<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 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 No. 0-25251
CENTRAL BANCORP, INC.
------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3447594
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Highland Avenue, Somerville, Massachusetts 02144
- -------------------------------------------------- ------------------------
(Address of principal office) (Zip Code)
Registrant's telephone number, including area code: (617) 628-4000
--------------
Securities registered under Section 12(b) of the Act: None
----
Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant was $32,820,807 based on the closing sales price of the
registrant's common stock as quoted on the Nasdaq National Market System which
on June 15, 1999 was $20.50 per share.
As of June 15, 1999, there were issued and outstanding 1,957,000 shares
of the registrant's common stock, par value $1.00 per share (of which 355,985
shares were held by affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
Ended March 31, 1999 (the "Annual Report to Stockholders") are
incorporated by reference into Parts I and II of this Form 10-K.
2. Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference
into Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
The Company. Central Bancorp, Inc. (the "Company"), a Massachusetts
corporation, was organized by Central Co-operative Bank (the "Bank") to be a
bank holding company. The Company was organized at the direction of the Bank on
September 30, 1998, to acquire all of the capital stock of the Bank upon the
consummation of the reorganization of the Bank into the holding company form of
ownership (the "Reorganization"), which was completed on January 8, 1999. The
Company's common stock, par value $1.00 per share (the "Common Stock") became
registered under the Securities Exchange Act of 1934 on January 8, 1999. The
Company qualifies under Section 38B of Chapter 63 of the Massachusetts General
Laws as a Massachusetts security corporation. The Company has no significant
assets other than the Common Stock of the Bank and various other liquid assets
which it invests in the ordinary course of business. For that reason,
substantially all of the discussion in this Form 10-K relates to the operations
of the Bank and its subsidiaries.
The executive offices of the Company are located at 399 Highland Avenue,
Somerville, Massachusetts 02144. The telephone number is (617) 628-4000.
The Bank. Central Co-operative Bank ("Central" or the "Bank") was
organized as a Massachusetts chartered co-operative bank in 1915 and converted
from mutual to stock form in 1986. The primary business of the Bank is to
acquire funds in the form of deposits and use the funds to make mortgage loans
for the construction, purchase and refinancing of residential properties, and to
a lesser extent, to make loans on commercial real estate in its market area. The
Bank also makes a limited amount of consumer loans including education, home
improvement and secured and unsecured personal loans. In recent years, the Bank
has engaged in increased commercial lending and has used excess funds to
purchase investment and mortgage-backed securities. The Bank's operations are
conducted through eight full service office facilities located in Somerville,
Arlington, Burlington, Chestnut Hill, Malden, Melrose and Woburn, Massachusetts.
The Bank's main office is located at 399 Highland Avenue, Somerville,
Massachusetts and its telephone number is (617) 628-4000.
The operations of the Bank and savings institutions are generally
influenced by overall economic conditions, the related monetary and fiscal
policies of the federal government, and the regulatory policies of financial
institution regulatory authorities, including the Massachusetts Commissioner of
Banks (the "Commissioner"), the Federal Reserve Board and the FDIC.
The Bank monitors its exposure to earnings fluctuations resulting from
market interest rate changes. At March 31, 1999, the Bank's earnings are
vulnerable to increasing interest rates due to its present one year asset-
liability mismatch, which resulted in an excess of maturing or repricing
interest-bearing liabilities over interest-earning assets of $61.9 million, or
17%, of total assets at March 31, 1999. Therefore, in a rising interest rate
environment, the Bank's net interest income and net income would be negatively
affected as the larger amount of interest-sensitive liabilities (deposits and
borrowings) would adjust more quickly to rising interest rates than the Bank's
interest-sensitive assets (loans and investments). The Bank seeks to reduce its
exposure to changes in interest rate, or market risk, through active monitoring
and management of its interest rate risk exposure. The policies and procedures
for managing both on and off balance sheet activities are established by the
Bank's asset/liability management committee (ALCO). Investments, which
generally are easily saleable compared to individual loans, made up 21.0% of
interest-earning assets at March 31, 1999 compared to 22.5% of interest-earning
assets at March 31, 1998 and 24.2% of interest-earning assets at March 31, 1997.
For further information regarding the Bank's asset-liability management, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders, attached hereto as Exhibit 13.
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MARKET AREA
The Bank faces strong competition from commercial banks, mortgage banking
companies, diversified financial services companies and other thrift
institutions. See "Business -- Competition." Although legislation and
regulations have expanded the activities in which the Bank may engage, the
Bank's ability to remain competitive in its industry will depend upon how
successfully it can respond to the rapidly evolving competitive, regulatory,
technological and demographic developments affecting its operations.
Weakness in the New England real estate market caused many financial
institutions in the region to experience significant losses in the early 1990s
due to increases in problem real estate loans, primarily loans on commercial
real estate. Such deterioration was due to a severe downturn in the New England
economy which, generally beginning in fiscal 1990 and continuing through fiscal
1993, severely affected the Bank's real estate market. The weakness in the
Bank's real estate market stabilized during fiscal 1994, and since that time the
Bank's asset quality has improved with the recovery of the local economy. Any
reversal of the apparent improvement of the economy, however, could result in
the Bank experiencing increases in problem assets which would likely negatively
affect the Bank's results of operations. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio in the future, will not
request that the Bank further increase its allowance for loan losses, thereby
negatively impacting the Bank's financial condition and earnings. The Security
Committee of the Board of Directors of the Bank reviews the status of problem
assets on a monthly basis.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES
Legislation has been reintroduced in the U.S. Congress which calls for the
modernization of the banking system and which would significantly affect the
operations and regulatory structure of the financial services industry,
including savings institutions like the Bank. At this time, management does not
know what form the final legislation might take, or if enacted into law, how the
legislation would affect the Company's and Bank's business and operations and
competitive environment. For additional information on the provisions of this
legislation, see "Regulation of the Bank --Proposed Legislative and Regulatory
Changes."
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AVERAGE BALANCE SHEET
The following table shows the Bank's average balances of assets,
liabilities and stockholders' equity for the periods indicated. All average
balances disclosed herein are based on average daily balances.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks................................... $ 4,861 $ 4,035 $ 3,396 $ 4,658 $ 3,013
Short-term investments.................................... 13,128 4,495 4,851 6,993 7,389
Investment securities..................................... 23,375 38,836 52,907 69,164 11,753
Mortgage-backed securities................................ 37,676 44,073 17,382 11,065 61,840
Loans..................................................... 287,513 250,329 231,006 215,765 175,888
Less allowance for loan losses.......................... (2,912) (2,877) (2,922) (3,010) (2,918)
-------- -------- -------- -------- --------
Net loans............................................. 284,601 247,452 228,084 212,755 172,970
The Co-operative Central Bank Reserve Fund................ 1,576 1,576 1,576 1,576 1,576
Real estate acquired by foreclosure, net.................. -- 32 870 2,058 1,788
Office properties and equipment, net...................... 2,885 3,027 2,882 2,843 2,543
Other assets.............................................. 4,132 3,473 3,874 3,330 2,963
Goodwill, net............................................. 3,240 3,528 3,818 4,104 1,261
-------- -------- -------- -------- --------
Total assets........................................... $375,474 $350,527 $319,640 $318,546 $267,096
======== ======== ======== ======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits................................................. $275,135 $270,650 $258,017 $262,901 $212,558
Advances from FHLB of Boston............................. 59,901 42,130 25,330 21,984 24,047
Advance payments by borrowers for
taxes and insurance.................................... 1,329 837 773 784 688
Other liabilities........................................ 1,424 1,662 2,938 1,726 1,803
-------- -------- -------- -------- --------
Total liabilities...................................... 337,789 315,279 287,058 287,395 239,096
-------- -------- -------- -------- --------
Stockholders' equity:
Common stock............................................. 1,966 1,965 1,965 1,937 1,885
Additional paid-in capital............................... 11,164 11,159 11,159 10,976 10,641
Retained income.......................................... 24,825 22,900 20,505 18,829 17,042
Accumulated other comprehensive income................... 417 2 (153) 161 (848)
Unearned compensation - ESOP............................. (687) (778) (894) (752) (720)
-------- -------- -------- -------- --------
Total stockholders' equity............................. 37,685 35,248 32,582 31,151 28,000
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity............. $375,474 $350,527 $319,640 $318,546 $223,414
======== ======== ======== ======== ========
</TABLE>
LENDING ACTIVITIES
The Bank offers residential mortgage and home equity loans, commercial real
estate loans, construction loans, commerce and industry loans, personal, home
improvement, education loans and various other types of consumer loans. Commerce
and industry loans represent loans to commercial enterprises which are either
unsecured or are secured by property other than real estate. For the fiscal
year ended March 31, 1999, the Bank originated loans totaling $111.2 million, of
which $60.1 million, or 54.0%, were fixed rate loans and $51.1 million, or
46.0%, were adjustable rate loans. Of the total loans originated during fiscal
1999, $72.3 million, or 65.0%, were residential mortgage loans and $14.4
million, or 13.0%, were commercial mortgage loans. At March 31, 1999, the
Bank's mortgage loans providing for periodic interest rate adjustments totaled
$176.5 million, or 63.0%, of the total mortgage loan portfolio. No loans were
sold during fiscal 1999, while loans amounting to $193,000 and $1.2 million were
sold during fiscal 1998 and 1997, respectively, in the secondary market.
Servicing of fixed-rate loans sold in the secondary market is retained by the
Bank. The sale of loans in the secondary market allows the Bank to continue to
make loans during periods when savings flows decline or funds are not otherwise
available for lending purposes and to manage interest rate risk. The Bank's
loan portfolio decreased by $1.4 million, or .5%, to $280.3 million at March 31,
1999 from $281.7 million at March 31, 1998. The decrease was due to (i) a high
level of pay-off's of residential mortgages as customers took advantage of
3
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lower interest rates to refinance their mortgages and (ii) a decision by
management to slow down residential fixed rate loan growth as part of the Bank's
asset and liability management strategies.
4
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The following table shows the composition of the Bank's loan portfolio by
type of loan and the percentage each type represents of the total loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ---------------- ----------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
------------ ------ -------- ------ --------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential...................... $212,638 75.8% $207,860 73.8% $176,317 75.1% $161,142 75.1% $155,203 73.1%
Commercial....................... 48,756 17.4 52,491 18.6 41,822 17.8 38,308 17.9 40,558 19.1
Construction..................... 5,269 1.9 8,256 2.9 3,095 1.3 994 0.4 671 0.3
Second mortgage and home equity.. 7,462 2.7 8,369 3.0 8,397 3.6 8,740 4.1 10,060 4.7
FHA and VA....................... 21 -- 49 -- 85 -- 150 0.1 240 0.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans........... 274,146 97.8 277,025 98.3 229,716 97.8 209,334 97.6 206,732 97.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
Commerce and Industry(1)......... 4,391 1.6 2,530 0.9 2,431 1.0 2,735 1.3 2,719 1.3
Education........................ -- -- 31 -- 28 -- 35 -- 24 --
Secured by deposits.............. 1,225 .4 1,357 0.5 1,063 0.5 951 0.4 1,030 0.5
Consumer......................... 40 -- 48 -- 579 0.2 574 0.3 801 0.4
Unsecured........................ 544 .2 733 0.3 1,118 0.5 792 0.4 1,132 0.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans.............. 6,200 2.2 4,699 1.7 5,219 2.2 5,087 2.4 5,706 2.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.................... 280,346 100.0% 281,724 100.0% 234,935 100.0% 214,421 100.0% 212,438 100.0%
===== ===== ===== ===== =====
Less:
Allowance for possible
loan losses..................... 2,913 2,886 (2,900) (3,032) (2,954)
-------- -------- -------- -------- --------
Loans, net..................... $277,433 $278,838 $232,035 $211,389 $209,484
======== ======== ======== ======== ========
</TABLE>
___________
(1) Represents loans to commercial enterprises which are either unsecured or
secured by property other than real estate.
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RESIDENTIAL LENDING. The Bank's residential mortgage loan programs
currently are focused on the origination of adjustable rate mortgages and fixed
rate mortgages. At March 31, 1999, adjustable rate residential mortgage loans
totaled $140.5 million, or 50.1%, of the total loan portfolio. Fixed rate
residential mortgages totaled $72.1 million, or 25.7%, of the total loan
portfolio.
The Bank's adjustable rate residential mortgage loans have a maximum term
of 30 years, and allow for periodic interest rate adjustments. The Bank prices
the initial rate competitively but avoids initial deep discounts from contracted
indices and margins. The Bank has adopted the U.S. Treasury Securities Index,
adjusted to a constant maturity of one to five years. The margin at which
adjustable rate loans are set is a minimum of 2.50% over the stated index.
Interest rate adjustments are capped on adjustable mortgage loans at 2% per
adjustment and 6% over the life of the loan.
Residential loans may be granted as construction loans or permanent loans
on residential properties. Construction loans on owner occupied residential
properties may convert to residential loans at fixed or adjustable rates upon
completion of construction. Loans secured by one- to four-family residential
properties are typically written in amounts up to 80% of the property value.
The Bank generally requires private mortgage insurance for loans in excess of
80% of property value. The maximum loan-to-value ratio on owner occupied
residential properties is 95%. The maximum loan-to-value ratio on non-owner
occupied residential properties is 80%.
COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING. The Bank originates
permanent and construction loans on commercial real estate. These loans are
typically secured by income producing apartment buildings, office buildings,
industrial buildings and various retail properties. As of March 31, 1999,
commercial real estate loans totaled $48.8 million and constituted 17.4% of the
total loan portfolio.
Commercial real estate loans have been made for up to 80% of the appraised
value of the property and have generally been made for amounts up to $3.0
million. Commercial real estate loans currently offered by the Bank have terms
of one to ten years. Title insurance, fire, casualty insurance and flood
insurance are required in amounts sufficient to protect the Bank's interest,
where applicable. In some cases, commercial real estate loans were granted in
participation with other lenders.
The Bank's construction loans totaled $5.2 million, or 1.9%, of the Bank's
loan portfolio at March 31, 1999. Construction loans are short term in nature
and have maturities ranging from six months to two years. The Bank grants loans
to construct residential and commercial real estate, as well as land development
for individual residential lots. Currently, construction loans are made for up
to 80% of the completed value of the property, based on independent appraisals.
The Bank analyzes the construction budget and reviews the developer's past
projects in addition to conducting responsible commercial real estate
underwriting practices. Funds are disbursed based on a schedule of completed
work presented to the Bank and confirmed by physical inspection of the property
by a designated Bank officer or construction consultant and, in general, after
receipt of title updates.
The Bank determines aggregate loan limitations for individual borrowers
based upon market conditions and the financial capacity of that borrower or
guarantor. During the past five years, such aggregate limits have not exceeded
$4.0 million per borrower.
The Bank also originates loans for the construction of single family homes
for resale by professional builders. The Bank also lends to individuals for
construction of one to four family homes which they intend to occupy. Borrowers
are required to have a firm contract with a qualified builder or developer or to
have demonstrated prior home building experience. The borrower must be approved
for permanent financing by the Bank prior to a construction loan being granted.
Such construction loans are normally made for a term of not more than one year
and based on a completed value of not more than 80%, as determined by an
independent certified or licensed appraiser.
SECOND MORTGAGES AND HOME EQUITY LINES OF CREDIT. The Bank offers home
equity lines of credit that are secured by the borrower's equity in their
primary residence and may take the form of a first or second mortgage. Equity
loans are made in amounts up to 80% of the appraised value less any first
mortgage. Payment of interest is required monthly and the rate is adjusted
monthly based on changes in the Prime Rate, as quoted in the Wall Street
Journal.
6
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Loans are not contingent upon proceeds being used for home improvement. The
Bank's home equity loans outstanding, and amortizing second mortgages totaled
$7.5 million, or 2.7%, of the Bank's loan portfolio at March 31, 1999.
COMMERCE AND INDUSTRY, CONSUMER AND OTHER LOANS. The Bank's commerce and
industry, consumer and other loans totaled $6.2 million, or 2.2%, of the total
loan portfolio on March 31, 1999. The Bank entered the commerce and industry
lending business in fiscal 1995 with its acquisition of Metro Bancorp, Inc. The
commerce and industry loan portfolio consists of time, demand and line-of-credit
loans to a variety of local small businesses.
RISKS OF COMMERCIAL REAL ESTATE, CONSTRUCTION, COMMERCE AND INDUSTRY, AND
CONSUMER LENDING. Commercial real estate, construction, commerce and industry
and consumer lending entail significant additional risks compared to residential
mortgage lending. In addition, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of the properties and thus may be subject to a greater extent to adverse
conditions in the local real estate market or in the economy generally.
Construction loans involve additional risks, because of the uncertainties
inherent in estimating construction costs, delays arising from labor problems,
material shortages, and other unpredictable contingencies, which make it
relatively difficult to evaluate accurately the total loan funds required to
complete a project, and related loan-to-value ratios. Commerce and industry
loans are not secured by real estate and may involve greater risks than other
types of lending. Because payments on such loans are often dependent on the
successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. Consumer
loans and particularly unsecured personal loans may involve additional risks,
and it may be expensive and time consuming to recover the money lent in the
event of a default. The Bank has attempted to limit the risk of loss on its
commercial real estate, construction and consumer loans, and has established
provisions for loan losses. For more information see " -- Non-Performing
Assets" and " -- Impaired Loans". Any reversal of the apparent stabilization in
the New England real estate market and economy would likely negatively affect
the Bank's commercial real estate, construction and consumer loan portfolios,
which would thereby negatively affect the Bank's results of operations.
ORIGINATION FEES AND OTHER FEES. The Bank currently collects origination
fees on some of the real estate loan products offered. Fees to cover the cost
of appraisals, credit reports, and other direct costs are also collected. Loan
origination fees collected vary in proportion to the level of lending activity
as well as competitive and economic conditions.
The Bank imposes late charges on all loans with the exception of equity
lines of credit and loans secured by deposits. The Bank also collects
prepayment premiums and partial release fees on commercial real estate and
construction loans where such items are negotiated as part of the loan
agreement.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a number of
sources. Most real estate loans are attributable to walk-in customers, existing
customers, real estate brokers, third party originators and builders. Consumer
loans result from walk-in customers and depositors.
Each loan originated by the Bank is underwritten by lending personnel of
the Bank, and qualified independent contract underwriters. Individual lending
officers, a committee of loan officers and the Bank's Security Committee have
the authority to approve loans up to various limits. Applications are received
in each of the offices of the Bank. Independent certified or licensed appraisers
are used to appraise the property intended to secure real estate loans. The
Bank's underwriting criteria are designed to minimize the risks of each loan.
There are detailed guidelines concerning the types of loans that may be made,
the nature of the collateral, the information that must be obtained concerning
the loan applicant and follow-up inspections of collateral after the loan is
made.
NON-PERFORMING ASSETS. The Bank notifies a borrower of a delinquency when
any payment becomes 15 days past due. Repeated contacts are made if the loan
remains delinquent for 30 days or more. The Bank will consider working out a
payment schedule with a borrower to clear a delinquency, if necessary. If,
however, a borrower is unwilling or unable to resolve such a default after 90
days, the Bank will generally proceed to foreclose and liquidate the property to
satisfy the debt. Real estate acquired through foreclosure is classified as
"real estate acquired by foreclosure" until it is sold or otherwise disposed of
by the Bank.
