) $(781) ===== ===== ===== ===== Change in projected benefit obligation: Accumulated benefit obligations at prior year-end ....................... $(256) $(781) $(239) $(730) Service cost less expense component ..................................... -- -- -- -- Interest cost ........................................................... (17) (48) (17) (51) Actuarial gain (loss) ................................................... 21 69 (2) (28) Assumptions ............................................................. 18 46 -- -- Benefits paid ........................................................... 1 34 2 28 ----- ----- ----- ----- Accumulated benefit obligation at year-end ........................... $(233) $(680) $(256) $(781) ===== ===== ===== ===== Change in plan assets: Fair value of plan assets at prior fiscal year-end ...................... $ -- $ -- $ -- $ -- Actual return on plan assets ............................................ -- -- -- -- Employer contribution ................................................... 1 34 2 28 Benefits paid end expenses .............................................. (1) (34) (2) (28) ----- ----- ----- ----- Fair value of plan assets at current fiscal year-end ................. $ -- $ -- $ -- $ -- ===== ===== ===== ===== Funded status .............................................................. $(233) $(680) $(256) $(781) Unrecognized net obligation ................................................ 111 322 121 347 Unrecognized prior year service ............................................ -- -- 8 -- Unrecognized net (loss) gain ............................................... (64) 53 (32) 193 ----- ----- ----- ----- (Accrued) benefit cost recognized in financial position .................... $(186) $(305) $(159) $(241) ===== ===== ===== ===== Reconciliation of (accrual) prepaid: (Accrued) prepaid pension cost at prior year-end ........................ $(159) $(241) $(119) $(186) Minus net periodic cost ................................................. (28) (98) (41) (83) Plus employee contributions ............................................. 1 34 1 28 ----- ----- ----- ----- (Accrued) prepaid cost ............................................... $(186) $(305) $(159) $(241) ===== ===== ===== ===== Benefit obligation weighted average assumption as of fiscal year-end: Discount rate ........................................................... 7.75% 7.75% 7.00% 7.00% Expected return on plan assets .......................................... 7.75% 7.75% 7.00% 7.00% Rate of compensation increase ........................................... -- -- -- --
31 Central Bancorp 2000 Annual Report
2000 1999 ------------------------------------------------- Life Medical Life Medical Plan Plan Plan Plan - ---------------------------------------------------------------------------------------------------------------------------------- 1 Percentage Point Increase ------------------------------------------------- Impact of 1% change in health care trend rates: Effect on total service and interest cost components ................ n/a $ (5) n/a $ (9) Effect on the post retirement benefit obligation .................... n/a $ 72 n/a $ 67 Components of net periodic benefit obligations: Service cost ........................................................ $ -- $ -- $ -- $ -- Interest cost ....................................................... 17 49 17 51 Expected return on plan assets ...................................... -- -- -- -- Amortization of prior service cost .................................. 17 25 25 25 Recognized actuarial (gain) loss .................................... (6) 24 (1) 7 ----- ----- ----- ----- Net periodic benefit cost for fiscal year ending ................. $ 28 $ 98 $ 41 $ 83 ===== ===== ===== ===== Periodic benefit cost weighted average assumptions: Discount rate ....................................................... 7.00% 7.00% 7.00% 7.00% Expected return on plan assets ...................................... 7.00% 7.00% 7.00% 7.00% Rate of compensation increase ....................................... -- -- -- --
For measurement purposes, a 9.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the fiscal year ended March 31, 1999. The rate was assumed to decrease gradually to 5.5% for the fiscal year ending March 31, 2003 and remain at that level thereafter. 16 Legal Proceedings The Bank is a party to certain litigation in the normal course of business. Management and counsel are of the opinion that the aggregate liability, if any, resulting from such litigation would not be material to the Bank's financial position. 17 Fair Values of Financial Instruments (In Thousands) Estimated fair value amounts have been determined using available quoted market information or other appropriate valuation methods. