EXHIBIT 99.2
CHART BANK, A COOPERATIVE BANK
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Chart Bank, A Cooperative Bank
Waltham, Massachusetts
We have audited the accompanying consolidated balance sheets of Chart Bank, A
Cooperative Bank and subsidiaries, as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Bank'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 Chart Bank, A
Cooperative Bank and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
February 18, 2005
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
--------- ---------
(In Thousands)
Cash and due from banks $ 36,002 $ 32,882
Short-term investments 3,356 1,992
--------- ---------
Total cash and cash equivalents 39,358 34,874
--------- ---------
Securities available for sale, at fair value 3,510 5,404
Securities held to maturity, at amortized cost 32,607 23,965
Loans 178,294 141,547
Allowance for loan losses (1,783) (1,657)
--------- ---------
Loans, net 176,511 139,890
--------- ---------
Banking premises and equipment, net 2,123 2,400
Federal Home Loan Bank stock, at cost 1,680 1,060
Co-operative Central Bank deposit 536 536
Accrued interest receivable 878 816
Deferred income taxes 354 352
Other assets 914 557
--------- ---------
$ 258,471 $ 209,854
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 208,683 $ 175,801
Federal Home Loan Bank advances:
Short-term 26,000 5,202
Long-term 5,000 10,728
Mortgagors' escrow accounts 390 307
Other liabilities 633 417
--------- ---------
Total liabilities 240,706 192,455
--------- ---------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity:
Preferred stock; $1 par value, 3,000,000 shares
authorized; none issued - -
Common stock - Series B; $1 par value;
3,000,000 shares authorized; none issued - -
Common stock - Series A; $1 par value; 3,000,000 shares
authorized; 1,420,000 shares issued and outstanding 1,420 1,420
Additional paid-in capital 11,575 11,575
Retained earnings 4,724 4,337
Accumulated other comprehensive income 46 67
--------- ---------
Total stockholders' equity 17,765 17,399
--------- ---------
$ 258,471 $ 209,854
========= =========
See accompanying notes to consolidated financial statements.
2
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------- -------
(In Thousands)
Interest and dividend income:
Interest and fees on loans $ 9,924 $ 8,971
Interest and dividends on securities:
Taxable interest on securities 899 990
Dividends on securities 83 31
Other interest income 78 99
------- -------
Total interest and dividend income 10,984 10,091
------- -------
Interest expense:
Interest on deposits 3,223 3,014
Interest on borrowed funds:
Short-term 334 148
Long-term 215 290
------- -------
Total interest expense 3,772 3,452
------- -------
Net interest income 7,212 6,639
Provision for loan losses 120 120
------- -------
Net interest income, after provision for loan losses 7,092 6,519
------- -------
Other income:
ATM service contract fees 1,883 1,755
Customer service fees 596 713
Loan brokerage fees 55 158
Net gain on sales and redemptions of securities 67 6
Miscellaneous income 28 33
------- -------
Total other income 2,629 2,665
------- -------
Operating expenses:
Salaries and employee benefits 3,811 3,279
Occupancy and equipment 1,226 1,260
Professional services 374 343
Advertising and marketing 340 242
Data processing 622 433
Merger expenses 637 -
Other general and administrative 772 849
------- -------
Total operating expenses 7,782 6,406
------- -------
Income before income taxes 1,939 2,778
Income tax provision 955 1,076
------- -------
Net income $ 984 $ 1,702
======= =======
See accompanying notes to consolidated financial statements.
