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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 NUMBER 000-29343
PORT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Massachusetts Application Pending
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
689 Massachusetts Avenue, Cambridge, Massachusetts 02139
(Address of principal executive office-zip code)
Telephone (617) 661-4900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 No X .
--- ---
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K [X]
As of December 31, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Registrant was zero.
As of December 31, 1999, no shares of Registrant's common stock were
outstanding.
PORT FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I .................................................................... 1
ITEM 1. BUSINESS ............................................... 1
ITEM 2. PROPERTIES ............................................. 41
ITEM 3. LEGAL PROCEEDINGS ...................................... 42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .... 42
PART II ................................................................... 42
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................... 42
ITEM 6. SELECTED FINANCIAL AND OTHER DATA ...................... 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................... 45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ............................................ 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............ 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................... 58
PART III .................................................................. 58
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..... 58
ITEM 11. EXECUTIVE COMPENSATION ................................. 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ......................................... 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......... 65
PART IV ................................................................... 65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ............................................ 65
PART I
ITEM 1. BUSINESS
General
Port Financial Corp. is a Massachusetts-chartered stock holding company, to
be formed upon the completion of the conversion of Cambridgeport Mutual Holding
Company from a mutual holding company to a stock holding company structure. Upon
completion of the conversion, Port Financial Corp. will own all of the capital
stock of Cambridgeport Bank. Port Financial Corp. will be a registered bank
holding company with the Federal Reserve Board.
Cambridgeport Bank is a Massachusetts-chartered stock savings bank,
chartered in 1853. We are headquartered in Cambridge, Massachusetts, a suburb of
Boston. Our deposits are insured by the FDIC up to applicable legal limits and
by the Depositors Insurance Fund in excess of such amounts. We are examined and
regulated by the Division of Banks of the Commonwealth of Massachusetts and the
FDIC.
We are a community-oriented bank providing retail and business customers
with value-driven products and services to meet customer needs. We provide a
wide variety of deposit products, residential mortgage loans, commercial real
estate loans, commercial loans and consumer loans to our customers in the cities
and towns around Cambridge, Massachusetts. Over the past five years, we have
more than doubled our branch network from four full service bank offices to ten
full service bank offices and one Telebanking Center. We have strategically
located our branch offices in cities and towns with a strong base for real
estate lending and deposit growth and where community bank competition has been
reduced by a consolidating banking industry. Our branch expansion has increased
our customer base and allowed us to increase our profitability by shifting our
mix of assets more towards higher yielding loans relative to investment
securities. As of December 31, 1999, approximately 76.6% of our total assets
were invested in loans. These loans are funded primarily by deposits with some
reliance on FHLB borrowings. Our total deposits amounted to $621.3 million at
December 31, 1999 while borrowings totaled $55.9 million on that date.
Our branch expansion and broadened customer base has also enabled us to
diversify our loan portfolio without sacrificing asset quality or capital
strength. As of December 31, 1999, 36.5% of our loan portfolio consisted of
commercial real estate loans and 10.7% consisted of home equity lines of credit.
Non-performing assets were .02% of total assets while our Tier 1 leverage
capital ratio was 10.4% on that date.
Our revenues are derived principally from interest on our loans and
mortgage-backed securities and interest and dividends on our investment
securities. Our primary sources of funds are deposits, scheduled amortization
and prepayments of loan principal and mortgage-backed securities, maturities and
calls of investment securities, funds provided by operations and borrowings. We
also use borrowings from the Federal Home Loan Bank as a source of funds for
loans, investments and other assets. The largest component of our expenses is
the interest that we pay on deposits.
Business Strategy
The following are highlights of our operating strategy:
. Community Banking and Customer Service
Since 1853, we have met the banking needs of Cambridge and its surrounding
communities. We are a service-oriented bank providing retail and business
customers with value-driven products and services designed to create long-term,
profitable relationships. Our focus is to develop core banking relationships by
securing checking accounts and then to provide customers appropriate loan and
other services from among a full array of banking products. In this regard, we
offer residential mortgage loans, commercial real estate loans and business
banking loans and services to customers throughout eastern Massachusetts. With
the recent mergers and consolidations of banks in our market, we believe that
our community-oriented approach to banking may help us to increase our market
share of retail consumers and business customers.
. Residential Lending
Cambridgeport Bank emphasizes the origination of residential mortgage
loans. At December 31, 1999, we had $297.3 million of residential mortgage
loans, representing 50.9% of our total loan portfolio. Our strategy is to offer
customers a broad range of mortgage products including adjustable and fixed-rate
loans and jumbo loan products. We utilize mortgage originators to call on real
estate brokers and other key referral sources. In addition, our branch staff is
trained to prequalify potential mortgage borrowers and actively refer new
lending relationships to the mortgage department. Our Telebanking Center is
equipped with a special toll-free number for loan customers and handles
information requests and accepts mortgage applications over the telephone.
We also offer home equity lines of credit to complement our mortgage
services. At December 31, 1999, we had $62.5 million of outstanding borrowings
under home equity lines of credit representing 10.7% of our portfolio.
. Commercial Real Estate Lending
Beginning in 1994, we developed an expertise in commercial real estate
lending throughout the Boston metropolitan area as a means to increase the yield
on our loan portfolio and diversify our assets. Currently the commercial real
estate portfolio represents a significant portion of our lending activity. At
December 31, 1999, there were 247 loans in the commercial real estate portfolio
which totaled $213.6 million, or approximately 36.5% of our total loan
portfolio. The average size of commercial real estate loans in our portfolio was
approximately $891,000. Approximately 38% of our commercial real estate
portfolio was secured by properties located in the City of Boston. Properties in
Cambridge secured about 18% of the portfolio. The remainder was secured by
properties located elsewhere in our market area.
. Business Banking
We plan to increase our emphasis on business banking and to utilize our
existing branch franchise to provide expanded commercial deposit products and
services to business customers. Our service-oriented relationship banking
philosophy is targeted to capture business customers disenfranchised by recent
bank mergers. We have recently hired two senior commercial banking officers who
have extensive experience in establishing commercial banking centers and
generating and administering business banking for large Boston-based commercial
banks. These senior officers will work to enhance our operational infrastructure
and our loan production capabilities, so we can both expand relationships with
current business customers and attract new relationships. We will also hire
additional personnel to serve our business customers. We currently offer
2
traditional lending products such as lines of credit and term loans and we will
be expanding our services in 2000 by introducing cash management services, sweep
accounts and business banking using the Internet, which will benefit our
customers and increase our non-interest income.
. Business Diversification Strategies
We plan to become a broader provider of financial services, enhancing our
ability to attract and retain both retail and commercial customers and
diversifying our income stream. We intend to increase both our customer base and
our share of customers' financial services business by offering a diverse range
of products and services that formerly were offered only by insurance companies
and securities brokerage firms. We will continue to offer various uninsured
investment and insurance products, including fixed-rate and variable annuities
and mutual funds, through a relationship with a third-party broker-dealer that
serves both retail and business customer needs for investment products. In
addition, we have applied to the Commissioner of Banks for permission to conduct
expanded insurance activities.
. Expanded Delivery Systems
To serve our existing customers better and to complement our expanded
product line and presence in the business banking market, we will increase the
channels through which we deliver products and services. The increased use of
alternative delivery channels has simplified and reduced the costs of financial
transactions for consumers, businesses and financial institutions. In addition
to conducting financial transactions at branch offices, customers are
increasingly using ATMs and online banking. In response to these trends, we
offer 24 hour telebanking services which provide our customers with continuous
access to their accounts through the use of a touch tone telephone. We plan to
introduce an internet home banking product which will give our customers access
to their accounts and the ability to conduct account transactions such as online
bill payment and electronic funds transfers. Business banking customers will
also have access to an internet banking service tailored to their needs.
. Asset Quality
We have a commitment to conservative loan underwriting policies and
investing in high grade assets. As a result of such practices and a relatively
stable economy, at December 31, 1999, we had $128,000 in non-performing assets
and a ratio of allowance for possible loan losses to total loans of 1.21%.
. Interest Rate Strategy
We seek to maintain an acceptable balance between maximizing potential
yield and limiting exposure to changing interest rates. To reduce the risk that
our earnings will be impacted if interest rates change, we:
. sell most of our fixed-rate one - to four-family mortgage loans
rather than retain them in our loan portfolio;
. emphasize investments with adjustable-rates and/or short and
intermediate-term maturities of less than ten years;
. structure most of our commercial real estate loans with
adjustable-rates; and
. offer home equity credit lines with variable rates indexed to the
prime rate.
3
Market Area
Consistent with large metropolitan areas in general, the economy in our
market area is based on a mixture of service, manufacturing, wholesale/retail
trade, and state and local government. The market area suffered a downturn in
terms of economic activity and real estate values in the late 1980s and early
1990s-in lockstep with the national recession. However, more recently, the
Boston economy has flourished in line with the national economic expansion and a
resulting increase in demand for the products and services produced by the
Boston economy, particularly with respect to the technology and financial
services sectors. Maintaining operations in a large metropolitan area serves as
a benefit to us in periods of economic growth, while at the same time fostering
significant competition for the financial services provided by us.
Our primary market area is representative of the Boston metropolitan area,
with employment primarily in services, wholesale/retail trade and manufacturing
sectors. Our market area also has a high concentration of white collar
professionals who work at the numerous colleges and universities, hospitals and
medical care companies, financial services firms, and high technology companies
located in the Boston metropolitan area. Service jobs represent the largest
employment sector in both of the primary market counties, with jobs in
wholesale/retail trade accounting for the second largest employment sector. The
manufacturing industry, once the backbone of local economy, remains a notable
employment sector in both Middlesex and Norfolk Counties. Manufacturing
employment has experienced a decline in our primary market during the 1990's,
reflecting the general trend of a shrinking manufacturing basis throughout the
northeast. However, the number of manufacturing jobs increased in both Norfolk
and Middlesex Counties during 1997. Population growth has facilitated job growth
in most sectors of the local economy, with services, wholesale/retail trade,
financial services and construction all reflecting strong job growth in our
primary market area.
We believe that the relative affluence of our market area and recent
population and job growth provide significant opportunities for profitable
household banking relationships. The median household and per capita income
levels in Middlesex and Norfolk Counties, the primary two counties of our market
area, were higher than the comparative medians for Massachusetts and the U.S.
However, in comparison to the U.S. and Massachusetts, growth in household income
was lower for Middlesex and Norfolk Counties from 1990 to 1999. Based on the
projections of CACI, household income for both Middlesex and Norfolk Counties
will increase over the next five years, but will continue to increase at a
slower pace than the projected growth rates for Massachusetts and the U.S.
Unemployment rates in Middlesex and Norfolk Counties are lower than comparative
measures for Massachusetts and the U.S.
Competition
We face intense competition both in making loans and attracting deposits.
Eastern Massachusetts has a high concentration of financial institutions, many
of which are branches of large money centers and regional banks which have
resulted from the consolidation of the banking industry in Massachusetts and
surrounding states. Some of these competitors have greater resources than we do
and may offer services that we do not provide.
Our competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
4
Lending Activities
Loan Portfolio Composition. Our loan portfolio consists of one- to
four-family residential first mortgage loans, commercial real estate loans,
consumer loans and commercial loans.
At December 31, 1999, we had total loans of $584.4 million, of which $297.3
million were residential mortgage loans. Outstanding advances under home equity
credit lines totaled $62.5 million. Loans secured by mortgages on commercial
real estate totaled $213.6 million. The remaining portion of our loan portfolio
at December 31, 1999 consisted of consumer loans totaling $6.0 million and
commercial loans of $1.3 million.
Our loans are subject to federal and state law and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by general and
local economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.
5
Loan Portfolio. The following table presents the composition of our loan
portfolio in dollar amounts and in percentages of the total portfolio at the
dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Real estate loans:
Residential(1) ................ $297,313 50.87% $246,917 49.04% $208,124 49.04% $159,271 51.24% $156,031 56.26%
Home equity lines of credit.. 62,458 10.69 56,502 11.22 60,875 14.34 46,745 15.04 39,386 14.20
Commercial .................. 213,567 36.54 189,275 37.59 144,292 34.00 91,528 29.45 69,732 25.14
Construction 3,716 0.64 2,741 0.55 1,940 0.46 2,692 0.86 988 0.35
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans ... $577,054 98.74% $495,435 98.40% $415,231 97.84% $300,236 96.59% $266,137 95.95%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other loans:
Commercial................... 1,348 0.23 724 0.15 581 0.14 807 0.26 775 0.28
Consumer..................... 6,046 1.03 7,310 1.45 8,576 2.02 9,787 3.15 10,451 3.77
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans ......... 7,394 1.26 8,034 1.60 9,157 2.16 10,594 3.41 11,226 4.05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans ............. $584,448 100.00% $503,469 100.00% $424,388 100.00% $310,830 100.00% $277,363 100.00%
Less:
Net deferred loan fees....... 338 446 294 240 321
Allowance for loan losses ... 7,081 6,633 4,907 4,269 4,074
-------- -------- -------- -------- --------
Total loans, net .......... $577,029 $496,390 $419,187 $306,321 $272,968
======== ======== ======== ======== ========
- -------------------------
(1) Includes loans held for sale.
6
Loan Maturity and Repricing. The following table shows the repricing dates
or contractual maturity dates of Cambridgeport Bank's loans as of December 31,
1999. The table does not reflect prepayments or scheduled principal
amortization.
At December 31, 1999
---------------------------------------------------------------------------------------------
Home Equity
Residential Line of Commercial Construction Commercial Consumer
Loans Credit Real Estate and Land Loans Loans Totals
---------- ----------- ----------- ------------ ---------- ---------- ----------
(In thousands)
Amounts due:
Within one year ............ $ 23,672 $ 62,458 $ 5,500 $ 3,716 $ 194 $ 4,826 $100,366
After one year:
One to three years .......... 60,627 - 47,745 - 201 1,033 109,606
Three to five years ......... 137,198 - 115,365 - 553 187 253,303
Five to ten years ........... 62,920 - 44,504 - - - 107,424
Ten to twenty years ......... 8,683 - 453 - 400 - 9,536
Over twenty years ........... 4,213 - - - - - 4,213
-------- -------- -------- -------- -------- -------- --------
Total due after one year ...... 273,641 - 208,067 - 1,154 1,220 484,082
-------- -------- -------- -------- -------- -------- --------
Total amount due: $297,313 $ 62,458 $213,567 $ 3,716 $ 1,348 $ 6,046 $584,448
======== ======== ======== ======== ======== ======== ========
Less:
Net deferred loan
origination costs ........ 338
Allowance for loan losses ..... 7,081
--------
Loans, net .................... $577,029
========
7
The following table presents, as of December 31, 1999, the dollar amount of
all loans contractually due or scheduled to reprice after December 31, 2000 and
whether such loans have fixed interest rates or adjustable interest rates.
Due After December 31, 2000
-----------------------------------
Fixed Adjustable Total
--------- ----------- ----------
(In thousands)
Real Estate Loans
Residential .................... 38,150 235,491 273,641
Home equity lines of credit .... -- -- --
Commercial real estate ......... 24,332 183,735 208,067
Construction ................... -- -- --
------- -------- --------
Total real estate loans ..... 62,482 419,226 481,708
------- -------- --------
Other Loans
Commercial ..................... 1,154 -- 1,154
Other consumer loans ........... 1,220 -- 1,220
------- -------- --------
Total other loans ........... 2,374 -- 2,374
------- -------- --------
Total loans ...................... 64,856 419,226 484,082
======= ======== ========
Residential Mortgage Loans and Originations. We emphasize the origination
of first and second mortgages secured by one- to four-family properties
primarily within eastern Massachusetts. As of December 31, 1999, loans on
residential properties accounted for 50.9% of our total loan portfolio.
Our mortgage origination strategy is to offer a broad array of products to
meet customer needs. These products include adjustable-rate loans which are held
in our portfolio, fixed-rate loans sold to investors with servicing released for
fee income, and fixed-rate loans sold to the secondary market where we retain
the servicing rights. In 1998, we introduced a "mini-mortgage" product to take
advantage of the high volume of mortgage refinancings. Mini-mortgages are loans
with fixed terms of up to 15 years and loan amounts up to $250,000.
Mini-mortgages are first position mortgages with loan-to-value ratios under 70%
and which we hold in our portfolio.
Our originations of all types of residential first and second mortgages
amounted to $144.5 million for the 1999 fiscal year, $201.4 million in 1998 and
$109.6 million in 1997. Due to the low interest rate environment, a significant
portion of loans originated in 1998 and 1999 were refinances, including
refinances of our existing portfolio loans and loans in our servicing portfolio.
The average size of our residential mortgage loans originated in 1999 was
$181,290.
We utilize a variety of strategies to originate new mortgage loans
including third-party alliances with mortgage lenders, dedicated mortgage
originators, branch referrals, Telebanking mortgage specialists and targeted
advertising. Our mortgage originators develop referrals from real estate
brokers, attorneys, past customers and other key referral sources. Originators
are also assigned a branch in order to process mortgage referrals made by our
branch staff. In addition, we market our mortgage capabilities in appropriate
media highlighting our toll-free Telebanking number. Our Telebanking Center has
a specialized loan staff which handle mortgage inquiries and preapprovals, and
are equipped to take telephone applications for mortgages as well as home equity
products.
We have invested in automated mortgage origination software allowing us to
take applications via a personal computer at a customer's home or office. In
addition, our software interfaces with Fannie Mae's automated underwriting
software allowing us to make loan decisions quickly and often reducing the
documentation required from the borrower. We believe our investment in
automation makes the mortgage loan process efficient and fast, thereby improving
the quality of service to our customers.
8
We offer a variety of mortgage products to allow customers to select the
best product for their needs. A description of the products and underwriting
guidelines are highlighted below:
Adjustable-Rate Mortgage Loans. We offer a variety of adjustable-rate
mortgage (ARM) products that initially adjust after one, three, five, seven or
ten years. After the initial term, ARM loans generally adjust on an annual basis
at a fixed spread over the monthly average yield on United States Treasury
securities. The adjusted rates are based on a constant maturity of one year
(constant treasury maturity index). The interest rate adjustments are generally
subject to a maximum increase of 2% per adjustment period and the aggregate
adjustment is generally subject to a maximum increase of 6% over the life of the
loan. The initial interest rates on our ARM loans are frequently below the
interest rate that we determine by a fixed spread above the monthly constant
treasury maturity index. We originated $95.1 million in one- to four-family ARM
loans in the 1999 fiscal year. At December 31, 1999, 86.9% of our residential
mortgage loans in our portfolio were ARM loans.
Generally, we offer ARM loans in amounts up to $1.0 million depending on
the loan-to-value ratio and the type of property. The loan-to-value ratio is the
loan amount divided by the lower of (a) the appraised value of the property or
(b) the purchase price of the property. The loan-to-value ratio is commonly used
by financial institutions as one measure of potential exposure to risk.
Loans on owner-occupied one- to four-family homes of up to $450,000 are
generally subject to a maximum loan-to-value ratio of 80%. However, we may make
loans with loan-to-value ratios above 80% if the borrower obtains private
mortgage insurance. All loans above $500,000 require two outside appraisals and
the lower value is used to determine the loan-to-value ratio. On loan amounts
between $450,000 and $650,000, our maximum loan-to-value ratio accepted is 75%.
For loans between $650,000 and $850,000, our maximum loan-to-value ratio
accepted is 70%. For loan amounts over $850,000, the maximum loan-to-value ratio
accepted is 60%. As of December 31, 1999, the average loan size of our one- to
four-family mortgage loans held in portfolio was $144,748.
All ARM loans are underwritten using specifications set by Fannie Mae.
Generally, our ARM loans with loan balances below the Fannie Mae maximum loan
standard ($240,000 for a single-family property) are conforming loans maintained
in our portfolio. Jumbo loans (amounts above the secondary market conforming
standards) are considered non-conforming but may be saleable to other investors.
As of December 31, 1999, we had approximately $137.9 million in ARM loans in
portfolio with balances above the Fannie Mae maximum loan amount standard of
$240,000.
Fixed-Rate Mortgages Sold Servicing Released. We offer a variety of
fixed-rate products that we sell to investors on a servicing released basis.
These loans are underwritten to the investors' standards and are sold to the
investor after the loan closes. Gains on sales of residential loans amounted to
$592,000 of our non-interest income for the 1999 fiscal year.
Fixed-Rate Mortgages Sold with Servicing Retained. We are an approved
seller/servicer for both Fannie Mae and the Federal Home Loan Mortgage Corp.
(Freddie Mac). Our fixed-rate loans are underwritten to comply with Fannie
Mae/Freddie Mac standards for sale to these investors.
Mini-Mortgages. In 1998, we introduced a mini-mortgage product targeted at
borrowers whose loan balances are $250,000 or less and properties with
loan-to-value ratios under 70% in order to take advantage of the large volume of
mortgage refinancings. The property value is determined by use of a property tax
assessment or an appraisal. These loans use a simplified loan application
similar to fixed-rate home equity loans and have lower fees than a conventional
mortgage. Applications are reviewed as if they were fixed-rate home equity loans
where income and asset information is verified and credit reports are evaluated
to ensure credit quality. Borrowers are also evaluated based on debt-to-income
ratios as outlined in our underwriting policy similar to our mortgage
underwriting guidelines. Terms are fixed for 10 to 15 years fully amortizing.
The rates charged on mini-mortgages
9
are generally higher than conventional fixed-rate mortgage loans. As of
December 31, 1999 mini-mortgages in our portfolio amounted to $26.3 million or
8.8% of total residential mortgage loans.
In addition to our standard mortgage products, we offer mortgage programs
designed to address the credit needs of low-to moderate-income home mortgage
applicants, first-time home buyers and low- to moderate-income home improvement
loan applicants. We define low- to moderate-income applicants as borrowers
residing in low- to moderate-income census tracts or households with income not
greater than 80% of the median income in the county where the subject property
is located. Among the features of the low- to moderate-income home mortgage and
first-time home buyer's programs are reduced rates, lower down payments, reduced
fees and closing costs, and generally less restrictive requirements for
qualification compared to our traditional one- to four-family mortgage loans.
For instance, some of these programs currently provide for loans with up to 95%
loan-to-value ratios and rates which are 25 to 75 basis points lower than our
traditional mortgage loans. During the 1999 fiscal year, we originated $45.0
million in mortgage loans to home buyers under these programs.
Fixed-Rate Home Equity Loans and Second Mortgages. We offer fixed-rate home
equity loans and second mortgages in amounts up to $250,000 secured by
owner-occupied one- to four-family residences. The maximum term offered is 10
years. At December 31, 1999, these loans totaled $4.0 million or 1.3% of our
residential mortgage portfolio. Generally, fixed-rate home equity loans have
higher rates of interest than conventional mortgages. The underwriting terms are
similar to those used to originate first mortgages.
Home Equity Credit Lines. We offer home equity lines of credit as a
complement to our one- to four-family lending activities. We believe that
offering home equity credit lines helps to expand and create stronger ties to
our existing customer base by increasing the number of customer relationships
and providing cross-marketing opportunities. Home equity credit lines provide
adjustable-rate loans secured by a first or second mortgage on owner-occupied
one- to four-family residences located primarily in eastern Massachusetts. As of
December 31, 1999, 84.8% of our home equity credit lines were secured by first
mortgages. Home equity credit lines enable customers to borrow at rates tied to
the prime rate as reported in The Wall Street Journal. Generally, the maximum
home equity credit line we offer is $250,000. The underwriting standards
applicable to home equity credit lines generally are the same as one- to
four-family first mortgage loans, except that the combined loan-to-value ratio,
including the balance of the first mortgage, cannot exceed 80% of the appraised
or tax assessed value of the property. Generally, our home equity credit lines
have a ten-year advance period and repayment period and are renewable in
five-year increments.
Commercial Real Estate Loans. We originate commercial real estate loans
secured by properties located primarily in the Boston metropolitan area. We
generally make loans on existing properties that have identifiable cash flows.
In underwriting commercial real estate loans, we consider not only the
property's historic cash flow, but also its current and projected occupancy,
location and physical condition. We generally lend up to a maximum loan-to-value
ratio of 80% on commercial properties and require a minimum debt coverage ratio
of 1.25%. At December 31, 1999, we had 247 loans in our commercial real estate
portfolio. The average loan size was approximately $865,000. Approximately 38%
of our $213.6 million commercial real estate portfolio was secured by property
located in the City of Boston (Suffolk County) and 18% was secured by property
in Cambridge. The remainder was secured by property located elsewhere in our
market area. Our largest loan is a commercial real estate loan with an
outstanding balance of $5.5 million at December 31, 1999 which was secured by a
commercial property located in Belmont, Massachusetts.
Commercial real estate lending involves additional risks compared with one-
to four-family residential lending. Payments on loans secured by commercial real
estate properties often depend on the successful management of the properties,
on the amount of rent from the properties, or on the level of expenses needed to
maintain the properties. Repayment of such loans may therefore be adversely
affected by conditions in the real estate market or the general economy. Also,
commercial real estate loans typically involve large loan balances to single
borrowers or groups of related borrowers. In order to mitigate this risk, we
monitor our loan concentration
10
and our loan policies generally limit the amount of loans to a single borrower
or group of borrowers. We also utilize the services of an outside consultant to
conduct on-site credit quality reviews of the commercial loan portfolio.