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Loans on which the accrual of interest has been discontinued are designated
as non-accrual loans. Accrual of interest on loans and amortization of net
deferred loan fees or costs are discontinued either when reasonable doubt exists
as to the full and timely collection of interest or principal, or when a loan
becomes contractually past due 90 days with respect to interest or principal.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current period interest income. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to interest and principal and when, in the judgment of management, the
loans are estimated to be fully collectable as to both principal and interest.
The Bank has instituted additional procedures to closely monitor loans and
bring potential problems to management's attention early in the collection
process. The Bank prepares a monthly watch list of potential problem loans
including currently performing loans. The Senior Loan Officer reviews
delinquencies with the Security Committee of the Board of Directors at least
monthly. Due to the high priority given to monitoring asset quality, Senior
Management is involved in the early detection and resolution of problem loans.
As of March 31, 1999, the Bank had four non-performing loans, with
outstanding balances ranging from less than $3,000 to $295,000, and totaling
$419,000.
At March 31, 1999, the Bank did not have any real estate acquired by
foreclosure.
IMPAIRED LOANS. At March 31, 1999, there were no impaired loans.
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis, non-performing loans.. $ 419 $ 357 $2,145 $ 758 $2,291
Restructured loans......................... -- -- -- 3,815 4,589
Real estate acquired by foreclosure........ -- -- 13 1,538 2,737
----- ------ ------ ------ ------
Non-performing assets................... $ 419 $ 357 $2,158 $6,111 $9,617
===== ====== ====== ====== ======
Impaired loans, accruing................... -- 1,306 664 -- --
Non-performing loans to total loans........ 0.15% 0.13% 0.91% 0.35% 1.08%
Non-performing assets to total assets...... 0.12% 0.09% 0.67% 1.97% 3.00%
</TABLE>
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<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at
a level which management considers adequate to provide for potential losses
based on an evaluation of known and inherent risks in the portfolio. Such
evaluation for each of the periods reported includes identification of adverse
situations which may affect the ability of certain borrowers to repay, a review
of overall portfolio size, quality, composition and an assessment of existing
and anticipated economic conditions. Regular reviews of the loan portfolio are
performed to identify loans for which specific allowance allocations are
considered prudent. Specific allocations are made based on the risk
classification assigned to individual loans. Additionally, general risk
allocations are determined by formula whereby the loan portfolio is stratified
by loan type and by risk rating category. Loss factors are then applied to each
strata based on various considerations including historical loss experience,
delinquency trends, current economic conditions, industry standards and
regulatory guidelines. While management uses available information in
establishing the allowance for loan losses, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. Additions to the allowance are
charged to earnings and realized losses, net of recoveries, are charged to the
allowance.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
their judgment of information available to them at their examination date.
The following table presents activity in the allowance for loan losses
during the years indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............... $ 2,886 $ 2,900 $ 3,032 $ 2,954 $ 2,817
-------- -------- -------- -------- --------
Loans charged-off:
Residential mortgage..................... (88) (--) (160) (73) (160)
Commercial mortgage...................... (--) (83) (57) (70) (1,072)
Other loans.............................. (11) (14) (7) (23) (3)
-------- -------- -------- -------- --------
Total loans charged-off................ (99) (97) (224) (166) (1,235)
-------- -------- -------- -------- --------
Recoveries:
Residential mortgage..................... 78 16 43 20 117
Commercial mortgage...................... 36 46 -- 71 51
Other loans.............................. 12 21 49 33 3
-------- -------- -------- -------- --------
Total recoveries....................... 126 83 92 124 171
-------- -------- -------- -------- --------
Net loans recovered (charged-off).......... 27 (14) (132) (42) (1,064)
Provision.................................. -- -- -- 120 700
-------- -------- -------- -------- --------
Balance at end of year..................... $ 2,913 $ 2,886 $ 2,900 $ 3,032 $ 2,954
======== ======== ======== ======== ========
Average loans outstanding during the year $287,513 $250,329 $231,006 $215,765 $175,888
Ratio of net charge-offs to average loans --% 0.01% 0.06% -- 0.60%
Total loans outstanding at end of year..... $280,346 $281,724 $234,935 $214,421 $212,438
Ratio of allowance for loan
losses to loans at end of year........... 1.04% 1.02% 1.23% 1.41% 1.39%
</TABLE>
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The following table presents the allocation of the Bank's allowance for
loan losses, by type of loan, at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- ---------------------
% of % of % of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------ ------ ------------ ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential mortgage...................... $1,120 75.8% $1,104 73.8% $ 964 75.1%
Commercial mortgage....................... 1,556 17.4 1,578 18.6 1,808 17.8
Construction.............................. 92 1.9 105 2.9 36 1.3
Second mortgage and
home equity.............................. 58 2.7 48 3.0 44 3.6
------ ----- ------ ----- ------ --------
Total mortgages......................... 2,826 97.8 2,835 98.3 2,852 97.8
Other loans................................ 87 2.2 51 1.7 48 2.2
------ ----- ------ ----- ------ --------
Total.................................... $2,913 100.0% $2,886 100.0% $2,900 100.0%
====== ===== ====== ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------
1996 1995
------------------- -------------------
% of % of
Loans to Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
Residential mortgage...................... $1,077 75.2% $ 791 73.2%
Commercial mortgage....................... 1,837 17.9 2,038 19.1
Construction.............................. 13 0.4 8 0.3
Second mortgage and
home equity.............................. 51 4.1 58 4.7
------ ----- ------ -----
Total mortgages......................... 2,978 97.6 2,895 97.3
Other loans................................ 54 2.4 59 2.7
------ ----- ------ -----
Total.................................... $3,032 100.0% $2,954 100.0%
====== ===== ====== =====
</TABLE>
INVESTMENT ACTIVITIES
The Bank's management believes it prudent to maintain an investment
portfolio that provides not only a source of income but also a source of
liquidity to meet lending demands and fluctuations in deposit flows.
Investments are classified as either held to maturity, available for sale
or trading. Investments classified as trading securities are reported at fair
value with unrealized gains and losses included in earnings. Investments
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as a separate component of stockholders' equity.
Securities held to maturity continue to be carried at amortized cost.
10
<PAGE>
The following table sets forth the composition of the Bank's investment
portfolio (at amortized cost), as well as the percentage such investments
comprise of the Bank's total assets, at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Short-term investments:
Interest bearing deposits in other banks.. $ 177 $ 177 $ 177
Federal funds sold overnight.............. 16,762 3,144 2,861
------- ------- -------
Total short-term investments.......... 16,939 3,321 3,038
------- ------- -------
Percent of total assets................. 4.7% 0.9% 0.9%
======= ======= =======
Investment securities:
U. S. Government and federal
agency obligations...................... $15,500 $22,510 $35,811
Municipals................................ -- -- --
Common and preferred stocks............... 5,682 5,026 4,004
Mortgage-backed securities................ 30,190 45,263 28,180
------- ------- -------
51,372 72,799 67,995
Unrealized gain (loss) on securities
available for sale...................... 570 907 (156)
------- ------- -------
Total investment securities........... $68,881 $73,706 $67,839
======= ======= =======
Percent of total assets............... 18.9% 19.6% 21.1%
======= ======= =======
</TABLE>
11
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities at March
31, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
-------------------- -------------------- --------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities................ $ 511 7.75% $ 3,017 6.39% $ 11,994 6.22%
Municipals........................................... -- -- -- -- -- --
Common and preferred stocks.......................... -- -- -- -- -- --
Mortgage-backed securities........................... 925 6.13% 946 6.57% 4,687 7.19
-------- -------- --------
Total............................................... $ 1,436 $ 3,963 $ 16,681
======== ======== ========
<CAPTION>
Common
More than Ten Years Stock Total Investment Portfolio
-------------------- --------- --------------------------------
Carrying Average Carrying Carrying Market Average
Value Yield Value Value Value Yield
--------- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities................ $ -- --% $ -- $15,522 $15,522 6.30%
Municipals........................................... -- -- -- -- --
Common and preferred stocks.......................... -- -- 6,421 6,421 6,421
Mortgage-backed securities........................... 23,441 6.87% -- 29,999 29,999 6.80%
-------- -------- ------- -------
Total............................................... $ 23,441 $ 6,421 $51,942 $51,942
======== ======== ======= =======
</TABLE>
12
<PAGE>
SAVINGS ACTIVITIES, BORROWINGS AND OTHER SOURCES OF FUNDS
GENERAL. Savings accounts and other types of deposits have traditionally
been an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments, loan sales, borrowings and from other operations. The
availability of funds is influenced by the general level of interest rates and
other market conditions. Scheduled loan repayments are a relatively stable
source of funds while deposit inflows and outflows vary widely and are
influenced by prevailing interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in deposits or
deposit inflows at less than projected levels and may be used on a longer term
basis to support expanded lending activities.
DEPOSITS. Consumer deposits are attracted principally from within the
Bank's market area through the offering of a broad selection of deposit
instruments including demand deposit accounts, NOW and Preferred NOW accounts,
money market deposit accounts, regular savings accounts, term deposit accounts
and retirement savings plans. The Bank does not actively solicit or advertise
for deposits outside of its market area or solicit brokered deposits. The Bank
attracts deposits through its branch office network, automated teller machines
and by paying rates competitive with other Massachusetts financial institutions.
The Bank follows a policy of controlled deposit growth, by pricing its
savings products based on the Bank's need for additional funds and rates being
paid by other Massachusetts financial institutions. The Bank's efforts to
reduce the overall cost of deposits has resulted in a decline in total deposits
of $9.9 million during fiscal 1999. As a result, the cost of deposits declined
19 basis points for fiscal 1999. The deposit outflow was primarily funded by
maturing and called investment securities.
13
<PAGE>
DEPOSIT ACCOUNTS. The following table shows the distribution of the Bank's
deposit accounts at the dates indicated and the weighted average rate paid for
each category of account for the years indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Average Average Average
Average % of Rate Average % of Rate Average % of Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand..................... $ 15,219 5.5% --% $ 13,608 5.0% --% $ 12,564 4.9% --%
NOW accounts............... 26,917 9.8 1.28 25,924 9.6 1.27 23,714 9.2 1.26
Regular, club and 90-day
notice accounts.......... 61,572 22.4 2.34 59,146 21.9 2.53 61,391 23.8 2.53
Money market deposit
accounts.................. 22,375 8.1 2.64 22,253 8.2 2.87 23,885 9.2 2.83
Term deposit certificates:
Six-month money market... 14,274 5.2 4.80 13,569 5.0 5.06 16,315 6.3 4.97
Other.................... 134,778 49.0 5.72 136,150 50.3 5.85 120,148 46.6 5.73
-------- ------ -------- ------ -------- ------
Total term deposit
certificates.......... 149,052 54.2 5.63 149,719 55.3 5.77 136,463 52.9 5.64
-------- ------ -------- ------ -------- ------
Total deposits......... $275,135 100.0% 3.91% $270,650 100.0% 4.10% $258,017 100.0% 3.95%
======== ====== ===== ======== ====== ===== ======== ====== =====
</TABLE>
14
<PAGE>
TIME DEPOSITS IN EXCESS OF $100,000. The following table indicates the
amount of the Bank's time deposits of $100,000 or more by time remaining until
maturity as of March 31, 1999.
<TABLE>
<CAPTION>
Time Deposits
--------------
(In thousands)
<S> <C>
Maturity Period of Deposits:
Three months or less............................ $ 2,677
Three through six months........................ 10,372
Six through twelve months....................... 6,053
Over twelve months.............................. 3,265
--------
Total......................................... $ 22,367
========
</TABLE>
BORROWINGS. From time to time the Bank borrows funds from the FHLB of
Boston on a short-term basis to compensate for reductions in deposits or deposit
inflows at less than projected levels. Such funds may also be used on a longer
term basis to support expanded lending or investment activities to increase
yields or improve asset-liability management. All advances from the FHLB of
Boston are secured by a blanket lien on residential first mortgage loans,
investment securities and all stock in the FHLB of Boston. At March 31, 1999,
the Bank had advances outstanding from the FHLB of Boston of $57.0 million.
Funds from these advances were used in conjunction with the increase in deposits
to fund the Bank's growth in loans and investments. Additional sources of funds
include The Co-operative Central Bank Reserve Fund and the Federal Reserve
System.
SUBSIDIARY ACTIVITIES
In April 1998, the Bank established Central Securities Corporation, a
Massachusetts corporation, as a wholly owned subsidiary of the Bank for the
purpose of engaging exclusively in buying, selling and holding, on its own
behalf, securities that may be held directly by the Bank. This subsidiary
corporation holds U.S. Treasury notes and Government agency obligations and
mortgage-backed securities and qualify under Section 38B of Chapter 63 of the
Massachusetts General Laws as a Massachusetts security corporation.
REGULATION AND SUPERVISION OF THE COMPANY
REGULATION OF THE COMPANY. The Company is a bank holding company subject to
regulation by the Federal Reserve Board under the Bank Holding Company Act (the
"BHCA"). As a result, the activities of the Company are subject to certain
limitations, which are described below. In addition, as a bank holding company,
the Company is required to file annual and quarterly reports with the Federal
Reserve Board and to furnish such additional information as the Federal Reserve
Board may require pursuant to the BHCA. The Company is also subject to regular
examination by the Federal Reserve Board.
With certain exceptions, the BHCA prohibits a bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking. The
activities of the Company are subject to these legal and regulatory limitations
under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power to order a
holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
15
<PAGE>
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after
such acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ("CRA") ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
The BHCA prohibits the Federal Reserve Board from approving an application
by a bank holding company to acquire voting shares of a bank located outside the
state in which the operations of the holding company's bank subsidiaries are
principally conducted, unless such an acquisition is specifically authorized by
state law. See " --Interstate Banking." The BHCA does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding
companies.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA, "control" is defined as ownership of more than 25% of any class of voting
securities of the Company or the Bank, the ability to control the election of a
majority of the directors, or the exercise of a controlling influence over
management or policies of the Company or the Bank. In addition, the Change in
Bank Control Act and the related regulations of the Federal Reserve Board
require any person or persons acting in concert (except for companies required
to make application under the BHCA), to file a written notice with the Federal
Reserve Board before such person or persons may acquire control of the Company
or the Bank. The Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting securities or to
direct the management or policies of a bank holding company or an insured bank.
Under Massachusetts banking law, prior approval of the Division is also
required before any person may acquire a Massachusetts bank holding company.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "-- Capital Requirements."
HOLDING COMPANY DIVIDENDS AND STOCK REPURCHASES. The Federal Reserve Board
has the power to prohibit dividends by bank holding companies if their actions
constitute unsafe or unsound practices. The Federal Reserve Board has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the Federal Reserve Board's view that a bank holding company
should pay cash dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the company's capital needs, asset
quality, and overall financial condition. The Federal Reserve Board also
indicated that it would be inappropriate for a bank holding company experiencing
serious financial problems to borrow funds to pay dividends. Under the prompt
corrective action regulations adopted by the Federal Reserve Board pursuant to
FDICIA, the Federal Reserve Board may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized." See "-- Prompt Corrective Regulatory Action."
As a bank holding company, the Company is required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve Board may disapprove such
a purchase or redemption if it determines that the proposal would violate any
law, regulation, Federal Reserve Board order, directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. This
requirement does not apply to bank holding companies that are "well-
capitalized," received one of the two highest examination ratings at their last
examination and are not the subject of any unresolved supervisory issues.
16
<PAGE>
REGULATION AND SUPERVISION OF THE BANK
GENERAL. The Bank is subject to extensive regulation by the Commissioner
and the FDIC. The lending activities and other investments of the Bank must
comply with various regulatory requirements. The Commissioner and FDIC
periodically examine the Bank for compliance with various regulatory
requirements. The Bank must file reports with the Commissioner and the FDIC
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES. The U.S. Congress is in the
process of drafting legislation which may have a profound effect on the
financial services industry. In January 1999 legislation restructuring the
activities and regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress. The stated purposes of the
House bill ("H.R. 10") are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition. H.R. 10 would permit affiliations between commercial
banks, securities firms, insurance companies and, subject to certain
limitations, other commercial enterprises allowing holding companies to offer
new services and products. In particular, H.R. 10 repeals the Glass-Steagall
Act prohibitions on bank affiliating with securities firms and thereby allow
holding companies to engage in securities underwriting and dealing without
limits and to sponsor and act as distributor for mutual funds and also removes
the Bank Holding Company Act's prohibitions on insurance underwriting allowing
holding companies to underwrite and broker any type of insurance product. H.R.
10 also calls for a new regulatory framework for financial institutions and
their holding companies. The legislation preserves the thrift charter and all
existing thrift powers, but would restrict the activities of new unitary thrift
holding companies. The legislation is expected to be voted by the House and if
passed, reconciled with the Senate version during the summer of 1999. In May
1999, the Senate passed a version of financial services modernization which
differs from H.R. 10. At this time, it is unknown how the legislation will be
modified, or if enacted, what form the final version of the legislation might
take, and how it will affect the Bank's business and operations and competitive
environment.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System are required to maintain a minimum
leverage capital requirement consisting of a ratio of Tier 1 capital to total
assets of 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and in general a strong banking organization, rated composite 1 under
the Uniform Financial Institutions Rating System (the CAMELS rating system)
established by the Federal Financial Institutions Examination Council. For all
but the most highly rated institutions meeting the conditions set forth above,
the minimum leverage capital ratio is 3% plus an additional "cushion" amount of
at least 100 to 200 basis points with a minimum leverage capital requirement of
not less than 4%. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than certain mortgage servicing rights, purchased credit card
relationships and qualifying supervisory goodwill) minus identified losses and
minus investments in certain subsidiaries.
In addition to the leverage ratio (the ratio of Tier I capital to total
assets), state-chartered nonmember banks must maintain a minimum ratio of
qualifying total capital to risk-weighted assets of at least 8% of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2
capital items include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, cumulative preferred stock and preferred stock with a
maturity of over 20 years, certain other capital instruments and up to 45% of
pretax net unrealized savings on equity securities. The includable amount of
Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying total
capital is further reduced by the amount of the bank's investments in banking
and finance subsidiaries that are not consolidated for regulatory capital
purposes, reciprocal cross-holdings of capital securities issued by other banks,
most intangible assets and certain other deductions. Under the FDIC risk-
weighted system, all of a bank's balance sheet assets and the credit equivalent
amounts of certain off-balance sheet items are assigned to one of four broad
risk weight categories from 0% to 100%, based on the risks inherent in the type
of assets or item. The aggregate dollar amount of each category is multiplied
by risk weight assigned to that category. The sum of these weighted values
equals the bank's risk-weighted assets.
17
<PAGE>
At March 31, 1999, the Bank's ratio of core Tier 1 capital to total assets
was 10.0, its ratio of Tier 1 capital to risk-weighted assets was 15.5% and its
ratio of total risk-based capital to risk-weighted assets was 16.8%.
The Federal banking regulators, including the Federal Reserve Board and the
FDIC, have proposed to revise their risk-based capital requirements to ensure
that such requirements provide for explicit consideration of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the rule or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's
interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank is required under the rule to
hold additional capital equal to the dollar amount of the excess. Management of
the Bank has not determined what effect, if any, the FDIC's proposed interest
rate risk component would have on the Bank's capital if adopted as proposed.