3
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Income Equity
---------- ---------- -------- ------------- -------------
(In Thousands, Except Per Share Data)
Balance at December 31, 2002 $ 1,420 $ 11,575 $ 2,848 $ 218 $ 16,061
-------------
Comprehensive income:
Net income - - 1,702 - 1,702
Change in net unrealized gain/loss on securities
available for sale, net of reclassification
adjustment and tax effects - - - (151) (151)
-------------
Total comprehensive income 1,551
-------------
Cash dividends declared ($.15 per share) - - (213) - (213)
---------- ---------- -------- -------- -------------
Balance at December 31, 2003 1,420 11,575 4,337 67 17,399
-------------
Comprehensive income:
Net income - - 984 - 984
Change in net unrealized gain/loss on securities
available for sale, net of reclassification
adjustment and tax effects - - - (21) (21)
-------------
Total comprehensive income 963
-------------
Cash dividends declared ($.42 per share) - - (597) - (597)
---------- ---------- -------- -------- -------------
Balance at December 31, 2004 $ 1,420 $ 11,575 $ 4,724 $ 46 $ 17,765
========== ========== ======== ======== =============
See accompanying notes to consolidated financial statements.
4
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
-------- --------
(In Thousands)
Cash flows from operating activities:
Net income $ 984 $ 1,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 120 120
Net gain on sales and redemptions of securities (67) (6)
Depreciation and amortization 388 429
Deferred tax provision 12 6
Net increase in accrued interest receivable (62) (37)
Other, net (108) (961)
-------- --------
Net cash provided by operating activities 1,267 1,253
-------- --------
Cash flows from investing activities:
Activity in securities available for sale:
Maturities and redemptions 3,775 10,831
Sales 722 -
Purchases (2,583) -
Activity in securities held to maturity:
Maturities and redemptions 6,883 12,114
Purchases (15,546) (23,077)
Loan originations, net of principal payments (22,739) (17,045)
Purchase of loans (14,002) -
Purchase of banking premises and equipment (111) (235)
Purchase of Federal Home Loan Bank stock (620) -
-------- --------
Net cash used by investing activities (44,221) (17,412)
-------- --------
(continued)
See accompanying notes to consolidated financial statements.
5
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
-------- --------
(In Thousands)
Cash flows from financing activities:
Net increase in deposits 32,882 5,522
Activity in Federal Home Loan Bank advances:
Net increase in advances with maturities
within three months 3,798 1,202
Proceeds from issuance of advances with maturities
greater than three months 15,000 3,000
Repayments of advances with maturities greater than
three months (3,728) (3,258)
Net change in mortgagors' escrow accounts 83 27
Cash dividends paid on common stock (597) (213)
-------- --------
Net cash provided by financing activities 47,438 6,280
-------- --------
Net change in cash and cash equivalents 4,484 (9,879)
Cash and cash equivalents at beginning of year 34,874 44,753
-------- --------
Cash and cash equivalents at end of year $ 39,358 $ 34,874
======== ========
Supplemental cash flow information:
Interest paid on deposits $ 3,228 $ 3,015
Interest paid on borrowed funds 537 439
Net income tax payments 846 1,139
See accompanying notes to consolidated financial statements.
6
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Chart Bank,
A Cooperative Bank (the "Bank") and its wholly-owned subsidiaries,
Creative Strategic Solutions, Inc. ("CSSI"), which provides electronic
commerce, electronic funds transfer, automated teller machine services and
related consulting services, and Weston Street Securities Corporation,
which buys, sells and holds securities. All significant intercompany
balances and transactions have been eliminated in consolidation.
BUSINESS
The Bank is a full service community bank that provides financial
services, through its three offices in Waltham and Newton, including a
complete line of personal and consumer accounts as well as an extensive
line of commercial loan services to accounts in eastern Massachusetts. In
addition, the Bank, through its subsidiary CSSI, provides electronic
commerce, electronic funds transfer, automated teller machine services and
related consulting services to the financial services industry, while
offering services and specific products to third parties throughout the
United States.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan losses.
RECLASSIFICATIONS
Certain amounts in the 2003 consolidated financial statements have been
reclassified to conform to the 2004 presentation.
7
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents include amounts due from banks and short-term investments,
which consist of federal funds sold and investment in the Bank Investment
Liquidity Fund. The Bank is required to maintain average balances on hand or
with the Federal Reserve Bank. At December 31, 2004 and 2003, the required
reserve balance amounted to $1,193,000 and $1,160,000, respectively.