Because of increased risks associated with commercial real estate loans,
our commercial real estate loans generally have higher rates and shorter
maturities than residential mortgage loans. We usually offer commercial real
estate loans at adjustable-rates tied to the prime rate or to yields on U.S.
Treasury securities. The terms of such loans generally do not exceed 25 years.
We closely monitor the performance of our commercial real estate portfolio.
We maintain an internal risk rating system that classifies each loan into one of
the following eight categories:
1. Nominal Risk for our best rated credits
2. Very Satisfactory
3. Satisfactory
4. Generally Satisfactory
5. Close Monitoring
6. Substandard
7. Doubtful
8. Loss
At December 31, 1999, all commercial real estate loans were rated Generally
Satisfactory or better. No commercial real estate loans had outstanding
delinquent payments as of that date.
Commercial Loans. We make loans to businesses in our market area. While the
number and amount of business loans is small in relation to our total portfolio,
we intend to significantly expand our business lending activities in the future.
Commercial loans generally are limited to terms of five years or less.
Substantially all have variable interest rates tied to the prime rate. Whenever
possible, we collateralize these loans with a lien on commercial real estate, or
alternatively, with a lien on business assets and equipment. We also generally
require the personal guarantee of the business owner. Interest rates on
commercial loans generally have higher yields than residential or commercial
real estate loans.
Commercial loans are generally considered to involve a higher degree of
risk than residential or commercial real estate loans because the collateral may
be in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial loans may also involve relatively large loan balances
to single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater oversight
efforts by our staff compared to residential or commercial real estate lending.
In this regard, we have recently hired two senior commercial banking officers
who have extensive experience in business banking at large Boston based
commercial banks who will work to enhance our operational infrastructure and our
loan production capabilities as well as introduce new underwriting techniques
for commercial loans which will enable us to approve such loans more quickly and
to assess more accurately the credit risk associated with such lending.
Consumer Loans. We offer a variety of consumer loans to retail customers in
the communities we serve in order to increase the yield on our loan portfolio.
Examples of our consumer loans include:
. education loans;
. new and used automobile loans;
11
. secured passbook loans;
. credit lines tied to deposit accounts to provide overdraft protection;
and
. unsecured personal loans.
At December 31, 1999, the consumer loan portfolio totaled $6.0 million or
1.0% of total loans.
Consumer loans are generally originated at higher interest rates than
residential and commercial mortgage loans but they also generally tend to have a
higher credit risk than residential loans because they are usually unsecured or
secured by rapidly depreciable assets. Despite these risks, our level of
consumer loan delinquencies generally has been low. No assurance can be given,
however, that our delinquency rate on consumer loans will continue to remain low
in the future, or that we will not incur future losses on these activities.
Education loans currently represent the largest portion of our consumer
loan portfolio, $3.4 million, 56.7% of total consumer loans at December 31,
1999. There are two types of education loans in our portfolio. First, we have
$2.9 million, as of December 31, 1999, of loans guaranteed by The Education
Resources Institute, Inc. The Education Resources Institute is a tax exempt
corporation whose principal service is to function as a guarantor of student
loans disbursed by participating lending institutions. In its capacity as
guarantor, The Education Resources Institute is required to reimburse us for
unpaid principal and interest on qualifying defaulted loans. The Education
Resources Institute is subject to various regulatory requirements administered
by state banking agencies, including the Massachusetts Division of Banks. Until
1995, we made education loans with The Education Resources Institute guarantees.
In February, 1995, we discontinued this program. The balances of student loans
made under this program were $4.1 million and $5.1 million respectively. At
December 31, 1999, $96,000 of loans made prior to 1995 by The Education
Resources Institute were more than 90 days delinquent. See "Allowance for Loan
Losses."
The other portion of our education loan portfolio consists of loans
guaranteed by Student Loan Marketing Association, Inc. (Sallie Mae). This
amounted to $563,000 at December 31, 1999. Under a program sponsored by Sallie
Mae, we originate and disburse funds to students for educational expenses while
they are in school. Prior to the loan entering full repayment, we sell the loans
to Sallie Mae. We originated total student loans of $315,000 during the fiscal
year of 1999.
We make loans for automobiles, both new and used, directly to the
borrowers. The required repayment schedule of our automobile loans is generally
limited to five years. The other terms of these loans vary depending on the age
and condition of the collateral. We obtain a title lien on the vehicle and we
require collision insurance policies on all auto loans. At December 31, 1999,
our automobile loans totaled $608,000.
We make loans for up to 90.0% of the amount of a borrower's savings account
or certificate of deposit balance. These passbook loans totaled $1.5 million at
December 31, 1999.
Loan Approval Procedures and Authority. Our lending policies provide that
our residential mortgage and home equity underwriting departments may review and
approve one- to four-family mortgage loans and home equity loans and lines up to
prescribed limits as follows:
. Residential mortgage loans up to but not exceeding $500,000 that meet
underwriting standards set forth in our policies;
. Mini-mortgage loans up to $250,000 that meet our underwriting
standards;
. Home equity loans or lines for owner-occupied one- to four-properties
up to $250,000 that conform to our underwriting guidelines; and
12
. Home equity loans or lines up to $100,000 for vacation and
non-owner-occupied properties.
All loan applications that exceed the above mentioned amounts or have
exceptions to our policies require approval of either the Executive Committee of
the Board of Directors or approval of the Credit Committee.
The following generally describes our current lending procedures for
residential mortgages and home equity lines and loans. Upon receipt of a
completed loan application from a prospective borrower, we order a credit report
and verify other information. If necessary, we obtain additional financial or
credit related information. We require an appraisal for all mortgage loans,
except for home equity loans or lines and mini-mortgages where tax assessed
values may be used to determine the loan-to-value ratio. Appraisals are
performed by a licensed or certified third-party appraisal firms and are
reviewed by our lending department. We require title insurance on all mortgage
loans, except for home equity lines and loans and mini-mortgages that do not
exceed $250,000. For these loans, we require evidence of previous title
insurance.
We require borrowers to obtain hazard insurance and we may require
borrowers to obtain flood insurance prior to closing. For properties with a
private sewage disposal system, we also require evidence of compliance with
applicable law on residential mortgage loans, except mini-mortgages. Further, we
require borrowers to advance funds on a monthly basis together with each payment
of principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, flood insurance and private
mortgage insurance premiums, if required.
Commercial real estate loans are approved through Cambridgeport Bank's
Credit Committee process. The Credit Committee consists of the President, the
Executive Vice President, the Chief Financial Officer, certain other senior
lending and credit officers, as well as a non-management member of the Board of
Directors. The Credit Committee has authority to approve individual loans and
modifications up to $3.0 million, provided they are not part of a relationship
that exceeds $6.0 million. Any loan exceeding $3.0 million or any loan in a
relationship greater than $6.0 million requires approval by both the Credit
Committee and the Executive Committee of the Board of Directors.
On an exception basis, commercial real estate loans less than $250,000 may
be approved outside the Committee process with the dual signatures including the
President, Chief Financial Officer or Senior Vice-President, Commercial Lending,
and the Vice-President Loan Officer. These loans must also be ratified at the
next Executive Committee meeting.
The Credit Committee meeting minutes detail all approved loans and are
reviewed at least monthly by the Executive Committee and monthly by the Board of
Directors.
Asset Quality
One of our key operating objectives has been and continues to be the
achievement of a high level of asset quality. We maintain a large proportion of
loans secured by residential one- to four-family properties and commercial
properties, we set sound credit standards for new loan originations and we
follow careful loan administration procedures. These practices and relatively
favorable economic and real estate market conditions have resulted in
historically low delinquency ratios and, in recent years, a low level of
non-performing assets. These factors have helped strengthen our financial
condition.
Delinquent Loans and Foreclosed Assets. Our policies require that
management continuously monitor the status of the loan portfolio and report to
the Board of Directors on a monthly basis. These reports include information on
delinquent loans and foreclosed real estate, as well as our actions and plans to
cure the delinquent status of the loans and to dispose of the foreclosed
property.
13
Cambridgeport Bank had non-performing assets of $128,000 and $963,000 at
December 31, 1999 and 1998, respectively.
The following table presents information regarding non-accrual mortgage and
consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated. At December 31, 1999, 1998 and
1997, we had $128,000, $290,000 and $215,000, respectively, of non-accrual
loans. If all non-accrual loans had been performing in accordance with their
original terms and had been outstanding from the earlier of the beginning of the
period or origination, we would have recorded interest income on these loans of
approximately $8,000 for 1998. In 1999, there would have been $7,000.
Non-performing Assets At December 31,
At December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands)
Non-accrual real estate loans
Residential .......................... $ 32 $ 290 $ 201 $ 212 $ 667
Home equity lines of credit .......... -- -- 14 -- 51
Commercial real estate ............... -- -- -- -- 104
Construction and loans ............... -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual real estate loans .. 32 290 215 212 822
====== ====== ====== ====== ======
Other loans:
Commercial ........................... -- -- -- -- --
Consumer ............................. 96 -- -- -- --
Total non-accrual consumer and other loans 96 -- -- -- --
====== ====== ====== ====== ======
Accruing loans delinquent 90 days or more -- 673 574 597 544
====== ====== ====== ====== ======
Total non-performing loans ............... 128 963 789 809 1,366
====== ====== ====== ====== ======
Foreclosed real estate, net .............. -- -- -- 94 105
====== ====== ====== ====== ======
Total non-performing assets .............. 128 963 789 903 1,471
====== ====== ====== ====== ======
Non-performing loans to total loans ...... 0.02% 0.19% 0.19% 0.29% 0.49%
====== ====== ====== ====== ======
Non-performing assets to total assets .... 0.02% 0.14% 0.13% 0.16% 0.29%
====== ====== ====== ====== ======
Non-performing assets totaled $128,000 at December 31, 1999, including
$96,000 of delinquent student loans. The non-performing asset totals at
December 31, 1998 and 1997 were $963,000, and $789,000 respectively. Of these
totals, $672,000 and $564,000 respectively represented student loans.
We stop accruing income when interest or principal payments are 90 days in
arrears. We may stop accruing income on some loans earlier than 90 days when we
consider the timely collectibility of interest or principal to be doubtful.
When we designate non-accrual loans, we reverse all outstanding interest
that we had previously credited. If we receive a payment on a non-accrual loan,
we may recognize that payment as interest income, if we determine that the
ultimate collectibility of principal is no longer in doubt. However, such loans
would remain on non-accrual status. We return a non-accrual loan to accrual
status when the borrower has made all past due payments and we determine that
ultimate collection of principal is no longer in doubt.
14
We define impaired loans as all non-accrual commercial real estate and
commercial loans. Impaired loans are individually assessed to determine whether
the carrying value exceeds the fair value of the collateral or the present value
of the cash flow produced by the underlying collateral. Smaller balance
homogeneous loans, such as residential mortgage loans and consumer loans, are
collectively evaluated for impairment. We had no loans classified as impaired at
December 31, 1999. At December 31, 1998 and 1997, impaired loans totaled
$290,000 and $215,000, respectively. At December 31, 1999, 1998 and 1997, we had
no loans classified at troubled debt restructuring, as defined in SFAS No. 15.
Foreclosed real estate consists of property we have acquired through
foreclosure or deed in lieu of foreclosure. Foreclosed real estate properties
are initially recorded at the lower of the recorded investment in the loan or
fair value. Thereafter, we carry foreclosed real estate at fair value less
estimated selling costs. As of December 31, 1999, we had no foreclosed real
estate.
15
Allowance for Loan Losses. The following table presents the activity in our
allowance for loan losses and other ratios at or for the dates indicated.
At or for Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
Balance at beginning of period ........................... $ 6,633 $ 4,907 $ 4,269 $ 4,074 $ 4,130
Charge-offs:
Residential .......................................... -- -- -- (136) (160)
Commercial real estate ............................... -- -- -- (93) --
Construction ......................................... -- -- -- -- --
Home equity lines of credit .......................... -- -- -- -- --
Commercial ........................................... -- -- -- -- --
Consumer ............................................. (407) (44) (16) (30) (3)
--------- --------- --------- --------- ---------
Total charge-offs ................................. (407) (44) (16) (259) (163)
--------- --------- --------- --------- ---------
Recoveries:
Residential .......................................... 5 2 27 -- 3
Commercial real estate ............................... 107 3 27 -- --
Construction ......................................... -- -- -- -- 3
Home equity lines of credit .......................... -- -- -- -- --
Commercial loans ..................................... -- -- -- -- --
Other consumer loans ................................. 3 5 -- 4 1
--------- --------- --------- --------- ---------
Total recoveries .................................. 115 10 54 4 7
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries ............................. (292) (34) 38 (255) (156)
Provision for possible loan losses ....................... 740 1,760 600 450 100
--------- --------- --------- --------- ---------
Balance at end of period ................................. $ 7,081 $ 6,633 $ 4,907 $ 4,269 $ 4,074
========= ========= ========= ========= =========
Total loans receivables (1) .............................. $ 582,875 $ 498,194 $ 420,611 $ 306,388 $ 272,758
========= ========= ========= ========= =========
Average loans outstanding ................................ $ 533,733 $ 462,528 $ 367,471 $ 285,406 $ 250,594
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans receivable(1) ......................... 1.21% 1.33% 1.17% 1.39% 1.49%
========= ========= ========= ========= =========
Net loans (charged off) recoveries as
a percent of average loans
outstanding .......................................... (0.05)% (0.01)% 0.01% (0.09)% (0.06)%
========= ========= ========= ========= =========
- ------------------------
(1) Does not include loans held for sale or passbook loans or deferred fees.
Our evaluation of the loan portfolio includes the review of all loans on
which the collection of principal might be at risk. We consider the following
factors as part of this evaluation: our historical loan loss experience, known
and inherent risks in the loan portfolio, increases in categories with higher
loss potential such as commercial real estate loans and jumbo loans, the
estimated value of the underlying collateral and current economic and market
trends. There may be other factors that may warrant our consideration in
maintaining the allowance at a level sufficient to cover probable losses.
Although we believe that we have established and maintained the allowance for
loan losses at adequate levels, future additions may be necessary if economic,
real estate and other conditions differ substantially from the current operating
environment.
16
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. These agencies, including the FDIC and the Massachusetts
Division of Banks, may require us to increase the allowance for loan losses or
the valuation allowance for foreclosed real estate based on their judgments of
information available to them at the time of their examination, thereby
adversely affecting our results of operations.
For the fiscal year ended December 31, 1999, we increased our allowance for
loan losses through a $740,000 provision for loan losses based on our evaluation
of the items discussed above. We believe that the current allowance for loan
losses accurately reflects the level of risk in the current loan portfolio. To
determine the adequacy of the allowance, we look at historical trends in the
growth and composition of our loan portfolio, among other factors. The most
significant trend over the last five years is the growth in our commercial real
estate loan portfolio, which has risen from $48.1 million at the end of 1994 to
$213.6 million at December 31, 1999.
We believe that, despite using prudent underwriting standards, commercial
real estate loans contain higher loss potential than one- to four-family
residential mortgages.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--for the Years Ended December 31, 1999, 1998 and 1997--
"Provision for Possible Loan Losses."
17
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
indicated.
At December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Loan Each Loan Each Loan Each
Balances by Category to Balances by Category to Balances by Category to
Loan Category Amount Category Total Loans Amount Category Total Loans Amount Category Total Loans
- ------------- -------- ----------- ----------- -------- ----------- ----------- -------- ----------- -----------
Real estate-mortgages:
Residential(1) .. $2,352 $359,773 61.72% $2,014 $298,485 59.91 $1,780 $266,075 63.26
Commercial ...... 3,042 217,283 37.28 2,103 193,046 38.75 1,908 146,806 34.90
Commercial loans ..... 22 1,348 0.23 11 724 0.15 9 581 0.14
Consumer loans(2) .... 297 4,471 0.77 65 5,939 1.19 79 7,149 1.70
Unallocated .......... 1,368 -- -- 1,843 -- -- 1,131 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total allowance
for loan losses. $7,081 $582,875 100.00% $6,633 $498,194 100.00% $4,907 $420,611 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
At December 31,
------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
Percent of Percent of
Loans in Loans in
Loan Each Loan Each
Balances by Category to Balances by Category to
Loan Category Amount Category Total Loans Amount Category Total Loans
- ------------- -------- ----------- ----------- -------- ----------- -----------
Real estate-mortgages:
Residential(1) .. $1,515 $203,053 66.27 $1,488 $191,254 70.12%
Commercial ...... 1,225 94,220 30.75 943 70,720 25.93
Commercial loans ..... 12 807 0.27 12 775 0.28
Consumer loans(2) .... 90 8,308 2.71 116 10,009 3.67
Unallocated .......... 1,427 -- -- 1,515 -- --
------ -------- ------ ------ -------- ------
Total allowance
for loan losses. $4,269 $306,388 100.00% $4,074 $272,758 100.00%
====== ======== ====== ====== ======== ======
_________________________
(1) Includes home equity lines of credit, excludes loans held for sale.
(2) Excluded passbook loans.
18
Investment Activities
The Board of Directors reviews and approves our investment policy on an
annual basis. The President, Chief Financial Officer and Investment Officer, as
authorized by the Board, implement this policy based on the established
guidelines within the written policy, and other established guidelines,
including those set periodically by the Asset Liability Management Committee.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within the range established by
policy. In determining our investment strategies, we consider our interest rate
sensitivity or "gap" position, yield, credit risk factors, maturity and
amortization schedules, and other characteristics of the securities to be held.
Massachusetts-chartered savings banks have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, certain certificates of deposit of
insured financial institutions, repurchase agreements, overnight and short-term
loans to other banks, corporate debt instruments, and equity securities.
Liquidity
We calculate liquidity by taking the total of the following assets and
subtracting a percentage of maturing CDs and other short-term liabilities. Our
policies provide that we shall attempt to maintain liquidity at 7% to 20% of
total assets. At December 31, 1999 our liquidity ratio was 8.3% of total assets.
. our cash;
. cash we have in other banks;
. our money market investments;
. U.S. Government Securities;
. Mortgage-backed securities guaranteed by the U.S. Government or
Agencies;
. Securities with remaining maturities of less than thirty days;
Investment Portfolio
Securities can be classified as trading, held to maturity, or available for
sale at the date of purchase. All of our securities are currently classified as
"available for sale." The weighted average annualized yield of the portfolio is
6.17% as of December 31, 1999. We believe the credit quality of the portfolio is
high, with 78% of the portfolio invested in U.S. Government, U.S. Agency, or
U.S. Agency guaranteed mortgage-backed securities. Our mortgage-backed security
portfolio is comprised predominately of adjustable-rate securities in addition
to 5-year and 7-year balloon securities. Balloon securities are so named because
the entire principal balance is due prior to completing the normal 30 year
amortization of the underlying mortgages. The remainder of our portfolio,
approximately 22%, is invested in corporate bonds with maturities of less than
five years. Corporate Bonds must be rated investment grade according to policy
guidelines. The amortized cost of the securities that will mature or reprice
within five years is $89.1 million or 69.9%. For information - "Carrying Values,
Yields and Maturities."
Finally, we own stock of the Federal Home Loan Bank, common stock of a
local financial institution and other equity securities also classified as
available for sale.
19
Investment Portfolio. The following table sets forth the composition of our
investment securities portfolio at the dates indicated.
At December 31,
-----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -----------------
Amortized Market Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- -------- --------- -------- --------- -------
(Dollars in thousands)
Investment securities:
U.S. Government securities $ -- $ -- $ -- $ -- $ 2,004 $ 2,008 $ 70,596 $ 70,527 $ -- $ --
Federal agency securities 53,986 52,361 55,516 55,734 53,060 53,262 28,633 28,645 43,059 43,609
Other debt securities .... 27,887 27,705 34,156 34,419 43,037 43,218 57,176 57,222 26,598 26,796
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total investment
securities ............. 81,873 80,066 89,672 90,153 98,101 98,488 156,405 156,394 69,657 70,405
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Mortgage-backed and mortgage-
related securities:
Ginnie Mae ............... 13,393 13,251 18,890 18,836 16,762 16,796 11,764 11,697 2,310 2,307
Fannie Mae ............... 18,417 18,221 16,516 16,755 17,298 17,391 16,626 16,771 27,089 27,414
Freddie Mac .............. 13,707 13,579 12,773 13,004 19,289 19,388 16,934 16,871 41,649 41,622
Other .................... -- -- 116 117 766 768 1,323 1,326 989 1,002
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total mortgage-backed
and mortgage-
related securities .... 45,517 45,051 48,295 48,712 54,115 54,343 46,647 46,665 72,037 72,345
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Asset-backed securities ..... -- -- -- -- -- -- 778 781 1,092 1,111
Marketable equity securities 1,381 6,530 1,262 5,964 3,069 6,790 3,048 6,533 14,008 16,685
SBLI stock .................. 1,934 1,934 1,934 1,934 1,934 1,934 1,934 1,934 1,934 1,934
Federal Home Loan Bank stock 4,452 4,452 3,879 3,879 3,062 3,062 3,062 3,062 2,312 2,312
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total investment
securities ............... $ 135,157 $ 138,033 $ 145,042 $ 150,642 $ 160,281 $ 164,617 $ 211,874 $ 215,369 $ 161,040 $ 164,792
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
20
Mortgage-Backed Securities and Mortgage-Related Securities. The following
table sets forth the amortized cost and fair value of our mortgage-backed and
mortgage-related securities, which are classified as available for sale or held
to maturity as of the dates indicated. Since 1995, all mortgage-backed and
mortgage-related securities have been classified as available for sale.
At December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
Amortized of Market Amortized of Market Amortized of Market
Cost Total Value Cost Total Value Cost Total Value
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Mortgage-backed and mortgage-
related securities
available for sale .........
Ginnie Mae ................. $13,393 29.43% $13,251 $18,890 39.11% $18,836 $16,762 30.97% $16,796
Fannie Mae ................. 18,417 40.46 18,221 16,516 34.20 16,755 17,298 31.97 17,391
Freddie Mac ................ 13,707 30.11 13,579 12,773 26.45 13,004 19,289 35.64 19,388
Other ...................... -- 0.00 -- 116 0.24 117 766 1.42 768
------- ------ ------- ------- ------ ------- ------- ------ -------
Total mortgage-backed and
mortgage-related securities $45,517 100.00% $45,051 $48,295 100.00% $48,712 $54,115 100.00% $54,343
------- ------ ------- ------- ------ ------- ------- ------ -------
At December 31,
---------------------------------------------------------------------
1996 1995
--------------------------------- ---------------------------------
Percent Percent
Amortized of Market Amortized of Market
Cost Total Value Cost Total Value
---------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Mortgage-backed and
mortgage-securities related
availables for sale
Ginnie Mae .................................. $ 11,764 25.22% $ 11,697 $ 2,310 3.21% $ 2,307
Fannie Mae .................................. 16,626 35.64 16,771 27,089 37.60 27,414
Freddie Mac ................................. 16,934 36.30 16,871 41,649 57.82 41,622
Other ....................................... 1,323 2.84 1,326 989 1.37 1,002
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
mortgage-related
securities .............................. $ 46,647 100.00% $ 46,665 $ 72,037 100.00% $ 72,345
-------- -------- -------- -------- -------- --------
21
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio (debt securities) and the mortgage-backed
securities portfolio at December 31, 1999 are summarized in the following table.
Maturities are based on the final contractual payment dates, and do not reflect
the impact of prepayments or redemptions that may occur.
More than One Year More than Five
One Year or Less through Five Years through Ten Years More than Ten Years Total Securities
------------------ ------------------ ------------------ -------------------- ------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
-------- --------- -------- --------- -------- --------- --------- --------- --------- ------- -------
(Dollars in thousands)
Investment securities
available for sale:
U.S. Government securities ... -- -- -- -- -- -- -- -- -- -- --
Federal agency securities .... -- -- $ 48,975% 5.96% $ 5,011 7.06% -- -- $ 53,986 $ 52,361 6.06%
Other debt securities ........ 9,939 6.01% 17,948 6.13 -- -- -- -- 27,887 27,705 6.09
-------- -------- -------- -------- --------- ---------
Total investment securities . 9,939 6.01 66,923 6.01 5,011 7.06 -- -- 81,873 80,066 6.07
-------- -------- -------- -------- --------- ---------
Mortgage-backed securities
available for sale:
Ginnie Mae ................... -- -- -- -- -- -- $ 13,393 5.73% 13,393 13,251 5.73
Fannie Mae ................... 217 5.94 6,850 6.57 8,425 6.73 2,925 6.10 18,417 18,221 6.56
Freddie Mae .................. -- -- 5,174 6.30 1,111 7.08 7,422 6.81 13,707 13,579 6.64
-------- -------- -------- -------- --------- ---------
Total mortgage-back
securities ................. 217 5.94 12,024 6.45 9,536 6.77 $ 23,740 6.12 45,517 45,051 6.34
-------- -------- -------- -------- --------- ---------
Total ....................... $ 10,156 6.01% $ 78,947 6.07% $ 78,947 6.87% $ 23,740 6.12% $ 127,390 $ 125,117 6.17%
======== ======== ======== ======== ========= =========
22
Sources of Funds
Deposits, scheduled amortization and prepayments of loan principal and
mortgage-backed securities, maturities and calls of investments securities and
funds provided by operations are our primary sources of funds for use in
lending, investing and for other general purposes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Deposits. We offer a variety of deposit products to meet the needs of
retail and business customers. We currently offer non-interest-bearing demand
accounts, interest-bearing demand accounts (NOWs), savings passbook and
statement accounts, money market accounts and certificates of deposits.