The FDIC has adopted a regulation that provides that the FDIC may take into
account whether a bank has significant risks from concentrations of credit or
nontraditional activities in determining the adequacy of its capital. The Bank
has not been advised that it will be required to maintain any additional capital
under this regulation.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Federal and State Taxation." The Bank intends to make
full use of this favorable tax treatment and does not contemplate use of any
earnings in a manner which would limit the Bank's bad debt deduction or create
federal tax liabilities.
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
DEPOSIT INSURANCE. The Bank is charged a premium by the FDIC for Bank
Insurance Fund ("BIF") insurance of its insurable deposit accounts. The FDIC is
required to establish an assessment rate for deposit insurance premiums that
protects the insurance fund and considers the fund's operating expenses, case
resolution expenditures, income and the effect of the assessment rate on the
earnings and capital of BIF members.
As required by the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC has established a risk-based assessment system for
insured depository institutions. Under the system, the assessment rate for an
insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by the
institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- based on the data reported to regulators for
the date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well capitalized institutions are institutions satisfying
the following capital ratio standards: (i) total risk-based capital ratio of
10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and
(iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized
institutions are institutions that do not meet the standards for well
capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
18
<PAGE>
The BIF deposit insurance assessment rates are determined by the FDIC based
on a number of factors to maintain a statutory designated reserve ratio for the
BIF of 1.25% of insured deposits. In March 1999, the reserve ratio was above
the target ratio. As a result, the BIF assessment rates of "well-capitalized"
institutions in Subgroup A, numbering 95% of BIF-insured institutions, including
the Bank, pay no federal deposit insurance premiums, with the remaining 5% of
institutions paying a graduated range of rates up to 0.27% of insured deposits
for the highest risk-based premium category. These rates will be effective for
the 1999 calendar year and indefinitely thereafter until the FDIC takes further
action.
In 1996, the FDIC issued a separate levy for the bonds of the Financing
Corporation ("FICO"), a federally chartered corporation which provided some of
the financing required to resolve the thrift crisis in the 1980s. All FDIC-
insured institutions must make FICO payments, but BIF-insured deposits are
assessed at only one-fifth of the rate of SAIF-insured deposits until January 1,
2000 (or sooner, if the two funds are merged).
All Massachusetts chartered co-operative banks are required to be members
of the Share Insurance Fund. The Share Insurance Fund maintains a deposit
insurance fund which insures all deposits in member banks which are not covered
by federal insurance, which in the case of the Bank are its deposits in excess
of $100,000 per insured account. In past years, a premium of 1/24 of 1% of
insured deposits has been assessed annually on member banks such as the Bank for
this deposit insurance. However, no premium has been assessed in recent years.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires the federal banking
regulators to take prompt corrective action in the event an FDIC-insured
institution fails to meet certain minimum capital requirements. Under FDICIA,
as implemented by regulations adopted by the FDIC, an institution is assigned to
one of the following five capital categories:
. well-capitalized -- total risk-based capital ratio of 10% or greater,
Tier 1 risk-based capital ratio of 6% or greater, leverage ratio of 5%
or greater, and no written FDIC directive or order requiring the
maintenance of specific levels of capital;
. adequately capitalized -- total risk-based capital ratio of 8% or
greater, Tier 1 risk-based capital ratio of 4% or greater, and
leverage ratio of 4% or greater (or 3% or greater if the institution's
composite rating under the CAMELS rating system is 1);
. undercapitalized -- total risk-based capital ratio of less than 8%, or
Tier 1 risk-based capital ratio of less than 4%, or leverage ratio of
less than 4% (or less than 3% if the institution's composite rating
under the CAMELS rating system is 1);
. significantly undercapitalized -- total risk-based capital ratio of
less than 6%, or Tier 1 risk-based capital ratio of less than 3% or
leverage ratio of less than 3%; and
. critically undercapitalized -- ratio of tangible equity to total
assets of 2% or less.
Under FDICIA, an "undercapitalized institution" generally is: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
significantly undercapitalized institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution may also be required to divest the institution. The senior
executive officers of such an institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt, with certain
exceptions. If an institution's ratio of tangible capital to total assets falls
below a level established by the appropriate federal banking regulator, which
may not be less than 2% of total assets nor more than 65% of the minimum
leverage capital level otherwise required (the "critical capital level"), the
institution is subject to
19
<PAGE>
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. At March 31, 1999, the Bank was
classified as "well-capitalized" under the FDIC's regulations.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. In 1995, these agencies,
including the FDIC, released interagency guidelines establishing such standards
and adopted rules with respect to safety and soundness compliance plans. The
guidelines require savings institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the agency determines
that a savings institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A savings institution must submit an
acceptable compliance plan to the agency within 30 days of receipt of a request
for such a plan. Failure to submit or implement a compliance plan may subject
the institution to regulatory sanctions. Management believes that the Bank has
met substantially all the standards adopted in the interagency guidelines.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies established standards relating to asset quality and earnings. Under
the guidelines a savings institution should maintain systems, commensurate with
its size and the nature and scope of its operations, to identify problem assets
and prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards
do not have a material effect on the operations of the Bank.
The federal banking agencies have also established Year 2000 readiness
safety and soundness guidelines requiring all insured depository institutions to
implement procedures by specified key dates to ensure the institution can
continue business operations after January 1, 2000. Every institution must
identify its internal and external "mission-critical" systems (i.e., those
systems vital to the continuance of a core business activity) and develop a
written plan establishing priorities, oversight and reasonable deadlines to
complete the testing and renovation of mission-critical systems. In addition,
an institution must prepare a written business resumption contingency plan that
(i) defines scenarios where mission-critical systems might fail, (ii) evaluates
contingency options to keep business operations going, and (iii) provides for
testing of the contingency plan by an independent party. Every depository
institution must also identify among its customers those persons that represent
a material risk to the institution in the event the customer is not Year 2000
compliant and implement appropriate risks controls to manage and mitigate the
customer's Year 2000 risk to the institution. The federal banking agencies will
examine the institution's overall progress in meeting the Year 2000 readiness
guidelines. In the event an institution has failed to renovate its mission-
critical systems or is not on schedule with key dates, the institution must
draft a remediation contingency plan outlining alternative strategies to comply
with the guidelines and locate available third party providers. The agencies,
in their sole discretion, may take actions under the FDICIA, the safety and
soundness guidelines or any other action available to them, including
enforcement action, to ensure an institution's Year 2000 readiness. For
additional information, see "Year 2000 Readiness Disclosure" in the Annual
Report.
UNIFORM LENDING STANDARDS. As required by FDICIA, the federal banking
agencies have adopted regulations that require banks to adopt and maintain
written policies establishing appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
20
<PAGE>
the Interagency Guidelines for Real Estate Lending Policies (the "Real Estate
Lending Guidelines") that have been adopted by the banking agencies. The Real
Estate Lending Guidelines, among other things, call upon depository institutions
to establish internal loan-to-value limits for real estate loans that should not
exceed supervisory loan-to-value limits for the various types of real estate
loans. The Real Estate Lending Guidelines state, however, that it may be
appropriate in individual cases to originate or purchase loans with loan-to-
value ratios in excess of the supervisory loan-to-value limits. The Bank does
not believe that the Real Estate Lending Guidelines will materially affect its
lending activities.
FEDERAL RESERVE BOARD REGULATIONS. Under FRB regulations, the Bank
currently must maintain average daily reserves equal to 3% of net transaction
accounts between $4.9 million and $46.5 million plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. At March 31, 1999, the Bank met applicable FRB reserve requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the Federal Home
Loan Bank System ("FHLBS") which consists of 12 regional Federal Home Loan Banks
governed and regulated by the Federal Housing Finance Board ("FHFB") of the
Federal Home Loan Bank Board. As a member, the Bank is required to purchase and
hold stock in the FHLB of Boston in an amount equal to the greater of 1% of
their aggregate unpaid home loan balances at the beginning of the year or an
amount equal to 5% of FHLB advances outstanding, whichever is greater. As of
March 31, 1999, the Bank held stock in the FHLB of Boston in the amount $3.4
million and was in compliance with the above requirement.
The FHLB of Boston serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of FHLBS. It makes loans
(i.e., advances) to members in accordance with policies and procedures
established by the FHLBS and the Board of Directors of the FHLB of Boston.
LOANS TO INSIDERS. Massachusetts-chartered co-operative banks are subject
to the restrictions contained in Section 22(h) of the Federal Reserve Act and
the Federal Reserve Board's Regulation O thereunder on loans to executive
officers, directors and principal stockholders, with limited exceptions. Under
Section 22(h), loans to a director, executive officer and to a greater than 10%
stockholder of an institution and certain affiliated interests of such persons,
may not exceed, together with all other outstanding loans to such person and
affiliated interests, the institution's loans-to-one-borrower limit (generally
equal to 20% of the institution's unimpaired capital and surplus). Section
22(h) also prohibits the making of loans above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and greater
than 10% stockholders of an institution, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
institution with any "interested" director not participating in the voting.
Regulation O prescribes the loan amount (which includes all other outstanding
loans to such person) as to which such prior board of director approval is
required as being the greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, Section 22(h) requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
those offered in comparable transactions to other persons. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the Bank Holding Company
Act of 1956, as amended ("BHCA") prohibits extensions of credit to executive
officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
21
<PAGE>
MASSACHUSETTS STATE LAW. As a Massachusetts-chartered co-operative bank,
the Bank is subject to the applicable provisions of Massachusetts law and the
regulations of the Commissioner adopted thereunder. The Bank derives its
lending and investment powers from these laws, and is subject to periodic
examination and reporting requirements by and of the Commissioner. In addition,
the Bank is required to make periodic reports to the Co-operative Central Bank.
In 1990, legislation was enacted permitting banks nationwide to enter the Bank's
market area and compete for deposits and loan originations. The approval of the
Massachusetts Commissioner of Banks is required prior to any merger or
consolidation, or the establishment or relocation of any office facility.
FEDERAL AND STATE TAXATION
For taxable years beginning after June 30, 1986, the Internal Revenue Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum
tax generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides for items of tax preference that include (a) tax-exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) for taxable years beginning
after 1989, this preference of 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Internal Revenue Code, over (ii) AMTI
(determined without regard to this preference and prior to reduction by net
operating losses). For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum taxes may be used as credits against regular tax liabilities in future
years. The Bank is not currently paying any amount of alternative minimum tax
but may, depending on future results of operations, become subject to this tax.
The Massachusetts excise tax rate for co-operative banks is currently
10.91% of federal taxable income, adjusted for certain items. It is anticipated
that this rate will be reduced so that the Bank's tax rate will become 10.5% by
March 31, 2000. Taxable income includes income from all sources, without
exclusion, less deductions, but not the credits, allowable under the provisions
of the Code, as amended. No deductions however, are allowed for dividends
received. In addition, carryforwards and carrybacks of net operating losses are
not allowed.
The Bank's federal income tax returns for years ended March 31, 1996 and
1997 were examined and finalized in 1998.
22
<PAGE>
COMPETITION
The Bank's competition for savings deposits has historically come from
other co-operative banks, savings banks, savings and loan associations and
commercial banks located in Massachusetts generally, and in the Boston
metropolitan area, specifically. In the past, during times of high interest
rates, the Bank has also experienced additional significant competition for
investor's funds from short-term money market funds and other corporate and
government securities. The Bank has faced continuing competition from other
financial intermediaries for deposits.
The Bank competes for deposits principally by offering depositors a wide
variety of savings programs, convenient branch locations, 24-hour automated
teller machines, preauthorized payment and withdrawal systems, tax-deferred
retirement programs, and other miscellaneous services such as money orders and
travelers' checks. The Bank does not rely upon any individual, group or entity
for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, co-operative banks and savings banks, savings and
loan associations, commercial banks, insurance companies and other institutional
lenders. The Bank competes for loan originations primarily through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers, real estate brokers and builders. The competition for loans
encountered by the Bank, as well as the types of institutions with which the
Bank competes, varies from time to time depending upon certain factors including
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, volatility in the mortgage
markets and other factors which are not readily predictable.
In addition to competing with other savings banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
increased competition from major commercial banks headquartered outside of
Massachusetts as a result of regional interstate banking laws which currently
permit banks located in New England to enter the bank's market are and compete
with it for deposits and loan originations. The Bank may also face increased
competition as a result of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 which, as of September 29, 1995, allowed the Federal
Reserve Board to approve a bank holding company's application to acquire control
of, or substantially all of the assets of, a Massachusetts bank without regard
to Massachusetts law.
Bank regulation is undergoing significant change with an increased number
of bank mergers and acquisitions, changes in the products and services banks can
offer, and involvement in non-banking activities by bank holding companies.
Recent legislation and regulations have expanded the activities in which
depository institutions may engage and reduced or eliminated some of the
competitive advantages which thrift institutions formerly held over commercial
banks, such as interest rate differentials which permitted thrift institutions
to offer a higher rate of interest to attract deposits. There are a number of
pending legislative and regulatory proposals that may further alter the
structure, regulation and competitive relationships of financial institutions.
The ability of the Bank to remain competitively viable will depend upon how
successfully it can respond to the rapidly evolving competitive, regulatory,
technological and demographic developments affecting its operations.
The Bank is headquartered in Somerville, Massachusetts and operates a
network of eight full service offices located in Somerville, Arlington,
Burlington, Chestnut Hill, Malden, Melrose and Woburn, as well as an operations
center located in Somerville. All offices are located in Massachusetts, within
the Boston metropolitan area. The majority of the properties securing loans
originated by the Bank are located within the Bank's primary market area which
encompasses Suffolk, Norfolk and Middlesex Counties, including the City of
Boston. As to the principal services rendered by the Bank, "Item 1 - Business -
General" is incorporated herein by reference.
The Bank does not believe that the nature of its business is seasonal.
Further, the Bank has not, within the last five fiscal years, been engaged in
any line of business in addition to its normal thrift banking activities.
23
<PAGE>
EMPLOYEES
At March 31, 1999, the Bank employed 80 full-time and 23 part-time
employees. The Bank's employees are not represented by any collective
bargaining agreement. Management of the Bank considers its relations with its
employees to be good.
EXECUTIVE OFFICERS
The executive officers of the Bank at March 31, 1999 were as follows:
Age Position
--- --------
Joseph R. Doherty 75 Chairman of the Board
John D. Doherty 41 President and Chief Executive Officer
Paul S. Feeley 52 Senior Vice President - Treasurer and Chief
Financial Officer
David W. Kearn 57 Senior Vice President - Retail Banking and
Senior Loan Officer
William P. Morrissey 71 Senior Vice President
Gladys N. Partamian 60 Vice President - Investor Relations and Clerk
The following is a description of the principal occupation and employment
of the executive officers of the Bank during the past five years:
JOSEPH R. DOHERTY served as President of the Bank since prior to 1986.
Effective April 1, 1992 he retired as Chief Executive Officer, a position he
held since April 1986. Mr. Doherty remains as Chairman of the Board of
Directors and as a consultant to the Bank. Mr. Doherty is the father of Bank
President John D. Doherty.
JOHN D. DOHERTY was elected President of the Bank in April 1986 and Chief
Executive Officer effective April 1, 1992. Mr. Doherty is responsible for
guiding the overall operations of the Bank and reports on the Bank's operations
directly to the Board of Directors. Mr. Doherty has been employed by the Bank
in various capacities since prior to 1986 and is the son of Chairman of the
Board Joseph R. Doherty.
PAUL S. FEELEY joined the Bank in July 1997 as Senior Vice President and
Treasurer/Chief Financial Officer. From 1993 to 1997, Mr. Feeley was Senior Vice
President and Treasurer of Bridgewater Credit Union. Prior to 1993 Mr. Feeley
was Senior Vice President, Chief Financial Officer and Clerk of the Corporation
at The Cooperative Bank of Concord, Acton, Massachusetts.
DAVID W. KEARN joined the Bank in June 1993 as Senior Vice President -
Retail Banking. From 1990 to 1993, Mr. Kearn was a Vice President of Loan
Administration at Somerset Savings Bank, Somerville, Massachusetts. Mr. Kearn
was Senior Vice President/Branch Administration at United States Trust Company
from 1987 to 1990.
WILLIAM P. MORRISSEY joined the Bank on November 1, 1992 as Senior Vice
President of public affairs who represents the Bank in outside banking and
business organizations. Prior to 1986, Mr. Morrissey served as Executive Vice
President for Corporate Affairs at the Boston Five Cents Savings Bank, and as
Deputy Commissioner of Banks for the Commonwealth of Massachusetts.
GLADYS N. PARTAMIAN joined the Bank in 1979 as an executive secretary. In
1985, Ms. Partamian became Vice President - Corporate Affairs, in which capacity
she manages the Bank's corporate affairs. In connection with the Bank's
conversion to stock form in 1986, Ms. Partamian became Vice President - Investor
Relations. Ms. Partamian has served as Clerk of the Bank since 1992.
24
<PAGE>
ITEM 2. PROPERTIES.
- -------------------
The Bank owns all its offices, except the Burlington and Malden branch
offices, and the operations center located in Somerville (Inner Belt Road). Net
book value includes the cost of land, buildings and improvements as well as
leasehold improvements, net of depreciation and/or amortization. At March 31,
1999, all of the Bank's offices were in reasonable condition and met the
business needs of the Bank. The following table sets forth the location of the
Bank's offices, as well as certain information relating to these offices as of
March 31, 1999:
<TABLE>
<CAPTION>
Net Book
Year Value at
Office Location Opened March 31, 1999
--------------- ------ --------------
<S> <C> <C>
Main Office.................... 1974 $280,000
399 Highland Avenue
Somerville, MA
175 Broadway................... 1982 $137,000
Arlington, MA
85 Wilmington Road............. 1978(a) $ 2,000
Burlington, MA
1192 Boylston Street........... 1954 $164,000
Chestnut Hill (Brookline), MA
137 Pleasant Street............ 1975(b) $ 47,000
Malden, MA
846 Main Street................ 1994(c) $221,000
Melrose, MA
275 Main Street................ 1980 $486,000
Woburn, MA
198 Lexington Street........... 1974 $200,000
Woburn, MA
Operations Center.............. 1994 (c) $ 43,000
17 Inner Belt Road
Somerville, MA
</TABLE>
___________
(a) The lease for the Burlington branch expires in 2002 with an option to
extend the lease for one five-year term.
(b) The lease for the Pleasant Street branch expires in 2005 with an
option to extend the lease for one ten-year term.
(c) The Melrose and Somerville (Inner Belt Road) offices were obtained as
part of the Bank's acquisition of Metro Bancorp, Inc. The lease for
the operations center (Inner Belt Road) expires in 2004 with no
renewal option.
During fiscal 1999, the Bank upgraded its data processing systems,
outsourcing all major functions, including deposit and loan processing, general
ledger and check processing to Bankline New England, Plymouth Massachusetts.
At March 31, 1999, the total net book value of the Bank's premises and
equipment was $2.6 million.