SECURITIES
Securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost. All
other securities are classified as available for sale and recorded at fair
value, with unrealized gains and losses excluded from income and reported in
other comprehensive income/loss.
Discounts and premiums are recognized in income over the term of the securities,
by the interest method. Declines in the value of securities that are deemed to
be other than temporary are reflected in earnings when identified. In estimating
other-than-temporary impairment losses, management considers (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Bank to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value. Gains and
losses on disposition of securities are computed by the specific identification
method.
LOANS
The Bank grants mortgage and consumer loans to customers and a substantial
portion of the loan portfolio is represented by mortgage loans in the Waltham
and Newton areas. The ability of the Bank's debtors to honor their contracts is
dependent upon the real estate and economic sectors.
Loans are reported at their outstanding principal balances, adjusted for
charge-offs, the allowance for loan losses, deferred loan origination fees or
costs and loan purchase premiums.
Interest is not accrued on loans, including impaired loans, ninety days or more
past due, unless the loan is well-secured and in process of collection. Past due
status is based on contractual terms of the loan. Interest income previously
accrued on such loans is reversed against current period income. In addition,
interest collected is applied to principal when management is uncertain as to
the collectibility of the principal balance. Net deferred loan costs/fees and
purchase premiums are amortized over the life of the related loan on the
interest method.
8
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONCLUDED)
Loans are considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Impairment is measured on a loan by loan basis by the fair value of
the collateral.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to operations. Loan losses,
including loan losses on impaired loans, are charged against the allowance when
management believes the uncollectibility of the loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of known and inherent risks in the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of allocated, general and unallocated components. The
allocated component relates to loans that are classified as either substandard
or loss. For such loans that are also classified as impaired, an allowance is
established when the collateral value of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified loans
and is based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
management's estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating losses in the portfolio.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Building, leasehold improvements and equipment are
stated at cost, less accumulated depreciation and amortization, computed
principally on the straight-line method over the estimated useful lives of the
assets or the anticipated term of the lease, if shorter.
9
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred.
STOCK COMPENSATION PLAN
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Bank has
elected to measure compensation cost for its stock option plan using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees," whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Bank's stock option plan have no intrinsic
value at the grant date, and under Opinion No. 25 no compensation cost is
recognized for them. The pro forma impact of accounting for stock options
granted in accordance with SFAS No. 123 was not material. (See Recent Accounting
Pronouncements.)
10
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on securities available for
sale, are reported as a separate component of the stockholders' equity section
of the consolidated balance sheet, such items, along with net income, are
components of comprehensive income. The components of other comprehensive
income/loss and related tax effects are as follows:
Before-Tax Tax Net-of-Tax
Amount Effects Amount
---------- ------- ----------
(In Thousands)
YEAR ENDED DECEMBER 31, 2004
Unrealized holding losses on securities available for sale $ 32 $ (13) $ 19
Reclassification adjustment for gains realized in income (67) 27 (40)
------ ----- ------
Other comprehensive loss $ (35) $ 14 $ (21)
====== ===== ======
YEAR ENDED DECEMBER 31, 2003
Unrealized holding losses on securities available for sale $ (246) $ 99 $ (147)
Reclassification adjustment for gains realized in income (6) 2 (4)
------ ----- ------
Other comprehensive loss $ (252) $ 101 $ (151)
====== ===== ======
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R, "Share-Based Payment," which is an Amendment of SFAS Nos. 123 and
95. SFAS No. 123R changes, among other things, the manner in which share-based
compensation, such as stock options, will be accounted for by both public and
non-public companies. SFAS No. 123R allows nonpublic entities, such as the Bank,
to elect to measure compensation cost of awards of equity share options and
similar instruments at intrinsic value through the date of settlement and
therefore, is not expected to have a material impact on the Bank's consolidated
financial statements.