Deposit products are developed to meet the needs of our market. For
instance, we introduced the Treasury Index Account in October, 1987 to capture
investment dollars of consumers and businesses. The Treasury Index Account is a
savings account where the rate offered on monthly average balances over $25,000
is based on the three month U.S. Treasury bill rate. Currently, the Treasury
Index Account can only be opened by customers who maintain a personal
interest-bearing checking account or business demand deposit account. We also
offer a Kids Bank Club savings passbook account targeted at children under 13
years of age in an effort to teach children the value of saving money at an
early age.
We offer other specially packaged deposit products to encourage broad
relationships. Our Appreciation Now account requires a minimum of $10,000 in
various deposit accounts to waive monthly maintenance charges and offers
customers premium rates on selected certificate of deposit accounts. We waive
monthly maintenance fees on our Real Checking Account (an interest-bearing
checking account) if mortgage or home equity loan payments are automatically
deducted from the Real account. These and other products have enabled us to
develop multiple account relationships with customers.
Our deposit flows are influenced by a number of factors including: general
and local economic conditions, the perceived strength of the stock and stock
mutual fund market, prevailing interest rates and competition. Our deposits are
primarily obtained from areas surrounding our offices. To attract and retain
deposits, we utilize a strategy that incorporates competitive pricing with high
quality service and the development of long-term relationships. We determine our
deposit rates by evaluating our competition's pricing, the cost of Federal Home
Loan Bank borrowings, rates on U.S. Treasury securities and other related funds.
As of December 31, 1999, demand deposits, NOW deposits, savings, and money
market accounts represented 47.1% of total deposits. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Analysis of Net Interest Income" for information relating to the
average balances and costs of our deposit accounts for the years ended
December 31, 1999, 1998 and 1997.
23
Deposit Distribution Weighted Average. The following table sets forth the
distribution of our deposit accounts, by account type, at the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rates Amount Percent Rates Amount Percent Rates
-------- --------- ---------- -------- -------- ---------- -------- --------- ----------
(Dollars in thousands)
Demand deposits (1) ....... $ 32,808 5.28% 0.00% $ 30,742 5.42% 0.00% $ 23,600 4.53% 0.00%
NOW deposits .............. 44,429 7.15 1.43 41,546 7.31 1.50 35,061 6.74 1.69
Savings deposits .......... 53,346 8.59 2.03 53,560 9.43 2.18 54,281 10.43 2.28
Money market deposits ..... 162,304 26.12 4.33 132,219 23.27 3.71 93,712 18.01 3.79
-------- ------ -------- ------ -------- ------
Total non-certificated
accounts .............. 292,887 47.14 2.99 258,067 45.43 2.60 206,654 39.71 2.60
Certificate of deposit
Due within 1 year ....... 269,579 43.39 4.91 252,594 44.46 5.33 203,194 39.05 5.58
Over 1 year through 3
years ................. 56,374 9.07 5.43 54,615 9.61 5.43 105,126 20.20 5.94
Over 3 years ............ 2,479 0.40 5.40 2,799 0.50 5.38 5,383 1.04 5.84
-------- ------ -------- ------ -------- ------
Total certificate
accounts ............ 328,432 52.86 5.00 310,008 54.57 5.35 313,703 60.29 5.70
-------- ------ -------- ------ -------- ------
Total ..................... $621,319 100.00% 4.05% $568,075 100.00% 4.10% $520,357 100.00% 4.46%
======== ====== ======== ====== ======== ======
- ----------------------
(1) Includes mortgagor's escrow payments.
24
Deposit Flow. The following table summarizes the deposit activity of
Cambridgeport Bank for the periods indicated.
At December 31,
----------------------------------
1999 1998 1997
--------- ---------- ---------
(Dollars in thousands)
Balance at beginning of period ......................... $ 568,075 $ 520,357 $ 502,698
Net increase (decrease) before interest credited (1) ... 23,420 23,376 (5,081)
Interest credited ...................................... 29,824 24,342 22,740
--------- --------- ---------
Balance at end of period ............................... $ 621,319 $ 568,075 $ 520,357
========= ========= =========
Total increase in deposit accounts .................. $ 53,244 $ 47,718 $ 17,659
========= ========= =========
Percentage increase .................................... 9.37% 9.17% 3.51%
- -----------------
(1) Includes mortgage escrow payments.
C.D. Maturities. At December 31, 1999, we had $61.1 million in certificates
of deposits with balances of $100,000 and over maturing as follows:
Weighted
Average
Maturity Period Amount Rate
- --------------------------------------------------- ---------- ------------
(In thousands)
Three months or less............................... $10,603 4.46%
Over three months through six months............... 13,182 4.91%
Over six months through 12 months.................. 26,192 5.04%
Over 12 months..................................... 11,128 5.53%
-------
Total.......................................... $61,105 5.00%
=======
25
C.D. Balances by Rates. The following table sets forth, by interest rate
ranges, information concerning our certificates of deposit at December 31, 1999:
At December 31, 1999
----------------------------------------------------------------------------------
Period to Maturity
----------------------------------------------------------------------------------
Interest Rate Less than One to Two Two to More than Percent of
Range One Year Years Three Years Three Years Total Total
- ------------------- ----------- ------------ ------------- ------------- ----------- ------------
(Dollars in thousands)
4.00% and below 2,529 1 -- -- 2,530 0.77%
4.01% to 5.00% 174,677 8,839 540 449 184,505 56.18
5.01% to 6.00% 86,391 35,340 8,510 1,473 131,714 40.10
6.01% to 7.00% 5,982 2,240 904 557 9,683 2.95
7.01% and above -- -- -- -- -- 0.00
-------- -------- -------- -------- -------- ---------
Total $269,579 $ 46,420 $ 9,954 $ 2,479 $328,432 $ 100.00%
======== ======== ======== ======== ======== =========
Borrowings. In addition to deposits, borrowings from the Federal Home Loan
Bank provide an additional source of funds to finance our lending and investing
activities. The following table sets forth information concerning balances and
interest rates on Cambridgeport Bank's Federal Home Loan Bank advances at the
dates and for the periods indicated.
At or for the Year Ended
December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
Federal Home Loan Bank advances:
Average balance outstanding .................. $40,374 $25,097 $13,550
Maximum amount outstanding
at any month-end during the period ........ 55,891 31,902 35,810
55,891 27,066 21,604
Balance outstanding at end of the period
Weighted average interest rate
during the period ......................... 5.53% 6.13% 6.01%
Weighted average interest rate
at end of period .......................... 6.00% 6.04% 6.52%
Personnel
As of December 31, 1999, we had 178 full-time employees and 38 part-time
employees. The employees are not represented by a collective bargaining unit,
and we consider our relationship with our employees to be excellent.
26
FEDERAL AND STATE TAXATION
Federal Taxation
General. For federal income tax purposes, we report income on the basis of
a taxable year ending December 31, using the accrual method of accounting, and
we are generally subject to federal income taxation in the same manner as other
corporations. Cambridgeport Bank and Port Financial Corp. constitute an
affiliated group of corporations and, therefore, are eligible to report their
income on a consolidated basis. We are not currently under audit by the IRS.
Distributions. To the extent that we (Cambridgeport Bank) make
"non-dividend distributions" to stockholders, such distributions will be
considered to result in distributions from our unrecaptured tax bad debt reserve
as of December 31, 1987 (our "base year reserve"), to the extent thereof and
then from our supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in our income. Non-dividend
distributions include distributions in excess of our current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. Dividends paid out of our current or
accumulated earnings and profits will not be included in our income.
The amount of additional income created from a non-dividend distribution is
equal to the lesser of our base year reserve and supplemental reserve for losses
on loans or an amount that, when reduced by the tax attributable to the income,
is equal to the amount of the distribution. Thus, in some situations,
approximately one and one-half times the non-dividend distribution would be
includible in gross income for federal income tax purposes, assuming a 34%
federal corporate income tax rate. We do not intend to pay dividends that would
result in the recapture of any portion of our bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax on alternative minimum taxable income at a
rate of 20%. Only 90% of alternative minimum taxable income can be offset by net
operating loss carryovers of which we currently have none. Alternative minimum
taxable income is also adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. We have not been subject to a tax on alternative
minimum taxable income during the past five years.
Elimination of Dividends. Port Financial Corp. may exclude from its income
100% of dividends received from Cambridgeport Bank as a member of the same
affiliated group of corporations.
State
We file Massachusetts Financial Institution income tax returns. Generally,
the income of financial institutions in Massachusetts, which is calculated based
on federal taxable income, subject to certain adjustments, is subject to
Massachusetts tax. We are not currently under audit with respect to our
Massachusetts income tax returns and our state tax returns have not been audited
for the past five years.
Port Financial Corp. is required to file a Massachusetts income tax return
and will generally be subject to a state income tax rate that is the same tax
rate as the tax rate for financial institutions in Massachusetts. However,
Brighton Investments Corp., a Massachusetts Security Corporation and a wholly
owned subsidiary of Port Financial Corp., and Temple Investment Corp. a
Massachusetts subsidiary of Cambridgeport Bank, are taxed at a rate that is
currently lower than income tax rates for savings institutions in Massachusetts.
For additional information regarding taxation, see Note 8 of the Notes to
Consolidated Financial Statements.
27
REGULATION
General
Port Financial Corp. is the Massachusetts-chartered stock holding company
formed from the reorganization of Cambridgeport Mutual Holding Company from a
mutual holding company to a stock holding company structure. As the bank holding
company controlling Cambridgeport Bank, Port Financial is subject to the Bank
Holding Company Act of 1956, as amended, and the rules and regulations of the
Federal Reserve Board under the Bank Holding Company Act. Port Financial Corp.
is also subject to the provisions of the Massachusetts General Laws applicable
to savings banks and other depository institutions and their holding companies
(the Massachusetts banking laws) and the regulations of the Massachusetts
Division of Banks under the Massachusetts banking laws applicable to bank
holding companies. Port Financial Corp. is required to file reports with, and
otherwise comply with the rules and regulations of the Federal Reserve Board and
the Division. Port Financial Corp. is required to file reports with, and
otherwise comply with, the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Division, the FDIC,
or the Federal Reserve Board, or through legislation, could have a material
adverse impact on Port Financial Corp. and Cambridgeport Bank and their
operations and stockholders.
Massachusetts Banking Regulation
Activity Powers. Cambridgeport Bank derives its lending, investment and
other activity powers primarily from the applicable provisions of the
Massachusetts banking laws and its related regulations. Under these laws and
regulations, savings banks, including Cambridgeport Bank, generally may invest
in:
. real estate mortgages;
. consumer and commercial loans;
. specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
. certain types of corporate equity securities; and
. certain other assets.
A savings bank may also:
. invest pursuant to a "leeway" power that permits investments not
otherwise permitted by the Massachusetts banking laws. "Leeway"
investments must comply with a number of limitations on the individual
and aggregate amounts of "leeway" investments;
. exercise trust powers upon approval of the Division; and
. exercise certain powers and engage in certain activities permissible
for national banks in accordance with regulations adopted by the
Division with respect to such power or activity.
The exercise of these lending, investment and activity powers are limited by
federal law and the related regulations. See "- Federal Banking Regulation -
Activity Restrictions on State-Chartered Banks" below.
Community Reinvestment Act. Cambridgeport Bank is also subject to
provisions of the Massachusetts banking laws that, like the provisions of the
federal Community Reinvestment Act, impose continuing and
28
affirmative obligations upon a banking institution organized in Massachusetts to
serve the credit needs of its local communities. The obligations of the
Massachusetts Community Reinvestment Act are similar to those imposed by the
federal Community Reinvestment Act with the exception of the assigned exam
ratings. Massachusetts banking law provides for an additional exam rating of
"high satisfactory" in addition to the federal Community Reinvestment Act
ratings of "outstanding," "satisfactory," "needs to improve" and "substantial
noncompliance." The Division has adopted regulations to implement the
Massachusetts Community Reinvestment Act that are based on the federal Community
Reinvestment Act. See "Federal Banking Regulation - Community Reinvestment Act."
The Division is required to consider a bank's Massachusetts Community
Reinvestment Act rating when reviewing the bank's application to engage in
certain transactions, including mergers, asset purchases and the establishment
of branch offices or automated teller machines, and provides that such
assessment may serve as a basis for the denial of any such application. The
Massachusetts Community Reinvestment Act requires the Division to assess a
bank's compliance with the Massachusetts Community Reinvestment Act and to make
such assessment available to the public. Cambridgeport Bank's latest
Massachusetts Community Reinvestment Act rating, received by letter, dated
July 8, 1999, from the Division was a rating of "satisfactory."
Loans-to-One-Borrower Limitations. With specified exceptions, the total
obligations of a single borrower to a Massachusetts-chartered savings bank may
not exceed 20% of the savings bank's retained earnings account. A savings bank
may lend additional amounts up to 100% of the bank's retained earnings account
if secured by collateral meeting the requirements of the Massachusetts banking
laws. Cambridgeport Bank currently complies with applicable
loans-to-one-borrower limitations.
Loans to a Bank's Insiders. The Massachusetts banking laws prohibit any
officer, director or trustee from borrowing, otherwise becoming indebted, or
becoming liable for a loan or other extension of credit by such bank to any
other person, except for any of the following loans or extensions of credit:
. loan or extension of credit, secured or unsecured, to an officer of
the bank in an amount not exceeding $20,000;
. loan or extension of credit intended or secured for educational
purposes to an officer of the bank in an amount not exceeding $75,000;
. loan or extension of credit secured by a mortgage on residential real
estate to be occupied in whole or in part by the officer to whom the
loan or extension of credit is made, in an amount not exceeding
$275,000;
. loan or extension of credit to a director or trustee of the bank who
is not also an officer of the bank in an amount permissible under the
bank's loans-to-one borrower limit. See "Massachusetts Banking
Regulation - Loans-to-One Borrower Limitations" above.
The loans listed above require approval of the majority of the members of the
bank's executive committee, excluding any member involved in the loan or
extension of credit. No such loan or extension of credit may be granted with an
interest rate or other terms that are preferential in comparison to loans
granted to persons not affiliated with the savings bank.
Dividends. Under the Massachusetts banking laws, a stock savings bank may,
subject to several limitations, declare and pay a dividend on its capital stock
out of the bank's net profits. A dividend may not be declared, credited or paid
by a stock savings bank so long as there is any impairment of capital stock. No
dividend may be declared on the bank's common stock for any period other than
for which dividends are declared upon preferred stock, except as authorized by
the Commissioner. The approval of the Commissioner is also required for a stock
savings bank to declare a dividend, if the total of all dividends declared by
the savings bank in any calendar year shall exceed the total of its net profits
for that year combined with its retained net profits of the preceding two years,
less any required transfer to surplus or a fund for the retirement of any
preferred stock.
29
In addition, federal law may also limit the amount of dividends that may be paid
by Cambridgeport Bank. See "- Federal Banking Regulation - Prompt Corrective
Action" below.
Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once each 18
month period if the savings bank qualifies as well capitalized under the prompt
corrective action provisions of the Federal Deposit Insurance Act. See
"- Federal Banking Regulation - Prompt Corrective Action" below. The Division
may also examine a savings bank whenever the Division deems an examination
expedient. If the Division finds, after an inquiry, that any trustee, director
or officer of a savings bank has, among other things, violated any law related
to such bank or has conducted the business of such bank in an unsafe or unsound
manner, the Division may take various actions that could result in the
suspension or removal of such person as an officer, director or trustee of the
savings bank. If the Division determines that, among other things, a savings
bank has violated its charter or any Massachusetts law or is conducting its
business in an unsafe or unsound manner or is in an unsafe or unsound condition
to transact its banking business, the Division may take possession of the
property and business of the savings bank and may, if the facts warrant,
initiate the liquidation of the bank.
Federal Banking Regulation
Capital Requirements. FDIC regulations require banks whose deposits are
insured by the Bank Insurance Fund, such as Cambridgeport Bank, to maintain
minimum levels of capital. The FDIC regulations define two tiers, or classes, of
capital.
Tier 1 capital is comprised of the sum of:
. common stockholders' equity, excluding the unrealized appreciation or
depreciation, net of tax, from available-for-sale securities;
. non-cumulative perpetual preferred stock, including any related
retained earnings; and
. minority interests in consolidated subsidiaries
minus all intangible assets, other than qualifying servicing rights and any net
unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include:
. cumulative perpetual preferred stock;
. certain perpetual preferred stock for which the dividend rate may be
reset periodically;
. mandatory convertible securities;
. subordinated debt;
. intermediate preferred stock; and
. allowance for possible loan losses.
Allowance for possible loan losses includible in Tier 2 capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital
that may be included in total capital can not exceed 100% of Tier 1 capital.
30
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2
capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include:
. the quality of the bank's interest rate risk management process;
. the overall financial condition of the bank; and
. the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
As of December 31, 1999, Cambridgeport Bank exceeded the minimum capital
adequacy requirements.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended, which was added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDIC Improvement Act), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if
. the bank held such types of investments during the 14-month period
from December 31, 1990 through November 26, 1991;
. the state in which the bank is chartered permitted such investments as
of December 31, 1991; and
. the bank notifies the FDIC and obtains approval from the FDIC to make
or retain such investments. Upon receiving such FDIC approval, an
institution's investment in such equity securities will be subject to
an aggregate limit up to the amount of its Tier 1 capital. C
Cambridgeport Bank received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Cambridgeport Bank's Tier 1 capital or the maximum permissible
amount specified by the Massachusetts banking laws. Section 24 also provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those
31
permissible for a national bank, permissible under Section 24 of the Federal
Deposit Insurance Act and the related FDIC regulations, or as approved by the
FDIC.
Before making a new investment or engaging in a new activity which is not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations, an insured bank must seek approval from the FDIC to make such
investment or engage in such activity. The FDIC will not approve the activity
unless the bank meets its minimum capital requirements and the FDIC determines
that the activity does not present a significant risk to the FDIC insurance
funds.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Cambridgeport Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with some exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
. insolvency, or when the assets of the bank are less than its
liabilities to depositors and others;
. substantial dissipation of assets or earnings through violations of
law or unsafe or unsound practices;
. existence of an unsafe or unsound condition to transact business;
. likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business;
and
. insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital with
no reasonable prospect of replenishment of capital without federal
assistance.
Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC established a
system for setting deposit insurance premiums based upon the risks a particular
bank or savings association posed to its deposit insurance funds. Under the
risk-based deposit insurance assessment system, the FDIC assigns an institution
to one of three capital categories based on the institution's financial
information, as of the reporting period ending six months before the assessment
period. The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized. The FDIC also assigns an institution to
one of three supervisory subcategories within each capital group. With respect
to the capital ratios, institutions are classified as well capitalized,
adequately capitalized or undercapitalized using ratios that are substantially
similar to the prompt corrective action capital ratios discussed below. The FDIC
also assigns an institution to supervisory subgroup based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds, which may
include information provided by the institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Cambridgeport Bank.
32
Under the Deposit Insurance Funds Act of 1996 the assessment base for the
payments on the bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation was
expanded to include, beginning January 1, 1997, the deposits of institutions
insured by the Bank Insurance Fund, such as Cambridgeport Bank. Until December
31, 1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for Bank Insurance Fund-assessable deposits will
be one-fifth of the rate imposed on deposits insured by the Savings Association
Insurance Fund. The annual rate of assessments for the payments on the Financing
Corporation bonds for the quarterly period beginning on January 1, 1999 was
0.0122% for Bank Insurance Fund-assessable deposits and 0.0610% for Savings
Association Insurance Fund-assessable deposits.
Under the Federal Deposit Insurance Act, the FDIC may terminate the
insurance of an institution's deposits upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of Cambridgeport Bank does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
Transactions with Affiliates of Cambridgeport Bank. Transactions between an
insured bank, such as Cambridgeport Bank, and any of its affiliates is governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution is not treated as an affiliate of the bank for purposes of Sections
23A and 23B, but the Federal Reserve Board has proposed treating any subsidiary
of a bank that is engaged in activities not permissible for bank holding
companies under the Bank Holding Company Act of 1956, as amended, as an
affiliate for purposes of Sections 23A and 23B. Sections 23A and 23B:
. limit the extent to which the bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of such bank's capital stock and retained earnings, and limit on
all such transactions with all affiliates to an amount equal to 20% of
such capital stock and retained earnings; and
. require that all such transactions be on terms that are consistent
with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of guarantees and other similar types of transactions. Further, most
loans by a bank to any of its affiliates must be secured by collateral in
amounts ranging from 100 to 130 percent of the loan amounts. In addition, any
covered transaction by a bank with an affiliate and any purchase of assets or
services by a bank from an affiliate must be on terms that are substantially the
same, or at least as favorable, to the bank as those that would be provided to a
non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. (S) 1972 on certain tying arrangements. A depository
institution is prohibited, subject to some exceptions, from extending credit to
or offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Uniform Real Estate Lending Standards. Under the FDIC Improvement Act, the
federal banking agencies adopted uniform regulations prescribing standards for
extensions of credit that are secured by liens on interests in real estate or
made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish 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. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
33
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
. for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
. for land development loans, or loans for the purpose of improving
unimproved property prior to the erection of structures, the
supervisory limit is 75%;
. for loans for the construction of commercial, multi-family or other
non-residential property, the supervisory limit is 80%;
. for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
. for loans secured by other improved property, for example, farmland,
completed commercial property and other income-producing property
including non-owner-occupied, one- to four-family property, the limit
is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Community Reinvestment Act. Under the Community Reinvestment Act, any
insured depository institution, including Cambridgeport Bank, has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The Community Reinvestment
Act requires the FDIC, in connection with its examination of a savings bank, to
assess the depository institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution, including applications for additional branches
and acquisitions.
Among other things, the current Community Reinvestment Act regulations
replace the prior process-based assessment factors with a new evaluation system
that rates an institution based on its actual performance in meeting community
needs. In particular, the current evaluation system focuses on three tests:
. a lending test, to evaluate the institution's record of making loans
in its service areas;
. an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
. a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The Community Reinvestment Act requires the FDIC to provide a written
evaluation of an institution's Community Reinvestment Act performance utilizing
a four-tiered descriptive rating system and requires public disclosure of an
institution's Community Reinvestment Act rating. Cambridgeport Bank received a
"satisfactory" rating in its Community Reinvestment Act examination conducted by
the FDIC on October 27, 1997.
Safety and Soundness Standards. Pursuant to the requirements of FDIC
Improvement Act, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC, has
adopted guidelines establishing general standards relating to internal controls,
information
34
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, asset quality, earnings, and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDIC Improvement Act. If a bank fails to comply with such an
order, the FDIC may seek to enforce such an order in judicial proceedings and to
impose civil monetary penalties.
Prompt Corrective Action. FDIC Improvement Act also established a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. The FDIC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The FDIC's
regulations defines the five capital categories as follows:
An institution will be treated as "well capitalized" if:
. its ratio of total capital to risk-weighted assets is at least 10%;
. its ratio of Tier 1 capital to risk-weighted assets is at least 6%;
and
. its ratio of Tier 1 capital to total assets is at least 5%, and it is
not subject to any order or directive by the FDIC to meet a specific
capital level.
An institution will be treated as "adequately capitalized" if:
. its ratio of total capital to risk-weighted assets is at least 8%;
. its ratio of Tier 1 capital to risk-weighted assets is at least 4%;
and
. its ratio of Tier 1 capital to total assets is at least 4% (3% if the
bank receives the highest rating under the Uniform Financial
Institutions Rating System) and it is not a well capitalized
institution.
An institution will be treated as "undercapitalized" if:
. its total risk-based capital is less than 8%;
. its Tier 1 risk-based-capital is less than 4%; or
. its leverage ratio is less than 4% (or less than 3% if the institution
is rated a composite "1" under the Uniform Financial Institutions
Rating System).
35
An institution will be treated as "significantly undercapitalized" if:
. its total risk-based capital is less than 6%; or
. its Tier 1 capital is less than 3% or a leverage ratio is less than
3%.