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include real estate acquired by foreclosure and office properties and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair values and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. The following methods and assumptions were used by the Bank in estimating fair values of its financial instruments: Cash and Due from Banks The carrying values reported in the balance sheet for cash and due from banks approximate their fair value because of the short maturity of these instruments. Short-term Investments The carrying values reported in the balance sheet for short-term investments approximate fair value because of the short maturity of these investments. Investment and Mortgage-Backed Securities The fair values presented for investment and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 32 Central Bancorp 2000 Annual Report 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 nonper- forming loans has been considered in the determination of the fair value of loans. Accrued Interest Receivable The carrying value reported in the balance sheet for accrued interest receivable approximates its fair value because of the short maturity of these accounts. Stock in FHLB of Boston The carrying amount reported in the balance sheet for FHLB stock approximates its fair value. If redeemed, the Bank will receive an amount equal to the par value of the stock. The Co-operative Central Bank Reserve Fund The carrying amount reported in the balance sheet for the Co-operative Central Bank Reserve Fund approximates its fair value. Deposits The fair values of deposits (excluding term deposit certificates) are, by definition, equal to the amount payable on demand at the reporting date. Fair values for term deposit certificates are estimated using a discounted cash flow technique that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities on time deposits with similar remaining maturities. Off-Balance Sheet Instruments The Bank's commitments for unused lines of credit and unadvanced portions of loans are at floating rates, which approximate current market rates, and, therefore, no fair value adjustment has been made. Advances from FHLB of Boston Fair values of advances from FHLB of Boston are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated monthly maturities and anticipated calls on FHLB advances. Advance Payments by Borrowers for Taxes and Insurance and Accrued Interest Payable The carrying values reported in the balance sheet for advance payments by borrowers for taxes and insurance and accrued interest payable approximate their fair value because of the short maturity of these accounts. The estimated carrying amounts and fair values of the Bank's financial instruments are as follows:
At March 31, 2000 At March 31, 1999 ---------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks ........................................ $ 6,588 $ 6,588 $ 4,964 $ 4,964 Short-term investments ......................................... 14,802 14,802 16,939 16,939 Investments available for sale: Investment securities ....................................... 32,135 32,135 21,943 21,943 Mortgage-backed securities .................................. 23,308 23,308 29,999 29,999 Net loans ...................................................... 317,020 310,543 277,433 281,421 Accrued interest receivable .................................... 2,036 2,036 1,614 1,614 Stock in Federal Home Loan Bank of Boston, at cost ............. 5,800 5,800 3,350 3,350 The Co-operative Central Bank Reserve Fund ..................... 1,576 1,576 1,576 1,576 Liabilities Deposits ....................................................... $258,339 258,332 $266,463 $267,340 Advances from Federal Home Loan Bank of Boston ................. 111,000 110,200 57,000 55,575 Advance payments by borrowers for taxes and insurance .......... 1,053 1,053 1,389 1,389 Accrued interest payable ....................................... 542 542 291 291
33 Central Bancorp 2000 Annual Report 18 Parent Company Only Condensed Financial Statements (In Thousands) The following are the condensed financial statements for Central Bancorp, Inc. (the "Parent") only:
Balance Sheets March 31, ---------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Assets Cash deposit in subsidiary bank .................................................................. $ 1,046 $ 2,081 Investment in subsidiary, at equity .............................................................. 36,251 36,441 Other assets ..................................................................................... 100 235 ------- ------- Total assets .................................................................................. $37,397 $38,757 ======= ======= Liabilities and Stockholders' Equity Accrued expenses and other liabilities ........................................................... $ -- $ 15 Total stockholders' equity ....................................................................... 37,397 38,742 ------- ------- Total liabilities and stockholders' equity .................................................... $37,397 $38,757 ======= =======
Statements of Income Fiscal Year Ended March 31, --------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Dividend income .................................................................................. $ 3,012 $ 2,500 Non-interest expense ............................................................................. 331 62 ------- ------- Income before income taxes .................................................................... 2,681 2,438 Income tax benefit ............................................................................... 109 20 ------- ------- Net income before cumulative effect of change in accounting principle ......................... 2,790 2,458 Cumulative effect of change in accounting principle, net of taxes ................................ (234) -- ------- ------- Net income before equity in net income of subsidiary .......................................... 2,556 2,458 Equity in net income of subsidiary ............................................................... 777 224 ------- ------- Net income .................................................................................... $ 3,333 $ 2,682 ======= =======