11
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONCLUDED)
On September 30, 2004, the FASB issued FASB Staff Position ("FSP")
Emerging Issues Task Force ("EITF") Issue No. 03-1-1 delaying the
effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments", which provides guidance for determining the meaning of
"other-than-temporarily impaired" and its application to certain debt and
equity securities within the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and investments
accounted for under the cost method. The guidance requires that
investments which have declined in value due to credit concerns or solely
due to changes in interest rates must be recorded as
other-than-temporarily impaired unless the Bank can assert and demonstrate
its intention to hold the security for a period of time sufficient to
allow for a recovery of fair value up to or beyond the cost of the
investment which might mean maturity. The delay of the effective date of
EITF 03-1 will be superceded concurrent with the final issuance of
proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to
provide implementation guidance with respect to all securities analyzed
for impairment under paragraphs 10-20 of EITF 03-1. Management continues
to closely monitor and evaluate how the provisions of EITF 03-1 and
proposed FSP Issue 03-1-a will affect the Bank.
2. SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
securities follows. At December 31, 2003, all securities consisted of
federal agency obligations.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
(In Thousands)
DECEMBER 31, 2004
Securities available for sale:
Federal agency obligations $ 1,507 $ 12 $ - $ 1,519
Marketable equity securities 1,926 100 (35) 1,991
-------- ----- ------ -------
Total securities available for sale $ 3,433 $ 112 $ (35) $ 3,510
======== ===== ====== =======
Securities held to maturity:
Federal agency obligations $ 32,607 $ 12 $ (332) $32,287
======== ===== ====== =======
12
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES (CONTINUED)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -------
(In Thousands)
DECEMBER 31, 2003
Securities available for sale $ 5,292 $ 112 $ - $ 5,404
======= ===== ====== =======
Securities held to maturity $23,965 $ 113 $ (118) $23,960
======= ===== ====== =======
The carrying value and estimated fair value of debt securities by contractual
maturity at December 31, 2004, follows. Expected maturities may differ from
contractual maturities because the issuer may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
--------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- --------- --------
(In Thousands)
Within 1 year $ 1,507 $ 1,519 $ 3,001 $ 2,996
Over 1 year to 2 years - - 19,095 18,889
Over 2 years to 5 years - - 10,511 10,402
------- ------- ------- --------
$ 1,507 $ 1,519 $32,607 $ 32,287
======= ======= ======= ========
Proceeds from the sales of securities for the year ended December 31, 2004
amounted to $722,000, which realized gross gains of $71,000 and gross losses of
$4,000. There were no sales of securities in 2003.
13
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES (CONCLUDED)
At December 31, 2004 and 2003, securities with a fair value of $5,010,000 and
$5,775,000, respectively, were pledged to secure municipal deposits, the Bank's
treasury, tax and loan account and funds advanced under the Federal Reserve
borrowing agreement. (See Note 6.)
Information pertaining to securities with gross unrealized losses at December
31, 2004 and 2003, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, follows:
Less Than Twelve Months Over Twelve Months
----------------------- ------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- -------- ---------- ---------
(In Thousands)
DECEMBER 31, 2004
Securities available for sale:
Marketable equity securities $ 35 $ 568 $ - $ -
Securities held to maturity:
Federal agency obligations 150 21,425 182 10,862
---------- -------- ---------- ---------
Total temporarily impaired
securities $ 185 $ 21,993 $ 182 $ 10,862
========== ======== ========== =========
DECEMBER 31, 2003
Securities held to maturity $ 118 $ 11,950 $ - $ -
========== ======== ========== =========
At December 31, 2004, four marketable equity securities had unrealized losses of
6% from the Bank's cost. These unrealized losses have existed for less than
twelve months and relate principally to the financial services industry. No
credit issues have been identified that cause management to believe the declines
are other-than-temporary.
At December 31, 2004, forty-four securities held to maturity had unrealized
losses of 1% from the Bank's amortized cost. The declines in value are due
principally to the effect that rising interest rates have on the value of the
securities. The securities are issued by government agencies, therefore
impairment is not deemed to be other-than-temporary.