An institution that has a tangible capital to assets ratio equal to or less
than 2% would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
. an amount equal to the five percent of the bank's total assets at the
time it became "undercapitalized," and
. the amount that is necessary (or would have been necessary) to bring
the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
The FDIC has a broad range of grounds under which it may appoint a receiver
or conservator for an insured depositary bank. If one or more grounds exist for
appointing a conservator or receiver for a bank, the FDIC may require the bank
to issue additional debt or stock, sell assets, be acquired by a depository bank
holding company or combine with another depository bank. Under FDIC Improvement
Act, the FDIC is required to appoint a receiver or a conservator for a
critically undercapitalized bank within 90 days after the bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first became critically undercapitalized, a
receiver must be appointed, unless the FDIC makes findings that the bank is
viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an "insider") and any
entities affiliated with an insider are subject to the conditions and
limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal
Reserve Board's Regulation O. Under these restrictions, the aggregate amount of
the loans to any insider and any entities affiliated with such insider may not
exceed the loans-to-one-borrower limit applicable to national banks, which is
comparable to the loans-to-one-borrower limit applicable to Cambridgeport Bank's
loans. See "Massachusetts Banking Regulation - Loans-to-One Borrower
Limitations." All loans by a bank to all insiders and their affiliates in the
aggregate may not exceed the bank's unimpaired capital and unimpaired retained
earnings. With some exceptions, loans to an executive officer, other than loans
for the education of the officer's children and certain loans secured by the
officer's residence, may not exceed the lesser of (1) $100,000 or (2) the
greater of $25,000 or 2.5% of the bank's capital and unimpaired retained
earnings. Regulation O also requires that any proposed loan to an insider or the
insider's affiliates be approved in advance by a majority of the Board of
Directors of the bank, with any interested director not participating in the
voting, if such loan, when aggregated with any existing loans to that insider
and that insider's affiliates, would exceed either (1) $500,000 or (2) the
greater of $25,000 or 5% of the bank's
36
unimpaired capital and retained earnings. Generally, such loans must be made on
substantially the same terms as, and follow credit underwriting procedures that
are not less stringent than, those that are prevailing at the time for
comparable transactions with other persons. An exception is made for extensions
of credit made pursuant to a benefit or compensation plan of a bank that is
widely available to employees of the bank and that does not give any preference
to insiders of the bank over other employees of the bank.
In addition, provisions of the Bank Holding Company Act prohibit extensions
of credit to a bank's insiders and their affiliates by any other institution
that has a correspondent banking relationship with the bank, 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.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act:
. repeals the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
. provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
. broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
. provides an enhanced framework for protecting the privacy of consumer
information;
. adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
. modifies the laws governing the implementation of the Community
Reinvestment Act and
. addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
Bank holding companies will be permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies will be in a position to be owned, controlled or acquired
by any company engaged in financially-related activities.
We do not believe that the Act will have a material adverse effect on our
operations in the near-term. However, to the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than we currently offer and that can aggressively compete in the
markets we currently serve.
37
Federal Reserve System
Under Federal Reserve Board regulations, Cambridgeport Bank is required to
maintain non-interest-earning reserves against its transaction accounts. The
Federal Reserve Board regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $46.5 million or less,
subject to adjustment by the Federal Reserve Board, and an initial reserve of
$1.4 million plus 10%, subject to adjustment by the Federal Reserve Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $46.5 million. The first $4.9 million of otherwise reservable balances,
subject to adjustments by the Federal Reserve Board, are exempted from the
reserve requirements. Cambridgeport Bank is in compliance with these
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of this
reserve requirement is to reduce Cambridgeport Bank's interest-earning assets.
Holding Company Regulation
Federal Regulation. Port Financial Corp. is regulated as a bank holding
company. Bank holding companies are subject to examination, regulation and
periodic reporting under the Bank Holding Company Act, as administered by the
Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FDIC for Cambridgeport Bank. As of December 31, 1999,
Port Financial Corp.'s total capital and Tier 1 capital ratios exceeded these
minimum capital requirements. See "Regulatory Capital Compliance."
Regulations of the Federal Reserve Board provide that a bank holding
company must serve as a source of strength to any of its subsidiary banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective action provisions of FDIC Improvement Act, a bank holding company
parent of an undercapitalized subsidiary bank would be directed to guarantee,
within limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "- Federal Banking Regulation - Prompt Corrective
Action" above. If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the Federal Reserve
Board may prohibit the bank holding company parent of the undercapitalized bank
from paying any dividend or making any other form of capital distribution
without the prior approval of the Federal Reserve Board.
As a bank holding company, Port Financial Corp. is required to obtain the
prior approval of the Federal Reserve Board to acquire all, or substantially
all, of the assets of any bank or bank holding company. Prior Federal Reserve
Board approval is required for Port Financial Corp. to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
A bank holding 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, will be 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 constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company which does not qualify as a financial
holding company under the Gramm-Leach-Bliley Financial Services Modernization
Act, is generally prohibited from engaging in, or acquiring direct or indirect
control of any company engaged in non-banking activities. (For a discussion of
the powers of
38
financial holding companies, see "Financial Services Modernization
Legislation.") One of the principal exceptions to this prohibition is for
activities found by the Federal Reserve Board to be so closely related to
banking or managing or controlling banks as to be permissible. Some of the
principal activities that the Federal Reserve Board has determined by regulation
to be so closely related to banking as to be permissible are:
. making or servicing loans;
. performing certain data processing services;
. providing discount brokerage services;
. acting as fiduciary, investment or financial advisor;
. leasing personal or real property;
. making investments in corporations or projects designed primarily to
promote community welfare; and
. acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incident to activities which are
financial in nature. Bank holding companies may qualify to become a financial
holding company if:
. each of its depository institution subsidiaries is "well capitalized";
. each of its depository institution subsidiaries is "well managed";
. each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most recent
examination; and
. the bank holding company has filed a certification with the Federal
Reserve Board that it elects to become a financial holding company.
Under the Federal Deposit Insurance Act, depository institutions are liable
to the FDIC for losses suffered or anticipated by the FDIC in connection with
the default of a commonly controlled depository institution or any assistance
provided by the FDIC to such an institution in danger of default. This law would
potentially be applicable to Port Financial Corp. if it ever acquired as a
separate subsidiary a depository institution in addition to Cambridgeport Bank.
Massachusetts Regulation. Under the Massachusetts banking laws, a company
owning or controlling two or more banking institutions, including a savings
bank, is regulated as a bank holding company. The term "company" is defined by
the Massachusetts banking laws similarly to the definition of "company" under
the Bank Holding Company Act. Each Massachusetts bank holding company must:
. obtain the approval of the Massachusetts Board of Bank Incorporation
before engaging in certain transactions, such as the acquisition of
more than 5% of the voting stock of another banking institution; and
. register, and file reports, with the Division and is subject to
examination by the Division.
Port Financial Corp. will become a Massachusetts bank holding company if it
acquires a second banking institution and holds and operates it separately from
Cambridgeport Bank.
39
Federal Home Loan Bank System
Cambridgeport Bank is a member of the Federal Home Loan Bank of Boston
(FHLBB), which is one of the 12 regional Federal Home Loan Banks in the FHLB
system. Each of the Federal Home Loan Banks are subject to supervision and
regulation by the Federal Housing Finance Board, and each acts as a central
credit facility primarily for its member institutions. As a member,
Cambridgeport Bank is required to hold shares of capital stock in the FHLBB in
an amount at least equal to the greater of 1% of the aggregate unpaid principal
of its home mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 1/20 of its advances (borrowings) form the FHLBB.
Cambridgeport Bank was in compliance with this requirement with an investment in
FHLBB stock at December 31, 1999 of $4.5 million.
Each FHLB serves as a reserve or central bank for its member institutions
within its assigned region. Each is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB system. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the board of directors of the FHLB. Long-term advances may only be made for the
purpose of providing funds for residential housing finance.
Federal Home Loan Bank System Modernization Act of 1999. Title 6 of the
Gramm-Leach-Bliley Financial Services Modernization Act, entitled the Federal
Home Loan Bank System Modernization Act of 1999 (FHLB Modernization Act), has
amended the FHLB Act by allowing for voluntary membership and modernizing the
capital structure and governance of the FHLB system. The new capital structure
established under the FHLB Modernization Act sets forth new leverage and
risk-based capital requirements based on permanence of capital. It also requires
some minimum investment in FHLB stock of all member entities. Capital will
include retained earnings and two forms of stock: Class A stock redeemable
within six months, written notice and Class B stock redeemable within five
years, written notice. The FHLB Modernization Act provides a transition period
to the new capital regime, which will not be effective until the FHLB enacts
implementing regulations. The FHLB Modernization Act also reduces the period of
time in which a member exiting the FHLB system must stay out of the system.
Acquisition of Port Financial Corp.
Under federal law, no person may acquire control of Port Financial Corp. or
Cambridgeport Bank without first obtaining, as summarized below, approval of
such acquisition of control by the Federal Reserve Board.
Federal Restrictions. Under the federal Change in Bank Control Act, any
person (including a company), or group acting in concert, seeking to acquire 10%
or more of the outstanding shares of Port Financial Corp.'s common stock will be
required to submit prior notice to the Federal Reserve Board, unless the Federal
Reserve Board has found that the acquisition of such shares will not result in a
change in control of Port Financial Corp. Under the Bank Holding Company Act,
the Federal Reserve Board has 60 days within which to act on such notices,
taking into consideration factors, including the financial and managerial
resources of the acquirer, the convenience and needs of the communities served
by Port Financial Corp. and Cambridgeport Bank, and the anti-trust effects of
the acquisition. Under the Bank Holding Company Act, any company would be
required to obtain prior approval from the Federal Reserve Board before it may
obtain "control," within the meaning of the Bank Holding Company Act, of Port
Financial Corp. The term "control" is defined generally under the Bank Holding
Company Act to mean the ownership or power to vote 25% more of any class of
voting securities of an institution or the ability to control in any manner the
election of a majority of the institution's directors.
Massachusetts Restrictions. Under the Massachusetts banking laws, the prior
approval of the Division is required before any person may acquire a
Massachusetts bank holding company, such as Port Financial Corp. For this
purpose, the term "person" is defined broadly to mean a natural person or a
corporation, company, partnership, or any other form of organized entity. The
term "acquire" is defined differently for an existing bank holding company and
for other companies or persons. A bank holding company will be treated as
"acquiring" a
40
Massachusetts bank holding company if the bank holding company acquires more
than 5% of any class of the voting shares of the bank holding company. Any other
person will be treated as "acquiring" a Massachusetts bank holding company if it
acquires ownership or control of more than 25% of any class of the voting shares
of the bank holding company.
Federal Securities Laws
The common stock of Port Financial Corp. is registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Accordingly, the Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
ITEM 2. PROPERTIES
We currently conduct our business through our executive and administrative
offices, our ten full service banking offices and our Telebanking Center. We are
in the process of building a new facility located at 1380 Soldiers Field Road,
Brighton, MA. Occupancy of the building should occur by the end of the second
quarter 2000. This facility will house certain administrative departments and
all lending operations. The estimated cost is approximately $16.5 million of
which approximately $14.5 million was borrowed from the Federal Home Loan Bank.
As of December 31, 1999, the properties and leasehold improvements we owned had
an aggregate net book value of $10.6 million.
Year of Lease or
License
Location Ownership Year Opened Expiration(1)
- --------------------------- ----------- ------------- ----------------
Administrative/Main Office:
689 Massachusetts Avenue
Cambridge, MA 02139 Owned N/A -
Branch Offices:
1751 Massachusetts Avenue
Lexington, MA 02420 Leased 1978 2007
522 Main Street
Winchester, MA 01890 Leased 1980 2004
Harvard Square Office
1290 Massachusetts Avenue Leased 1985 2003
Cambridge, MA 02139
177 Linden Street
Wellesley, MA 02482 Leased 1994 2003
1243 Centre Street
Newton, MA 02459 Leased 1995 2010
133 Chapel Street
Needham, MA 02492 Leased 1995 2015
Supermarket Offices:
101 Falls Boulevard
Quincy, MA 02169 Licensed 1996 2011
150 W. Central Street
Natick, MA 01760 Licensed 1997 2012
41
Year of Lease or
License
Location Ownership Year Opened Expiration(1)
- --------------------------- ----------- ------------- ----------------
338 Washington Street
Westwood, MA 02090 Licensed 1997 2012
Residential Mortgage Center
2150 Washington Street
Newton, MA 02462 Leased 1998 2003
Center
100 Cambridge Park Drive
Cambridge, MA 02140 Telebanking Leased 1997 2000
______________________________
(1) Lease expiration dates assume all options to extend lease terms are
exercised.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceeding other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1999 and until the conversion from mutual to stock form
is complete, there will be no stock and therefore no trading market for the
common stock of Port Financial. Upon completion of the conversion, Port
Financial's common stock is expected to be quoted for trading on the Nasdaq
National Market under the symbol "PORT." The price of the common stock to be
sold in the stock offering is $10.00 per share.
Ryan, Beck & Co., Inc. has advised us that it intends to make a market in
the common stock, but is under no obligation to do so. We will encourage and
assist additional market makers to make a market in our common stock.
Although no decision has been made yet regarding the payment of dividends,
we will consider a policy of paying quarterly cash dividends on the common stock
of Port Financial Corp., beginning in the first full fiscal quarter after
completion of the conversion. The payment of dividends will be subject to the
determination of our Board of Directors and will depend upon our debt and equity
structure, earnings and financial condition, need for capital in connection with
possible future acquisitions and other factors, including economic conditions,
regulatory restrictions and tax considerations. We cannot guarantee that we will
pay dividends or the amount and frequency of dividends, if declared.
42
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of Port
Financial Corp. The following information is only a summary and should be read
in conjunction with our consolidated financial statements and notes beginning on
page F-1.
At December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Selected Financial Data:
Total assets ..................................... $762,741 $678,087 $619,368 $574,817 $508,558
Loans, net(1) ................................ 577,029 496,390 419,187 306,321 272,968
Investment securities available for sale(2)... 138,033 150,642 164,617 215,369 164,792
Investments securities held to maturity ...... -- -- -- -- --
Deposits ..................................... 621,319 568,075 520,357 502,698 425,199
Federal Home Loan Bank advances .............. 55,891 27,066 21,604 720 11,720
Total retained earnings ...................... 79,130 76,088 71,072 66,845 64,552
Allowance for possible loan losses ........... 7,081 6,633 4,907 4,269 4,074
Non-performing assets ........................ 128 963 789 903 1,471
For the Years Ended
December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(In thousands)
Selected Operating Data:
Interest and dividend income ................... $49,971 $48,656 $43,961 $37,741 $35,413
Interest expense ............................... 25,706 25,880 23,554 21,038 18,733
------- ------- ------- ------- -------
Net interest income ....................... 24,265 22,776 20,407 16,703 16,640
Provision for possible loan losses ........ 740 1,760 600 450 100
------- ------- ------- ------- -------
Net interest and dividend income after
provision for loan losses ................. 23,525 21,016 19,807 16,253 16,540
Total non-interest income ................. 3,059 3,571 3,176 3,220 3,506
Total non-interest expenses ............... 19,620 18,042 17,638 16,199 13,945
------- ------- ------- ------- -------
Income before provision for income
taxes ..................................... 6,964 6,545 5,345 3,274 6,101
Provision for income taxes ................ 2,190 2,357 1,679 787 2,101
------- ------- ------- ------- -------
Net income ................................ $ 4,774 $ 4,188 $ 3,666 $ 2,487 $ 4,000
======= ======= ======= ======= =======
- ---------------------------
(1) Loans include loans held for sale and are shown net of deferred loan fees,
allowance for loan loss and unadvanced loan funds.
(2) Includes Federal Home Loan Bank of Boston stock and Savings Bank Life
Insurance stock.
43
At or for the Years Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Selected Financial Ratios and Other Data
Performance Ratios:
Return on average assets ............... 0.67% 0.63% 0.61% 0.46% 0.82%
Return on average equity ............... 6.34 5.93 5.50 3.89 6.62
Average equity to average assets ....... 10.56 10.71 11.14 11.81 12.32
Equity to total assets at end of
period ............................... 10.37 11.22 11.47 11.63 12.69
Average interest rate spread ........... 2.98 2.94 2.91 2.58 2.86
Net interest margin(3) ....................... 3.53 3.56 3.52 3.19 3.50
Average interest-earning assets to average
interest-bearing liabilities ............... 114.71 115.32 115.04 115.03 111.24
Total non-interest expense to average assets 2.76 2.73 2.95 2.99 2.78
Efficiency ratio(4) ......................... 71.81 68.64 77.17 83.72 72.59
Regulatory Capital Ratios:
Regulatory Tier 1 leverage capital ...... 10.42 10.66 11.04 11.38 12.42
Tier 1 risk-based capital ............... 17.51 18.74 19.24 21.32 20.93
Total risk-based capital ................ 19.29 20.54 20.51 22.57 22.18
Asset Quality Ratios:
Non-performing loans as a percent of
total loans ........................... 0.02 0.19 0.19 0.29 0.49
Non-performing assets as a percent of
total assets .......................... 0.02 0.14 0.13 0.16 0.29
Allowance for loan losses as a percent
of total loans ........................ 1.21 1.32 1.16 1.37 1.47
Allowance for loan losses as a percent
of non-performing assets .............. 5,532 689 622 473 277
Number of:
Full-service offices .................... 10 10 9 8 6
Telebanking Center ...................... 1 1 1 -- --
Full-time equivalent employees .......... 193 179 169 155 141
- --------------------------------------
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) The efficiency ratio represents the ratio of non-interest expenses divided
by the sum of net interest income and non-interest income less gain on
sales of investments.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Cambridgeport Mutual Holding Company's results of operations is comprised
of earnings on investments and the net income recorded by its principal
operating subsidiary, Cambridgeport Bank. Cambridgeport Bank's results of
operations depend primarily on net interest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets
and the interest we pay on interest-bearing liabilities. Our interest-earning
assets consist primarily of residential mortgage loans including home equity
loans, commercial mortgage loans, borrowings under home equity credit lines,
consumer loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit,
savings and money market and NOW account deposits, and borrowings from the
Federal Home Loan Bank of Boston. Our results of operations also depend on our
provision for possible loan losses, non-interest income, and our non-interest
expense. Non-interest expense includes salaries and employee benefits, occupancy
expenses and other general and administrative expenses. Non-interest income
includes service fees and charges.
Our results of operations may also be affected significantly by economic
and competitive conditions in our market area and elsewhere, including those
conditions that influence market interest rates, government policies and the
actions of regulatory authorities. Future changes in applicable laws,
regulations or government policies may materially impact us. Furthermore, our
lending activity is concentrated in loans secured by real estate located in the
Boston metropolitan area.
Management Strategy
Our primary management strategy has been to offer a variety of checking and
savings deposit products, as well as residential and commercial mortgage loan
products, in order to generate earnings and to expand our customer base in our
primary market area of Middlesex and Norfolk counties in Massachusetts. We seek
to provide high quality service to our customers while meeting their savings and
borrowing needs. We try to limit our exposure to changes in interest rates by
monitoring and managing our interest rate-sensitive assets and liabilities. To
accomplish these strategies, we originate one- to four-family residential
mortgage loans, home equity and consumer loans and commercial real estate
mortgage loans, and we offer competitive rates to attract new deposits. We also
attempt to cross-sell additional services to our existing customers as a way of
maintaining these deposit relationships. We train our employees not only in the
technical aspects of their jobs, but also in how to provide outstanding quality
service to customers. To facilitate our management of liquidity and interest
rate risk, we purchase investment and mortgage-backed securities. In recent
years, we have adopted a growth-oriented strategy that has focused on broadening
our product lines and services, expanding delivery systems for our customers and
extending our branch network. We believe that this business strategy is best for
our long-term success and viability, and complements our existing commitment to
high quality customer service. In connection with our overall growth strategy,
we seek to:
. continue to focus on expanding our residential lending and retail
banking franchise, and increasing the number of households served
within our market area;
. expand our commercial banking products and services for businesses, as
a means to increase the yield on our loan portfolio, to attract lower
cost transaction deposit accounts and increase non-interest income;
45
. offer a variety of uninsured investment and insurance products and
services as a means to compete for an increased share of our
customers' financial service business; and
. increase the use of alternative delivery channels, such as internet
home banking and telebanking.
Market Risk and Management of Interest Rate Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. Port Financial's primary
market risk exposure is interest rate risk, which occurs from interest rate
volatility. Fluctuations in interest rates impact both our level of income and
expense on a large portion of our assets and liabilities, as well as the market
value of all interest-earning assets.
The ongoing monitoring and management of interest rate risk is an important
component of our asset/liability management process which is governed by
policies established by our Board of Directors that are reviewed and approved
annually. The Board of Directors delegates responsibility for carrying out the
asset/liability management policies to the Asset/Liability Management Committee
("ALCO"). In this capacity, ALCO develops guidelines and strategies affecting
Port Financial's asset/liability management related activities based upon
estimated market risk sensitivity, policy limits and overall market interest
rate levels and trends. The primary goal of our interest rate management
strategy is to limit fluctuations in net interest income as interest rates vary
up or down. We seek to coordinate asset and liability decisions so that, under
changing interest rate scenarios, our net interest income will remain within an
acceptable range.
Our lending activities have emphasized one- to four-family and commercial
mortgage loans. Our primary source of funds has been deposits, consisting
primarily of certificates of deposit, which have shorter terms to maturity than
the loan portfolio, and transaction accounts. Occasionally, we have funded loan
growth with Federal Home Loan Bank advances. We have employed several strategies
to manage the interest rate risk inherent in the asset/liability mix, including
but not limited to:
. Selling a majority of the 30 and 15 year fixed-rate mortgages we
originate to the secondary market;
. Maintaining the diversity of our existing loan portfolio through the
origination of commercial real estate and consumer loans which
typically have variable rates and shorter terms than residential
mortgages; and
. Emphasizing investments with short- and intermediate-term maturities
of less than ten years, with the majority of maturities or rate resets
currently under 5 years.
The actual amount of time before loans are repaid can be significantly
impacted by changes in market interest rates. Prepayment rates will also vary
due to a number of other factors, including the regional economy in the area
where the loans were originated, seasonal factors, demographic variables, the
assumability of the loans, related refinancing opportunities and competition. We
monitor interest rate sensitivity so that we can adjust our asset and liability
mix in a timely manner and minimize the negative effects of changing rates.
Net Interest Income Simulation. We use a simulation model to monitor
interest rate risk. This model reports the net interest income at risk primarily
under two different interest rate environments. Specifically, an analysis is
performed of changes in net interest income assuming changes in interest rates,
both up and down 200 basis points from current rates over the one year time
period following the current financial statement. In addition, we periodically
simulate other scenarios by increasing the assumed changes in interest rates
both up and down 400 basis points, or extending the time period covered by the
analysis. Our policy objective is to limit any reduction
46
in net interest income over a one-year period to 10% from the current financial
statement given a change in interest rates of up or down 200 basis points.
The table below sets forth the estimated changes in net interest income
that would result from a 200 basis point change in interest rates over the
applicable twelve-month period.
For the Fiscal Year Ended December 31, 2000
---------------------------------------------------
(Dollars in thousands)
Changes in
Interest Rates Net Interest
(Basis Points) Income % Change
------------------ -------------- ----------
200 22,524 -4.52%
0 23,590 --
-200 24,126 2.27%
Gap Analysis. In addition to net interest income simulation, we use gap
analysis to monitor interest rate risk. We analyze the repricing characteristics
of assets and liabilities by examining the extent to which such assets and
liabilities are "interest rate sensitive". An asset or liability is deemed to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest-earnings assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets. Thus, our net interest income would likely decrease. An
institution with a positive gap position would be expected, absent the effect of
other factors, to experience the opposite result. Conversely, during a period of
declining interest rates, a negative gap would tend to result in an increase in
net interest income. A positive gap would tend to reduce net interest income.
At December 31, 1999, based on the assumptions below, our interest-bearing
liabilities maturing or repricing within one year exceeded our interest-earning
assets maturing or repricing within the same period by $214.2 million. This
represented a negative cumulative one-year interest rate sensitivity gap of
29.4% of total assets and a ratio of cumulative interest-earning assets maturing
or repricing within one year to cumulative interest-bearing liabilities maturing
or repricing within one year of 53.9%. Our negative gap position could more
adversely impact our net interest income in a rising rate environment than if we
had a positive gap position.
The following table presents the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which we
anticipate to reprice or mature in each of the future time periods shown. Except
as stated below, we determined the amounts of assets and liabilities shown which
reprice or mature during a particular period in accordance with the earlier of
the term to repricing or the contractual maturity of the asset or liability. The
information presented in the following table is also based on the following
assumptions:
. We assume that various mortgage related products will prepay principal
balances. Prepayment speeds will vary depending on the interest rate
environment, mortgage product type, outstanding principal balances,
average life to maturity and other factors. The residential mortgage
portfolio
47
is segregated based on these factors and prepayment speeds are
calculated using analytical historical data from the Office of Thrift
Supervision.
. 10% of our commercial mortgages and home equity loans are assumed to
prepay annually.
. Federal agency securities with call options that we believed would be
called were reported at the earlier of the next call date or
contractual maturity date.
. Higher earning savings accounts, money market accounts and the
Treasury index accounts are reported in the three month category.
The assumptions, as reflected in the last two items, are based on
regulatory guidance, as modified by our historical analysis of deposit levels
over during various changes in market rates. Deposit assumptions, prepayment
rates and anticipated call dates can have a significant impact on the estimated
interest sensitivity gap. While we believe that our assumptions are reasonable,
they may not be indicative of actual future deposit activity, mortgage and
mortgage-backed securities prepayments, and the actual timing of federal agency
calls.