Statements of Cash Flows Fiscal Year Ended March 31, --------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income .................................................................................... $ 3,333 $ 2,682 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiary ............................................... (777) (224) Increase in other assets ................................................................... (100) (235) (Decrease) increase in accrued expenses and other liabilities .............................. (15) 15 Cumulative effect of change in accounting principle ........................................ 234 -- ------- ------- Net cash provided by operating activities ............................................... 2,675 2,238 ------- ------- Cash flows from financing activities: Proceeds from exercise of stock options ....................................................... 22 -- Purchase of Treasury stock .................................................................... (3,043) -- Cash dividends paid ........................................................................... (689) (157) ------- ------- Net cash used by financing activities ................................................... (3,710) (157) ------- ------- Net (decrease) increase in cash deposit in subsidiary bank ....................................... (1,035) 2,081 Cash deposit in subsidiary bank at beginning of year ............................................. 2,081 -- ------- ------- Cash deposit in subsidiary bank at end of year ................................................... $ 1,046 $ 2,081 ======= =======
34 Central Bancorp 2000 Annual Report 19 Quarterly Results of Operations (Unaudited) (In Thousands, Except Per Share Data)
2000 Quarters ----------------------------------------------- First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------------------------ Interest and dividend income .................................................. $ 6,227 $ 6,314 $ 6,779 $ 7,104 Interest expense .............................................................. 3,097 3,038 3,302 3,612 ------- ------- ------- ------- Net interest and dividend income ........................................... 3,130 3,276 3,477 3,492 Non-interest income ........................................................... 278 660 394 337 Operating expenses ............................................................ 2,233 2,268 2,248 2,596 ------- ------- ------- ------- Income before income taxes ................................................. 1,175 1,668 1,623 1,233 Income tax .................................................................... 462 636 603 431 ------- ------- ------- ------- Net income before cumulative effect of change in accounting principle ...... 713 1,032 1,020 802 Cumulative effect of change in accounting principle, net of taxes ............. (234) -- -- -- ------- ------- ------- ------- Net income .................................................................... $ 479 $ 1,032 $ 1,020 $ 802 ======= ======= ======= ======= Earnings per common share: Before cumulative effect of change in accounting principle ................. $ 0.37 $ 0.54 $ 0.55 $ 0.44 ======= ======= ======= ======= Before cumulative effect of change in accounting principle- assuming dilution ....................................................... $ 0.37 $ 0.54 $ 0.55 $ 0.44 ======= ======= ======= ======= After cumulative effect of change in accounting principle .................. $ 0.25 $ 0.54 $ 0.55 $ 0.44 ======= ======= ======= ======= After cumulative effect of change in accounting principle- assuming dilution ....................................................... $ 0.25 $ 0.54 $ 0.55 $ 0.44 ======= ======= ======= =======
1999 Quarters ----------------------------------------------- First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------------------------ Interest and dividend income .................................................. $ 6,563 $ 6,649 $ 6,619 $ 6,165 Interest expense .............................................................. 3,661 3,688 3,521 3,179 ------- ------- ------- ------- Net interest and dividend income ........................................... 2,902 2,961 3,098 2,986 Non-interest income ........................................................... 331 188 358 491 Operating expenses ............................................................ 2,111 2,210 2,331 2,121 ------- ------- ------- ------- Income before income taxes ................................................. 1,122 939 1,125 1,356 Income tax .................................................................... 451 375 454 580 ------- ------- ------- ------- Net income ................................................................. $ 671 $ 564 $ 671 $ 776 ======= ======= ======= ======= Earnings per common share ..................................................... $ 0.35 $ 0.29 $ 0.35 $ 0.40 ======= ======= ======= ======= Earnings per common share-assuming dilution ................................... $ 0.34 $ 0.29 $ 0.35 $ 0.40 ======= ======= ======= =======