14
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS
The composition of the balance of loans at December 31, 2004 and 2003,
follows:
2004 2003
--------- ---------
(In Thousands)
Real estate mortgage loans:
Residential $ 56,799 $ 31,113
Home equity lines-of-credit 7,509 6,462
Commercial 100,515 91,774
Construction loans 7,760 6,498
--------- ---------
172,583 135,847
--------- ---------
Commercial loans:
Secured 4,265 3,913
Unsecured 748 512
--------- ---------
5,013 4,425
--------- ---------
Consumer loans:
Consumer share secured 164 741
Other consumer 102 429
--------- ---------
266 1,170
--------- ---------
Total loans 177,862 141,442
Allowance for loan losses (1,783) (1,657)
Net deferred loan origination costs 203 105
Loan purchase premiums 229 -
--------- ---------
Loans, net $ 176,511 $ 139,890
========= =========
An analysis of the allowance for loan losses for the years ended December
31, 2004 and 2003 follows:
2004 2003
------- -------
(In Thousands)
Balance at beginning of year $ 1,657 $ 1,536
Provision for loan losses 120 120
Recoveries 13 6
Charge-offs (7) (5)
------- -------
Balance at end of year $ 1,783 $ 1,657
======= =======
15
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOANS (CONCLUDED)
At December 31, 2004, impaired and non-accrual loans amounted to $119,000.
For the year ended December 31, 2004, the average balance of impaired
loans was $119,000 and $5,000 in interest income was recognized on
impaired loans on the cash basis during the period they were impaired. At
December 31, 2003, impaired and non-accrual loans amounted to $120,000.
For the year ended December 31, 2003, the average balance of impaired
loans was $40,000 and $1,000 in interest income was recognized on impaired
loans on the cash basis during the period they were impaired.
At December 31, 2004 and 2003, accruing loans past due greater than ninety
days amounted to $136,000 and $93,000, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of mortgage
loans serviced for others was $13,208,000 and $10,553,000 at December 31,
2004 and 2003, respectively. Loans sold did not contain recourse
provisions.
4. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment follows:
December 31,
-------------------- Estimated
2004 2003 Useful Lives
------- ------- ------------
(In Thousands)
Banking premises:
Land $ 380 $ 380
Building and improvements 1,181 1,181 10-35 years
Leasehold improvements 670 665 10 years
Furniture, fixtures and equipment 2,896 2,790 3-10 years
------- -------
5,127 5,016
Less accumulated depreciation
and amortization (3,004) (2,616)
------- -------
$ 2,123 $ 2,400
======= =======
Depreciation and amortization expense for the years ended December 31,
2004 and 2003 amounted to $388,000 and $429,000, respectively.
16
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. DEPOSITS
A summary of deposit balances by type follows:
December 31,
---------------------
2004 2003
-------- --------
(In Thousands)
Demand deposits $ 34,349 $ 30,458
NOW accounts 9,883 9,601
Money market deposits 61,077 50,977
Other savings accounts 15,083 21,479
-------- --------
Total non-certificate accounts 120,392 112,515
-------- --------
Term certificates less than $100 47,538 32,013
Term certificates of $100 or more 40,753 31,273
-------- --------
Total certificate accounts 88,291 63,286
-------- --------
$208,683 $175,801
======== ========
A summary of term certificates by maturity at December 31, 2004 and 2003,
follows:
2004 2003
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- ------- --------
(Dollars in Thousands)
Within 1 year $68,900 2.51% $38,041 2.41%
Over 1 year to 3 years 16,476 2.96 23,302 2.63
Over 3 years to 5 years 2,915 3.36 1,943 3.46
------- -------
$88,291 2.64% $63,286 2.52%
======= =======
17
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BORROWED FUNDS
Borrowed funds consist of advances from the Federal Home Loan Bank of
Boston ("FHLB"). Short-term advances mature within one year and have a
weighted average interest rate of 2.34% and 1.24% at December 31, 2004 and
2003, respectively. Long-term advances at December 31, 2004 and 2003 are
as follows:
2004 2003
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- -------- --------
(Dollars in Thousands)
Fixed-rate advances maturing:
2004 $ - -% $ 5,500 3.91%
2006 2,000 2.82 2,000 2.82
2008 3,000 3.79 3,000 3.79
Amortizing advance, due
September 30, 2004, requiring
monthly principal and
interest of $23,500 - - 228 6.38
--------- --------
$ 5,000 2.53% $ 10,728 3.73%
========= ========
At December 31, 2004 and 2003, the Bank's unadvanced Ideal Way line of
credit available from the FHLB amounted $2,389,000 and $187,000,
respectively, at an interest rate that adjusts daily. All FHLB borrowings
are secured primarily by a blanket lien on the Bank's unencumbered
residential real estate loan portfolio and at December 31, 2004 and 2003,
$34,409,000 and $27,793,000, respectively, in commercial real estate loans
in accordance with the FHLB's products policy.