48
GAP Table
Amounts Maturing or Repricing as of December 31, 1999
---------------------------------------------------------------------------------------------
less than 3 3 to 6 6 months to 1 1 to 2 2 to 3 3 to 5 greater than
months months year years years years 5 yrs. Total
------------ --------- ------------- -------- -------- -------- ------------ ---------
[Dollars in thousands)
Interest-earning Assets(1)
Short-term investments ............. $ 2,875 -- -- -- -- -- -- $ 2,875
Certificates of Deposit ............ 2,830 $ 2,319 -- -- -- -- -- 5,149
Investment securities(2) ........... 6,727 3,691 $ 4,021 $ 11,615 $ 20,033 $ 35,477 $ 8,076 89,640
Mortgage and assets backed
securities (2) .................. 2,751 11,641 7,334 7,275 3,179 7,426 5,911 45,517
Loans(3) ........................... 96,699 34,401 75,471 99,077 103,151 151,693 23,956 584,448
--------- --------- --------- --------- --------- -------- -------- ---------
Total interest-earning assets ... $ 111,882 $ 52,052 $ 86,826 $ 117,967 $ 126,363 $194,596 $ 37,943 $ 727,629
========= ========= ========= ========= ========= ======== ======= =========
Interest-Bearing Liabilities
NOW accounts(4) .................... -- -- -- -- -- -- $ 44,429 $ 44,429
Regular savings accounts ........... -- -- -- -- -- -- 53,346 53,346
Money market accounts(5) ........... $ 157,662 -- -- -- -- -- 4,642 162,304
Certificate of deposit accounts .... 46,258 $ 80,524 $ 142,798 $ 46,419 $ 9,954 $ 2,479 -- 328,432
Borrowed funds ..................... 10,219 27,109 424 909 951 1,999 14,452 56,063
--------- --------- --------- --------- --------- -------- -------- ---------
Total interest-bearing
liabilities .................... $ 214,139 $ 107,633 $ 143,222 $ 47,328 $ 10,905 $ 4,478 $116,869 $ 644,574
========= ========= ========= ========= ========= ======== ======== =========
Interest sensitivity gap ............. (102,257) (55,581) (56,396) 70,639 115,458 190,118 (78,926)
Cumulative interest sensitivity gap .. (102,257) (157,838) (214,234) (143,595) (28,137) 161,981 83,055
Cumulative interest sensitivity
gap as a percent of total assets ... -13.41% -20.69% -28.09% -18.83% -3.69% 21.24% 10.89%
Cumulative interest sensitivity
gap as a percent of total interest-
earning assets ..................... -14.05% -21.69% -29.44% -19.73% -3.87% 22.26% 11.41%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities ...................... 52.25% 50.95% 53.93% 71.97% 94.62% 130.70% 112.89%
_______________
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Debt securities are presented at amortized cost.
(3) For the purposes of the gap analysis, allowances for loan losses and
deferred loan fees have been excluded.
(4) NOW accounts also include appreciation checking and are included in the
over five year column.
(5) Treasury Index and Real Savings accounts are included in 3 months or less.
Business investments accounts are in the over five year category.
49
Average Balance Sheet and Analysis of Net Interest Income. The following
tables set forth information relating to our financial condition and net
interest income at and for the fiscal years ended December 31, 1999, 1998 and
1997, and reflect the average yield on assets and average cost of liabilities
for the periods indicated. We derived the yields and costs by dividing income or
expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown. We derived average balances
from actual daily balances over the periods indicated. Interest income includes
fees we earned from making changes in loan rates or terms, and fees we earned
when commercial real estate loans were prepaid or refinanced.
For the Fiscal Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ --------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- ---------- -------- --------- -------- -------- -------- --------- ----------
Assets: (Dollars in thousands)
Interest-earning assets:
Short-term investments(1)............. $ 11,935 $ 735 6.16% $ 12,373 $ 787 6.36% $ 8,026 $ 574 7.15%
Certificates of deposit............... 5,737 408 7.11 6,736 472 7.01 12,480 801 6.42
Investment securities(2).............. 138,594 8,462 6.18 162,152 10,023 6.33 194,564 12,282 6.42
Loans(3).............................. 527,142 40,366 7.56 457,271 37,374 8.08 362,888 30,304 8.25
--------- -------- -------- ------- -------- ---------
Total interest-earning assets...... 683,408 49,971 7.26 638,532 48,656 7.60 577,958 43,961 7.59
-------- ------- ---------
Total non-interest-earning assets.. 28,541 21,658 20,103
--------- -------- --------
Total assets....................... $ 711,949 $660,190 $598,061
========= ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts.......................... 40,388 567 1.40 36,323 559 1.54 32,898 568 1.73
Savings accounts...................... 54,058 1,136 2.10 53,283 1,194 2.24 56,688 1,298 2.29
Money market deposit accounts......... 142,148 5,518 3.88 123,020 4,825 3.92 85,968 3,063 3.56
Certificate of deposit accounts....... 322,872 16,199 5.02 316,937 17,740 5.60 314,360 17,803 5.66
--------- -------- -------- ------- -------- ---------
Total interest-bearing deposits.... 559,466 23,420 4.19 529,563 24,318 4.59 489,914 22,732 4.64
Borrowed funds........................ 40,576 2,286 5.63 25,352 1,562 6.16 13,609 822 6.04
--------- -------- -------- ------- -------- ---------
Total interest-bearing liabilities. 600,042 25,706 4.28 554,915 25,880 4.66 503,523 23,554 4.68
Non-interest-bearing deposits 29,607 26,134 20,330
Other non-interest-bearing liabilities.. 5,891 5,923 5,403
--------- -------- --------
Total non-interest-bearing
liabilities.......................... 35,498 32,057 25,733
Total liabilities..................... 635,540 586,972 529,256
Total retained earnings............... 76,409 73,218 68,805
--------- -------- --------
Total liabilities and retained
earnings............................. $ 711,949 $660,190 $598,061
========= ======== ========
Net interest income..................... $ 24,265 $22,776 $ 20,407
======== ======= =========
Net interest rate spread(4)............. 2.98 2.94 2.91
Net interest margin(5).................. 3.53 3.56 3.52
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 114.71 X 115.32 X 115. 04 X
- ------------------------
(1) Short-term investments include federal funds sold.
(2) All investments securities are considered available for sale and carried at
market value.
(3) Loans are net of deferred loan origination costs (fees), allowance for loan
losses and unadvanced funds.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
50
Rate/Volume Analysis. The following table shows how changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) interest income changes attributable to changes in volume (changes in
volume multiplied by prior rate);
(2) interest income changes attributable to changes in rate (changes in
rate multiplied by prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
Increase/(Decrease) Increase/(Decrease)
------------------------------- -------------------------------
Due to Due to
--------------------- ---------------------
Volume Rate Net Volume Rate Net
---------- ---------- --------- ---------- ---------- ---------
(In thousands)
Interest-earning assets:
Short-term investments ....................... $ (28) $ (24) $ (52) $ 268 $ (55) $ 213
Certificates of deposit ...................... (71) 7 (64) (411) 82 (329)
Investment securities ........................ (1,342) (219) (1,561) (2,088) (171) (2,259)
Loans ........................................ 5,169 (2,177) 2,992 7,682 (612) 7,070
------- ------- ------- ------- ------- -------
Total interest-earning assets ................ $ 3,728 $(2,413) $ 1,315 $ 5,451 $ (756) $ 4,695
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
NOW accounts ................................. 43 (35) 8 164 (173) (9)
Savings accounts ............................. 18 (76) (58) (76) (28) (104)
Money market deposit accounts ................ 742 (49) 693 1,427 335 1,762
Certificates of deposit ...................... 340 (1,881) (1,541) 215 (278) (63)
Borrowed funds ............................... 845 (121) 724 723 17 740
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ........... $ 1,988 $(2,162) $ (174) $ 2,453 $ (127) $ 2,326
======= ======= ======= ======= ======= =======
Change in net interest income ................ $ 1,740 $ (251) $ 1,489 $ 2,998 $ (629) $ 2,369
======= ======= ======= ======= ======= =======
51
Financial Condition and Results of Operations
Cambridgeport Bank's results of operations depend primarily on net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets and the interest we pay on interest-bearing
liabilities. Our interest-earning assets consist primarily of residential
mortgage loans including home equity loans, commercial mortgage loans,
borrowings under home equity credit lines, consumer loans, mortgage-backed
securities and investment securities. Interest-bearing liabilities consist
primarily of certificates of deposit, savings and money market and NOW account
deposits, and borrowings from the Federal Home Loan Bank of Boston. Our results
of operations also depend on our provision for possible loan losses,
non-interest income, and our non-interest expense. Non-interest expense includes
salaries and employee benefits, occupancy expenses and other general and
administrative expenses. Non-interest income includes service fees and charges.
See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for a
more detailed discussion about net interest income.
Our results of operations may also be affected significantly by economic
and competitive conditions in our market area and elsewhere, including those
conditions that influence market interest rates, government policies and the
actions of regulatory authorities. Future changes in applicable laws,
regulations or government policies may materially impact us. Furthermore, our
lending activity is concentrated in loans secured by real estate located in the
Boston metropolitan area.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Our consolidated total assets increased $84.6 million, or 12.5%, to $762.7
million at December 31, 1999 from $678.1 million at December 31, 1998. This
increase was primarily the result of $81.0 million, or 16.2% growth, in loans.
Loan growth included $50.4 million in residential mortgage loans, $25.3
million in commercial real estate and construction loans, and $5.9 million in
home equity loans, offset by a $640,000 decline in consumer and other loans.
This loan activity reflects our strategy to build loan relationships with
property owners in our market area. It also reflects the strong local economic
conditions that prevailed in our region during 1999.
The growth in total assets during the period was primarily funded by:
. deposit growth;
. reduction in investment and mortgage-backed securities;
. additional Federal Home Loan Bank borrowings; and
. growth in retained earnings.
Total cash and investments decreased $4.0 million, 2.4%, to $162.6 million.
This reduction is part of our strategy to shift assets from securities into
higher yielding loan assets.
Deposits rose $53.2 million, or 9.4%, to $621.3 million at December 31,
1999 compared with $568.1 million at December 31, 1998. Money market accounts
and certificates of deposit represented $48.5 million, or 91.2%, of the growth
in total deposits and totaled $490.7 million at December 31, 1999. Certificates
of deposit increased $18.4 million, or 5.9%, to $328.4 million at December 31,
1999 from $310.0 million at December 31, 1998. Money market account balances
grew $30.1 million, 22.8%, to $162.3 million at December 31, 1999. The growth in
money market deposits reflects the continued success of our Treasury Index
Account.
Federal Home Loan Bank borrowings at December 31, 1999 were $28.8 million
above the level at December 31, 1998. In June 1999, we borrowed $14.5 million
from the Federal Home Loan Bank in order to fund
52
the construction and acquisition of a new building. See "Business of
Cambridgeport Bank - Properties." The remaining growth in Federal Home Loan Bank
borrowings was to fund loan growth.
Total equity increased $3.0 million, or 3.9%, to $79.1 million at December
31, 1999 from $76.1 million at December 31, 1998. Net income of $4.8 million was
partially offset by a decline of $1.7 million in the unrealized gain on
available for sale securities net of related taxes.
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General
Net income was $4.8 million for year ended December 31, 1999, an increase
of $586,000, or 14.0%, compared with net income of $4.2 million for 1998. The
increase in net income was attributable to a $1.5 million increase in net
interest income and a $1.0 million decrease in the provision for loan losses.
These were partially offset by a $512,000 decline in total non-interest income,
an increase of $1.6 million in total non-interest expense and a $ 167,000
decrease in income tax expense.
Interest Income
Total interest and dividend income increased $1.3 million, or 2.7%, to
$50.0 million for 1999 compared with $48.7 million in 1998. Interest on loans
rose $3.0 million, or 8%, to $40.4 million in 1999, from $37.4 million in 1998.
This was primarily the result of the loan growth discussed above. Average loans
outstanding during 1999 were $533.7 million compared with average loans
outstanding of $462.6 million in 1998.
Interest and dividends on investment securities and deposits held at other
banks decreased $1.7 million to $9.6 million in 1999 from $11.3 million in 1998.
Interest-bearing investment securities balances averaged $156.3 million in 1999
and $181.2 million in 1998, which is the primary reason for the decline in
interest income in this area.
Interest Expense
Total interest expense for 1999 was $25.7 million, $174,000, or .7%, below
1998, despite a higher average balance of interest-bearing liabilities in 1999
of $600.0 million compared with $554.9 the year before. This growth in
interest-bearing liabilities was offset by a 38 basis point decrease in their
average cost, to 4.28% in 1999 from 4.66% for 1998. This decrease reflects the
lower interest rate environment that prevailed during 1999 compared to the 1998
period.
Interest expense on deposits declined by $898,000, or 3.7%, to $23.4
million in 1999 compared with $24.3 million for the year before. The average
balance of deposits rose to $589.1 million in 1999, from $555.7, but their
average cost declined from 4.38% in 1998 to 3.98% in 1999.
Interest expense on borrowed funds increased $724,000 as a result of an
$15.2 million rise in the average balance of borrowings used to fund the
building of new facilities and to fund loan growth.
Provision for Possible Loan Losses
In 1999 we provided $740,000 for possible loan losses, compared to $1.8
million in 1998. The 1998 provision reflected not only the strong loan growth
during that period, but also the higher number of large balance commercial real
estate loans we originated during 1998 compared to prior periods. At the end of
1999 and 1998, the allowance for loan losses was $7.1 million and $6.6 million,
or 1.21% and 1.32% of total loans outstanding.
Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and its underlying collateral, the mix
of loans within the portfolio, delinquency trends, economic
53
conditions, current and prospective trends in real estate values, and other
relevant factors. As we expand our commercial business lending, additional
increases to the provision for possible loan losses are likely.
Non-interest Income
Non-interest income includes service fees and charges for bank services,
gains or losses from asset sales, and other income resulting from miscellaneous
transactions. Total non-interest income was $3.1 million for 1999 compared with
$3.6 million for the prior year. The 1998 figure includes gains on fixed-rate
loan sales of $1.1 million. In 1999, as mortgage interest rates increased,
fixed-rate loan applications declined, and loan sale gains declined to $599,000.
We expect that the new administrative center building, described above, will be
approximately 60% occupied by us, and 40% by companies that enter into long-term
lease agreements with us. In future periods we expect to receive non-interest
income from these tenants.
Non-interest Expense
Total non-interest expense in 1999 increased $1.6 million, or 8.9%, to
$19.6 million compared with $18.0 million for the prior year. The 1999 figure
includes a one-time charge of $578,000, reflecting a curtailment loss on a
restructured executive non-qualified retirement plan. Salaries and employee
benefits increased 7.2%, or $682,000 compared with 1998. This was attributable
to: increased staffing levels in the areas of wealth management and business
banking, periodic salary adjustments for existing staff, and increased personnel
benefit costs.
Advertising expense increased $233,000, or 25.8%, over the 1998 level,
primarily related to promotions of our home equity loan products and our
Treasury Index money market account.
Other non-interest expense of $3.0 million in 1999 included $193,224 of
expenses related to the Y2K date change project. Y2K expenses in 1998 totaled
$50,767. Other non-interest expense also included professional services expense
of $695,000 in 1999, an increase of $155,000 over 1998. This included $125,000
of fees paid in connection with leasing activity at our new building.
Income Taxes
Income tax expense was $2.2 million for 1999 compared to $2.4 million in
1998, resulting in effective tax rates of 31.5% and 36.0% for the respective
periods. The lower effective tax rate in 1999 is primarily the result of
increased utilization of qualified securities investment companies and
non-taxable increases in cash surrender values of life insurance policies.
Comparison of Financial Condition at December 31, 1998 and 1997
Our total assets increased $58.7 million, or 9.5%, to $678.1 million at
December 31, 1998 from $619.4 million at December 31, 1997. Loans increased
$79.1 million, or 18.6%, to $503.5 million. Growth in commercial real estate
loans totaled $45.0 million, and residential mortgage loan growth was $38.8
million. Partially offsetting loan growth was a decline in securities available
for sale which fell $15.2 million to $145.0 million, and a decline in
certificates of deposit that we held in other banks which totaled $12.1 million
at December 31, 1998 and $5.9 million at December 31, 1997.
Asset growth was funded primarily by an increase of $47.7 million in total
deposits, to $568.1 million at December 31, 1998 compared with $520.4 million at
December 31, 1997. We introduced a new "Treasury Index Account" in October,
1997. The Treasury Index Account is a money market savings account offering a
rate that is based on the three month U.S. Treasury bill. The Treasury Index
Account generated approximately $45.9 million in account balances during 1998.
54
Our total equity increased $5.0 million, or 7.0%, to $76.1 million at
December 31, 1998. Net income accounted for $4.2 million of that increase and
the remainder was attributed to an $828,000 increase in unrealized gains on
securities.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General
Net income of $4.2 million for 1998 represents a $522,000, or 14.1%,
increase from 1997's earnings of $3.7 million. This increase was due primarily
to loan growth. At the same time, earnings on investment securities declined
primarily because of the reduction in investment securities balances discussed
above.
Interest Income
Total interest income increased $4.7 million to $48.7 million for 1998
compared to $44.0 million for 1997. The average balance of interest-earning
assets increased $60.6 million, or 10.5%, and the yield on earning assets
increased from 7.60% in 1997 to 7.59% for 1998.
The previously mentioned growth in the loan portfolio, is the primary
reason for the rise in interest income. Interest and fees on loans increased
$7.1 million, or 23.4% to $37.4 million in 1998 from $30.3 million in 1997.
Partially offsetting the increase was a $2.4 million reduction in interest
income from securities and other investments caused primarily by a decline in
average investment portfolio balances.
We reduced the size of the investment portfolio as part of our strategy to
redeploy assets into higher yielding loan products.
Interest Expense
Interest expense increased $2.3 million, or 9.9%, to $25.9 million for 1998
compared with $23.6 million for 1997. The average balance of total
interest-bearing deposits grew $39.6 million in 1998 to $529.6 million, while
the average cost of our deposits fell 5 basis points to 4.59%. The combined
effect of the deposit growth and the decrease in cost of funds produced a $1.6
million increase in interest expense for the year. The average balance of
borrowed funds rose in 1998, by $11.7 million, and the average cost of the
borrowings also rose by 12 basis points to 6.16% in 1998. These produced an
increase in interest expense of approximately $740,000 compared with 1997.
Net Interest Income
Net interest income for 1998 was $22.8 million as compared with $20.4
million for 1997. Net interest rate spread--the difference between the yield on
average total interest-earning assets and the cost of average total
interest-bearing liabilities--rose to 2.94% for 1998 from 2.91% for the prior
year. Net interest margin--net interest income divided by average total
interest-earning assets-increased to 3.56% for 1998 compared with 3.52% for
1997. The improvement in net interest income is primarily the result of the
shift in our mix of assets from investment securities to higher yielding loans.
Provision for Possible Loan Losses
During 1998, we provided $1.8 million for loan losses, compared to $600,000
in 1997. The higher provision in 1998 reflects the continued growth in our loan
portfolio, and in particular the growth in commercial real estate loans and in
"jumbo" residential mortgages. We consider these types of loans to contain more
inherent risk than conventional residential mortgages that conform to Fannie Mae
guidelines. The higher provision also reflects the fact that the average size of
the commercial real estate loans we originated in 1998 was significantly higher
than the average size of commercial real estate loans we originated in prior
years. The average size of the
55
new commercial loans was $1.25 million in 1998, 53% larger than the average
commercial real estate loan in our portfolio at the end of 1997, which was
$815,000.
The allowance for loan losses at the end of 1998 was 1.32% of total loans
compared with 1.16% at the end of the 1997. The increase in the coverage ratio
reflects the change in loan portfolio composition described above.
Non-Interest Income
Non-interest income increased to $3.6 million in 1998 compared with $3.2
million the year before. Loan fees declined from $995,000 in 1997 to $656,000 in
1998. The high level of residential mortgage refinancing reduced the balance of
loans we had been servicing and the fees we earned from that servicing.
Refinancing activity in 1998 also produced an increase in fixed-rate mortgage
applications. Because we sell fixed-rate residential mortgage loans, primarily
servicing released, the increased volume produced additional gains on loan sales
compared to 1997. The loan sale gains rose from $300,000 in 1997 to $1.1 million
in 1998.
Service charges on deposit accounts increased from $623,000 in 1997 to
$726,000 in 1998 primarily because we had more checking and NOW account
customers.
Securities gains were $61,000 in 1998, down from $727,000 in 1997. The
gains in 1997 reflect primarily the sale of most of our common stock holdings.
Total non-interest income in 1998 included a $457,000 increase in the cash
surrender value of certain life insurance policies compared with 1997.
Non-Interest Expense
Total non-interest expense increased $404,000, or 2.3%, to $18.0 million in
1998 compared with $17.6 million for the prior year. Salaries and employee
benefits expense represented $378,000 of the increase. During 1998, we increased
our staffing levels in order to handle the higher loan and deposit activity we
were experiencing.
Income Taxes
Income taxes increased $678,000 or 40.4% to $2.4 million from $1.7 million
in 1997. The effective tax rate was 36.0% in 1998 and 31.4% in 1997. The 1997
tax rate was lower because we had held certain tax advantaged securities during
1997 which we no longer held in 1998. The effective tax rate also reflects the
utilization of qualified securities investment companies to substantially reduce
state income taxes.
56
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts of
cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of liquidity are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by our
operations. We also can borrow funds from the Federal Home Loan Bank based on
eligible collateral of loans and securities. Our maximum borrowing capacity from
the Federal Home Loan Bank is approximately $300.0 million, net of borrowings
that are already outstanding. In addition, we may enter into reverse repurchase
agreements with approved broker-dealers. Reverse repurchase agreements are
agreements that allow us to borrow money using our securities as collateral.
At December 31, 1999, outstanding borrowings from Federal Home Loan Bank
were $55.9 million, $28.8 million above the level at December 31, 1998. In June
1999, we borrowed $14.5 million from the Federal Home Loan Bank in order to fund
the construction and acquisition of a new building. The Federal Home Loan Bank
loan is to be repaid in equal monthly payments over 20 years. The rate is fixed
at 6.19%.
Loan repayment and maturing investment securities are a relatively
predictable source of funds. However, deposit flows, calls of investment
securities and prepayments of loans and mortgage-backed securities are strongly
influenced by interest rates, general and local economic conditions and
competition in the marketplace. These factors reduce the predictability of the
timing of these sources of funds.
Our primary investing activities are the origination of one- to four-family
real estate, commercial real estate, commercial and consumer loans, and to the
purchase of investment securities. During the 1999 fiscal year, we originated
loans of approximately $252.6 million, and during the 1998 fiscal year we
originated loans of approximately $330.1 million. Purchases of investment
securities totaled $43.3 million for the 1999 fiscal year and $70.9 million for
1998. At December 31, 1999, Cambridgeport had loan commitments to borrowers of
approximately $26.8 million, and available home equity and unadvanced lines of
credit of approximately $135.3 million.
Deposit flows are affected by the level of interest rates, by the interest
rates and products offered by competitors and by other factors. Total deposits
increased $53.2 million and $47.7 million during the 1999 and 1998 fiscal years,
respectively. Time deposit accounts scheduled to mature within one year were
$269.6 million at December 31, 1999. Based on our deposit retention experience
and current pricing strategy, we anticipate that a significant portion of these
certificates of deposit will remain on deposit. We monitor our liquidity
position frequently and anticipate that we will have sufficient funds to meet
our current funding commitments.
At December 31, 1999, we exceeded each of the applicable regulatory capital
requirements. Our leverage Tier 1 capital was $77.2 million, or 17.5% of
risk-weighed assets, and 10.4% of average assets. We had a risk-based total
capital of $85.1 million and a risk-based capital ratio of 19.3%.
Except for the construction of our new administrative center, for which we
have already secured funding, and other costs associated with the new building
such as furniture, we do not anticipate any other material capital expenditures
during calendar year 2000. We do not have any balloon or other payments due on
any long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated herein by reference
to this Annual Report on Form 10-K, under Item 7, entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operation s -
Market Risk and Management of Interest Rate Risk."
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Cambridgeport Mutual Holding
Company and subsidiary Cambridgeport Bank as of December 31, 1999 and 1998 are
included in pages F-1 through F-38 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Shared Management Structure
Port Financial Corp. and Cambridgeport Bank have the same directors and
executive officers. Although it has no current plans to do so, Cambridgeport
Bank may choose to appoint additional directors in the future. We expect that
Port Financial Corp. and Cambridgeport Bank will continue to have common
executive officers until there is a business reason to establish separate
management structures.
To date, Cambridgeport Bank has compensated its directors and executive
officers for their services to the bank. Port Financial Corp. has not paid any
additional compensation to these people for their additional services to the
holding company. We expect to continue this practice in the case of executive
officers until we have a business reason to establish separate compensation
programs. Until then, we expect Port Financial Corp. to reimburse Cambridgeport
Bank for a part of the compensation paid to each executive officer that is
proportionate to the amount of time which he or she devotes to performing
services for Port Financial Corp.