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank from time to time is involved as plaintiff or defendant in various
legal actions incident to its business. None of these actions are believed to be
material, either individually or collectively, to the results of operations and
financial condition of the Company or any subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
- -------
The information contained under the section captioned "Stockholder
Information" in the Annual Report to Stockholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained under the section captioned "Financial
Highlights" in the Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" in the Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET ISSUES
- --------------------------------------------------------------------
The tabular and narrative information set forth in "Item 1. Business" in
Part I of this report and in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II of this report
discloses detailed quantitative and qualitative information about market risks
and their effects on the Company and its subsidiaries, particularly with respect
to changes in market interest rates on interest-earning assets and interest-
bearing liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report to Stockholders
which are listed below are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31, 1999 and 1998
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 1999, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity for the
Fiscal Years Ended March 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 1999, 1998 and 1997
26
<PAGE>
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND PRINCIPAL OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information concerning directors of the Company is incorporated herein by
reference to the sections titled "Proposal I -- Election of Directors" and
"Voting Securities and Principle Holders Thereof" in the Proxy Statement.
Information concerning executive officers of the Company is incorporated
herein by reference to the section titled "Item 1. Business -- Executive
Officers" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information required by this item is incorporated herein by reference
to the section titled "Executive Compensation and Other Matters" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Security Ownership" in the Proxy
Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and Security
Ownership" and "Proposal I -- Election of Directors" in the Proxy
Statement.
(c) Changes in Control
The information required by this item is incorporated by reference to
the Current Report on Form 8-K filed by the Company on January 8, 1999
that reported the reorganization of the Bank to a bank holding company
form of ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section titled "Transactions with Management" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form 10-
K.
27
<PAGE>
(1) Financial Statements
--------------------
For the Financial Statements filed as part of this Annual Report on
Form 10-K, reference is made to "Item 8 -- Financial Statements and
Supplementary Data"
(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as not applicable
or not required or because they are included in the financial
statements appearing at Item 8.
(3) Exhibits Required by Paragraph (c) of Item 14
---------------------------------------------
See "Item 14(c) -- Exhibits"
(b) Reports on Form 8-K -- The Company filed a current report on Form 8-K on
-------------------
January 8, 1999 reporting the reorganization of the Bank to a bank holding
company form of ownership, whereby stockholders received for each
outstanding share of Bank common stock, one share of the Company Common
Stock.
The Company also filed a Current Report on Form 8-K on April 8, 1999,
announcing the commencement of a stock repurchase program.
On January 12, 1999, the Company filed a Current Report on Form 8-K
announcing the declaration of a dividend of one right for each share of
Common Stock held, which were issued pursuant to a Rights Agreement.
(c) Exhibits
--------
The following exhibits are filed as exhibits to this report.
Exhibit No. Exhibit
----------- -------
2.1* Plan of Reorganization and Acquisition dated as of August
13, 1998.
3.1 Articles of Organization of Central Bancorp, Inc.
3.2 Bylaws of Central Bancorp, Inc.
4* Stock Certificate of Central Bancorp, Inc.
10.1 Employment Agreement between the Bank and John D. Doherty
dated October 24, 1986
10.2 First Amendment to Employment Agreement between the Bank and
John D. Doherty dated March 31, 1992
10.3 Second Amendment to Employment Agreement between the Bank
and John D. Doherty dated June 8, 1995
10.4 Third Amendment to the Employment Agreement between the Bank
and John D. Doherty dated January 8, 1999.
10.5 Termination Agreement dated March 31, 1992 by and between
the Bank and Joseph R. Doherty
10.6 Consulting Agreement dated March 31, 1992 by and between the
Bank and Joseph R. Doherty
10.7 Amendment to Consulting Agreement between the Bank and
Joseph R. Doherty dated August 11, 1994
10.8** 1986 Stock Option Plan, as amended
10.9*** Rights Agreement dated as of January 8, 1999 by and between
the Company and State Street Bank & Trust Company as Right
Agent
10.10 Severance Agreement between the Bank and William P.
Morrissey dated December 14, 1994
28
<PAGE>
10.11 Severance Agreement between the Bank and David W. Kearn
dated December 14, 1994
10.12 Severance Agreement between the Bank and Paul S. Feeley
dated May 14, 1998
10.13 Amendments to Severance Agreements between the Bank and
Messrs. Feeley, Kearn and Morrissey dated January 8, 1999.
13 1999 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
______
* Incorporated herein by reference to the Current Report on Form 8-K filed on
January 8, 1999 with the SEC.
** Incorporated herein by reference to the Registration Statement on Form S-8
filed with the SEC on January 26, 1999.
*** Incorporated by reference to the Form 8-A12(g) filed with the SEC on
January 8, 1999.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTRAL BANCORP, INC.
Date: June 25, 1999 By: /s/ John D. Doherty
--------------------------------------
John D. Doherty
President, Chief Executive Officer and
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
By: /s/ John D. Doherty Date: June 25, 1999
-----------------------------------
John D. Doherty
President, Chief Executive Officer
and Director
By: /s/ Paul S. Feeley Date: June 25, 1999
-----------------------------------
Paul S. Feeley
Senior Vice President - Treasurer
and Chief Financial and
Accounting Officer
By: ___________________________________ Date:
Joseph R. Doherty
Chairman of the Board
By: /s/ Terence D. Kenney Date: June 25, 1999
-----------------------------------
Terence D. Kenney
Director
By: /s/ John G. Quinn Date: June 25, 1999
-----------------------------------
John G. Quinn
Director
By: /s/ John F. Gilgun, Jr. Date: June 25, 1999
-----------------------------------
John F. Gilgun, Jr.
Director
By: /s/ Marat E. Santini Date: June 25, 1999
-----------------------------------
Marat E. Santini
Director
By: ___________________________________ Date:
George L. Doherty, Jr.
Director
By: /s/ Gregory W. Boulos Date: June 25, 1999
-----------------------------------
Gregory W. Boulos
Director
<PAGE>
Exhibit 3.1
ARTICLES OF ORGANIZATION
OF
CENTRAL BANCORP, INC.
ARTICLE I
NAME
The name by which the corporation shall be known is: Central Bancorp, Inc.
(the "Corporation").
ARTICLE II
PURPOSES
The purpose for which the Corporation is formed is to engage generally in
any business activity which may be lawfully carried on by a corporation
organized under Chapter 156B of the Massachusetts General Laws and to acquire,
invest in or hold stock in any subsidiary permitted under the Bank Holding
Company Act of 1956, as amended, and to engage in any other activity or
enterprise permitted to a bank holding company under said statute or other
applicable law.
ARTICLE III
SHARES OF CAPITAL STOCK
The total number of shares and the par value, if any, of each class of
stock which the Corporation is authorized to issue is as follows:
<TABLE>
<CAPTION>
Without Par Value With Par Value
------------------------- --------------------------
Class of Stock Number of Shares Type Number of Shares Par Value
- -------------- ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Common -0- Common 15,000,000 $1.00
Preferred -0- Preferred 5,000,000 $1.00
</TABLE>
ARTICLE IV
DESCRIPTION OF CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 20,000,000, of which 15,000,000 are to be
shares of common stock, $1.00 par value per share, and of which 5,000,000 are to
be shares of serial preferred stock, $1.00 par value per share. The shares may
be issued by the Corporation from time to time as approved by the Board of
Directors of the Corporation without the approval of the stockholders except as
otherwise provided in this Article IV or the rules of a national securities
exchange or registered securities association if applicable. The consideration
for the issuance of the shares shall be paid to or received by the Corporation
in full before their issuance and shall not be less than the par value per
share. The consideration for the issuance of the shares shall be cash, services
rendered, personal property (tangible or intangible), real property, leases of
real property or any
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other consideration deemed appropriate by the Board of Directors. In the absence
of actual fraud in the transaction, the judgment of the Board of Directors as to
the value of such consideration shall be conclusive. Upon payment of such
consideration, such shares shall be deemed to be fully paid and nonassessable.
In the case of a stock dividend, the part of the surplus of the Corporation
which is transferred to stated capital upon the issuance of shares as a stock
dividend shall be deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series (if
any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. COMMON STOCK. Except as provided in these Articles (or in any
certificate of establishment of series of preferred stock), the holders of the
common stock shall exclusively possess all voting power. Each holder of shares
of common stock shall be entitled to one vote for each share held by such
holder.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and sinking fund or retirement fund or other retirement payments, if
any, to which such holders are respectively entitled in preference to the common
stock, then dividends may be paid on the common stock, and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends, but only when and as
declared by the Board of Directors of the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having preference
over the common stock in any such event the full preferential amounts to which
they are respectively entitled, the holders of the common stock and of any class
or series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets shall be entitled, after payment or provision for payment
of all debts and liabilities of the Corporation, to receive the remaining assets
of the Corporation available for distribution, in cash or in kind.
Each share of common stock shall have the same relative powers, preferences
and rights as, and shall be identical in all respects with, all the other shares
of common stock of the Corporation.
B. SERIAL PREFERRED STOCK. Subject to any limitations prescribed by law
or these Articles, the Board of Directors of the Corporation is authorized, by
vote from time to time taken, to provide for the issuance of serial preferred
stock in one or more series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series, and the qualifications, limitations or restrictions
thereof, including, but not limited to, the determination of any of the
following:
1. the distinctive serial designation and the number of shares
constituting such series; and
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends;
and
3. the voting powers, full or limited, if any, of the shares of such
series; and
4. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed; and
5. the amount or amounts payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution or winding
up of the Corporation; and
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6. whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such fund and
the manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such fund;
and
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series
of the same or any other class of classes of stock of the Corporation and,
if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which
such conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange; and
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any
other series of serial preferred stock.
Any establishment of a series of preferred stock by the Board of Directors
shall become effective when the Corporation files with the Secretary of State of
the Commonwealth of Massachusetts a certificate of establishment of series of
preferred stock, signed under the penalties of perjury by the Chairman of the
Board, the President or any Vice President and by the Clerk or an Assistant
Clerk or the Secretary or an Assistant Secretary, setting forth the text of the
vote of the Board of Directors determining the terms of the class or the number
of shares and the terms of any series, the date of adoption of such vote and a
certification that such vote was duly adopted by the Board of Directors of the
Corporation.
Each share of each series of serial preferred stock shall have the same
relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None, however, see ARTICLE VI(L), "Approval of Certain Business
Combinations."
ARTICLE VI
Other lawful provisions, for the conduct and regulation of business and
affairs of the Corporation, for its voluntary dissolution or for limiting,
defining or regulating the powers of the Corporation, or of its directors or
stockholders, or of any class of stockholders are as follows:
ARTICLE VI(A)
PREEMPTIVE RIGHTS
No holder of any of the shares of any class or series of stock or of
options, warrants or other rights to purchase shares of any class or series of
stock or of other securities of the Corporation shall have any preemptive right
to purchase
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or subscribe for any unissued stock of any class or series, or any unissued
bonds, charters of indebtedness, debentures or other securities convertible into
or exchangeable for stock of any class or series or carrying any right to
purchase stock of any class or series; but any such unissued stock, bonds,
charters or indebtedness, debentures or other securities convertible into or
exchangeable for stock or carrying any right to purchase stock may be issued
pursuant to a vote of the Board of Directors of the Corporation to such persons,
firms, corporations or associations, whether or not holders thereof, and upon
such terms as may be deemed advisable by the Board of Directors in the exercise
of its sole discretion.
ARTICLE VI(B)
REPURCHASE OF SHARES
The Corporation may from time to time, pursuant to authorization by the
Board of Directors of the Corporation and without action by the stockholders,
purchase or otherwise acquire shares of any class, bonds, debentures, notes,
scrip, warrants, obligations, evidences of indebtedness, or other securities of
the Corporation in such manner, upon such terms, and in such amounts as the
Board of Directors shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of any class of
shares of the Corporation outstanding at the time of the purchase or acquisition
in question or as are imposed by applicable law.
ARTICLE VI(C)
MEETINGS OF STOCKHOLDERS; CUMULATIVE VOTING
A. Notwithstanding any other provision of these Articles or the Bylaws of
the Corporation, any action required to be taken or which may be taken at any
annual or special meeting of stockholders of the Corporation may be taken
without a meeting, if all stockholders entitled to vote on the matter consent in
writing and the written consents are filed with the records of the meeting of
stockholders.
B. Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors of the
Corporation, the Chairman of the Board, the President of the Corporation or a
committee of the Board of Directors which has been duly designated by the Board
of Directors and whose powers and authorities, as provided in a vote of the
Board of Directors or in the Bylaws of the Corporation, include the power and
authority to call such special meetings. Such special meetings may not be called
by any other person or persons, except to the extent the Massachusetts Business
Corporation Law may require.
C. There shall be no cumulative voting by stockholders of any class or
series in the election of directors of the Corporation.
ARTICLE VI(D)
NOTICE FOR NOMINATIONS AND PROPOSALS
A. Nominations for the election of directors and proposals for any new
business to be taken up at any annual or special meeting of stockholders may be
made by the Board of Directors of the Corporation or by any stockholder of the
Corporation entitled to vote generally in the election of directors. In order
for a stockholder of the Corporation to make any such nominations and/or
proposals, he or she shall give notice thereof in writing, delivered or mailed
by first class United States mail, postage prepaid, to the Clerk or the
Secretary of the Corporation not less than 30 days nor more than 60 days prior
to any such meeting. Each such notice given by a stockholder with respect to
nominations for the election of directors shall set forth (i) the name, age,
business address and, if known, residence
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address of each nominee proposed in such notice, (ii) the principal occupation
or employment of each such nominee, and (iii) the number of shares of stock of
the Corporation which are beneficially owned by each such nominee. In addition,
the stockholder making such nomination shall promptly provide any other
information reasonably requested by the Corporation. Each such notice given by a
stockholder with respect to new business shall set forth as to each matter that
the stockholder proposes to bring before the meeting of stockholders (i) a brief
description of the proposal desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address,
as they appear on the Corporation's stock transfer books, of the stockholder
proposing such business and of the beneficial owners (if any) of the stock
registered in such stockholder's name and the name and address of other
stockholders known by such stockholder to be supporting the proposal, (iii) the
class and number of shares of the Corporation's capital stock which are held of
record, beneficially owned or represented by proxy by the stockholder and by any
other stockholders known by such stockholder to be supporting such proposal on
the record date for the meeting in question and on the date of such
stockholder's notice, and (iv) any material interest of the stockholder (or any
other stockholders known by such stockholders to be supporting such proposal) in
such proposal.
B. The presiding officer of the annual or special meeting of stockholders
may, if the facts warrant, determine and declare to such meeting that a
nomination or proposal was not made in accordance with the foregoing procedure,
and, if he should so determine, he shall so declare to the meeting and the
defective nomination or proposal shall be disregarded and laid over for action
at the next succeeding adjourned, special or annual meeting of the stockholders
taking place 30 days or more thereafter. This provision shall not require the
holding of any adjourned or special meeting of stockholders for the purpose of
considering such defective nomination or proposal.
ARTICLE VI(E)
DIRECTORS
A. NUMBER; VACANCIES. The number of directors of the Corporation shall be
such number, not less than 7 nor more than 21 as shall be provided from time to
time in or in accordance with the Bylaws, provided that no decrease in the
number of directors shall have the effect of shortening the term of any
incumbent director, and provided further that no action shall be taken to
decrease or increase the number of directors from time to time unless at least
two-thirds of the directors then in office shall concur in said action.
Vacancies in the Board of Directors of the Corporation, however caused, and
newly created directorships shall be filled solely by at least two-thirds of the
remaining directors then in office, whether or not a quorum, and any director so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires and until the director's successor is elected and qualified. Each
director, when appointed or elected, shall take an oath that he will faithfully
perform the duties of his office and that he is the owner, in his own right and
free of any lien or encumbrance, of the required amount of stock as set forth in
the Bylaws of the Corporation. The oath shall be taken before a notary public or
justice of the peace, who is not an officer of the Corporation, and a record of
the oath shall be made a part of the records of the Corporation.
B. CLASSIFIED BOARD. The Board of Directors of the Corporation shall be
divided into three classes of directors as nearly equal in number as possible,
with one class to be elected annually. The initial directors of the Corporation
shall hold office as follows: the first class of directors shall hold office
initially for a term expiring at the annual meeting of stockholders to be held
in calendar 1999, the second class of directors shall hold office initially for
a term expiring at the annual meeting of stockholders to be held in calendar
2000, and the third class of directors shall hold office initially for a term
expiring at the annual meeting of stockholders to be held in calendar 2001, with
the members of each class to hold office until their respective successors are
duly elected and qualified. At each annual meeting of stockholders of the
Corporation, the successors to the class of directors whose term expires at the
meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election and until their respective successors are elected and qualified.
Should the number of directors
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of the Corporation be increased, the additional directorships shall be allocated
among classes as appropriate so that the number of directors in each class is as
nearly equal as possible.
Whenever the holders of any one or more series of preferred stock of the
Corporation shall have the right, voting separately as a class, to elect one or
more directors of the Corporation, the Board of Directors shall consist of said
directors so elected in addition to the number of directors fixed as provided
above in this Article VI(E). Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
ARTICLE VI(F)
REMOVAL OF DIRECTORS
Notwithstanding any other provision of these Articles or the Bylaws of the
Corporation, any director or the entire Board of Directors of the Corporation
may be removed at any time for cause only by the affirmative vote of the holders
of at least two-thirds of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class) cast at a meeting of the stockholders called for
that purpose. For the purpose of this Article VI(F), "cause" shall mean (a) a
felony conviction by a court of competent jurisdiction, which conviction is no
longer subject to direct appeal, or (b) an adjudication by a court of competent
jurisdiction that the director to be removed is liable for negligence or
misconduct in the performance of his duty to the Bank, which adjudication is no
longer subject to direct appeal, or (c) a finding by at least a majority of the
full board of directors of actions or failure to act which are in derogation of
the director's duties. Notwithstanding the foregoing, whenever the holders of
any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the preceding provisions of this Article VI(F) respecting removal
by stockholders of the Corporation shall not apply with respect to the director
or directors elected by such holders of preferred stock.
ARTICLE VI(G)
AFFILIATED TRANSACTIONS
A. VALIDITY. Except as otherwise provided in these Articles, if paragraph
B is satisfied, no contract or transaction between the Corporation and any of
its directors, officers or security holders, or any corporation, partnership,
association or other organization in which any of such directors, officers or
security holders are directly or indirectly financially interested, shall be
void or voidable solely because of this relationship, or solely because of the
presence of the director, officer or security holder at the meeting authorizing
the contract or transaction, or solely because of his or their participation in
the authorization of such contract or transaction or vote at the meeting
therefor, whether or not such participation or vote was necessary for the
authorization of such contract or transaction.
B. DISCLOSURE, APPROVAL; FAIRNESS. PARAGRAPH A SHALL APPLY ONLY IF:
1. the material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors (or
a committee thereof) and it nevertheless in good faith authorizes or ratifies
the contract or transaction by a majority of the directors present, each such
interested director to be counted in determining whether a quorum is present but
not in calculating the majority necessary to carry the vote; and
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2. the contract or transaction is fair to the Corporation as of the time
it is authorized or ratified by the Board of Directors (or committee thereof) or
the stockholders.