The Bank also maintains a borrowing agreement with the Federal Reserve
Bank of Boston at an interest rate that adjusts daily. Advances are
limited to the amount of collateral pledged. At December 31, 2004 and
2003, certain federal agency obligations are pledged as collateral under
this agreement and no advances are outstanding.
18
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The allocation of income taxes between current and deferred portions is as
follows:
Years Ended December 31,
------------------------
2004 2003
------ ------
(In Thousands)
Current tax provision:
Federal $ 771 $ 872
State 172 198
------ ------
943 1,070
------ ------
Deferred tax provision:
Federal 9 5
State 3 1
------ ------
12 6
------ ------
$ 955 $1,076
====== ======
The reasons for the differences between the statutory federal income tax
rate and the effective tax rates for the years ended December 31, 2004 and
2003 are summarized as follows:
2004 2003
---- ----
Statutory rate 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 5.9 4.7
Merger expenses 8.7 -
Other, net 0.7 -
---- ----
Effective tax rates 49.3% 38.7%
==== ====
The components of the net deferred tax asset are as follows:
December 31,
-----------------
2004 2003
------ ------
(In Thousands)
Deferred tax asset:
Federal $ 542 $ 504
State 187 174
------ ------
729 678
------ ------
Deferred tax liability:
Federal (280) (247)
State (95) (79)
------ ------
(375) (326)
------ ------
Net deferred tax asset $ 354 $ 352
====== ======
19
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONCLUDED)
The tax effects of each item that gives rise to deferred taxes are as
follows:
December 31,
-------------------
2004 2003
---- ----
(In Thousands)
Cash basis of accounting $ (4) $ (3)
Net unrealized gain on securities available for sale (31) (45)
Depreciation and amortization (62) (32)
Deferred income (72) (43)
Allowance for loan losses 523 474
Other - 1
---- ----
Net deferred tax asset $354 $352
==== ====
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31,
------------------------
2004 2003
---- ----
(In Thousands)
Balance at beginning of year $352 $257
Deferred tax provision (12) (6)
Change in deferred tax effect of net unrealized
gain/loss on securities available for sale 14 101
---- ----
Balance at end of year $354 $352
==== ====
There was no valuation reserve required years ended December 31, 2004 and
2003.
20
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) Plan whereby each employee reaching the age of 21
and having completed six months of service automatically becomes a
participant in the Plan. Employees may contribute up to 15% of their
compensation subject to certain limits based on federal tax laws. The Bank
may make discretionary matching contributions each Plan year proportionate
to the employee's contribution up to 4% of the employee's compensation.
The Bank's contributions vest 20% per year of service and are fully vested
after five years. For the years ended December 31, 2004 and 2003, expense
attributable to the Plan amounted to $84,000 and $78,000, respectively.
9. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's consolidated 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 of total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes December 31, 2004 and 2003, that the Bank
met all capital adequacy requirements to which it is subject.