Directors
Composition of our Boards. We have nine directors. Each belongs to one of
three classes with staggered three-year terms of office. Classes One, Two and
Three have directors whose terms expire in 2001, 2002 and 2003. At each of the
annual shareholder meetings of Port Financial Corp., the shareholders elect
directors to fill the seats of the directors whose terms are expiring in that
year and any vacant seats. Directors of Cambridgeport Bank are elected by Port
Financial Corp. as its sole stockholder.
Who Our Directors Are. The following table states our directors' names,
their ages as of their birthdays in 1999, the years when they began serving as
directors and the years when their current terms of office as directors will
expire:
Bank Company
Director Director Term
Name Age Since Since Expires
---- --- ----- ----- -------
Paul R. Corcoran, Jr. 67 1972 2000 2002
Daniel C. Crane, Esq. 49 1986 2000 2003
Samuel C. Fleming 59 1993 2000 2001
William Goldberg, Esq. 70 1977 2000 2002
Robert D. Happ 59 1997 2000 2001
James B. Keegan 58 1985 2000 2003
Jane L. Lundquist 46 1999 2000 2001
Joseph F. O'Connor 70 1979 2000 2002
Rudolph R. Russo 72 1974 2000 2003
58
Our Directors' Backgrounds. The business experience for the past five years
of each of our directors is as follows:
Paul R. Corcoran, Jr. is the owner and President of The Harvard Shop, Inc.,
a retail specialty store which sells college insignia merchandise. He has held
the office of Clerk of Cambridgeport Bank since 1990.
Daniel C. Crane, Esq. has served as Chief Bar Counsel for the Board of Bar
Overseers of the Supreme Judicial Court of Massachusetts since September, 1999.
Prior to this position, he was an attorney in private practice for over twenty
years. He has served on the boards of directors of a number of charitable and
professional organizations, including service as president of the Massachusetts
Bar Association. He currently serves as Chair of the Audit Committee of the
Bank, a position he has held for the last five years.
Samuel C. Fleming has been the Board Chairman and Chief Executive Officer
of Decision Resources, Inc., an international health care research and
consulting company since 1990. From 1967 to 1990, Mr. Fleming held various
positions at Arthur D. Little, Inc., most recently as Senior Vice President,
Member of the Corporate Management Committee and Chairman of Arthur D. Little
Decision Resources, which he founded in the mid-1970s. Mr. Fleming received a
B.Ch.B. from Cornell University and an M.B.A. from Harvard Business School. In
addition to Cambridgeport Bank, he serves as a Director of CareGroup, Inc. and
as a Trustee of Cornell University and the Standish Ayer & Wood Investment
Trust.
William Goldberg, Esq. has been an attorney with the Goldberg Law Office in
Cambridge, Massachusetts since 1954.
Robert D. Happ is a director for Net Optix. He retired in June, 1994 from
his position as Regional Managing Partner of KPMG Peat Marwick.
James B. Keegan has served as the President and Chief Executive Officer of
Cambridgeport Bank since 1984. Prior to this position, he was the Executive Vice
President of the Bank for one year. Before joining Cambridgeport Bank, Mr.
Keegan held positions in various financial institutions, including Rochester
Savings Bank, First Pennsylvania Bank and New England Merchants National Bank.
Mr. Keegan earned his undergraduate degree from Harvard College and his MBA from
the Harvard Business School.
Jane L. Lundquist has been the Executive Vice President of Cambridgeport
Bank since 1996. Prior to this position, she served as the Senior Vice President
from 1987 to 1996. As Executive Vice President, she is currently the Senior
Officer of Cambridgeport Bank for the Consumer Banking Department, which
includes mortgage lending, consumer lending, branch banking and telebanking. She
also manages several administrative areas such as Human Resources, Marketing,
Community Relations and Auditing (administrative reporting only). Prior to
Cambridgeport Bank, Ms. Lundquist worked at Braxton Associates, a strategic
management consulting firm, and at Arthur Andersen. Ms. Lundquist holds a
business degree from the University of North Carolina and an MBA from the
University of Virginia.
Joseph F. O'Connor is Consultant to the Charles Stark Draper Laboratory,
Inc., a nonprofit research company and Secretary of that corporation. He retired
as Vice-President of Administration in 1994. He also serves as a director of the
Delta Dental Corporation of Massachusetts, Inc., a nonprofit dental insurance
company. He is also Chairman of the Board of Denta Quest Investment Corp., a
wholly owned subsidiary of Delta Dental.
Rudolph R. Russo has 50 years of experience in all phases of real estate
including brokering, appraising, investing, developing and consulting. He also
served as Chairman of the Board of Assessors for the City of Cambridge from 1969
to 1982. He has been involved with Cambridgeport Bank since 1977 and has been a
director since 1994.
59
Meetings of the Board of Directors and Its Committees
Our Boards of Directors meet on a monthly basis and may hold additional
special meetings. During 1999, the Board of Directors of Cambridgeport Bank held
12 regular meetings and three special meetings. The Board of Directors of Port
Financial Corp. did not meet in 1999.
The Boards of Directors of Cambridgeport Bank and Port Financial Corp.
maintain Executive, Audit, Compensation, Credit and Nominating Committees with
identical compositions.
The Executive Committee consists of Messrs. Keegan, Corcoran, Fleming,
Goldberg and Russo and Ms. Lundquist, with Mr. Keegan serving as Chair. The
Executive Committees meet as needed with the full power of the Board of
Directors. The Executive Committee of Cambridgeport Bank met 22 times during
1999.
The Audit Committees consist of Messrs. Crane, Happ and O'Connor, with Mr.
Crane serving as Chair. These Committees review the annual audit prepared by the
independent accountants, recommend the appointment of accountants and review the
work of the internal auditors. The Audit Committee of Cambridgeport Bank met
four times during 1999.
The Compensation Committees consist of Messrs. Corcoran, Fleming, Happ,
Keegan, O'Connor, and Ms. Lundquist with Mr. Corcoran serving as Chair. These
Committees provide advice and recommendations to the Board in the areas of
employee salaries and benefit programs. The Compensation Committee of
Cambridgeport Bank met one time during 1999.
The Credit Committees consist of Messrs. Russo and Keegan and Ms. Lundquist
and certain officers of Cambridgeport Bank, with Mr. Keegan as the Chair. The
Credit Committee of Cambridgeport Bank met 22 times during 1999.
The Nominating Committees consist of Messrs. Crane, Fleming and Keegan,
with Mr. Crane as the Chair. These Committees nominate individuals for election
to the Board of Directors. The Nominating Committee of Cambridgeport Bank met
one time during 1999.
Executive Officers Who are Not Directors
Charles Jeffrey serves as Senior Vice President and Chief Financial Officer
of Cambridgeport Bank, a position he has held since July of 1998. From 1994 to
1997, he served as President of the Massachusetts Division of Albank, FSB
located in Ludlow, Massachusetts. His background also includes 15 years at Bank
of America where he held positions in commercial lending, operations, and
finance.
Transactions with Affiliates
We do not make loans to our executive officers. However, we do make loans
to our trustees/directors and non-executive officers. These loans bear interest
at the same rate as loans offered to non-trustee/director borrowers and have the
same underwriting terms that apply to non-trustee/director borrowers.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Meeting Fees. Cambridgeport Bank's practice has been to pay a fee of $500
to each of its non-employee directors for attendance at each board meeting and
each committee meeting and to pay each non-employee director an annual retainer
of $10,000. Cambridgeport Bank paid fees totaling $216,000 to its non-employee
directors for the year ended December 31, 1999.
60
Effective as of the conversion, non-employee directors of Cambridgeport
Bank will receive an annual retainer of $5,000 and non-employee directors of
Port Financial Corp. will receive an annual retainer of $5,000. Directors of
Cambridgeport Bank will receive a $500 fee for any board or committee meeting
attended and, similarly, directors of Port Financial Corp. will receive a $500
fee for any board or committee meeting attended. However, only one board or
committee meeting fee will be paid to a director for any joint meeting of the
boards of Cambridgeport Bank and Port Financial Corp. or any joint meeting of
any committees of the boards.
Mr. Corcoran receives an additional annual retainer of $10,000 for his
service as Clerk of Cambridgeport Bank. In addition, Cambridgeport Bank pays Mr.
Russo $70 per hour for special assignments.
Directors' Emeritus Consultation Plan. Directors of Port Financial Corp.
who retire from service on the board of Port Financial Corp. within four years
from the conversion may elect to participate in the Directors' Emeritus
Consultation Plan by agreeing to provide consulting services to Port Financial
Corp. for a period of 12 to 36 months. A retiring director who elects to provide
consulting services will receive a fee of $1,000 per month and will be
designated as a director emeritus. A director emeritus will provide the
consulting services agreed upon and may attend meetings of the board of Port
Financial Corp., but will have no power or right to vote at such meetings.
Executive Officer Compensation
Summary Compensation Table. The following table provides information about
the compensation paid for 1999 to the Bank's Chief Executive Officer and to the
other most highly compensated executive officers whose annual salary and bonus
for 1999 was at least $100,000.
Annual Compensation
--------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary($) Bonus($) Compensation($)(a) Compensation($)(b)
------------------ ---- --------- -------- ------------------ ------------------
James B. Keegan,
President and Chief 1999 331,602 120,000 -- 8,520
Executive Officer
Jane L. Lundquist,
Executive Vice-President 1999 216,009 90,000 -- 6,940
Charles Jeffrey, Senior Vice
President and Chief 1999 139,669 40,000 -- 2,130
Financial Officer
- -----------------------
(a) Cambridgeport Bank provides its executive officers with non-cash benefits
and perquisites, such as the use of employer-owned or leased automobiles.
Management of the Bank believes that the aggregate value of these benefits
for 1998 did not, in the case of any executive officer, exceed $50,000 or
10% of the aggregate salary and annual bonus reported for him or her in the
Summary Compensation Table.
(b) Includes the following components: (1) employer matching contributions to
the Cambridgeport Bank 401(k) Plan: Mr. Keegan, $3,754; Ms. Lundquist,
$4,452; and Mr. Jeffrey, $882; and (2) the premium cost for life insurance
coverage provided by Cambridgeport Bank: Mr. Keegan, $4,766; Ms. Lundquist,
$2,488; and Mr. Jeffrey, $1,248.
Employment Agreements
Port Financial Corp. and Cambridgeport Bank have jointly entered into
employment agreements with Mr. Keegan to secure his services as President and
Chief Executive Officer, and Ms. Lundquist to secure her services as Executive
Vice President. For purposes of Port Financial Corp.'s obligations, the
employment agreements have rolling three-year terms beginning November 1, 1999
which by decision of the executive or joint decision of Port Financial Corp. and
Cambridgeport Bank may be converted to a fixed three-year term. For purposes of
Cambridgeport Bank's obligations the employment agreements have fixed terms of
three years beginning November 1, 1999 and may be renewed annually after a
review of the executive's performance. These agreements provide for minimum
annual salaries of $375,000 and $220,000, respectively, discretionary cash
bonuses, and participation on generally applicable terms and conditions in other
compensation and fringe benefit plans. They
61
also guarantee customary corporate indemnification and errors and omissions
insurance coverage throughout the employment term and for six years after
termination.
Port Financial Corp. and Cambridgeport Bank may terminate each executive's
employment, and each executive may resign, at any time with or without cause.
However, in the event of termination during the term without cause, they will
owe the executive severance benefits generally equal to the value of the cash
compensation and fringe benefits that the executive would have received if he
had continued working for an additional three years. The same severance benefits
would be payable if the executive resigns during the term following: a loss of
title, office or membership on the board of directors; material reduction in
duties, functions or responsibilities; involuntary relocation of the executive's
principal place of employment to a location over 25 miles in distance from
Cambridgeport Bank's principal office in Cambridge, Massachusetts and over 25
miles from the executive's principal residence; or other material breach of
contract by Port Financial Corp. or Cambridgeport Bank which is not cured within
30 days. For 60 days after a change in control, each executive may resign for
any reason and collect severance benefits as if he or she had been discharged
without cause. The employment agreements also provide uninsured death and
disability benefits.
If Port Financial Corp. or Cambridgeport Bank experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
employment agreements might constitute an "excess parachute payment" under
current federal tax laws. Federal tax laws impose a 20% excise tax, payable by
the executive, on excess parachute payments. Under the employment agreements,
Cambridgeport Bank and Port Financial Corp. would reimburse the executive for
the amount of this excise tax and would make an additional gross-up payment so
that, after payment of the excise tax and all income and excise taxes imposed on
the reimbursement and gross-up payments, the executive will retain approximately
the same net-after tax amounts under the employment agreement that he or she
would have retained if there were no 20% excise tax. The effect of this
provision is that Cambridgeport Bank and Port Financial Corp., rather than the
executive, bears the financial cost of the excise tax. Assuming a change in
control occurred as of December 31, 1999 and payments became payable under the
employment agreements on that date, approximately $2.9 million and $1.5 million
would become payable to Mr. Keegan and Ms. Lundquist, respectively. Neither Port
Financial Corp. nor Cambridgeport Bank could claim a federal income tax
deduction for an excess parachute payment, excise tax reimbursement payment or
gross-up payment.
Change of Control Agreements
Cambridgeport Bank and Port Financial Corp. will jointly enter into
two-year change of control agreements with Mr. Jeffrey and two non-executive
officers. The term of these agreements is perpetual until Cambridgeport Bank
gives notice of non-extension, at which time the term is fixed for two years.
Generally, Cambridgeport Bank may terminate the employment of any officer
covered by these agreements, with or without cause, at any time prior to a
change of control without obligation for severance benefits. However, if
Cambridgeport Bank or Port Financial Corp. signs a merger or other business
combination agreement, or if a third-party makes a tender offer or initiates a
proxy contest, it could not terminate an officer's employment without cause
without liability for severance benefits. The severance benefits would generally
be equal to the value of the cash compensation and fringe benefits that the
officer would have received if he or she had continued working for an additional
two years. Cambridgeport Bank would pay the same severance benefits if the
officer resigns after a change of control following a loss of title, office or
membership on the Board of Directors, material reduction in duties, functions or
responsibilities, involuntary relocation of his or her principal place of
employment to a location over 25 miles from Cambridgeport Bank's principal
office on the day before the change of control and over 25 miles from the
officer's principal residence or other material breach of contract which is not
cured within 30 days. These agreements also provide uninsured death and
disability benefits.
If Cambridgeport Bank or Port Financial Corp. experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
change of control
62
agreements might constitute an "excess parachute payment" under current federal
tax laws. Any excess parachute payment would be subject to a federal excise tax
payable by the officer and would be non-deductible by Cambridgeport Bank and
Port Financial Corp. for federal income tax purposes. The change of control
agreements do not provide a tax indemnity.
Similar change of control agreements providing severance benefits equal to
one year's compensation and benefits will be entered into with 21 non-executive
officers of Cambridgeport Bank.
Benefit Plans
Severance Pay Plan. This plan provides severance benefits to salaried
employees with one year of service who are not parties to individual employment
or change of control agreements and are discharged without cause due to a change
of control. Severance benefits include two weeks' base salary for each year of
service for officers and one week's base salary for each year of service for
non-officer employees. The minimum severance benefit is twelve weeks' base
salary for officers and two weeks' base salary for non-officers. The maximum
severance benefit payable under the plan is 52 weeks' base salary. Employees
entitled to severance also receive continued employer-paid life and health
insurance coverage for up to one year after termination of employment as well as
professional outplacement and job assistance services. These same benefits are
available to an employee who resigns after a change of control following a
material adverse change in title, position or responsibilities, involuntary
relocation to a worksite requiring that the officer move his place of residence
to avoid an unreasonable commute, a reduction in base salary of more than 20%,
or assignment to duties, offices or working space involving unreasonable
personal embarrassment.
Pension Plans. Cambridgeport Bank has adopted the SBERA Pension Plan for
its employees. The SBERA Pension Plan is a tax-qualified plan that covers
substantially all employees who are age 21 and completed at least one year of
service. The following table shows the estimated aggregate benefits payable
under the SBERA Pension Plan upon retirement at age 65 with various years of
service and average compensation combinations.
Years of Service
Average -------------------------------------------------------------
Compensation(a) 15 20 25 30(b) 35(b)
- ----------------- ---------- ----------- ----------- ---------- -----------
$ 100,000 $ 17,274 $ 23,032 $ 28,790 $ 28,790 $ 28,790
$ 120,000 21,324 28,432 35,540 35,540 35,540
$ 140,000 25,374 33,832 42,290 42,290 42,290
$ 160,000 29,424 39,232 49,040 49,040 49,040
$ 200,000 29,424 39,232 49,040 49,040 49,040
$ 400,000 29,424 39,232 49,040 49,040 49,040
$ 600,000 29,424 39,232 49,040 49,040 49,040
_______________________
(a) Average compensation is average base salary plus bonus, as reported in the
"Salary" and "Bonus" columns of the Summary Compensation Table, for the
highest three consecutive years during the participant's employment period.
Tax laws impose a limit ($160,000 for individuals retiring in 1999) on the
average compensation that may be counted in computing benefits under the
SBERA Pension Plan.
(b) The SBERA Pension Plan does not count service in excess of 25 years in the
benefit formula.
The benefits shown in the preceding table are annual benefits payable in the
form of a single life annuity at age 65 and are not subject to any deduction for
Social Security or other offset amounts. An additional benefit equal to 0.6% of
Average Compensation is provided for each year of service credited prior to
April 1, 2000. Mr. Keegan, Ms. Lundquist and Mr. Jeffrey have 17, 14 and 1 year
(s) of such prior service credit, respectively. At December 31, 1999, the
estimated average compensation and years of service of the executive officers
named in the Summary Compensation Table were: Mr. Keegan: $397,889, 17 years of
service; Ms. Lundquist: $259,876, 14 years of service; and Mr. Jeffrey:
$109,104, 1 year of service.
63
Mr. Keegan and Ms. Lundquist also are entitled to retirement benefits under
the Cambridgeport Bank 1999 Nonqualified Pension Plan. Under this plan, each
executive is entitled to a monthly retirement benefit equal to the greater of
25% of his or her highest monthly salary or 75% of his or her highest monthly
salary, reduced by his or her monthly retirement benefit under the SBERA Pension
Plan and his or her monthly Social Security benefit. Under the plan, the
executive's highest monthly salary is equal to the executive's average annual
base salary for the three calendar years out of the five calendar years prior to
retirement in which the executive's base salary is the highest, divided by
twelve.
401(k) Plan. Cambridgeport Bank has adopted the SBERA 401(k) Plan, a
tax-qualified defined contribution plan, for substantially all employees of
Cambridgeport Bank who have attained age 21 and completed at least one year of
service. Eligible employees may contribute from 1% to 15% of annual compensation
to the plan on a pre-tax basis each year, subject to limitations of the Internal
Revenue Code (for 1999 the limit was $10,000). Cambridgeport Bank makes a
matching contribution to the plan equal to 50% of the first three percent of
annual compensation contributed to the plan on a pre-tax basis by a participant.
Effective January 1, 2000, the matching contribution made by Cambridgeport Bank
will increase to 100% of the first three percent of a participant's annual
compensation contributed to the plan on a pre-tax basis.
This plan has an individual account for each participant's contributions
and allows each participant to direct the investment of his or her account. One
permitted investment is Port Financial Corp. common stock. The plan itself is
not an eligible account holder in this initial stock offering. However,
participants who are eligible account holders and supplemental eligible account
holders may use their subscription rights to purchase stock for their plan
accounts. This plan will purchase common stock for other participants in the
initial offering, to the extent that shares are available. After the offering,
the plan will purchase in open market transactions. Participants will direct the
voting of shares purchased for their plan accounts.
Officers' Deferred Compensation Plan. Cambridgeport Bank also maintains the
Cambridgeport Bank Officers' Deferred Compensation Plan, a non-qualified plan,
in order to provide restorative payments to executives whose employer matching
contributions under the 401(k) Plan are limited by legal limitations applicable
to tax-qualified plans. The Officers' Deferred Compensation Plan also offers
eligible executives the opportunity to defer the receipt of a portion of their
income in a manner that defers the taxation of such income.
Long-Term Incentive Plan. This plan was established to permit executives
selected by the Compensation Committee to earn cash bonuses based on the
achievement of objective, preestablished performance goals appropriate for a
publicly-held company that are set for periods longer than one year. This plan
is effective as of January 1, 2000. Under the plan the Compensation Committee
grants participation units to selected employees each year. Each unit represents
a dollar amount that will be paid at the end of a three-year performance period
if specified performance targets are met. The Compensation Committee may
establish lower unit values for performance that exceeds a minimum threshold but
is below the target and higher unit values for performance that exceeds the
target. Participation units granted in any plan year may be canceled and
substituted with awards of restricted stock or stock options granted to the
participant.
Payments for participation units will be made as soon as practicable
following the end of the relevant performance period. In general, a participant
whose employment terminates prior to the payment for units for a performance
period will forfeit his or her units. There is an exception, and payment will be
made in the event of death, disability, retirement or a change in control occurs
after the end of a performance period but prior to the payment for units related
to the performance period.
Limitations on Federal Tax Deductions for Executive Officer Compensation
As a private entity, Cambridgeport Bank has been subject to federal tax
rules which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the conversion, federal tax laws may limit this deduction to
$1 million each tax year for each executive officer named in the summary
compensation table in Port Financial Corp.'s proxy statement for that year. This
limit will not apply to non-taxable compensation under various broad-based
retirement and
64
fringe benefit plans, to compensation that is paid in "qualified
performance-based compensation" under applicable law or to compensation that is
paid in satisfaction of commitments that arose before the conversion. Port
Financial Corp. and Cambridgeport Bank expect that the Compensation Committee
will take this deduction limitation into account with other relevant factors in
establishing the compensation levels of their executive officers and in setting
the terms of compensation programs. Currently, none of our executives officers
receive annual compensation expected to exceed this limit. However, there is no
assurance that all compensation paid to our executive officers will be
deductible for federal income tax purposes. To the extent that compensation paid
to any executive officer is not deductible, the net after-tax cost of providing
the compensation will be higher and the net after-tax earnings of Port Financial
Corp. and Cambridgeport Bank will be reduced.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders of the Company
Not applicable. As of the date of this report, the Company has issued no
shares of its common stock.
Security Ownership of Management
Not applicable. As of the date of this report, the Company has issued no
shares of its common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Directors/Trustees and Executive Officers
We do not make loans to our executive officers. However, we do make loans
to our trustees/directors and non-executive officers. These loans bear interest
at the same rate as loans offered to non-trustee/director borrowers and have the
same underwriting terms that apply to non-trustee/director borrowers.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Listed below are all financial statements and exhibits filed as
part of this report:
(1) The consolidated balance sheets of Cambridgeport Mutual
Holding Company and subsidiary Cambridgeport Bank as of
December 31, 1999 and 1998 and the related consolidated
statements of income and cash flows for each of the years in
the three-year period ended December 31, 1999, together with
the related notes and the independent auditors' report of
Arthur Andersen LLP, independent public accountants.
(2) Schedules omitted as they are not applicable.
(3) Exhibits
2.1 Plan of Conversion and Stock Issuance Plan of Cambridgeport Mutual
Holding Company (including the Amended and Restated Charter and
Bylaws of Cambridgeport Bank)*
3.1 Articles of Organization of Port Financial Corp.*
3.2 Bylaws of Port Financial Corp.*
4.1 Articles of Organization of Port Financial Corp. (See Exhibit
3.1)*
4.2 Bylaws of Port Financial Corp. (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Port Financial Corp.*
10.1 Form of Employee Stock Ownership Plan of Port Financial Corp.*
10.2 Form of ESOP Restoration Plan of Port Financial Corp.*
10.3 Form of Employment Agreement, between James Keegan and Port
Financial Corp.*
10.4 Form of Employment Agreement, between Jane Lundquist and Port
Financial Corp.*
10.5 Form of Trust Agreement under the Cambridgeport Bank Nonqualified
Pension Plans and Supplemental Executive Retirement Plan*
10.6 Form of 1999 Nonqualified Pension Plan of Cambridgeport Bank and
Amendment thereto*
10.7 Form of Directors' Emeritus Consultation Plan of Port Financial
Corp.*
10.8 Form of Officers' Deferred Compensation Plan of Cambridgeport
Bank*
10.9 Long-Term Incentive Plan of Port Financial Corp.*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Arthur Andersen LLP
65
27.1 Financial Data Schedule (Submitted only with filing in electronic
format)
* Incorporated herein by reference to Registration Statement No. 333-91549 on
Form S-1 of Port Financial Corp. filed with the Securities and Exchange
Commission on November 23, 1999, as amended.
(b) The Company has not filed any reports on Form 8-K.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
report to be signed on its behalf by the undersigned, hereunto duly authorized,
in the City of Cambridgeport, Commonwealth of Massachusetts, on March 21, 2000.
Port Financial Corp.
/s/ James B. Keegan
---------------------------------------
By: James B. Keegan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
/s/ James B. Keegan Director, Chairman of the Board, March 21, 2000
- ------------------------- President and Chief Executive
James B. Keegan Officer (Principal Executive Officer)
/s/ Charles Jeffrey Treasurer and Chief Financial Officer March 21, 2000
- ------------------------- (Principal Financial and Accounting Officer)
Charles Jeffrey
/s/ Paul R. Corcoran, Jr. Director March 21, 2000
- -------------------------
Paul R. Corcoran, Jr.