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ARTICLE VI(H)
INDEMNIFICATION
The Corporation shall indemnify each director or officer of the Corporation
to the fullest extent now or hereafter permitted by law against all expenses
(including attorneys' fees and disbursements), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative to which he is or is threatened to be
made a party by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation or of a subsidiary of the Corporation, or
is or was a director, custodian, administrator, committeeman or fiduciary of any
employee benefit plan established and maintained by the Corporation or by a
subsidiary of the Corporation, or is or was serving another enterprise in any
such capacity at the written request of the Corporation. To the extent
authorized at any time by the Board of Directors of the Corporation, the
Corporation may similarly indemnify other persons against liability incurred in
any capacity, or arising out of any status, of the character described in the
immediately preceding sentence. At the discretion of the Board of Directors, any
indemnification hereunder may include payment by the Corporation of expenses
incurred in defending a civil or criminal action or proceeding in advance of the
final disposition of such action or proceeding, upon receipt of an undertaking
by the person indemnified to repay such payment if he shall be adjudicated to be
not entitled to indemnification under this Article VI(H) or applicable laws. In
no event, however, shall the Corporation indemnify any director, officer, or
other person hereunder with respect to any matter as to which he shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Corporation. The
Corporation may purchase and maintain insurance to protect itself and any
present or former director, officer or other person against any liability of any
character asserted against and incurred by the Corporation or any such director,
officer or other person in any capacity, or arising out of any status, whether
or not the Corporation would have the power to indemnify such person against
such liability by law or under the provisions of this Article VI(H). The
provisions of this Article VI(H) shall be applicable to persons who shall have
ceased to be directors or officers of the Corporation, and shall inure to the
benefit of the heirs, executors and administrators of persons entitled to
indemnity hereunder. Nothing herein shall be deemed to limit the Corporation's
authority to indemnify any person pursuant to any contract or otherwise.
ARTICLE VI(I)
ACTING AS PARTNER
The Corporation may be a partner in any business enterprise which it would
have power to conduct by itself.
ARTICLE VI(J)
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the Corporation. Notwithstanding
any other provision of these Articles or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be specified by law),
the Bylaws shall not be made, repealed, altered, amended, or rescinded by the
stockholders of the Corporation except by the vote of the holders of not less
than two-thirds of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as one class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed adoption, repeal, alteration,
amendment or rescission is included in the notice of such meeting), or, as set
forth above, by the Board of Directors by the affirmative vote of not less than
two-thirds of the directors then in office.
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ARTICLE VI(K)
APPROVAL OF CERTAIN BUSINESS COMBINATIONS
The stockholder vote required to approve Business Combinations (as
hereinafter defined) shall be as set forth in this Article VI(K). Such
stockholder vote shall be in addition to any affirmative vote required by the
Massachusetts General Laws.
A. (1) Except as otherwise expressly provided in this Article VI(K), the
affirmative vote of the holders of at least two-thirds of the outstanding
shares entitled to vote thereon (and, if any class or series of shares is
entitled to vote thereon separately, the affirmative vote of the holders of
at least two-thirds of the outstanding shares of each such class or series)
shall be required in order to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a
Related Person (as hereinafter defined);
(b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage, or any other security
device, of all or any Substantial Part (as hereinafter defined) of the
assets of the Corporation (including without limitation any voting
accurities of a subsidiary) or of a subsidiary, to a Related Person;
c) any merger or consolidation of a Related Person with or into
the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of
all or any Substantial Part of the assets of a Related Person to the
disposition of all
(e) the issuance of any securities of the Corporation or a
subsidiary of the Corporation to a Related Person;
(f) the acquisition by the Corporation or a subsidiary of the
Corporation of any securities of a Related Person,
(g) any reclassification of the common stock of the Corporation,
or any recapitalization involving the common stock of the Corporation,
and
(h) any agreement, contract or other arrangement providing for
any of the transactions described in this Article VI(K).
(2) Such affirmative vote shall be required notwithstanding any other
provisions of these Articles, any provision of law, or any agreement with
any regulatory agency or national securities exchange which might otherwise
permit a lesser vote or no vote.
(3) The term "Business Combination" as used in this Article VI(K) shall
mean any transaction which is referred to in any one or more of
subparagraphs 1(a) through 1(h) above.
B. The provisions of Part A of this Article VI(K) shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by any other provision of
these Articles, any provision of law, if the Business Combination shall have
been approved by a majority of the Continuing Directors (as hereinafter
defined); provided, however, that such approval shall only be effective if
obtained at a meeting at which a Continuing Director Quorum (as hereinafter
defined) is present.
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C. For the purposes of this section the following definitions apply:
(1) The term "Related Person" shall mean and include (a) any
individual, corporation, partnership or other person or entity which together
with its "affiliates" (as that term is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934), "beneficially
owns" (as that term is defined in Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934) in the aggregate 10% or
more of the outstanding shares of the common stock of the Corporation; and (b)
any "affiliate" (as that term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934) of any such individual, corporation, partnership or other
person or entity. Without limitation, any shares of the common stock of the
Corporation which any Related Person has the right to acquire pursuant to any
agreement, or upon exercise or conversion rights, warrants or options, or
otherwise, shall be deemed "beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 25 percent of the
total assets of the Corporation, as of the end of its most recent fiscal year
ending prior to the time the determination is made.
(3) The term "Continuing Director" shall mean any member of the Board
of Directors of the Corporation who is unaffiliated with the Related Person and
was a member of the Board prior to the time that the Related Person became a
Related Person, and any successor of a Continuing Director who is unaffiliated
with the Related Person and is recommended to succeed a Continuing Director by a
majority of Continuing Directors then on the Board.
(4) The term "Continuing Director Quorum" shall mean two-thirds of the
Continuing Directors capable of exercising the powers conferred on them.
ARTICLE VI(L)
AMENDMENT OF ARTICLES OF ORGANIZATION
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in these Articles in the manner now or hereafter prescribed
by law, and all rights conferred on stockholders herein are granted subject to
this reservation. Notwithstanding the foregoing, the provisions set forth in
Articles VI(C), VI(D), VI(E), VI(F), VI(H), VI(J), VI(K) and this Article VI(L)
of these Articles may not be repealed, altered, amended, or rescinded in any
respect unless the same is approved by the affirmative vote of the holders of
not less than two-thirds of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as a single class) cast at a meeting of the stockholders called
for that purpose (provided that notice of such proposed adoption, repeal,
alteration, amendment or rescission is included in the notice of such meeting).
Any amendment, addition, alteration, change or repeal so acted upon shall be
effective on the date it is filed with the Secretary of State of the
Commonwealth of Massachusetts or on such other date as the Secretary of State
may specify.
ARTICLE VII
The effective date of organization of the corporation shall be the date
approved and filed by the Secretary of the Commonwealth of Massachusetts.
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ARTICLE VIII
THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE
ARTICLES OF ORGANIZATION.
A. The street address of the principal office of the Corporation in
Massachusetts is:
399 Highland Avenue, Somerville, Massachusetts 02144
B. The name, residence and post office address (if different) of the
directors and officers of the Corporation are:
<TABLE>
<CAPTION>
NAME RESIDENCE POST OFFICE ADDRESS
<S> <C> <C>
President and Chief Executive Officer:
John D. Doherty 572 Highland St.
Hamilton, MA 01982
Senior Vice President: David W. Kearn 6 Robinson Road
Medford, MA 02155
Senior Vice President: William P. Morrissey 143 Commonwealth Ave.
Newton, MA 02167
Senior Vice President, Treasurer and
Chief Financial Officer: Paul S. Feeley 67 Rice Avenue
Northborough, MA 01532
Clerk and Secretary: Gladys N. Partamian 6 Apache Trail
Arlington, MA 02474-1802
Directors:
Gregory W. Boulos 644 Shore Road
Cape Elizabeth, ME 04107
George L. Doherty, Jr. 855 Broadway
Somerville, MA 02144
John D. Doherty 572 Highland Street
Hamilton, MA 01982
Joseph R. Doherty The Ledges #56
7 Wainwright Road
Winchester, MA 01890
John F. Gilgun, Jr. 11 Ledgewood Road
Woburn, MA 01801
Terence D. Kennedy 74 High Street
Woburn, MA 01801
John G. Quinn 1 Longfellow Place, #3307
Boston, MA 02114
Marat E. Santini 11 Apache Trail
Arlington, MA 02474
</TABLE>
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C. The fiscal year (i.e., tax year) of the Corporation shall end on the
last day of the month of March.
D. The name and business of the resident agent of the Corporation is
Gladys N. Partamian who is located at 399 Highland Avenue, Somerville,
Massachusetts 02144.
ARTICLE IX
Bylaws of the Corporation have been duly adopted and the President,
Treasurer, Clerk, Secretary and directors whose names are set forth above, have
been duly elected.
IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I, John D.
Doherty, as incorporator and whose name and post office address are clearly
typed beneath my signature do hereby associate with the intention of forming
this Corporation under the provisions of General Laws, Chapter 156B and do
hereby sign these Articles of Organization as incorporator this 30 day of
September in the year 1998.
/s/ John D. Doherty
-----------------------------------------
John D. Doherty
399 Highland Avenue
Somerville, Massachusetts 02144
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Exhibit 3.2
BYLAWS
OF
CENTRAL BANCORP, INC.
ARTICLE I
MAIN OFFICE
The main office of Central Bancorp, Inc. (the "Corporation") shall be in
Somerville, Massachusetts, or such other location as the Board of Directors may
designate, subject to applicable law.
ARTICLE II
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The Annual Meeting of the stockholders for
elections and other purposes shall be held within six months after the end of
the Corporation's fiscal year at such date, time and place as fixed by the Board
of Directors, the Chairman of the Board or the President, consistent with the
requirements of Massachusetts law. The purposes for which the Annual Meeting is
to be held, in addition to those prescribed by law, by the Articles of
Organization or by these Bylaws, may be specified by the Board of Directors, the
Chairman of the Board or the President.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be
called only as provided in the Corporation's Articles of Organization.
SECTION 3. NOTICE OF MEETINGS. A written notice of all annual and special
meetings of stockholders stating the place, date and hour and the purpose or
purposes of such meeting shall be given by the Clerk or an Assistant Clerk, the
Secretary or an Assistant Secretary (or other person authorized by these Bylaws)
at least seven days before the meeting to each stockholder entitled to vote
thereat and to each stockholder who, by law, under the Articles of Organization
or under these Bylaws, is entitled to such notice, by delivering such notice to
him or by mailing it, postage prepaid, and addressed to such stockholder at his
address as it appears on the stock transfer books of the Corporation. Such
notice shall be deemed to be delivered when hand delivered to such address or
deposited in the mail so addressed, with postage prepaid.
When any stockholders' meeting, either annual or special, is adjourned for
30 days or more, notice of the adjourned meeting shall be given as in the case
of an original meeting. It shall not be necessary to give any notice of the
time and place of any meeting adjourned for less than 30 days or of the business
to be transacted thereat, other than an announcement at the meeting at which
such adjournment is taken.
SECTION 4. QUORUM. The holders of a majority in interest of all stock
issued, outstanding, and entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders. If a quorum is not
present, a lesser number may adjourn the meeting from time to time and the
meeting may be held as adjourned without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. The stockholders present at a duly organized
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meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 5. VOTING AND PROXIES. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the Corporation, and a proportionate vote for a fractional share, unless
otherwise provided by law or by the Articles of Organization. Stockholders may
vote either in person or by written proxy dated not more than six months before
the meeting named therein. Proxies shall be filed with the clerk or secretary
of the meeting, or of any adjournment thereof, before being voted. Except as
otherwise limited therein, proxies shall entitle the persons authorized thereby
to vote at any adjournment of such meeting, but they shall not be valid after
final adjournment of such meeting. A proxy with respect to stock held in the
name of two or more persons shall be valid if executed by one of them unless at
or prior to exercise of the proxy the Corporation receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a stockholder shall be deemed valid unless challenged at or
prior to its exercise, and the burden of proving invalidity shall rest on the
challenger.
SECTION 6. ACTION AT MEETING. When a quorum is present, any matter before
the meeting shall be decided by vote of the holders of a majority of the shares
of stock voting on such matter, except where a larger vote is required by law,
by the Articles of Organization or by these Bylaws. Any election by
stockholders shall be determined by a plurality of the votes cast, except where
a larger vote is required by law, by the Articles of Organization or by these
Bylaws. No action may be taken on the nomination of a director unless the
procedures set forth in the Articles of Organization have been complied with.
The Corporation shall not directly or indirectly vote any share of its own
stock, provided however, that no provision of these Bylaws shall be construed to
limit the voting rights and powers relating to shares of stock held pursuant to
a plan which is intended to be an "employee stock ownership plan" as defined in
section 409A of the Internal Revenue Code, as now or hereafter in effect.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. The business and affairs of the Corporation shall be
managed by a Board of Directors who may exercise all the powers of the
Corporation except as otherwise provided by law, by the Articles of Organization
or by these Bylaws.
SECTION 2. NUMBER, TERM AND ELECTION. The Board of Directors shall
initially consist of eight members and shall be divided into three classes as
nearly equal in number as possible. The Board of Directors shall be classified
in accordance with the provisions of the Corporation's Articles of Organization.
At each annual meeting of stockholders, the successors to the directors of the
class whose term shall expire in that year shall be elected to hold office for a
term expiring at the annual meeting of stockholders held in the third year
following the year of their election and until their respective successors are
elected and qualified. The Board of Directors may increase or decrease the
number of members of the Board of Directors by a vote of at least two-thirds of
the board members then in office, provided the total number of directors on the
board may not be more than 21 nor less than 7.
SECTION 3. QUALIFICATION. Each director shall have such qualifications as
are required by applicable law. In addition, at least three-fourths of the
directors shall be citizens of the United States of America and residents of the
Commonwealth of Massachusetts. Each director shall own, free of any lien or
encumbrance, in his own right or through a company in which he holds an
ownership interest of at least seventy-five percent, common stock of the
Corporation, having a par value, or a fair market value on the date the person
became a director, of not less than one thousand dollars. Any director who
ceases to be the owner of the required number of shares of stock, or who becomes
in any other manner disqualified, shall vacate his office forthwith. Each
director, when appointed or elected, shall take an oath that he will faithfully
perform the duties of his office and that he is the owner, in his own right and
free of any lien or encumbrance,
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of the amount of stock required by this section. The oath shall be taken before
a notary public or justice of the peace, who is not an officer of the
Corporation, and a record of the oath shall be made a part of the records of the
Corporation.
SECTION 4. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw at the same place as the
annual meeting of stockholders, or the special meeting held in lieu thereof,
following such meeting of stockholders. The Board of Directors may provide, by
resolution, the time and place for the holding of regular meetings without other
notice than such resolution.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the President,
or a majority of the directors. The persons authorized to call special meetings
of the Board of Directors may fix the place for holding any special meeting of
the Board of Directors called by such persons.
SECTION 6. NOTICE. Notice of any special meeting of the Board of Directors
shall be given to each director in person or by telephone or sent to his
business or home address by telegram at least 24 hours in advance of the meeting
or by written notice mailed to his business or home address at least 48 hours in
advance of such meeting. Such notice shall be deemed to be delivered when
deposited in the mail so addressed, with postage thereon prepaid if mailed, or
when delivered to the telegraph company if sent by telegram. Any director may
waive notice of any meeting by a writing filed with the records of the meeting.
The attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or converted. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors then in office
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time.
When any Board of Directors' meeting either regular or special is adjourned for
30 days or more, notice of the adjourned meeting shall be given as in the case
of an original meeting. It shall not be necessary to give any notice of the
time and place of any meeting adjourned for less than 30 days or of the business
to be transacted thereat, other than an announcement at the meeting at which
such adjournment is taken.
SECTION 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by governing law, by the
Articles of Organization or these Bylaws.
SECTION 9. ACTION BY CONSENT. Any action required or permitted to be
taken by the Board of Directors at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors and such consents are filed with the records of the meetings of
directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a
written notice of such resignation to the main office of the Corporation
addressed to the Chairman of the Board or the President. Unless otherwise
specified therein, such resignation shall take effect upon receipt thereof by
the Chairman of the Board or the President.
SECTION 11. REMOVALS. A director may be removed from office only as
provided in the Articles of Organization.
SECTION 12. VACANCIES. Any vacancy occurring on the Board of Directors as
a result of resignation, removal or death may be filled in accordance with the
provisions of the Articles of Organization.
SECTION 13. COMPENSATION. The members of the Board of Directors and the
members of either standing or special committees may be allowed such
compensation as the Board of Directors may determine.
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SECTION 14. PRESUMPTION OF ASSENT. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any
Corporation matter is taken shall be presumed to have assented to the action
taken unless his or her dissent or abstention shall be entered in the minutes of
the meeting or unless he or she shall file a written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Clerk or the Secretary
of the Corporation within five days after the date a copy of the minutes of the
meeting is received. Such right to dissent shall not apply to a director who
voted in favor of such action.
SECTION 15. COMMITTEES. The Board of Directors, by a vote of a majority
of the directors then in office, may elect from its number, not less than three
members in each case to serve as an Executive Committee, a Security Committee, a
Finance Committee, a Nominating Committee or other committees and may delegate
thereto some or all of its powers except those which by law, by the Articles of
Organization, or by these Bylaws may not be delegated. Except as the Board of
Directors may otherwise determine, any such committee may make rules for the
conduct of its business, but unless otherwise provided by the Board of Directors
or in such rules, its business shall be conducted so far as possible in the same
manner as is provided by these Bylaws for the Board of Directors. All members
of such committees shall hold such offices at the pleasure of the Board of
Directors. The Board of Directors may abolish any such committee at any time,
subject to any applicable requirements of law. Any committee to which the Board
of Directors delegates any of its powers or duties shall keep records of its
meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, but no such
rescission shall have retroactive effect. In the case of the Nominating
Committee, which shall be established for the purpose of making nominations for
election to the Board of Directors, such committee shall consist of at least
three members. The committee shall deliver its nominations to the Clerk or the
Secretary of the Corporation at least 30 days in advance of the meeting at which
elections are to be held.
SECTION 16. MANNER OF PARTICIPATION. Members of the Board of Directors
may participate in meetings of the Board of Directors by means of conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other.
ARTICLE IV
OFFICERS
SECTION 1. ENUMERATION. The officers of the Corporation shall consist of
a Chairman of the Board, a President, a Treasurer, a Clerk, and such other
officers, including Vice Chairmen of the Board, Vice Presidents or Assistant
Vice Presidents, Assistant Treasurers, Assistant Clerks, a Secretary or
Assistant Secretaries, as the Board of Directors may determine.
SECTION 2. ELECTION. The officers shall be elected annually by the Board
of Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Board of Directors at such
first meeting of the Board of Directors or at any other meeting.
SECTION 3. QUALIFICATION. No officer need be a stockholder. Any two or
more offices may be held by any person. The Clerk shall be a resident of
Massachusetts unless the Corporation has a resident agent appointed for the
purpose of service of process. Any officer may be required by the Board of
Directors to give bond for the faithful performance of his duties in such amount
and with such sureties as the Board of Directors may determine.
SECTION 4. TENURE. Except as otherwise provided by law, by the Articles
of Organization or by these Bylaws, all officers shall hold office until the
first meeting of the Board of Directors following the next annual meeting of
stockholders and until their respective successors are chosen and qualified.
Any officer may resign by delivering his
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written resignation to the Corporation at its main office addressed to the
Chairman of the Board, the President, Clerk or Secretary, and such resignation
shall be effective upon receipt unless it is specified to be effective at some
other time or upon the happening of some other event. Election or appointment of
an officer, employee or agent shall not of itself create contract rights. The
Board of Directors may authorize the Corporation to enter into an employment
contract with any officer in accordance with governing law or regulation, but no
such contract right shall impair the right of the Board of Directors to remove
any officer at any time in accordance with Section 5 of this Article IV.