21
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
As of December 31, 2004, the most recent notification from the Federal
Deposit Insurance Corporation 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 total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since the
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios as of December 31, 2004 and
2003 are also presented in the table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirements Action Provisions
--------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
DECEMBER 31, 2004
Total capital
(to risk weighted assets) $ 19,531 11.9% $ 13,128 8.0% $ 16,410 10.0%
Tier 1 capital
(to risk weighted assets) 17,719 10.8 6,564 4.0 9,846 6.0
Tier 1 capital
(to average assets) 17,719 6.9 10,278 4.0 12,848 5.0
DECEMBER 31, 2003
Total capital
(to risk weighted assets) $ 18,989 12.4% $ 12,274 8.0% $ 15,343 10.0%
Tier 1 capital
(to risk weighted assets) 17,332 11.3 6,137 4.0 9,206 6.0
Tier 1 capital
(to average assets) 17,332 8.4 8,279 4.0 10,349 5.0
10. STOCK OPTION PLAN
During 1996 and amended in 2000, the Bank adopted a stock option plan for
the benefit of employees of the Bank covering 142,000 shares of common
stock, all of which were granted by the end of 2000. At December 31, 2004
and 2003, there were 137,000 options outstanding. The exercise period for
all options is ten years and the exercise price is $10 per share, adjusted
for stock splits and dividends in stock. The options vest over periods up
to five years from the date of grant. At December 31, 2004 and 2003,
128,600 and 120,200 options, respectively, were exercisable. At December
31, 2004, the weighted average remaining contractual life of outstanding
options was 3.6 years. (See Note 13.)
22
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
GENERAL
In the ordinary course of business, various legal claims arise from time
to time and, in the opinion of management, these claims will have no
material effect on the Bank's consolidated financial statements.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Bank has entered into an employment and consulting agreement with the
former Chief Executive Officer of the Bank and an employment agreement
with the current Chief Executive Officer for periods of not less than
three years. The agreements generally provide for a specified minimum
annual salary, which may be increased at the discretion of the Bank's
Board of Directors, and continuation of benefits currently received. The
agreements provide for certain lump sum severance payments within a
one-year period following a "change in control," as defined in the
agreements. (See Note 13.)
In addition, in 2004 the Bank entered into a termination agreement with
another executive of the Bank, whereby the executive will continue to
receive base salary and benefits for eighteen months following a change in
control or terminating event, as defined in the agreement.
LOAN COMMITMENTS
The Bank is a 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 commitments to extend
credit and advance funds on home equity and commercial lines-of-credit and
construction loans and standby letters-of-credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. The
Bank's exposure to credit loss is represented by the contractual amount or
unpaid principal balance of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
The contract amount of financial instruments which represent credit risk
are as follows:
December 31,
------------------
2004 2003
-------- --------
(In Thousands)
Commitments to grant loans $ 11,668 $ 12,176
Unadvanced funds on home equity lines-of-credit 6,224 4,988
Unadvanced funds on commercial lines-of-credit 12,436 7,714
Unadvanced funds on construction loans 4,282 2,749
Standby letters-of-credit 610 542
23
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
LOAN COMMITMENTS (CONCLUDED)
Commitments to grant loans are agreements to lend to a customer as long as
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. The commitments for home equity
and commercial lines-of-credit may expire without being drawn upon,
therefore, 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 and these financial instruments are
generally collateralized by real estate or other assets.
Standby letters-of-credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private
borrowing arrangements. Essentially all letters of credit issued are
reviewable annually. The credit risk involved in issuing letters-of-credit
is essentially the same as that involved in extending loan facilities to
customers. The Bank collateralizes those commitments for which collateral
is deemed necessary.
LEASE COMMITMENTS
Pursuant to the terms of lease agreements in effect at the dates noted,
pertaining to banking premises, future minimum rent commitments are as
follows:
Year Ending
December 31, Amount
- ------------ --------------
(In Thousands)
2005 $ 186
2006 138
2007 138
2008 34
-----
$ 496
=====
In addition to the minimum rental payments, the leases contain renewal
options for up to forty years. The cost of such options is not included
above. Rent expense for the years ended December 31, 2004 and 2003
amounted to $318,000 and $320,000, respectively.