/s/ Daniel C. Crane Director March 21, 2000
- -------------------------
Daniel C. Crane
/s/ Samuel C. Fleming Director March 21, 2000
- -------------------------
Samuel C. Fleming
/s/ William Goldberg Director March 21, 2000
- -------------------------
William Goldberg
/s/ Robert D. Happ Director March 21, 2000
- -------------------------
Robert D. Happ
/s/Jane L. Lundquist Director and Executive Vice President March 21, 2000
- -------------------------
Jane L. Lundquist
/s/ Joseph F. O'Connor Director March 21, 2000
- -------------------------
Joseph F. O'Connor
/s/ Rudolph R. Russo Director March 21, 2000
- -------------------------
Rudolph R. Russo
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
Index to consolidated financial statements
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Retained Earnings
For the Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7-38
All schedules are omitted because they are not required or applicable, or the
required information is shown in the financial statements or notes thereto.
F-1
Report of Independent Public Accountants
To the Audit Committee of
Cambridgeport Mutual Holding Company:
We have audited the accompanying consolidated balance sheets of Cambridgeport
Mutual Holding Company and subsidiaries (collectively, the Bank) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in retained earnings and cash flows for each of the three years in the
period ended December 31, 1999. 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 generally accepted auditing
standards. 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 consolidated financial position of
Cambridgeport Mutual Holding Company and its subsidiaries as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
---------------------------
Arthur Andersen LLP
Boston, Massachusetts
January 27, 2000
F-2
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
Consolidated Balance Sheets
(In thousands)
December 31,
------------
1999 1998
---- ----
Assets
Cash and Due from Banks $ 16,594 $ 6,988
Other Cash Equivalents 2,835 3,059
-------- --------
Total cash and cash equivalents 19,429 10,047
Certificates of Deposit 5,149 5,900
Investment Securities Available-for-Sale, at fair value
(Note 2) 131,647 144,829
Loans Held-for-Sale - 3,842
Loans, net (Notes 1 and 3) 577,029 492,548
Federal Home Loan Bank Stock, at cost (Note 7) 4,452 3,879
Savings Bank Life Insurance Stock, at cost 1,934 1,934
Banking Premises and Equipment, net (Note 4) 11,782 5,616
Accrued Interest Receivable 4,054 4,032
Other Assets (Notes 5 and 11) 7,265 5,460
-------- --------
Total assets $762,741 $678,087
======== ========
Liabilities and Retained Earnings
Deposits (Note 6) $618,288 $565,418
Federal Home Loan Bank Advances (Note 7) 55,891 27,066
Mortgagors' Escrow Payments 3,031 2,657
Accrued Expenses and Other Liabilities (Notes 8 and 11) 6,401 6,858
-------- --------
Total liabilities 683,611 601,999
-------- --------
Commitments and Contingencies (Notes 8, 9 and 12)
Retained Earnings (Note 10) 77,221 72,447
Accumulated Other Comprehensive Income 1,909 3,641
-------- --------
Total retained earnings 79,130 76,088
-------- --------
Total liabilities and retained earnings $762,741 $678,087
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In THOUSANDS)
Years Ended
-----------
December 31
-----------
1999 1998 1997
---- ---- ----
Interest and Dividend Income:
Interest on loans $40,366 $37,374 $30,304
Interest and dividends on investment securities 8,462 10,023 12,282
Interest on other cash equivalents 735 787 574
Interest on certificates of deposit 408 472 801
------- ------- -------
Total interest and dividend income 49,971 48,656 43,961
------- ------- -------
Interest Expense:
Interest on deposits 23,420 24,318 22,732
Interest on borrowed funds 2,286 1,562 822
------- ------- -------
Total interest expense 25,706 25,880 23,554
------- ------- -------
Net interest income 24,265 22,776 20,407
Provision for Possible Loan Losses (Note 3) 740 1,760 600
------- ------- -------
Net interest income after provision for
possible loan losses 23,525 21,016 19,807
------- ------- -------
Noninterest Income:
Customer service fees 862 726 623
Gain on sales of investment securities, net (Note 2) - 61 727
Gain on sales of loans, net 599 1,143 312
Loan servicing fee income 416 656 995
Increase in cash surrender value, net 435 657 200
Other income 747 328 319
------- ------- -------
Total noninterest income 3,059 3,571 3,176
------- ------- -------
Noninterest Expenses:
Salaries and employee benefits (Note 11) 10,171 9,489 9,111
Occupancy and equipment expenses (Note 4 and Note 9) 3,305 3,507 3,590
Curtailment loss on nonqualified pension
plan (Note 11) 578 - -
Data processing service fees 1,435 1,279 1,198
Advertising 1,136 903 843
Other noninterest expenses 2,995 2,864 2,896
------- ------- -------
Total noninterest expenses 19,620 18,042 17,638
------- ------- -------
Income before provision for income taxes 6,964 6,545 5,345
Provision for Income Taxes (Note 8) 2,190 2,357 1,679
------- ------- -------
Net income $ 4,774 $ 4,188 $ 3,666
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
Accumulated Other
Comprehensive Comprehensive Total Retained
Income Retained Earnings Income Earnings
Balance, December 31, 1996 $ 64,593 $ 2,252 $66,845
Net income $ 3,666 3,666 - 3,666
Unrealized securities gains, net of $508 tax 1,060
expense
Less--Reclassification of securities gains 499
included in net income, net of $228 tax -------
expense
Total other comprehensive income 561 - 561 561
------- --------- --------- -------
Total comprehensive income $ 4,227
=======
Balance, December 31, 1997 68,259 2,813 71,072
Net income $ 4,188 4,188 - 4,188
Unrealized securities gains, net of $458 tax
expense 867
Less--Reclassification of securities gains
included in net income, net of $22 tax expense 39
-------
Total other comprehensive income 828 - 828 828
------- --------- --------- -------
Total comprehensive income $ 5,016
=======
Balance, December 31, 1998 72,447 3,641 76,088
Net income $ 4,774 4,774 - 4,774
Unrealized securities gains, net of $992 tax
expense (1,732)
Less--Reclassification of securities gains 0
included in net income, net of $0 tax expense -------
Total other comprehensive income (1,732) - (1,732) (1,732)
------- --------- --------- -------
Total comprehensive income $ 3,042
=======
Balance, December 31, 1999 $ 77,221 $ 1,909 $79,130
========= ========= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31
--------------------------------
1999 1998 1997
--------- --------- ----------
Cash Flows from Operating Activities:
Net income $ 4,774 $ 4,188 $ 3,666
Adjustments to reconcile net income to
net cash provided by operating
activities-
Provision for possible loan losses 121 1,760 600
Depreciation and amortization 1,214 1,353 1,285
Net gain from sales of investment
securities - (61) (727)
Amortization of premiums on investment
securities, net 123 353 800
Gain on loan sales, net (599) (1,143) (312)
Gain on sales of other real estate
owned, net - - (25)
Increase in cash surrender value, net (435) (657) (200)
Proceeds from sale of loans 44,897 88,175 27,999
Loans originated for sale (40,456) (90,629) (27,454)
(Increase) decrease in other assets (1,186) (523) 387
(Increase) decrease in accrued interest
receivable (22) 442 452
(Decrease) increase in deferred loan
fees (108) 152 (54)
(Decrease) increase in accrued expenses
and other liabilities (457) 523 1,782
Provision for prepaid taxes (183) (907) (328)
-------- -------- ---------
Net cash provided by operating
activities 8,300 3,026 7,871
-------- -------- ---------
Cash Flows from Investing Activities:
Proceeds from sales, maturities and
principal repayment of securities
available-for-sale 53,600 85,825 159,472
Purchase of securities available-for-sale (43,264) (68,484) (107,948)
Proceeds from maturities of certificates
of deposit 5,107 6,603 4,282
Purchase of certificates of deposit (4,356) (402) (1,499)
Net decrease in short-term investments - - 2,000
Purchase of FHLB stock (573) (817) -
Proceeds from sales of other real estate
owned - - 119
Purchase of premises and equipment (7,381) (1,252) (1,129)
Loan originations, net (84,235) (76,836) (113,699)
Recoveries of loans previously
charged-off 115 10 54
-------- -------- ---------
Net cash used in investing
activities (80,987) (55,353) (58,348)
-------- -------- ---------
Cash Flows from Financing Activities:
Increase (decrease) in certificates of
deposit 18,424 (3,695) 1,504
Increase in demand deposits, NOW
accounts and savings accounts 34,446 51,315 16,150
Increase in mortgagors' escrow payments 374 98 5
Additions to borrowings 28,825 5,462 20,884
-------- -------- ---------
Net cash provided by financing
activities 82,069 53,180 38,543
-------- -------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents (Note 1) 9,382 853 (11,934)
Cash and Cash Equivalents, beginning of
year 10,047 9,194 21,128
-------- -------- ---------
Cash and Cash Equivalents, end of Year $ 19,429 $ 10,047 $ 9,194
======== ======== =========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 25,511 $ 25,890 $ 23,569
======== ======== =========
Cash paid for income taxes $ 3,070 $ 2,143 $ 1,739
======== ======== =========
Supplemental Noncash Investing Activities:
Loans securitized into mortgage-backed
investments $ - $ 1,584 $ 696
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
Notes to Consolidated Financial Statements
DECEMBER 31, 1999, 1998 and 1997
(Continued)
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) Summary of Significant Accounting Policies
Basis of Presentation
Cambridgeport Savings Bank was reorganized into a mutual bank holding
company operating under the name Cambridgeport Mutual Holding Company (the
Company) on August 23, 1994 under the provisions of Massachusetts General
Law. A new Massachusetts savings bank in stock form, known as Cambridgeport
Bank, was chartered as a wholly owned subsidiary of the Company. The
Federal Deposit Insurance Corporation (FDIC) and the Depositors Insurance
Fund (DIF) insure all deposits of the Bank. The reorganization had no
effect on previously reported consolidated results of operations.
The accompanying consolidated financial statements include the accounts of
the Company and its two wholly owned subsidiaries, Cambridgeport Bank
(collectively, the Bank) and Brighton Investment Corporation. Cambridgeport
Bank has two wholly owned subsidiaries, Temple Investment Corporation and
The Port Corporation. Temple Investment Corporation and The Port
Corporation both engage in the investment of securities. In addition,
Cambridgeport Bank is the sole member of Temple Realty, LLC which was
formed to own the land and the building of Cambridgeport Bank's new
administrative center. It currently leases the real estate from the
developer. After the construction of the building is completed in early
2000, Temple Realty, LLC will purchase the real estate and will lease the
improved property to Cambridgeport Bank and other tenants. Brighton
Investment Corporation was established in December 1999 and engages in the
investment of securities. All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated
financial statements.
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation. Such
reclassifications have no effect on previously reported consolidated net
income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
financial statements
F-7
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
and the reported amounts of income and expenses during the reporting
periods. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks, federal funds sold and
overnight deposits with maturities of one day and investments in the highly
liquid Bank Investment Fund.
Investment Securities
Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity and are reported at cost,
adjusted for amortization of premiums and accretion of discounts, using the
effective-yield method. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading and reported at fair value, with unrealized gains and losses
included in earnings. The Bank has no securities classified as trading or
held-to- maturity. Debt and equity securities not classified as either
held-to- maturity or trading are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of other comprehensive
income, which is included in retained earnings, net of the related taxes.
The Bank classifies its securities based on the Bank's intention at the
time of purchase.
Unrealized losses that are determined to be other than temporary declines
in value are charged to operations. When securities are sold, the adjusted
cost of the specific security sold is used to compute gains or losses on
the sale.
Loans Held-for-Sale
Loans held-for-sale are carried at the lower of the recorded loan balance
or market value based on prevailing market conditions and commitments from
institutional investors to purchase such loans. The amount by which cost
exceeds market value is reflected in a valuation allowance, with subsequent
increases or decreases in market value charged or credited to the valuation
allowance and reflected in operations in the period in which they occur.
There were no adjustments required for unrealized losses at December 31,
1999 and 1998.
Loans, Deferred Fees and the Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by amounts due
to borrowers on unadvanced loans, net deferred loan fees and the allowance
for possible loan losses.
It is the policy of the Bank to discontinue the accrual of interest on
loans when, in the judgment of management, the ultimate collectibility of
principal or interest becomes doubtful. It is the policy of the
F-8
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
Bank to discontinue the accrual of interest on loans delinquent in excess
of 90 days. When a loan is placed on nonaccrual status, all interest
previously accrued is reversed against current-period interest income.
Interest received on nonaccrual loans is either applied against principal
or reported as income on the cash basis based on management's judgment as
to the collectibility of principal.
Deferred loan origination fees and certain deferred loan origination costs
are amortized over the contractual life of the related loan using the
interest method or taken into income at the time the loans are sold. At
December 31, 1999 and 1998, the Bank had net deferred loan fees of
approximately $338,000 and $446,000, respectively.
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased
by provisions charged to operations, and realized losses, net of
recoveries, are charged directly to the allowance. The provision and the
level of the allowance are based on management's periodic review of the
composition of the loan portfolio in light of historical experience and
prevailing economic conditions. The allowance is an estimate, and ultimate
losses may vary from current estimates. As adjustments become necessary,
they are reported in the results of operations in the period in which they
become known.
Loans are considered impaired when it is probable that the Bank will not be
able to collect principal, interest and fees according to the contractual
terms of the loan agreement. Management considers the paying status, net
worth and earnings potential of a borrower, and the value and cash flow to
the collateral as factors to determine whether a loan will be paid in
accordance with its contractual terms. The amount judged to be impaired is
the difference between the present value of the expected future cash flows
discounted at the loan's original contractual effective interest rate and
the net carrying amount of the loan. If foreclosure on a collateralized
loan is probable, impairment is measured based on the fair value of the
collateral compared to the carrying value. If appropriate, a valuation
reserve is established to recognize the difference between the carrying
value and the fair value. Impaired loans are charged off when management
believes that the collectibility of the loan's principal is doubtful. The
Bank considers nonaccrual loans, except for smaller balance homogenous
residential and consumer loans, to be impaired. All impaired loans are
classified as nonaccrual.
Loan Servicing
The Bank recognizes a servicing asset or a servicing liability upon the
purchase or origination of loans and the sale or securitization of those
loans with servicing retained. The amount capitalized is based on the
allocation of the total cost of the loans to the servicing rights and the
loans without the servicing rights based on their relative fair values. The
cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are
stratified based on predominant risk characteristics including loan type,
maturity date and
F-9
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
interest rate. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed their fair
value.
Banking Premises and Equipment
Land is stated at cost. Banking premises, leasehold improvements and
furniture, fixtures and equipment are stated at cost, less accumulated
depreciation and amortization. Construction-in-Progress represents
expenditures at cost and capitalized interest which is calculated using the
average construction costs for the period and the Bank's average borrowing
rate. Depreciation and amortization are primarily computed by use of the
straight-line method over the estimated useful lives of the respective
assets or the terms of the respective leases, if shorter. The cost of
maintenance and repairs is charged to expense as incurred; major
expenditures for betterments are capitalized and depreciated.
Income Taxes
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax bases of assets and
liabilities using currently enacted tax rates. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either as
asset or liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recorded currently in income
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains or losses to offset related
results of the hedged item in the statement of income and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as amended by
SFAS No. 137, Deferral of the Effective Date of FASB Statement No. 133, is
effective for fiscal years beginning after June 15, 2000. The Bank does not
expect that the adoption of this statement will have a material impact of
its financial position or results of operations.
In October 1998, the FASB issued SFAS No. 134, Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise. This statement
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability
and intent to sell or hold those investments. The Bank's adoption of this
F-10
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
statement on January 1, 1999 did not have a material impact on the Bank's
financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
that computer software costs associated with internal use software be
expensed as incurred until certain capitalization criteria are met. The
Bank's adoption of SOP 98-1 on January 1, 1999 did not have a material
impact on its financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting Costs of Start-up
Activities. SOP 98-5 requires all costs associated with pre-opening, pre-
operating and organization activities to be expensed as incurred. The
Bank's adoption of SOP 98-5 on January 1, 1999 did not have a material
impact on its financial position or results of operations.
F-11
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(2) Investment Securities
The amortized cost and fair value of securities classified as
available-for- sale at December 31, 1999 and 1998 are as follows (in
thousands):
----------- December 31, 1999 -----------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
--------- ------- --------- ----------
U.S. Treasury and agency obligations $ 53,986 $ - $(1,625) $ 52,361
Other bonds and notes 27,887 15 (197) 27,705
Mortgage-backed securities 45,517 42 (508) 45,051
-------- ------ ------- --------
Total debt securities 127,390 57 (2,330) 125,117
Marketable equity securities 1,381 5,149 - 6,530
-------- ------ ------- --------
Total securities available-for-sale $128,771 $5,206 $(2,330) $131,647
======== ====== ======= ========
---------- December 31, 1998 -----------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
--------- -------- ------- ----------
U.S. Treasury and agency obligations $ 55,516 $ 398 $(180) $ 55,734
Other bonds and notes 34,156 277 (14) 34,419
Mortgage-backed securities 48,295 517 (100) 48,712
-------- ------ ----- --------
Total debt securities 137,967 1,192 (294) 138,865
Marketable equity securities 1,262 4,702 - 5,964
-------- ------ ----- --------
Total securities available-for-sale $139,229 $5,894 $(294) $144,829
======== ====== ===== ========
F-12
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
A schedule of the maturity distribution of debt securities
available-for-sale at December 31, 1999 is as follows (dollars in
thousands):
Amortized Percent of
Cost Total Fair Value
--------- ---------- ----------
One year or less $ 10,203 8.0% $ 10,183
Over 1 year to 5 years 78,900 61.9 77,094
Over 5 years to 10 years 14,546 11.4 14,322
Over 10 years 23,741 18.7 23,518
-------- ---- --------
Total $127,390 100% $125,117
======== ==== ========
Actual maturities of mortgage-backed securities may differ from contractual
maturities presented because borrowers have the right to prepay obligations
without incurring prepayment penalties.
Proceeds from the sales and maturities of investment securities and related
gross gains and gross losses for the years ended December 31, 1999, 1998
and 1997 were as follows (in thousands):
Years Ended December 31,
------------------------
1999 1998 1997
---------- ------------ --------
Proceeds from $ - $9,280 $61,786
sales
Gross gains - 95 762
Gross losses - 34 35
(3) LOANS
The Bank's lending activities are conducted principally in Massachusetts.
The Bank grants single-family and multifamily residential loans, commercial
real estate loans, commercial loans and a variety of consumer loans. In
addition, the Bank grants loans for the construction of residential homes,
multifamily properties and commercial real estate properties. Most loans
granted by the Bank are collateralized by real estate. The ability and
willingness of the single-family residential and consumer borrowers to
honor their repayment commitments is generally dependent on the level of
overall economic activity within the borrowers' geographic areas and real
estate values. The ability and willingness of the commercial real estate,
commercial and construction loan borrowers to honor their repayment
commitments is generally dependent on the health of the real estate
economic sector in the borrowers' geographic areas and the general economy.
F-13
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The Bank's loan portfolio consisted of the following (in thousands):
December 31,
------------------------------
1999 1998
-------------- --------------
Real estate loans-
Residential $297,709 $243,363
Home equity lines of credit 62,458 56,502
Commercial 212,833 188,541
Construction 3,716 2,741
-------- --------
Total real estate loans 576,716 491,147
Commercial 1,348 724
Consumer 6,046 7,310
-------- --------
Total loans 584,110 499,181
Less-
Allowance for possible loan losses 7,081 6,633
-------- --------
Total loans, net $577,029 $492,548
======== ========
An analysis of the allowance for possible loan losses is as follows (in
thousands):
December 31,
------------------
1999 1998 1997
-------- -------- --------
Balance, beginning of year $6,633 $4,907 $4,269
------ ------ ------
Provision for possible loan losses 740 1,760 600
------ ------ ------
Charge-offs-
Consumer (407) (44) (16)
------ ------ ------
(407) (44) (16)
------ ------ ------
Recoveries-
Real estate 5 5 54
Commercial 107 - -
Consumer 3 5 -
------ ------ ------
115 10 54
------ ------ ------
Net (charge-offs) recoveries (292) (34) 38
------ ------ ------
Balance, end of year $7,081 $6.633 $4,907
====== ====== ======
F-14
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
Nonaccrual loans consisted of the following (in thousands):
December 31,
------------
1999 1998
---- ----
Residential real estate $ 32 $ 290
Consumer loans 96 --
----- -----
$ 128 $ 290
===== =====
If these loans had been paying in accordance with their original
contractual terms, approximately $7,000 and $8,000 of additional interest
income would have been recorded in 1999 and 1998, respectively. There are
no commitments to extend additional credit on these loans.
During 1999 and 1998, the average recorded investment in impaired loans was
$161,000 and $252,000, respectively, and no income was recognized related
to the impaired loans. At December 31, 1999 and 1998, the Bank classified
approximately $128,000 and $290,000, respectively, as impaired loans. These
impaired loans did not, in the opinion of the Bank's management, require a
related valuation reserve.
In the ordinary course of business, the Bank has granted loans to trustees
and officers at substantially the same terms and conditions as those
prevailing at the time of origination for comparable transactions with
other borrowers. In the opinion of management, these loans do not involve
more than normal risk of collectibility. The aggregate amount of these
loans was approximately $659,000 and $818,000 at December 31, 1999 and
1998, respectively. None of these loans were on nonaccrual status during
1999 and 1998.
F-16
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(4) Banking Premises and Equipment
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives is as
follows (in thousands):
December 31,
------------ Estimated
1999 1998 Useful Life
---- ---- -----------
Land $ 47 $ 47
Banking premises and leasehold 5,954 5,783 30 years or
improvements lease term
Furniture, fixtures and equipment 2,457 3,661 3-10 years
Construction-in-Progress 6,832 --
------- ------
15,290 9,491
Less--Accumulated depreciation and 3,508 3,875
amortization ------- ------
$11,782 $5,616
======= ======
Depreciation and amortization expense of banking premises and equipment for
the years ended December 31, 1999, 1998 and 1997 amounted to approximately
$1,214,000, $1,353,000 and $1,285,000, respectively, and is included in
occupancy and equipment expenses in the accompanying consolidated
statements of operations.
In February 1999, the Bank entered into an agreement with a developer for
the construction of a new administrative center. The Bank expects to incur
approximately $16.0 million in the construction of the building and the
purchase of land. At the completion of the project, which is estimated to
be in 2000, certain administrative and operating departments are expected
to be located in this building. The Bank expects to occupy 60% of the new
building and lease out the remaining portion. The current building serving
as the main office will continue to include a retail branch with the
remaining space leased to other tenants. No impairment write-down of the
carrying amount of the building was required as of December 31, 1999.
For the year ended December 31, 1999, the Bank capitalized approximately
$129,000 in interest expense associated with the construction costs.
F-17
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(5) Loan Servicing
Loans serviced for other investors amounted to approximately $192,363,000
and $228,778,000 at December 31, 1999 and 1998, respectively. There were no
formal recourse provisions related to these loans.
During 1999 and 1998, mortgage servicing rights of approximately $-0- and
$115,000, respectively, were capitalized. Amortization of mortgage
servicing rights for the years ended December 31, 1999, 1998 and 1997 were
approximately $158,000, $203,000 and $91,000, respectively. No adjustment
was required in 1999, 1998 and 1997 to write down the assets to fair value.
(6) Deposits
A summary of deposit balances, by type, is as follows (in thousands):
December 31,
------------
1999 1998
---- ----
Demand deposit accounts $ 29,777 $ 28,085
NOW accounts 44,429 41,546
Regular savings accounts 53,346 53,560
Money market accounts 162,304 132,219
-------- --------
Total noncertificate accounts 289,856 255,410
-------- --------
Term certificates-
Term certificates less than $100,000 267,327 256,097
Term certificates of $100,000 and over 61,105 53,911
-------- --------
Total term certificate accounts 328,432 310,008
-------- --------
Total deposits $618,288 $565,418
======== ========
F-18
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
A schedule of the maturity distribution of term certificates with weighted
average interest rates is as follows (dollars in thousands):
------------------ December 31, ------------------
1999 1998
------------------------ ------------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
--------- ------------- --------- -------------
Within 1 year $269,579 4.91% $252,594 5.33%
Over 1 to 2 years 46,420 5.41% 46,621 5.41%
Over 2 to 3 years 9,954 5.56% 7,994 5.54%
Over 3 to 5 years 2,479 5.40% 2,799 5.38%
-------- ---- -------- ----
$328,432 5.00% $310,008 5.35%
======== ==== ======== ====
(7) Federal Home Loan Bank Advances
Federal Home Loan Bank (FHLB) advances are collateralized by a blanket-type
pledge agreement on the Bank's FHLB stock, certain qualified investment
securities, deposits at the FHLB and first mortgages on residential
property. As a member of the FHLB, the Bank is required to invest in stock
of the FHLB at an amount equal to 1% of its outstanding first mortgage
residential loans, .3% of total assets or 5% of its outstanding advances
from the FHLB, whichever is higher. As and when such stock is redeemed, the
Bank will receive from the FHLB an amount equal to the par value of the
stock. The Bank also has access to a preapproved daily line of credit of
$11,003,000. Under this line of credit, there were no funds advanced as of
December 31, 1999 and $2,423,000 (5.4% per annum) was outstanding at
December 31, 1998.