SECTION 5. REMOVAL. The Board of Directors may remove any officer with
cause by a two-thirds vote of the entire number of directors then in office.
Such removal shall be without prejudice to the contract rights, if any, of the
persons involved. An officer may be removed for cause only after reasonable
notice and opportunity to be heard by the Board of Directors.
SECTION 6. VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 7. CHAIRMAN OF THE BOARD. The Board of Directors may annually
elect a Chairman of the Board. Unless the Board of Directors otherwise provides,
the Chairman of the Board shall preside, when present, at all meetings of the
stockholders and the Board of Directors.
SECTION 8. CHIEF EXECUTIVE OFFICER. Unless otherwise provided by the
Board of Directors, the Chairman of the Board shall be the chief executive
officer and shall, subject to the direction of the Board of Directors, have
general supervision and control of the Corporation's business.
SECTION 9. PRESIDENT AND VICE PRESIDENTS. The President shall have such
powers and shall perform such duties as the Board of Directors may from time to
time designate. Unless otherwise provided by the Board of Directors he shall
preside, when present, at all meetings of stockholders and of the Board of
Directors if the Chairman of the Board does not attend such meetings. The Board
shall rank the Vice Presidents, if there be more than one, and may give them
such additional designations as it may determine. In the event of the absence
or disability of the President, the ranking Vice President shall have all of the
powers and perform all of the duties of the President.
SECTION 10. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall,
subject to the direction of the Board of Directors have general charge of the
financial affairs of the Corporation and shall cause to be kept accurate books
of account. He shall have custody of all funds, securities, and valuable
documents of the Corporation, except as the Board of Directors may otherwise
provide.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors may from time to time designate.
SECTION 11. CLERK AND ASSISTANT CLERK. The Clerk shall keep a record of
the meeting of stockholders. In case a Secretary is not elected or is absent,
the Clerk or an Assistant Clerk shall keep a record of the meetings of the Board
of Directors. In the absence of the Clerk from any meeting of stockholders, an
Assistant Clerk, if one be elected, shall perform the duties of the Clerk.
SECTION 12. SECRETARY AND ASSISTANT SECRETARIES. The Secretary, if one be
elected, shall keep a record of the meetings of the Board of Directors. In the
absence of the Secretary or any Assistant Secretary, the Clerk or any Assistant
Clerk , a Temporary Secretary shall be designated by the person presiding at
such meeting to perform the duties of the Secretary.
SECTION 13. OTHER POWERS AND DUTIES. Subject to these Bylaws, each officer
of the Corporation shall have in addition to the duties and powers specifically
set forth in applicable law and in these Bylaws, such duties and powers as may
be designated from time to time by the Board of Directors. The President shall
have the authority to appoint additional officers of the Corporation other than
those enumerated herein.
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ARTICLE V
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer. Such signatures may be facsimile if the certificate is signed by a
transfer agent, or by a registrar, other than a director, officer or employee of
the Corporation. In case any officer who has signed or whose facsimile
signature has been placed on such certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the time of its issue.
SECTION 2. TRANSFERS. Subject to any restrictions on transfer, shares of
stock may be transferred on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate therefor properly endorsed
or accompanied by a written assignment and power of attorney properly executed,
with transfer stamps (if necessary) affixed, and with such proof of the
authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. RECORD HOLDERS. Except as may be otherwise required by law, by
the Articles of Organization or by these Bylaws, the Corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect thereto, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the Corporation in accordance with the requirements of these Bylaws.
It shall be the duty of each stockholder to notify the Corporation of his
postal address.
SECTION 4. RECORD DATE. The Board of Directors may fix in advance a time
of not more than 60 days preceding the date of any meeting of stockholders, or
the date for the payment of any dividend or the making of any distribution to
stockholders, or the last day on which the consent or dissent of stockholders
may be effectively expressed for any purpose, as the record date for determining
the stockholders having the right to notice of and to vote at such meeting, or
the right to receive such dividend or distribution or the right to give such
consent or dissent. In such case only stockholders of record on such record
date shall have such right, notwithstanding any transfer of stock on the books
of the Corporation after the record date. Without fixing such record date the
Board of Directors may for any of such purposes close the transfer books for all
or any part of such period.
If no record date is fixed and the transfer books are not closed, (a) the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and (b) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
SECTION 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms, including appropriate
indemnification of the Corporation, as the Board of Directors may prescribe.
SECTION 6. ISSUANCE OF CAPITAL STOCK. The Board of Directors shall have
the authority to issue or reserve for issue from time to time the whole or any
part of the capital stock of the Corporation which may be authorized from time
to time, to such persons or organizations, and on such terms as the Board of
Directors may determine, including without limitation the granting of options,
warrants, or conversion or other rights to subscribe to said capital stock.
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SECTION 7. DIVIDENDS. Subject to applicable law, the Articles of
Organization and these Bylaws, the Board of Directors may from time to time
declare, and the Corporation may pay, dividends on the outstanding shares of its
capital stock. Such dividends may be in the form of cash, property or stock.
ARTICLE VI
MISCELLANEOUS PROVISIONS
SECTION 1. FISCAL YEAR. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall be the twelve months ending
March 31st. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent accountants appointed by the Board of
Directors.
SECTION 2. SEAL. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without Board of Directors
action may be executed on behalf of the Corporation by the Chairman of the
Board, President, Treasurer or any other officer, employee or agent of the
Corporation as the Board of Directors may authorize.
SECTION 4. INDEMNIFICATION. Directors and officers of the Corporation
shall be entitled to indemnification as provided in the Articles of
Organization.
SECTION 5. VOTING OF SECURITIES. Unless otherwise provided by the Board
of Directors, the Chairman of the Board, the President or Treasurer may waive
notice of and act on behalf of the Corporation, or appoint another person or
persons to act as proxy or attorney in fact for the Corporation with or without
discretionary power and/or power of substitutions, at any meeting of
stockholders or shareholders of any other organization, any of whose securities
are held by the Corporation.
SECTION 6. RESIDENT AGENT. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Corporation. Said resident agent shall be either an individual who is a
resident of and has a business address in Massachusetts, or a corporation
organized under the law of any other state of the United States, which has
qualified to do business in, and has an office in, Massachusetts.
SECTION 7. CORPORATE RECORDS. The original, or attested copies, of the
Articles of Organization, Bylaws and records of all meetings of the directors
and stockholders, and the stock and transfer records, which shall contain the
names of all stockholders and the record address and amount of stock held by
each, shall be kept in Massachusetts at the main office of the Corporation, or
at an office of its transfer agent, Secretary or resident agent.
SECTION 8. ARTICLES OF ORGANIZATION. All references in these Bylaws to
the Articles of Organization shall be deemed to refer to the Articles of
Organization of the Corporation, as in effect from time to time.
SECTION 9. AMENDMENTS. These Bylaws may be altered, amended or repealed
as provided in the Articles of Organization.
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 24/th/ day of October, 1986, by and
between Central Cooperative Bank, Somerville, Massachusetts (hereinafter
referred to as the "Bank") and John D. Doherty (hereafter referred to as the
"Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
President; and
WHEREAS, the parties desire by this writing to set forth the continued
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the President of the Bank.
----------
The Employee shall render administrative and management services to the Bank
such as are customarily performed by persons situated in a similar executive
capacity. He shall also promote, by entertainment or otherwise, as and to the
extent permitted by law, the business of the Bank. The Employee's other duties
shall be such as the Board of Directors may from time to time reasonably direct,
including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $60,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors of the Bank not less often than
annually. Such rate of salary, or increased rate of salary, as the case may be,
may be further increased (but not decreased) from time to time in such amounts
as the Board in its discretion may decide.
3. Discretionary Bonuses. The Employee shall be entitled to participate
---------------------
in an equitable manner with all other key management personnel of the Bank in
discretionary bonuses authorized and declared by the Board of Directors of the
Bank to its key management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's right to
participate in such discretionary bonuses when and as declared by the Board of
Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee
---------------------------------------------
shall be entitled to participate in an Plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
---------------------------
participate in any fringe benefits which may be or become applicable to the
Bank's executive employees including participation in any stock option or
incentive plans adopted by the Board of Directors, the use of an automobile,
club memberships, a reasonable expense account, and any other benefits which are
commensurate with the responsibilities and functions to be performed by the
Employee under
<PAGE>
this Agreement. The Bank shall reimburse Employee for all out-of-pocket expenses
which Employee shall incur in connection with his services for the Bank.
5. Term. The initial term of employment under this Agreement shall be
----
for the period commencing October 24, 1986, and ending October 24, 1991.
Additionally, on each annual anniversary date from the date of commencement of
this Agreement the term of employment shall automatically be extended for an
additional one year period beyond the then effective expiration date unless
written notice from the Bank or the Employee is received prior to an anniversary
date advising the other party that this agreement shall not be further extended.
Any such written notice shall not effect any prior extensions of the term of
employment hereunder.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time to the performance of his
employment under this Agreement. During the term of Employee's employment under
this Agreement, the Employee shall not engage in any business or activity
contrary to the business affairs or interests of the Bank.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent
or limit the right of Employee to invest in the capital stock or other
securities of any business dissimilar from that of Employer, or solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Bank's Board of Directors. The Bank will provide Employee
with the working facilities and staff customary for similar executives and
necessary for him to perform his duties.
8. Vacation and Sick Leave. At such reasonable times as the Board of
-----------------------
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies as periodically established by the Board of
Directors for senior management officials of the Bank.
(b) The timing of vacations shall be scheduled in a reasonable manner
by the Board of Directors. The Employee shall not be entitled to receive any
additional compensation from the Bank on account of his failure to take a
vacation; nor shall he be entitled to accumulate unused vacation from one fiscal
year to the next except to the extent authorized by the Board of Directors for
senior management officials of the Bank.
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<PAGE>
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall be entitled to
grant to the Employee a leave or leaves of absence with or without pay at such
time or times and upon such terms and conditions as the Board in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick
leave as established by the Board of Directors for senior management officials
of the Bank. In the event any sick leave shall not have been used during any
year, such leave shall accrue to subsequent years only to the extent authorized
by the Board of Directors. Upon termination of his employment, the Employee
shall not be entitled to receive any additional compensation from the Bank for
unused sick leave.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon the
following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which his death
shall have occurred.
(b) Employee's employment under this Agreement may be terminated at
any time by a decision of the Board of Directors of the Bank for conduct not
constituting termination for Just Cause, or by the Employee upon ninety (90)
days written notice, to the Employee or Bank, as the case may be. In the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee his salary, up to the date of termination of the term (including any
renewal term) of this Agreement.
(c) The Bank reserves the right to terminate this Agreement at any
time for Just Cause. Termination for "Just Cause" shall mean termination for
conviction of a felony involving a crime or moral turpitude, deliberate
dishonesty to the Bank involving personal profit, or gross and willful failure
to perform stated duties after written notice form the Board of Directors.
Subject to the provisions of Section 11 hereof, in the event this Agreement is
terminated for Just Cause, the Bank shall only be obligated to continue to pay
the Employee his salary up to the date of termination.
10. Disability. If the Employee shall become disabled or incapacitated to
----------
the extent that he is unable to perform his duties hereunder, by reason of a
medically determinable physical or mental impairment, as determined by a doctor,
he shall nevertheless continue to receive 100% of his compensation, inclusive of
any benefits which may be payable to Employee under the provisions of disability
insurance coverage in effect for Bank employees, under Paragraph 2 of this
Agreement
-3-
<PAGE>
for the first 12 months following the date of such disability. Upon returning to
active full-time employment, the Employee's full compensation as set forth in
this Agreement shall be reinstated. In the event that said Employee returns to
active employment on other than a full-time basis, then his compensation (as set
forth in Paragraph 2 of this Agreement) shall be reduced in proportion to the
time spent in said employment, or as shall otherwise be agreed to by the
parties.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the
event of involuntary termination of Employee's employment under this Agreement
in connection with, or within one year after, any change in control of the Bank
which has not been approved in advance by a two-thirds vote of its full Board of
Directors, or in the event of voluntary termination by the Employee in
connection with, or within three years after, any change in control of the Bank
which has not been approved in advance by a two thirds vote of its full Board of
Directors, Employee shall be paid an amount equal to the product of 2.99 and the
Employee's "base amount" as defined in Section 280G(b) (3) of the Internal
Revenue Code of 1954, as amended. Said sum shall be paid, at the option of
Employee, either in one lump sum within thirty (30) days of such termination or
in periodic payments over the remaining term of this Agreement as if Employee's
employment not been terminated. The term "control" shall refer to the ownership,
holding or power to vote more than 25% of the Bank's voting stock, the control
of the election of a majority of the Bank's directors, or the exercise of a
controlling influence over the management or policies of the Bank by any person
or by persons acting as a group within the meaning of Section 13(d) of the
Securities Exchange Act of 1934. The term "person" means an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any provision of this Agreement to the contrary,
Employee may voluntarily terminate his employment under this Agreement following
a change in control of the Bank, whether approved in advance by its Board of
Directors or otherwise (as defined in Paragraph 11(a) of this Agreement), and
shall thereupon be entitled to receive the payment described in Paragraph 11(a)
of this Agreement, upon the occurrence, or within 30 days thereafter, of any of
the following events, which have not been consented to in advance by the
Employee in writing: (i) if Employee would be required to move his personal
residence or perform his principal executive functions outside a 35 mile radius
of Somerville, Massachusetts; (ii) if in the organizational structure of the
Bank Employee would be required to report to a person or persons other than the
Board of Directors or Chairman of the Board of the Bank; (iii) if the Bank
should fail to maintain employee benefits plans, including incentive
compensation, discretionary bonus, vacation, fringe benefit, stock option and
retirement plans providing at least the same level of benefits presently
afforded Employee; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
President; (v) if Employee would not be elected or reelected to the Board of
Directors of the Bank; or (vi) if Employee's responsibilities or authority have
in any way been diminished.
-4-
<PAGE>
(c) In the event any dispute shall arise between the Employee and the
Bank as to the terms or interpretation of this Agreement, including this
Paragraph 11, whether instituted by formal legal proceedings or otherwise,
including any action taken by Employee to enforce the terms of this Paragraph 11
or in defending against any action taken by the Bank, the Bank shall reimburse
Employee for all costs and expenses, including reasonable attorneys' fees,
arising from such dispute, proceedings or actions, notwithstanding the ultimate
outcome thereof. Such reimbursement shall be paid within 10 days of Employee
furnishing to the Bank written evidence, which may be in the form, among other
things, of a cancelled check or receipt, of any costs or expenses incurred by
Employee. Any such request for reimbursements by Employee shall be made no more
frequently than at 60 day intervals.
12. Successors and Assigns.
----------------------
(a) This Employment Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Bank which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Applicable Law. This Agreement shall be governed by all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of Massachusetts.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first herein above written.
CENTRAL COOPERATIVE BANK
/s/ John V. Hachikian
--------------------------------------
ATTEST:
/s/ Philibert L. Pelligrini
- --------------------------------------
Director
WITNESS:
/s/ Gladys N. Partamian By: /s/ John D. Doherty
- -------------------------------------- ----------------------------------
Employee
My commission expires July 23, 1987.
-6-
<PAGE>
Exhibit 10.2
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS AGREEMENT is entered into this 31/st/ day of March, 1992, by and
between Central Co-operative Bank, Somerville, Massachusetts (the "Bank") and
John D. Doherty (the "Employee").
WHEREAS, the parties have previously entered into an employment agreement
(the "Agreement") dated October 24, 1986 providing for the employment of the
Employee as the President of the Bank; and
WHEREAS, the parties desire by this writing to amend paragraph 1 of the
Agreement as set forth herein.
NOW, THEREFORE, it is AGREED as follows:
1. Section 1 of the Agreement is amended by deleting the first sentence
therein and adding a new first sentence as follows:
The Employee is employed as the President and Chief Executive Officer
of the Bank.
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Agreement other than as stated
above.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to
the Agreement on the day and year first written above.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ Burton F. Faulkner, Jr.
- ----------------------- ---------------------------
Chairman of the Finance
Committee
WITNESS:
/s/ Rosemarie Mitchell /s/ John D. Doherty
- ---------------------- -------------------------------
John D. Doherty
<PAGE>
Exhibit 10.3
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
----------------------------------------
THIS AGREEMENT is entered into this 8/th/ day of June, 1995, by between
Central Co-operative Bank, Somerville, Massachusetts (the "Bank") and John D.
Doherty (the "Employee").
WHEREAS, the parties have previously entered into an employment agreement
(the "Agreement") dated October 24, 1986 providing for the employment of the
Employee as the President of the Bank, which Agreement was amended on March 31,
1992; and
WHEREAS, the parties now desire by this writing to amend paragraph 11 of
the Agreement as set forth herein.
NOW, THEREFORE, it is AGREED as follows:
1. Section 11 of the Agreement is amended by deleting the same in its
entirety and replacing said Section 11 with the following:
11. Change in Control
-----------------
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment is terminated by the Bank, without the Employee's prior
written consent, in connection with or within three (3) years after any change
in control (as herein defined) of the Bank, the Employee shall be paid an amount
equal to the difference between (i) the product of 2.99 times his "base amount"
as defined in Section 280G(b) (3) of the Internal Revenue Code of 1986, as
amended (the "Code") and regulations promulgated thereunder, and (ii) the sum of
any other parachute payments (as defined under Section 280G(b) (2) of the Code)
that the Employee receives on account of the change in control. Said sum shall
be paid in one lump sum within ten (10) days after such termination. The term
"change in control" shall mean (1) the ownership, holding or power to vote more
than 25% of the Bank's voting stock, (2) the control of the election of a
majority of the Bank's directors, (3) the exercise of a controlling influence
over the management or policies of the Bank by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Securities Exchange Act
of 1934), or (4) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board of Directors of the Bank (the
"Company Board") (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. Directors then in office shall be considered a
Continuing Director. The term "person" means an individual other than the
Employee, or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form or entity not specifically listed herein.
<PAGE>
(b) Notwithstanding any other provision herein to the contrary, the
Employee may voluntarily terminate his employment under this Agreement within
three (3) years following a change in control of the Bank, and the Employee
shall thereupon be entitled to receive the payment described in Section 1(a) of
this Agreement, upon the occurrence of any of the following events, or within
ninety (90) days thereafter, which have not been consented to in advance by the
Employee in writing: (i) the requirement that the Employee perform his principal
executive functions, more than 35 miles from his primary office as of the
Effective Date of this Agreement; (ii) a reduction in the Employee's base
compensation as in effect immediately prior to the change in control; (iii) the
failure by the Bank to continue to provide the Employee with compensation and
benefits substantially similar to those provided to him at the time of the
change in control under any of the employee benefit plans in which the Employee
becomes a participant, or the taking of any action by the Bank which would
directly or indirectly reduce any of such benefits or deprive the Employee of
any material fringe benefit enjoyed by him at the time of the change in control;
(iv) the assignment to the Employee of material duties and responsibilities
other than those normally associated with his position as referenced in the
recitals above; or (v) a material diminution or reduction in the Employee's
responsibilities or authority (including reporting responsibilities) in
connection with his employment with the Bank.