The Bank leases an office from a director of the Bank. At December 31,
2004 and 2003, future minimum rent commitments, included in the table
above, total $447,000 and $584,000, respectively, through 2008. The lease
contains renewal options for four additional ten year periods. Rent
expense under this lease for both years ended December 31, 2004 and 2003
amounted to $139,000.
24
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation.
Fair value is best determined based upon quoted market prices. However, in
many instances, there are no quoted market prices for the Bank's various
financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. Certain financial instruments and
all nonfinancial instruments are excluded from disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash, due from
banks and short-term investments approximate fair values.
Securities: Fair values are based on quoted market prices.
FHLB stock: The carrying value of FHLB stock approximates fair value
based on the redemption provisions of the Federal Home Loan Bank of
Boston.
Loans: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms, adjusted for credit risk.
Accrued interest: The carrying amounts of accrued interest
approximate fair values.
Deposits: The fair values for non-certificate accounts are, by
definition, equal to the amount payable on demand at the reporting
date which is the carrying amount. Fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
FHLB advances: The fair value of FHLB advances is estimated using
discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.
25
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONCLUDED)
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing. The
estimated fair values of off-balance-sheet instruments are
immaterial.
The estimated fair values, and related carrying amounts, of the Bank's
financial instruments are as follows:
December 31,
--------------------------------------
2004 2003
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In Thousands)
Financial assets:
Cash and cash equivalents $ 39,358 $ 39,358 $ 34,874 $ 34,874
Securities available for sale 3,510 3,510 5,404 5,404
Securities held to maturity 32,607 32,287 23,965 23,960
FHLB stock 1,680 1,680 1,060 1,060
Loans, net 176,511 175,988 139,890 144,079
Accrued interest receivable 878 878 816 816
Financial liabilities:
Deposits 208,683 208,842 175,801 176,409
FHLB advances 31,000 30,891 15,930 15,941
13. MERGER AGREEMENT
On September 1, 2004, the Bank signed an Agreement and Plan of Merger with
Benjamin Franklin Bancorp, MHC ("Benjamin Franklin Bancorp"), a
Massachusetts-chartered mutual holding company, and Benjamin Franklin
Savings Bank ("Benjamin Franklin Bank"), a Massachusetts-chartered savings
bank and wholly-owned subsidiary of Benjamin Franklin Bancorp. Benjamin
Franklin Bancorp and Benjamin Franklin Bank are located in Franklin,
Massachusetts. Benjamin Franklin Bancorp will convert from mutual to stock
form pursuant to a plan of conversion. The Bank will merge with Benjamin
Franklin Bank, with Benjamin Franklin Bank as the surviving bank.
Each share of the Bank's common stock issued and outstanding immediately
prior to the merger shall be converted into, and shall be cancelled in
exchange for, the right to receive 3.075 shares of Benjamin Franklin
Bancorp common stock or a cash amount equal to $30.75 per share of the
Bank's common stock. The per share stock consideration assumes a $10 per
share price for Benjamin Franklin Bancorp's common stock to be sold in the
mutual-to-stock conversion.
26
CHART BANK, A COOPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
MERGER AGREEMENT (CONCLUDED)
In addition, each option to purchase Chart Bank stock outstanding at the
effective date of the merger becomes fully vested and may be exercised. If
the options are not exercised, they shall be terminated and each grantee
thereof shall be entitled to receive an amount of cash equal to the excess
of the $30.75 per share cash consideration over the option exercise price
of $10.00.
The Bank's employment agreements with the former and current Chief
Executive Officer will terminate upon completion of the merger. The merger
is subject to completion of Benjamin Franklin Bank's stock conversion,
approval by Chart Bank's stockholders and satisfaction of certain closing
conditions. Merger expenses incurred through December 31, 2004 amounted to
$637,000.
27