F-19
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
A schedule of the maturity distribution of FHLB advances with weighted
average interest rates is as follows (dollars in thousands):
------------------December 31,------------------
1999 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Interest Rate Amount Interest Rate
-------- ------------- -------- -------------
Within 1 year $36,900 5.83% $ 2,423 5.40%
Over 1 to 5 years - - 6,400 5.75%
Over 5 to 10 years 4,642 6.79% 18,243 6.23%
10 years and over 14,349 6.19% - -
------- ---- ------- ----
$55,891 6.00% $27,066 6.04%
======= ==== ======= ====
The Bank may be subject to a substantial penalty upon prepayment of FHLB
advances.
(8) Income Taxes
The components of the provision for income taxes for the years ended
December 31 are as follows (in thousands):
1999 1998 1997
-------- -------- --------
Current-
Federal $2,187 $2,843 $1,723
State 186 421 284
------ ------ ------
Total current 2,373 3,264 2,007
------ ------ ------
Prepaid-
Federal (156) (679) (252)
State (27) (228) (76)
------ ------ ------
Total prepaid (183) (907) (328)
------ ------ ------
Total $2,190 $2,357 $1,679
====== ====== ======
F-20
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The difference between the income tax rate computed by applying the
statutory federal income tax rate of 34% to income before income taxes and
the actual effective income tax rate is summarized as follows:
1999 1998 1997
------- ----- -------
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from-
State taxes, net of federal benefit 1.5 2.7 2.5
Dividends-received deduction (1.1) (1.0) (1.3)
Tax credits (0.5) (1.6) (1.9)
Other, net (2.4) 1.9 (1.9)
----- ---- -----
31.5% 36.0% 31.4%
===== ==== =====
The primary items giving rise to the temporary differences included in the
Bank's net deferred tax asset between year ends are the allowance for
possible loan losses, certain unfunded employee benefit accruals,
unrealized gains and losses on available-for-sale securities, deferred loan
origination fees and depreciation. A valuation allowance is provided when
it is more likely than not that some portion of the deferred tax asset will
not be realized.
At December 31, the Bank's net deferred tax asset consisted of the
following components (in thousands):
1999 1998
------- -------
Deferred Tax Assets:
Allowance for possible loan losses $2,898 $2,733
Supplemental Pension 781 698
Pension 620 660
Depreciation 534 395
Other 256 357
------ ------
5,089 4,843
------ ------
Deferred Tax Liabilities:
Net unrealized gain on securities
available for sale 967 1,959
Limited partnership 2,175 2,058
Other 22 76
------ ------
3,164 4,093
------ ------
Net deferred tax assets $1,925 $ 750
====== ======
In August 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of Internal Revenue Code Section
593, which allowed thrift institutions special
F-21
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
provisions in calculating bad debt deductions for income tax purposes.
Thrift institutions are viewed as commercial banks for income tax purposes.
The repeal is effective for tax years beginning after December 31, 1995.
One effect of this legislative change is to suspend the Bank's bad debt
reserve for income tax purposes as of its base year (December 31, 1987).
Any bad debt reserve in excess of the base year amount is subject to
recapture over a six-year time period. The suspended (i.e., base year)
amount is subject to recapture upon the occurrence of certain events, such
as a complete or partial redemption of the Bank's stock or if the Bank
ceases to qualify as a bank for income tax purposes.
At December 31, 1999, the Bank's retained earnings include approximately
$4,420,000 of bad debt reserves, representing the base year amount, for
which income taxes have not been provided. Since the Bank does not intend
to use the suspended bad debt reserve for purposes other than to absorb the
losses for which it was established, deferred taxes in the amount of
$1,800,000 have not been recorded with respect to such reserve.
F-22
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(9) Commitments and Contingencies
In the normal course of business, there are outstanding commitments and
contingencies that are not reflected in the consolidated financial
statements. On December 30, 1998, the Bank entered into a Master Commitment
to deliver or sell $5,000,000 in residential mortgage loans to a federal
agency on or before December 31, 1999. At December 31, 1999, the
unfulfilled portion that remained to be delivered under this commitment was
approximately $270,000.
The Bank acquired a portion of its furniture, fixtures and equipment under
various capital leases that expire through 2002. As of December 31, 1999,
capital lease obligations amounted to approximately $172,000 and are
included in accrued expenses and other liabilities.
The Bank operates branch offices and certain other operations under leases
that are classified as operating leases. The leases contain renewal options
that guarantee the Bank the right to extend the leases for additional
periods and also provide that the Bank shall pay, as additional rent, a
proportionate share of any increase in real estate taxes. At December 31,
1999, future minimum lease payments are as follows:
Years ending December 31,
2000 $ 949,000
2001 834,000
2002 601,000
2003 554,000
2004 324,000
Thereafter 2,023,000
----------
Total minimum lease payments $5,285,000
==========
The operating leases contain renewal options for periods ranging from one
to 15 years, the cost of which is not included above. Rental expense
amounted to approximately $1,116,000, $1,061,000 and $964,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, and is included in
occupancy and equipment expenses in the accompanying consolidated
statements of operations.
Aggregate reserves (in the form of deposits with the Federal Reserve Bank
and vault cash) of $13,379,000 and $2,564,000 were maintained to satisfy
regulatory requirements at December 31, 1999 and 1998, respectively.
In the ordinary course of business, the Bank is involved in litigation.
Based on its review of current litigation and discussion with legal
counsel, management does not expect that the resolution of such matters
will have a material adverse effect upon the Bank's consolidated financial
condition or results of operations.
F-23
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(10) Regulatory Matters
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 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
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999,
that the Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank of Boston relating to the Holding Company classified the
Holding Company's capital as satisfactory, and the most recent notification
from the FDIC relating to the Bank categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well-capitalized, an insured depository institution must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the Bank's
category.
F-24
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The Company's and the Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the table.
Actual For Capital Adequacy Purposes
------ -----------------------------
Amount Ratio Amount Ratio
-------- -------- ---------------------------------- ------------------------------
(Dollars in Thousands)
As of December 31, 1999:
Company (consolidated)-
Total capital (to
risk-weighted assets) $85,057 19.29% (greater than or equal to) $35,279 (greater than or equal to) 8.0%
Tier 1 capital (to
risk-weighted assets) $77,208 17.51% (greater than or equal to) $17,639 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets) $77,208 10.42% (greater than or equal to) $29,638 (greater than or equal to) 4.0%
Bank-
Total capital (to
risk-weighted assets) $57,453 13.40% (greater than or equal to) $34,288 (greater than or equal to) 8.0%
Tier 1 capital (to
risk-weighted assets) $52,074 12.15% (greater than or equal to) $17,144 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets) $52,074 7.28% (greater than or equal to) $28,626 (greater than or equal to) 4.0%
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------------ -----------
(Dollars in Thousands)
As of December 31, 1999:
Company (consolidated)-
Total capital (to
risk-weighted assets) N/A N/A
Tier 1 capital (to
risk-weighted assets) N/A N/A
Tier 1 capital (to
average assets) N/A N/A
Bank-
Total capital (to
risk-weighted assets) (greater than or equal to) $42,860 (greater than or equal to) 10.0%
Tier 1 capital (to
risk-weighted assets) (greater than or equal to) $25,716 (greater than or equal to) 6.0%
Tier 1 capital (to
average assets) (greater than or equal to) $35,782 (greater than or equal to) 5.0%
F-25
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
For Capital Adequacy
Actual For Capital Adequacy Purposes
------ -----------------------------
Amount Ratio Amount Ratio
-------- -------- ------ -----
(Dollars in Thousands)
As of December 31, 1998:
Company (consolidated)-
Total capital (to
risk-weighted assets) $79,389 20.54% (greater than or equal to) $30,752 (greater than or equal to) 8.0%
Tier 1 capital (to
risk-weighted assets) $72,420 18.74% (greater than or equal to) $15,376 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets) $72,420 10.66% (greater than or equal to) $27,183 (greater than or equal to) 4.0%
Bank-
Total capital (to
risk-weighted assets) $53,059 14.13% (greater than or equal to) $30,039 (greater than or equal to) 8.0%
Tier 1 capital (to
risk-weighted assets) $48,350 12.88% (greater than or equal to) $15,020 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets) $48,350 7.37% (greater than or equal to) $26,234 (greater than or equal to) 4.0%
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------------ -----------
(Dollars in Thousands)
As of December 31, 1998:
Company (consolidated)-
Total capital (to
risk-weighted assets) N/A N/A
Tier 1 capital (to
risk-weighted assets) N/A N/A
Tier 1 capital (to
average assets) N/A N/A
Bank-
Total capital (to
risk-weighted assets) (greater than or equal to) $37,547 (greater than or equal to) 10.0%
Tier 1 capital (to
risk-weighted assets) (greater than or equal to) $22,530 (greater than or equal to) 6.0%
Tier 1 capital (to
average assets) (greater than or equal to) $32,793 (greater than or equal to) 5.0%
(11) Employee Benefits
The Bank provides pension benefits for eligible employees through the
Savings Banks Employees' Retirement Association's (SBERA) Pension Plan (the
Plan). Each employee reaching the age of 21 and having completed one year
of service becomes a participant. All participants are fully vested after
three years of service.
F-26
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
According to the Plan's actuary and in accordance with SFAS No. 132,
Employers' Disclosures About Pensions and Other Postretirement Benefits,
the following summary sets forth the Plan's funded status and amounts
included in the Bank's consolidated balance sheets as of October 31, 1999
and 1998 (latest available data):
1999 1998
---- ----
(In thousands)
Benefit obligation at beginning
of year $ 4,292 $ 3,851
Service cost 420 366
Interest cost 290 279
Actuarial gain (714) (35)
Benefits paid (158) (169)
------- -------
Benefit obligation at end of year $ 4,130 $ 4,292
======= =======
Fair value of assets at beginning
of year $ 4,232 $ 3,781
Actual return on plan assets 825 309
Contributions by employer 366 311
Benefits paid (158) (169)
------- -------
Fair value of assets at end of
year $ 5,265 $ 4,232
======= =======
Fair value of assets at end of
year $ 5,265 $ 4,232
Benefit obligation at end of year 4,130 4,292
------- -------
Funded status 1,135 (60)
Unrecognized net gain (2,406) (1,253)
Unrecognized net asset (244) (266)
------- -------
Net accrued benefit cost $(1,515) $(1,579)
======= =======
The accumulated benefit obligation (substantially all vested) at October 31,
1999 and 1998 amounts to approximately $3,003,000 and $2,678,000, respectively.
Plan assets are primarily invested in fixed-income and equity securities.
Actuarial assumptions used in determining plan obligations and net pension
expense are as follows:
1999 1998 1997
----- ----- -----
Discount rate used to calculate projected
benefit obligation 6.75% 7.3% 7.5%
Expected long-term rate of return on plan
assets 8.0% 8.0% 8.0%
Annual salary increase 4.5% 5.0% 5.0%
F-27
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The net pension cost for years ended 1999, 1998 and 1997 included the
following components (in thousands):
1999 1998 1997
------ ------ ------
Service cost benefit earned during the
period $ 420 $ 366 $ 318
Interest cost on projected benefit
obligation 290 279 269
Expected return on plan assets (339) (302) (267)
Amortization of transition asset (22) (22) (22)
Amortization of net gain (46) (47) (36)
----- ----- -----
Net pension cost $ 303 $ 274 $ 262
===== ===== =====
Effective December 1, 1987, the Bank adopted a nonqualified supplemental
pension plan (the Nonqualified Plan). Certain officers as of December 1,
1987 were eligible for enrollment. In addition, certain officers elected
after December 1, 1987 were eligible for enrollment after five years of
service. The present value of the future payments was accrued over the
estimated remaining terms of employment. The Nonqualified Plan was being
funded through a life insurance program, with policy benefits accruing to
the Bank. The cash surrender value of the policies was approximately
$4,081,000 and $3,646,000 at December 31, 1999 and 1998, respectively, and
is included in other assets in the accompanying consolidated balance
sheets. The accrued liability associated with this Nonqualified Plan was
approximately $1,508,000 at December 31, 1998, respectively, and was
included in other liabilities in the accompanying consolidated balance
sheets. Net expense for these supplemental retirement benefits for the
years ended December 31, 1998 and 1997 was approximately $126,000 and
$455,000, respectively, and was included in salaries and employee benefits
in the accompanying consolidated statements of operations.
Effective May 4, 1999, the Bank terminated the Nonqualified Plan and paid
out the majority of participants. Included in noninterest expense for the
year ended December 31, 1999 is a $578,000 curtailment loss associated with
this Nonqualified Plan termination. Effective May 4, 1999, the Bank adopted
a 1999 Nonqualified Pension Plan (the 1999 Nonqualified Plan) for certain
executive officers. The accrued liability associated with this 1999
Nonqualified Plan is approximately $1,697,000 at December 31, 1999 and the
net expense associated with the 1999 Nonqualified Plan for the year ended
December 31, 1999 was approximately $145,000 and is included in salaries
and employee benefits in the accompanying consolidated statements of
operations.
The Bank offers a SBERA 401(k) Plan (the 401(k) Plan) for employees. Each
employee reaching the age of 21 and having completed one year of service
with the Bank becomes a participant. Participants are 100% vested in their
accounts. Participating employees are able to contribute up to 15% of their
salary, and the Bank matches 50% of a participant's deferral contribution
of the first 3% of the deferral amount subject to the maximum allowable
under federal regulations. The Bank's matching contribution expense was
approximately $78,000, $77,000 and $50,000 for the years ended December
F-28
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
31, 1999, 1998 and 1997, respectively, and is included in salaries and
employee benefits in the accompanying consolidated statements of
operations.
(12) Financial Instruments with Off-Balance-Sheet Risk and Concentration of
Credit Risk
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
and to reduce interest rate risk. These financial instruments primarily
include commitments to extend credit.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the accompanying
consolidated balance sheets.
The contract amounts of those instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments. The Bank's
exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented
by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
financial instruments.
Off-balance-sheet financial instruments whose contract amounts present
credit risk include the following (in thousands):
December 31,
------------
1999 1998
---- ----
Commitments to originate loans-
Variable $ 22,758 $ 32,366
Fixed 4,061 9,198
Unadvanced home equity lines of credit 124,063 106,393
Unadvanced lines of credit 11,231 5,988
Commitments to originate loans and unadvanced lines of credit 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 are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness 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. The collateral
supporting these commitments varies and may include real property, accounts
receivable or inventory. The bank originates primarily residential and
commercial real estate loans and, to a lesser extent, installment loans to
customers primarily located in eastern Massachusetts.
F-29
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(13) Fair Values of Financial Instruments
The reported fair values of financial instruments are based on a variety of
valuation techniques. In some cases, fair values represent quoted market
prices for identical or comparable instruments. In other cases, fair values
have been estimated based on assumptions concerning the amount and timing
of estimated future cash flows, assumed discount rates reflecting varying
degrees of risk and future expected-loss assumptions.
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because a market may not readily exist for a
significant portion of the Bank's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect these
estimates.
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. In addition, the tax implications
of unrealized gains and losses can also have a significant effect on the
fair value of the financial instruments that could have been realized as of
December 31, 1999 and 1998 or that will be realized in the future.
The following methods and assumptions were used by the Bank in estimating
fair values of the Bank's financial instruments.
Cash and Cash Equivalents
The balance sheet carrying amounts for cash and cash equivalents
approximate fair value due to the short maturities of those instruments.
Certificates of Deposit and Investment Securities
Fair value for investment securities and certificates of deposit are based
on published market prices, if available. If published market prices are
not available, fair values are based on quotations received from securities
dealers for comparable securities.
F-30
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
Loans Held-for-Sale
For loans held-for-sale, fair value is based on prevailing market
conditions and commitments from institutional investors to purchase such
loans.
Loans
The fair values of loans are estimated for loan portfolios of similar
characteristics. Loans are segregated by type, by fixed- and
adjustable-rate interest terms, and by performing and nonperforming status.
For variable-rate loans tied to the Bank's prime rate, which reprice
frequently and entail no significant change in credit risk, fair values are
based on the carrying values. The estimated fair values of all other loans
are estimated based on discounted cash flow analyses using interest rates
currently offered for loans with similar terms to borrowers of similar
credit quality. The carrying amount of accrued interest approximates its
fair value.
FHLB and Savings Bank Life Insurance Stock
The carrying amount reported in the accompanying consolidated balance
sheets approximates fair value. If redeemed, the Company will receive an
amount equal to the par value of the stock.
Mortgage Servicing Rights
The fair value is estimated by discounting the future cash flows through
the estimated maturity of the underlying mortgage loans.
Deposit Liabilities
The fair value of deposits does not include the value of the Bank's
long-term relationships with its depositors, nor do they reflect the value
associated with possessing this relatively inexpensive source of funds,
which may be available for a considerable length of time. The fair value of
noncertificate deposits is equal to the amount payable on demand at the
reporting date. The fair values of certificates of deposit are estimated by
discounting the contractual future cash flows at rates currently offered
for certificates of deposit with similar remaining maturities. No
consideration has been given to determine the deposit premium associated
with a core deposit intangible.
Borrowings
The fair value of the Bank's borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
F-31
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
Off-Balance-Sheet Instruments
The fair values of commitments are estimated using the fees charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. The
Bank's commitments for unused lines of credit are at floating rates, which
approximate current market rates. The fair value of the commitments to
extend credit and for unused lines of credit at December 31, 1999 and 1998
were deemed immaterial to the SFAS No. 107 disclosure and have been
excluded.
Certain assets are excluded from disclosure requirements, including banking
premises and equipment, the intangible value of the Bank's portfolio of
loans serviced for others and the intangible value inherent in the Bank's
deposit relationships among others. Accordingly, the aggregate fair value
amounts presented below do not represent the underlying value of the Bank.
The estimated fair values of the Bank's financial instruments at December
31, 1999 and 1998 are as follows:
1999 1998
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
(In thousands)
Financial assets-
Cash and cash equivalents $ 19,429 $ 19,429 $ 10,047 $ 10,047
Certificates of deposit 5,149 5,170 5,900 6,054
Investment securities 131,647 131,647 144,829 144,829
Loans held-for-sale - - 3,842 3,842
Loans, net 577,029 571,050 492,548 502,029
Federal Home Loan Bank stock 4,452 4,452 3,879 3,879
Savings Bank Life Insurance stock 1,934 1,934 1,934 1,934
Mortgage servicing rights 126 126 284 284
Financial liabilities-
Noncertificate deposits 289,856 289,856 255,410 255,410
Certificate deposits 328,432 329,595 310,008 310,584
FHLB Advances 55,891 54,109 27,066 27,567
F-32
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
(14) Condensed Parent Company Financial Statements
The Balance Sheets of the Company are as follows (in thousands):
December 31,
------------
1999 1998
-------- --------
Assets:
Cash and due from banks $ 1,576 $ 2,626
Investment securities available-for-sale,
at fair value 0 25,955
Investment in subsidiary 77,037 48,867
Other assets 559 320
------- -------
Total assets $79,172 $77,768
======= =======
Liabilities and Retained Earnings:
Accrued expenses and other liabilities $ 42 $ 1,680
Retained earnings 79,130 76,088
------- -------
Total liabilities and retained earnings $79,172 $77,768
======= =======
F-33
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The Statements of Operations of the Company are as follows (in thousands):
Years Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Interest and Dividend Income:
Interest and dividends on investment
securities $1,565 $1,557 $1,445
------ ------ ------
Noninterest Expense:
Other operating expenses 49 46 57
------ ------ ------
Total noninterest expense 49 46 57
------ ------ ------
Income before provision for income taxes
and equity in undistributed net income of
subsidiary 1,516 1,511 1,388
------ ------ ------
Provision for Income Taxes 492 495 451
------ ------ ------
Income before equity in undistributed net
income of subsidiary 1,024 1,016 937
Equity in Undistributed Net Income of
Subsidiary 3,750 3,172 2,729
------ ------ ------
Net income $4,774 $4,188 $3,666
====== ====== ======
F-34
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
The Statements of Cash Flows of the Company are as follows (in thousands):
Years Ended December 31,
------------------------------
1999 1998 1997
--------- -------- ---------
Cash Flows from Operating Activities:
Net income $ 4,774 $ 4,188 $ 3,666
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net amortization of premiums on investment
securities 20 12 23
Equity in undistributed earnings of
subsidiary (3,750) (3,172) (2,729)
Net increase (decrease) on other liabilities 2 (3) 11
Net (increase) decrease in other assets (454) 4 59
-------- ------- --------
Net cash provided by operating activities 592 1,029 1,030
-------- ------- --------
Cash Flows from Investing Activities:
Proceeds from sales, maturities and
principal repayments of securities
available-for-sale 10,050 8,500 28,168
Purchase of securities available-for-sale (11,692) (8,389) (28,389)
-------- ------- --------
Net cash provided by (used in) investing
activities (1,642) 111 (221)
-------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents (1,050) 1,140 809
Cash and Cash Equivalents,
beginning of year 2,626 1,486 677
-------- ------- --------
Cash and Cash Equivalents,
end of Period $ 1,576 $ 2,626 $ 1,486
======== ======= ========
(15) Business Segments
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, establishes standards for reporting segments of a business
enterprise. Operating segments are components of an enterprise, which are
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company's chief
operating decision maker is the President and Chief Executive Officer. The
adoption of SFAS No. 131 did not have a material effect on the Company's
primary financial statements, but did result in the disclosure of segment
information
F-35
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
contained herein. The Company has identified its reportable operating
business segment as community banking based on products and services
provided to the customer. The Company's community banking business segments
consist of commercial banking and retail banking. The community banking
business segment derives its revenues from a wide range of banking
services, including lending activities, acceptance of demand, saving and
time deposits, mortgage lending and sales, as well as servicing income from
investors. Non-reportable operating segments of the Company's operations
which do not have similar characteristics to the community banking
operations and do not meet the quantitative thresholds requiring disclosure
are included in the Other category in the disclosure of business segments
below. These non-reportable segments include Parent Company financial
information. Consolidation adjustments are included in the consolidation
adjustments category. The consolidated adjustments reflect certain
eliminations of cash and Parent Company investments in subsidiaries.
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies.
Community Consolidation
Banking Other Adjustments Consolidated
(Dollars in Thousands)
December 31, 1999:
- ------------------
Investment securities
available-for-sale, at fair
value $104,176 $27,471 $ - $131,647
Loans, net 577,029 - - 577,029
Total assets 734,468 80,851 (52,578) 762,741
Total deposits (1) 621,319 - - 621,319
Total liabilities 683,566 1,721 (1,676) 683,611
Total retained earnings 50,902 79,130 (50,902) 79,130
Total interest and dividend
income 48,398 1,573 - 49,971
Total interest expense 25,706 - - 25,706
Net interest income 22,692 1,573 - 24,265
Provision for possible loan
losses 740 - - 740
Total noninterest income 3,059 - - 3,059
Total noninterest expense 19,571 49 - 19,620
Net income 3,745 1,029 - 4,774
F-36
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
Community Consolidation
Banking Other Adjustments Consolidated
(Dollars in Thousands)
December 31, 1998:
- ------------------
Investment securities
available-for-sale, at fair value $118,874 $25,955 $ - $144,829
Loans, net 492,548 - - 492,548
Total assets 650,658 77,768 (50,339) 678,087
Total deposits (1) 568,075 - - 568,075
Total liabilities 601,792 1,680 (1,473) 601,999
Total retained earnings 48,866 76,088 (48,866) 76,088
Total interest and dividend income 47,099 1,557 - 48,656
Total interest expense 25,880 - - 25,880
Net interest income 21,219 1,557 - 22,776
Provision for possible loan losses 1,760 - - 1,760
Total noninterest income 3,571 - - 3,571
Total noninterest expense 17,996 46 - 18,042
Net income 3,172 1,016 - 4,188
(1) Includes mortgagors' escrow payments
(16) Stock Conversion
On October 19, 1999, the Board of Trustees of the Company adopted a Plan of
Conversion (the Conversion) pursuant to which the Company will convert to a
stock form of ownership and offer for sale 100% of its common stock in a
subscription offering initially to bank depositors, employee benefit plans
of the Company and certain other eligible subscribers. Any shares of stock
not sold in the subscription offering are expected to be sold to the public
by underwriters.
As part of the Conversion, the Bank will establish a liquidation account in
an amount equal to the net worth of the Bank as of the date of the latest
consolidated balance sheet appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders who maintain their
accounts at the Bank after the Conversion. The liquidation account will be
reduced annually to the extent that such account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
not restore an account
F-37
CAMBRIDGEPORT MUTUAL HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(Continued)
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive
balances for accounts then held.
Subsequent to the Conversion, the Company may not declare or pay dividends
on and may not repurchase any of its common stock if the effect thereof
would cause its capital to be reduced below applicable regulatory capital
maintenance requirements or if such declaration, payment or repurchase
would otherwise violate regulatory requirements.
F-38