(c) The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment.
(d) In the event that any dispute arises between the Employee and the
Bank as to the terms or interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action that the Employee
takes to enforce the terms of this Agreement or to defend against any action
taken by the Bank, the Employee shall be reimbursed for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions. Such reimbursement shall be paid within ten (10) days after the
Employee furnishes to the Bank written evidence, which may be in the form, among
other things, of a cancelled check or receipt, or any costs or expenses incurred
by the Employee.
(e) Any payments made to the Employee under this Agreement are subject
to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions or the Agreement other than as stated
above.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment to
the Agreement on the day and year first written above.
ATTEST: CENTRAL CO-OPERATIVE BANK
_______________________________ By: /s/ Burton F. Faulkner, Jr.
-------------------------------------
Chairman of the Finance
Committee
WITNESS:
/s/ Gladys N. Partamian By: /s/ John D. Doherty
- ------------------------------- --------------------------------------
John D. Doherty
<PAGE>
EXHIBIT 10.4
CENTRAL CO-OPERATIVE BANK
------------------------------------------
1998 Amendment to Employment Agreement
with John D. Doherty
------------------------------------------
WHEREAS, Central Co-operative Bank (the "Bank") has entered into an
employment agreement ("Employment Agreement") with John D. Doherty dated October
24, 1986, and said Employment Agreement was amended on March 31, 1992 and June
8, 1995; and
WHEREAS, in connection with the acquisition of the Bank by its Holding
Company, Central Bancorp, Inc. (the "Company"), the parties to the Employment
Agreement mutually desire to update its change-in-control provisions.
NOW, THEREFORE, pursuant to Section 6 of the Employment Agreement, the
undersigned agree to amend the Employment Agreement as follows, effective upon
the date of the acquisition of the Bank by the Company.
1. Section 11(a) and the first clause of Section 11(b) of the Employment
Agreement shall be amended in their entirety to provide as follows:
(a) Notwithstanding any provision herein to the contrary, if the
Employee's employment is terminated by the Bank, without the
Employee's prior written consent, in connection with or within three
(3) years after any change in control (as herein defined) of the Bank
or Central Bancorp, Inc. (the "Company"), the Employee shall be paid
an amount equal to the difference between (i) the product of 2.99
times his "base amount" as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended (the "Code") and regulations
promulgated thereunder, and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the
Employee receives on account of the change in control. Said sum shall
be paid in one lump sum within ten (10) days after such termination.
The term "change in control" shall mean (1) the ownership, holding or
power to vote more than 25% of the voting stock of the Bank or the
Company, (2) the control of the election of a majority of the Bank's
or the Company's directors, (3) the exercise of a controlling
influence over the management or policies of the Bank or the Company
by any person or by persons acting as a "group" (within the meaning of
Section 13(d) of the Securities Exchange Act of 1934), or (4) during
any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Bank or the
Company (the "Company Board") (the "Continuing Directors") cease for
any reason to constitute at least two-thirds thereof, provided that
any individual
<PAGE>
1998 Amendment to
Employment Agreement
with John D. Doherty
Page 2
whose election or nomination for election as a member of the Company
Board was approved by a vote of at least two-thirds of the Continuing
Directors then in office shall be considered a Continuing Director.
The term "person" means an individual other than the Employee, or a
corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any
other form of entity not specifically listed herein.
(b) Notwithstanding any other provision herein to the contrary, the
Employee may voluntarily terminate his employment under this Agreement
within three (3) years following a change in control of the Bank or
the Company,
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Employment Agreement, other than as
stated above.
WHEREFORE, on this 8/th/ day of January, 1999, the undersigned hereby
execute this 1998 Amendment to the Employment Agreement.
CENTRAL CO-OPERATIVE BANK
Witnessed by:
/s/ Gladys N. Partamian By /s/ Joseph R. Doherty
- ------------------------------------- -----------------------------------
Its Chairman of the Board
Witnessed by: EMPLOYEE
/s/ John D. Doherty
______________________ --------------------------------------
John D. Doherty
<PAGE>
Exhibit 10.5
TERMINATION AGREEMENT
---------------------
THIS AGREEMENT is entered into this 31/st/ day of March, 1992, by and
between Central Co-operative Bank, Somerville, Massachusetts (the "Bank") and
Joseph R. Doherty (the "Employee").
WHEREAS, the parties have previously entered into an employment agreement
(the "Agreement") dated October 24, 1986, as amended on January 9, 1987, June 9,
1988, and April 11, 1991, providing for the employment of the Employee as Chief
Executive Officer and Chairman of the Board of Directors of the Bank; and
WHEREAS, the Employee has indicated his desire to retire from his position
as Chief Executive Officer of the Bank, and to continue to serve as Chairman of
the Board pursuant to an agreement under which he will serve as a consultant to
the Bank, rather than as an employee of the Bank; and
WHEREAS, the parties have contemporaneously with execution of this
Agreement executed a Consulting Agreement, pursuant to which the Employee will,
after his retirement from employment with the Bank, continue to serve in a
consulting capacity with the title Chairman of the Board of Directors of the
Bank; and
WHEREAS, Section 4(c) of the Agreement provides for the payment of
supplemental retirement benefits to the Employee or his beneficiaries for a
period of fifteen (15) years following his retirement; and
WHEREAS, the parties have agreed that, on or about April 1, 1992, the
present value of the supplemental retirement benefits payable, on or about April
1, 1992, to the Employee under Section 4(c) of the Agreement equals $768,750;
and
WHEREAS, the parties desire by this writing to terminate the Agreement and
provide for a lump sum payment to the Employee of the present value of such
supplemental retirement benefits in full satisfaction of Employee's rights
thereunder.
NOW, THEREFORE, it is AGREED as follows:
1. Employee hereby resigns as Chief Executive Officer of the Bank.
2. The Bank shall pay, or cause to be paid, to the Employee, in one lump
sum the amount of $768,750 (less any applicable withholding amounts as may be
required by law), which amount shall be paid as soon as practicable, but in no
event later than ten days after the date hereof. Such payment shall be made in
full satisfaction of any rights of Employee to the supplemental retirement
benefits provided for under Section 4(c) of the Agreement, which shall be of no
further force or effect.
<PAGE>
3. The Agreement is hereby in all respects terminated and of no further
force and effect, and neither the Bank nor Employee shall be entitled or subject
to any of the rights, obligations, duties or other provisions thereunder.
4. This Termination Agreement shall be governed in all respects, whether
as to validity, construction, capacity, performance or otherwise, by the laws of
the Commonwealth of Massachusetts.
5. The provisions of this Termination Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.
This Termination Agreement together with any understanding or
modifications thereof as approved to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Termination Agreement on
the day and year first written above.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ Burton F. Faulkner, Jr.
- ----------------------- ---------------------------
Chairman of the Finance
Committee
WITNESS:
/s/ Rosemarie Mitchell /s/ Joseph R. Doherty
- ---------------------- ---------------------
Joseph R. Doherty
-2-
<PAGE>
EXHIBIT 10.6
CONSULTING AGREEMENT
--------------------
THIS AGREEMENT, entered into this 31/st/ day of March, 1992 (the "Effective
Date"), by and between Central Co-operative Bank, Somerville, Massachusetts (the
"Bank") and Joseph R. Doherty (the "Consultant").
WHEREAS, the Consultant has served for many years as the Bank's Chief
Executive Officer and as Chairman of its Board of Directors (the "Board of
Directors"), and effective as of the Effective Date has retired from his
position as Chief Executive Officer;
WHEREAS, the Consultant has developed, as a result of such service,
extensive knowledge, expertise and goodwill regarding the business, industry,
and community in which the Bank operates and competes;
WHEREAS, the Bank desires to retain the Consultant's services in order to
assist the Bank and the Board of Directors in successfully continuing the Bank's
operations in the business, industry, and community, and has therefore offered
to retain the Consultant in a consulting capacity as Chairman of the Board of
Directors; and
WHEREAS, the parties desire by this writing to set forth the engagement of
the Consultant by the Bank, upon the terms and conditions set forth below.
NOW, THEREFORE, it is AGREED as follows:
1. Duties. The Bank hereby agrees to retain the services of the
------
Consultant for the period set forth in Paragraph 3 below in a consulting
capacity and as Chairman of the Board of Directors. The Consultant's
responsibilities shall consist of rendering such executive, administrative and
management services for the Bank and its Board of Directors as he is currently
rendering in his capacity as Chairman of the Board of Directors and as are
customarily performed by persons situated in a similar executive capacity,
including rendering advice, consultation, and analysis to the Bank with respect
to solicitation of deposits, branch operations, financial matters, real estate
and commercial lending transactions, mergers and acquisitions, business
development, internal administration, securities and investment transactions,
the effect of legislative and regulatory developments on the business and
affairs of the Bank, and related activities, all on an as needed basis, and he
also shall be responsible for such other additional consulting duties and
special consulting assignments as from time-to-time may be mutually agreed upon
by the Bank's Board of Directors and the Consultant.
The Consultant agrees that he will devote a sufficient amount of his
working time to faithfully, fully and satisfactorily perform all the consulting
services to the Bank required of him hereunder, and that he will perform such
services to the best of his ability, it being understood that
<PAGE>
the Consultant shall not be obligated to devote in excess of 1,000 hours per
year to his services hereunder. The Consultant shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of the Bank.
2. Compensation. The Bank agrees to pay the Consultant during the term
------------
of this Agreement an annual fee at the rate of $100,000.00 per annum, payable
monthly on the first day of each month.
During the term of this Agreement, the Consultant shall be entitled to
continue to receive the following Bank-provided benefits, upon the terms in
effect at the time of his resignation from employment as Chief Executive Officer
of the Bank: (i) an office and reasonable secretarial assistance, (ii)
reimbursement for reasonable organization membership dues and reasonable
business-related expenses, (iii) coverage for himself and his dependents under
any group health or life insurance plan which the Bank maintains and in which he
was participating as an employee, and (iv) use of an automobile.
3. Term. The term of the Consultant's engagement under this Agreement
----
shall be for the period commencing on the Effective Date and ending on the third
anniversary of the Effective Date. In addition, the Bank, by resolution adopted
by its Board of Directors during the term of this Agreement, may extend this
Agreement for additional one year periods beyond its then effective expiration
date.
4. Loyalty; Noncompetition.
-----------------------
(a) During the term of the Consultant's engagement under this
Agreement, the Consultant shall not engage in any business or activity contrary
to the business affairs or interests of the Bank and shall not serve any other
depository institution as an officer, director or consultant, provided that
Consultant may continue to serve as a director of Century Bank and Trust
Company, Somerville, Massachusetts.
(b) The Consultant shall treat as confidential all information
regarding the Bank or any of its customers obtained in performing his services
pursuant to this Agreement, and the Consultant shall not disclose such
information to any third party except: (i) to governmental agencies, including,
without limitation, any federal or state bank regulators in accordance with
applicable law; (ii) to the extent required pursuant to any order of any court
or administrative agency having competent jurisdiction over Bank and its
business, subject to any privileges given to professionals retained by Bank; and
(iii) to the extent necessary, to any agent of the Consultant approved by the
Bank, provided such agent shall execute a confidentiality agreement authorized
in writing by the Bank.
(c) Nothing contained in this Paragraph 4 shall be deemed to prevent
or limit the right of the Consultant to invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive investor, in any business.
-2-
<PAGE>
5. Independent Contractor Status. The Bank and the Consultant agree that
-----------------------------
for purposes of this Agreement and all other purposes (including but not limited
to Federal and State income tax withholding), the Consultant is an independent
contractor, and not an employee of the Bank, and shall be liable for all income
and employment taxes on his compensation. The Bank has no right to control or
direct the details, manner or means by which the Consultant performs services
under this Agreement, and, except as specifically set forth herein, the
Consultant is not entitled to any benefits that the Bank provides for its
employees. However, this Agreement shall not impair, reduce or limit in any
respect whatsoever (a) the retirement, pension and related benefits from the
Bank which the Consultant is entitled to receive as a retired officer of the
Bank; (b) the Consultant's rights, obligations, duties or compensation as a
director of the Bank; or (c) the Consultant's rights of indemnification as a
director of the Bank and/or as an agent of the Bank hereunder in accordance with
applicable law, regulation, the Bank's amended charter or bylaws, it being
explicitly understood that the Consultant shall be entitled to such
indemnification.
6. Termination of the Agreement.
----------------------------
(a) Unless sooner terminated in accordance with this Section, this
Agreement shall terminate upon expiration of the term determined under Section 3
hereof.
(b) This Agreement shall automatically terminate upon the
Consultant's death, in which event his estate shall be entitled to receive the
compensation due the Consultant through the last day of the calendar month in
which his death occurred.
(c) For Just Cause, the Board of Directors may, by written notice to
the Consultant, immediately terminate this Agreement at any time. The
Consultant shall have no right to receive compensation or other benefits for any
period after being terminated for Just Cause. Termination for "Just Cause" shall
include termination because of the Consultant's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses), or
material breach of any provision of this Agreement.
(d) For a reason other than Just Cause, the Board of Directors may at
any time, by written notice to the Consultant, immediately terminate his
performance of future services under this Agreement, in which event the
Consultant shall be entitled to receive the compensation and benefits otherwise
payable under this Agreement until the expiration date hereof.
(e) The Consultant may voluntarily terminate this Agreement, upon at
least 60 days' prior written notice to the Board of Directors, in which case he
shall receive only his compensation up to the date on which the Agreement
terminates.
7. Regulatory Requirements. The provisions of this Agreement shall be
-----------------------
subject to any regulation or order issued by a governmental agency having
jurisdiction over the Bank.
-3-
<PAGE>
8. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal
expertise of the Consultant, the Consultant shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Bank.
9. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by both parties, except as herein
otherwise specifically provided.
10. Applicable Law. This Agreement shall be governed in all respects,
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the Commonwealth of Massachusetts.
11. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
12. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as approved to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ Burton F. Faulkner, Jr.
- ---------------------------------- ----------------------------------
Chairman of the Finance
Committee
WITNESS CONSULTANT
/s/ Rosemarie Mitchell By: /s/ Joseph R. Doherty
- ---------------------------------- ----------------------------------
Joseph R. Doherty
-5-
<PAGE>
Exhibit 10.7
AMENDMENT TO CONSULTING AGREEMENT
---------------------------------
THIS AMENDMENT, entered into this 11/th/ day of August, 1994 by and between
Central Cooperative Bank, Somerville, Massachusetts (the "Bank") and Joseph R.
Doherty (the "Consultant").
WHEREAS, the Bank and the Consultant have previously entered into a
Consulting Agreement as of March 31, 1992 (the "Agreement"); and
WHEREAS, the parties are desirous of amending Section 3 of the Agreement to
extend the term thereof.
NOW, THEREFORE, it is AGREED that Section 3 of the Agreement be and is
hereby amended to read in its entirety as follows:
3. Term. The term of the Consultant's engagement under this Agreement
----
shall be for the period commencing on the Effective Date and ending March 31,
1997. Additionally, commencing on March 31, 1995 and on each subsequent annual
anniversary date of the Effective Date the term of the Consultant's engagement
hereunder shall automatically be extended for an additional one year period
beyond the then effective expiration date unless written notice from the Bank or
the Consultant is received prior to an anniversary date advising the other party
that this Agreement shall not be further extended. Any such written notice
shall not effect any prior extensions of the term of the Consultant's engagement
hereunder.
IN WITNESS WHEREOF, the parties have executed this Amendment on the day and
year first hereinabove written.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ Burton F. Faulkner, Jr.
- -------------------------------- ---------------------------------
Gladys N. Partamian Chairman of the Finance
Committee
WITNESS CONSULTANT
/s/ George L. Doherty, Jr. By: /s/ Joseph R. Doherty
- -------------------------------- ---------------------------------
Joseph R. Doherty
<PAGE>
Exhibit 10.10
SEVERANCE AGREEMENT
-------------------
THIS AGREEMENT entered into this 14th day of December, 1994 ("Effective
Date"), by and between Central Co-operative Bank (the "Bank") and William P.
Morrisey (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as Senior
Vice President; and
WHEREAS, the Bank deems it to be in its best interest to enter into this
Agreement as additional incentive to the Employee to continue as an executive
employee of the Bank; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event of
termination of Employee's employment under the circumstances set forth in this
Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. Payment in the Event of Change in Control.
-----------------------------------------
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within twelve (12)
months after any change in control (as herein defined) of the Bank, the Employee
shall be paid an amount equal to two (2) times the Employee's annual base salary
amount at the rate in effect immediately prior to the date of the change in
control. In no event, however, shall such amount exceed the dif ference
between (i) the product of 2.99 times the Employee's "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one
lump sum within ten (10) days after such termination. The term "change in
control" shall mean (1) the ownership, holding or power to vote more than 25% of
the Bank's voting stock, (2) the control of the election of a majority of the
Bank's directors, (3) the exercise of a controlling influence over the
management or policies of the Bank by any person or by persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Bank (the
"Company Board") (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director.
<PAGE>
A "change in control" shall not be deemed to apply to a transaction in which the
Bank forms a holding company without change in the respective beneficial
ownership interests of its stockholders other than pursuant to the exercise of
any dissenter and appraisal rights, or to the purchase of shares by underwriters
in connection with a public offering. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of the Bank,
and the Employee shall thereupon be entitled to receive the payment described in
Section 1(a) of this Agreement, upon the occurrence of any of the following
events, or within ninety (90) days thereafter, which have not been consented to
in advance by the Employee in writing: (i) the requirement that the Employee
perform his principal executive functions, more than 35 miles from his primary
office as of the Effective Date of this Agreement; (ii) a reduction in the
Employee's base annual salary as in effect immediately prior to the change in
control; (iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits substantially similar to those provided to him at the
time of the change in control under any of the employee benefit plans in which
the Employee becomes a participant, or the taking of any action by the Bank
which would directly or indirectly reduce in any material respect any of such
benefits or deprive the Employee of any material fringe benefit enjoyed by him
at the time of the change in control; (iv) the assignment to the Employee of
material duties and responsibilities other than those normally associated with
his position as referenced in the recitals above; or (v) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his employment with the Bank.
(c) The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment.
2. Term.
----
This Agreement shall remain in effect for the period commencing on the
Effective Date and ending on the earlier of (i) the date thirty-six months after
the Effective Date, and (ii) the date on which the Employee terminates
employment with the Bank; provided that the Employee's rights hereunder shall
continue following the termination of his employment with the Bank under any of
the circumstances described in Paragraphs 1(a) or (b) hereof.
2
<PAGE>
Additionally, prior to each annual anniversary date from the Effective Date, the
term of this Agreement shall be automatically extended for a one-year period
beyond the then effective expiration date, unless written notice from the Bank
or the Employee is received prior to an anniversary date advising the other
party that this Agreement shall not be further extended. Any such written notice
shall not affect any prior extensions of the term of this Agreement.