35 Central Bancorp 2000 Annual Report 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts April 26, 2000 36 Central Bancorp 2000 Annual Report directors and officers Board of Directors Joseph R. Doherty Chairman Central Bancorp, Inc. John D. Doherty President & Chief Executive Officer Central Bancorp, Inc. Gregory W. Boulos Partner The Boulos Company John F. Gilgun, Jr. President John F. Gilgun Agency Terence D. Kenney Assessor City of Woburn Nancy D. Neri Manager George L. Doherty Funeral Service, Inc. John G. Quinn President Quinn Printing Company Marat E. Santini Consultant Santini, Inc. Honorary Director Philibert L. Pellegrini, Esq. Executive Officers Joseph R. Doherty Chairman John D. Doherty President & Chief Executive Officer Paul S. Feeley Senior Vice President & Treasurer/ Chief Financial Officer David W. Kearn Senior Vice President of Retail & Lending William P. Morrissey Senior Vice President of Public Affairs The directors and officers of Central Bancorp, Inc. also serve as directors and officers of Central Bank. stockholder information Annual Meeting. The Annual Meeting of Stockholders of Central Bancorp, Inc., will be held at 11:00 a.m. on July 27, 2000, in the Main Auditorium of FleetBoston, 100 Federal Street, Boston, Massachusetts. Investor Inquiries. Investors and other parties interested in obtaining information or who have questions about the Bank should contact Gladys N. Partamian, Vice President, 399 Highland Avenue, Somerville, MA 02144, (617) 628-4000. The Bank's Annual Report on Form 10-K for the fiscal year ended March 31, 2000, is available without charge. Common Stock. On January 8, 1999, Central Bancorp, Inc. became the holding company for Central Bank, whose legal name is Central Co-operative Bank. The Bank became a public company on October 24, 1986 by issuing 1,840,000 shares of common stock at $7.50 a share. Central Bancorp's common stock is traded over- the-counter on the NASDAQ National Market System under the symbol CEBK. At March 31, 2000, there were 1,810,450 shares of common stock outstanding and approximately 280 holders of record of the common stock. This total does not reflect the number of persons or entities who held the stock in nominee or "street name" through various brokerage firms. In October 1996, the Company established a quarterly cash dividend policy and made its first dividend distribution on November 15, 1996; it has paid cash dividends on a quarterly basis since initiating the dividend program. The following tables list the high and low prices for Central Bancorp's common stock during each quarter of fiscal 2000 and fiscal 1999 as reported by NASDAQ, and the amounts and payable dates of the cash dividends paid during each quarter of fiscal 2000 and fiscal 1999. The stock quotations constitute interdealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
Common Stock Prices Cash Dividends (payable dates) Fiscal 2000 High Low Fiscal 1999 High Low Fiscal 2000 Amount Fiscal 1999 Amount - ----------------------------------- ------------------------------ -------------------- -------------------- 6/30/99 $ 22.000 $ 19.375 6/30/98 $ 32.375 $ 25.000 5/21/99 $ .08 5/23/98 $ .08 9/30/99 22.500 16.500 9/30/98 27.000 19.000 8/20/99 .08 8/21/98 .08 12/31/99 22.250 14.500 12/31/98 20.250 16.734 11/19/99 .10 11/20/98 .08 3/31/00 16.750 14.500 3/31/99 21.000 15.750 2/18/00 .10 2/19/99 .08
Transfer Agent State Street Bank and Trust Company c/o EquiServe Limited Partnership P.O. Box 8200 Boston, MA 02266-8200 (800) 426-5523 Independent Auditors KPMG LLP 99 High Street Boston, MA 02110-2371 Deposit Insurance Federal Deposit Insurance Corporation (FDIC) Share Insurance Fund (SIF) Special Legal Counsel Stradley Ronon Housley Kantarian & Bronstein, LLP 1220 19th Street N.W., Suite 700 Washington, DC 20036 Website Home Page http://www.centralbk.com Central Bancorp, Inc. 399 Highland Avenue Somerville Ma 02144 617.628.4000 [Central Bancorp Logo] EX-21 3 0003.txt SUBSIDIARIES OF THE COMPANY Exhibit 21 Subsidiaries of the Company --------------------------- Central Co-operative Bank 100% owned by the Company, Incorporated under the laws of the Commonwealth of Massachusetts. Central Securities Corporation 100% owned by the Bank, Incorporated under the laws of the Commonwealth of Massachusetts. Central Preferred Capital Corporation 100% of the common stock and 89% of the preferred stock owned by the Bank, Incorporated under the laws of the Commonwealth of Massachusetts. EX-23 4 0004.txt KPMG CONSENT Exhibit 23 Independent Auditors' Consent The Board of Directors Central Bancorp, Inc.: We consent to incorporation by reference in the Registration Statement on Form S-8 (333-71165) of Central Bancorp, Inc. of our report, dated April 26, 2000, relating to the consolidated balance sheets of Central Bancorp, Inc. and subsidiary as of March 31, 2000 and 1999, 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, 2000, which report is incorporated by reference in the March 31, 2000 Annual Report on Form 10-K of Central Bancorp, Inc. /s/ KPMG LLP Boston, Massachusetts June 27, 2000 EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
9 1,000 12-MOS MAR-31-2000 APR-01-1999 MAR-31-2000 6,588 177 14,625 0 55,443 0 0 320,013 2,993 409,557 258,339 0 2,821 111,000 0 0 1,970 35,427 409,557 22,405 4,019 0 26,424 8,553 13,049 13,375 0 1,013 9,345 5,699 3,567 0 (234) 3,333 1.77 1.77 3.64 235 0 0 0 2,913 9 89 2,993 0 0 0
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