3. Expense Reimbursement.
---------------------
In the event that any dispute arises between the Employee and the Bank
as to the terms or interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action that the Employee
takes to enforce the terms of this Agreement or to defend against any action
taken by the Bank, the Employee shall be reimbursed for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, provided that the Employee shall obtain a final non-appealable judgment
by a court of competent jurisdiction in favor of the Employee. Such
reimbursement shall be paid within ten (10) days after the Employee furnishes to
the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
4. Regulatory Requirements.
-----------------------
Any payments made to the Employee under this Agreement are subject to
and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
5. Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
6. Amendments.
----------
No amendments or additions to this Agreement shall be binding unless
made in writing and signed by all of the parties, except as herein otherwise
specifically provided.
7. Applicable Law.
--------------
The laws of the Commonwealth of Massachusetts shall govern this
Agreement in all respects, whether as to its validity, construction, capacity,
performance or otherwise.
3
<PAGE>
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
9. Entire Agreement.
----------------
This Agreement, together with any understanding or modifications
hereof as agreed to in writing by the parties, shall constitute the entire
agreement between the parties hereto; provided however that nothing herein shall
be deemed alter or amend the rights or obligations of the Bank and the Employee
pursuant to any employee benefit or other plan, program or policy, including,
without limitation, the rights and obligations under any retirement, insurance,
group benefit, stock option, incentive bonus or other plan in which the Employee
is, or may become, a participant.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ John D. Doherty
- ------------------------- ------------------------------
Clerk
WITNESS: EMPLOYEE
/s/ Mary P. Duarte /s/ William P. Morrisey
- --------------------------- ----------------------------------
4
<PAGE>
Exhibit 10.11
SEVERANCE AGREEMENT
-------------------
THIS AGREEMENT entered into this 14/th/ day of December, 1994 ("Effective
Date"), by and between Central Co-operative Bank (the "Bank") and David W. Kearn
(the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as Chief
Financial Officer; and
WHEREAS, the Bank deems it to be in its best interest to enter into this
Agreement as additional incentive to the Employee to continue as an executive
employee of the Bank; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event of
termination of Employee's employment under the circumstances set forth in this
Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. Payment in the Event of Change in Control.
-----------------------------------------
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within twelve (12)
months after any change in control (as herein defined) of the Bank, the Employee
shall be paid an amount equal to two (2) times the Employee's annual base salary
amount at the rate in effect immediately prior to the date of the change in
control. In no event, however, shall such amount exceed the dif ference
between (i) the product of 2.99 times the Employee's "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one
lump sum within ten (10) days after such termination. The term "change in
control" shall mean (1) the ownership, holding or power to vote more than 25% of
the Bank's voting stock, (2) the control of the election of a majority of the
Bank's directors, (3) the exercise of a controlling influence over the
management or policies of the Bank by any person or by persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Bank (the
"Company Board") (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director.
<PAGE>
A "change in control" shall not be deemed to apply to a transaction in which the
Bank forms a holding company without change in the respective beneficial
ownership interests of its stockholders other than pursuant to the exercise of
any dissenter and appraisal rights, or to the purchase of shares by underwriters
in connection with a public offering. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of the Bank,
and the Employee shall thereupon be entitled to receive the payment described in
Section 1(a) of this Agreement, upon the occurrence of any of the following
events, or within ninety (90) days thereafter, which have not been consented to
in advance by the Employee in writing: (i) the requirement that the Employee
perform his principal executive functions, more than 35 miles from his primary
office as of the Effective Date of this Agreement; (ii) a reduction in the
Employee's base annual salary as in effect immediately prior to the change in
control; (iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits substantially similar to those provided to him at the
time of the change in control under any of the employee benefit plans in which
the Employee becomes a participant, or the taking of any action by the Bank
which would directly or indirectly reduce in any material respect any of such
benefits or deprive the Employee of any material fringe benefit enjoyed by him
at the time of the change in control; (iv) the assignment to the Employee of
material duties and responsibilities other than those normally associated with
his position as referenced in the recitals above; or (v) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his employment with the Bank.
(c) The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment.
2. Term.
----
This Agreement shall remain in effect for the period commencing on the
Effective Date and ending on the earlier of (i) the date thirty-six months after
the Effective Date, and (ii) the date on which the Employee terminates
employment with the Bank; provided that the Employee's rights hereunder shall
continue following the termination of his employment with the Bank under any of
the circumstances described in Paragraphs 1(a) or (b) hereof.
-2-
<PAGE>
Additionally, prior to each annual anniversary date from the Effective Date, the
term of this Agreement shall be automatically extended for a one-year period
beyond the then effective expiration date, unless written notice from the Bank
or the Employee is received prior to an anniversary date advising the other
party that this Agreement shall not be further extended. Any such written notice
shall not affect any prior extensions of the term of this Agreement.
3. Expense Reimbursement.
---------------------
In the event that any dispute arises between the Employee and the Bank
as to the terms or interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action that the Employee
takes to enforce the terms of this Agreement or to defend against any action
taken by the Bank, the Employee shall be reimbursed for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings or
actions, provided that the Employee shall obtain a final non-appealable judgment
by a court of competent jurisdiction in favor of the Employee. Such
reimbursement shall be paid within ten (10) days after the Employee furnishes to
the Bank written evidence, which may be in the form, among other things, of a
cancelled check or receipt, of any costs or expenses incurred by the Employee.
4. Regulatory Requirements.
-----------------------
Any payments made to the Employee under this Agreement are subject to
and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
5. Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
6. Amendments.
----------
No amendments or additions to this Agreement shall be binding unless
made in writing and signed by all of the parties, except as herein otherwise
specifically provided.
7. Applicable Law.
--------------
The laws of the Commonwealth of Massachusetts shall govern this
Agreement in all respects, whether as to its validity, construction, capacity,
performance or otherwise.
8. Severability.
------------
-3-
<PAGE>
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
9. Entire Agreement.
----------------
This Agreement, together with any understanding or modifications
hereof as agreed to in writing by the parties, shall constitute the entire
agreement between the parties hereto; provided however that nothing herein shall
be deemed alter or amend the rights or obligations of the Bank and the Employee
pursuant to any employee benefit or other plan, program or policy, including,
without limitation, the rights and obligations under any retirement, insurance,
group benefit, stock option, incentive bonus or other plan in which the Employee
is, or may become, a participant.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ John D. Doherty
- ------------------------- ------------------------------
Clerk
WITNESS: EMPLOYEE
/s/ Mary P. Duarte /s/ David W. Kearn
- ------------------------- ----------------------------------
-4-
<PAGE>
EXHIBIT 10.12
SEVERANCE AGREEMENT
-------------------
THIS AGREEMENT entered into this 14th day of May, 1998 ("Effective Date"),
by and between Central Co-operative Bank (the "Bank") and Paul S. Feeley (the
"Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Treasurer/Chief Financial Officer and Senior Vice President; and
WHEREAS, the Bank deems it to be in its best interest to enter into this
Agreement as additional incentive to the Employee to continue as an executive
employee of the Bank; and
WHEREAS, the parties desire by this writing to set forth their
understanding as to their respective rights and obligations in the event of
termination of Employee's employment under the circumstances set forth in this
Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. Payment in the Event of Change in Control.
-----------------------------------------
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within twelve (12)
months after any change in control (as herein defined) of the Bank, the Employee
shall be paid an amount equal to two (2) times the Employee's annual base salary
amount at the rate in effect immediately prior to the date of the change in
control. In no event, however, shall such amount exceed the difference between
(i) the product of 2.99 times the Employee's "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder, and (ii) the sum of any other parachute
payments (as defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid in one
lump sum within ten (10) days after such termination. The term "change in
control" shall mean (1) the ownership, holding or power to vote more than 25% of
the Bank's voting stock, (2) the control of the election of a majority of the
Bank's directors, (3) the exercise of a controlling influence over the
management or policies of the Bank by any person or by persons acting as a
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), or (4) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Bank (the
"Company Board") (the "Continuing Directors") cease for any reason to constitute
at least two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved by a vote
of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. A "change in control" shall not be deemed to
apply to a transaction in which the Bank forms a holding company without change
in the respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter and appraisal rights, or to the
purchase of shares by underwriters in connection with a public offering. The
term "person" means an individual other than the Employee, or a corporation,
<PAGE>
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of the Bank,
and the Employee shall thereupon be entitled to receive the payment described in
Section 1(a) of this Agreement, upon the occurrence of any of the following
events, or within ninety (90) days thereafter, which have not been consented to
in advance by the Employee in writing: (i) the requirement that the Employee
perform his principal executive functions, more than 35 miles from his primary
office as of the Effective Date of this Agreement; (ii) a reduction in the
Employee's base annual salary as in effect immediately prior to the change in
control; (iii) the failure by the Bank to continue to provide the Employee with
compensation and benefits substantially similar to those provided to him at the
time of the change in control under any of the employee benefit plans in which
the Employee becomes a participant, or the taking of any action by the Bank
which would directly or indirectly reduce in any material respect any of such
benefits or deprive the Employee of any material fringe benefit enjoyed by him
at the time of the change in control; (iv) the assignment to the Employee of
material duties and responsibilities other than those normally associated with
his position as referenced in the recitals above; or (v) a material diminution
or reduction in the Employee's responsibilities or authority (including
reporting responsibilities) in connection with his employment with the Bank.
(c) The Employee shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Employee in any subsequent employment.
2. Term.
----
This Agreement shall remain in effect for the period commencing on the
Effective Date and ending on the earlier of (i) the date thirty-six months after
the Effective Date, and (ii) the date on which the Employee terminates
employment with the Bank; provided that the Employee's rights hereunder shall
continue following the termination of his employment with the Bank under any of
the circumstances described in Paragraphs 1(a) or (b) hereof. Additionally,
prior to each annual anniversary date from the Effective Date, the term of this
Agreement shall be automatically extended for a one-year period beyond the then
effective expiration date, unless written notice from the Bank or the Employee
is received prior to an anniversary date advising the other party that this
Agreement shall not be further extended. Any such written notice shall not
affect any prior extensions of the term of this Agreement.
3. Expense Reimbursement.
---------------------
In the event that any dispute arises between the Employee and the Bank
as to the terms or interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action that the Employee
takes to enforce the terms of this Agreement or
-2-
<PAGE>
to defend against any action taken by the Bank, the Employee shall be reimbursed
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, provided that the Employee shall obtain a
final non-appealable judgment by a court of competent jurisdiction in favor of
the Employee. Such reimbursement shall be paid within ten (10) days after the
Employee furnishes to the Bank written evidence, which may be in the form, among
other things, of a cancelled check or receipt, of any costs or expenses incurred
by the Employee.
4. Regulatory Requirements.
-----------------------
Any payments made to the Employee under this Agreement are subject to
and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
5. Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank.
6. Amendments.
----------
No amendments or additions to this Agreement shall be binding unless
made in writing and signed by all of the parties, except as herein otherwise
specifically provided.
7. Applicable Law.
--------------
The laws of the Commonwealth of Massachusetts shall govern this
Agreement in all respects, whether as to its validity, construction, capacity,
performance or otherwise.
8. Severability.
------------
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
9. Entire Agreement.
----------------
This Agreement, together with any understanding or modifications
hereof as agreed to in writing by the parties, shall constitute the entire
agreement between the parties hereto; provided however that nothing herein shall
be deemed alter or amend the rights or obligations of the Bank and the Employee
pursuant to any employee benefit or other plan, program or policy, including,
without limitation, the rights and obligations under any retirement, insurance,
group benefit, stock option, incentive bonus or other plan in which the Employee
is, or may become, a participant.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
ATTEST: CENTRAL CO-OPERATIVE BANK
/s/ Gladys N. Partamian By: /s/ John D. Doherty
- ----------------------------------- -----------------------------------
Clerk
WITNESS: EMPLOYEE:
/s/ Joseph R. Doherty /s/ Paul S. Feeley
- ----------------------------------- --------------------------------------
Paul S. Feeley
-4-
<PAGE>
Exhibit 10.13
CENTRAL CO-OPERATIVE BANK
-----------------------------------------
1999 Amendment to Severance Agreement
with William P. Morrissey
-----------------------------------------
WHEREAS, Central Co-operative Bank (the "Bank") has entered into a
severance agreement (the "Severance Agreement") with William P. Morrissey,
dated December 14, 1994; and
WHEREAS, in connection with the acquisition of the Bank by its Holding
Company, Central Bancorp, Inc. (the "Company") the parties to the Severance
Agreement mutually desire to update its change-in-control provisions.
NOW, THEREFORE, pursuant to Section 6 of the Severance Agreement, the
undersigned agree to amend the Severance Agreement as follows, effective upon
the date of the acquisition of the Bank by the Company.
1. Section 1(a) and the first clause of Section 1(b) of the Severance
Agreement shall be amended in their entirety to provide as follows:
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within
twelve (12) months after any change in control (as herein defined) of
the Bank or Central Bancorp, Inc. (the "Company") , the Employee shall
be paid an amount equal to two (2) times the Employee's annual base
salary amount at the rate in effect immediately prior to the date of
the change in control. In no event, however, shall such amount exceed
the difference between (i) the product of 2.99 times the Employee's
"base amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended (the "Code") and regulations promulgated
thereunder, and (ii) the sum of any other parachute payments (as
defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid
in one lump sum within ten (10) days after such termination. The term
"change in control" shall mean (1) the ownership, holding or power to
vote more than 25% of the voting stock of the Bank or the Company,
(2) the control of the election of a majority of the Bank's or the
Company's directors, (3) the exercise of a controlling influence over
the management or policies of the Bank or the Company by any person or
by persons acting as a "group" (within the meaning of Section 13(d) of
the Securities Exchange Act of 1934), or (4) during any period of two
consecutive years,
<PAGE>
individuals who at the beginning of such period constitute the Board
of Directors of the Bank or the Company (the "Company Board") (the
"Continuing Directors") cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election or
nomination for election as a member of the Company Board was approved
by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. The term "person"
means an individual other than the Employee, or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of
the Bank or the Company,
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Severance Agreement, other than as
stated above.
WHEREFORE, on this 8th day of January, 1999, the undersigned hereby execute
this 1999 Amendment to the Severance Agreement.
CENTRAL CO-OPERATIVE BANK
Witnessed by:
/s/ Gladys N. Partamian By /s/ John D. Doherty
- --------------------------------- ------------------------------
Its President & CEO
EMPLOYEE
Witnessed by:
/s/ Maya Som /s/ William P. Morrissey
- --------------------------------- -----------------------------------
William P. Morrissey
<PAGE>
CENTRAL CO-OPERATIVE BANK
----------------------------------------
1999 Amendment to Severance Agreement
with David W. Kearn
----------------------------------------
WHEREAS, Central Co-operative Bank (the "Bank") has entered into a
severance agreement ("Severance Agreement") with David W. Kearn dated December
14, 1994; and
WHEREAS, in connection with the acquisition of the Bank by its Holding
Company, Central Bancorp, Inc. (the "Company") the parties to the Severance
Agreement mutually desire to update its change-in-control provisions.
NOW, THEREFORE, pursuant to Section 6 of the Severance Agreement, the
undersigned agree to amend the Severance Agreement as follows, effective upon
the date of the acquisition of the Bank by the Company.
1. Section 1(a) and the first clause of Section 1(b) of the Severance
Agreement shall be amended in their entirety to provide as follows:
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within
twelve (12) months after any change in control (as herein defined) of
the Bank or Central Bancorp, Inc. (the "Company"), the Employee shall
be paid an amount equal to two (2) times the Employee's annual base
salary amount at the rate in effect immediately prior to the date of
the change in control. In no event, however, shall such amount exceed
the difference between (i) the product of 2.99 times the Employee's
"base amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended (the "Code") and regulations promulgated
thereunder, and (ii) the sum of any other parachute payments (as
defined under Section 280G(b)(2) of the Code) that the Employee
receives on account of the change in control. Said sum shall be paid
in one lump sum within ten (10) days after such termination. The term
"change in control" shall mean (1) the ownership, holding or power to
vote more than 25% of the voting stock of the Bank or the Company, (2)
the control of the election of a majority of the Bank's or the
Company's directors, (3) the exercise of a controlling influence over
the management or policies of the Bank or the Company by any person or
by persons acting as a "group" (within the meaning of Section 13(d) of
the Securities Exchange Act of 1934), or (4) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Bank or the Company (the
"Company Board") (the "Continuing Directors") cease
<PAGE>
for any reason to constitute at least two-thirds thereof, provided
that any individual whose election or nomination for election as a
member of the Company Board was approved by a vote of at least two-
thirds of the Continuing Directors then in office shall be considered
a Continuing Director. The term "person" means an individual other
than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed
herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of
the Bank or the Company,
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Severance Agreement, other than as
stated above.
WHEREFORE, on this 8th day of January, 1999, the undersigned hereby execute
this 1999 Amendment to the Severance Agreement.
CENTRAL CO-OPERATIVE BANK
Witnessed by:
/s/ Gladys N. Partamian By /s/ John D. Doherty
- -------------------------------- --------------------------------
Its President &CEO
EMPLOYEE
Witnessed by:
/s/ Maya Som /s/ David W. Kearn
- -------------------------------- ---------------------------------------
David W. Kearn
<PAGE>
CENTRAL CO-OPERATIVE BANK
----------------------------------------
1999 Amendment to Severance Agreement
with Paul S. Feeley
----------------------------------------
WHEREAS, Central Co-operative Bank (the "Bank") has entered into a
severance agreement (the "Severance Agreement") with Paul S. Feeley, dated May
14, 1998; and
WHEREAS, in connection with the acquisition of the Bank by the Holding
Company, Central Bancorp, Inc. (the "Company"), the parties to the Severance
Agreement mutually desire to update its change-in-control provisions.
NOW, THEREFORE, pursuant to Section 6 of the Severance Agreement, the
undersigned agree to amend the Severance Agreement as follows, effective upon
the date of the acquisition of the Bank by the Company.
1. Section 1(a) and the first clause of Section 1(b) of the Severance
Agreement shall be amended in their entirety to provide as follows:
(a) If the Employee's employment is terminated by the Bank, without
the Employee's prior written consent, in connection with or within twelve
(12) months after any change in control (as herein defined) of the Bank or
Central Bancorp, Inc. (the "Company"), the Employee shall be paid an amount
equal to two (2) times the Employee's annual base salary amount at the rate
in effect immediately prior to the date of the change in control. In no
event, however, shall such amount exceed the difference between (i) the
product of 2.99 times the Employee's "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder, and (ii) the sum of any other
parachute payments (as defined under Section 280G(b)(2) of the Code) that
the Employee receives on account of the change in control. Said sum shall
be paid in one lump sum within ten (10) days after such termination. The
term "change in control" shall mean (1) the ownership, holding or power to
vote more than 25% of the voting stock of the Bank or the Company, (2) the
control of the election of a majority of the Bank's or the Company's
directors, (3) the exercise of a controlling influence over the management
or policies of the Bank or the Company by any person or by persons acting
as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934), or (4) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Bank or the Company (the "Company Board") (the "Continuing
Directors") cease
<PAGE>
for any reason to constitute at least two-thirds thereof, provided that any
individual whose election or nomination for election as a member of the
Company Board was approved by a vote of at least two-thirds of the
Continuing Directors then in office shall be considered a Continuing
Director. The term "person" means an individual other than the Employee, or
a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(b) The Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of the
Bank or the Company,
2. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Severance Agreement, other than as
stated above.
WHEREFORE, on this 8th day of January, 1999, the undersigned hereby execute
this 1999 Amendment to the Severance Agreement.
CENTRAL CO-OPERATIVE BANK
Witnessed by:
/s/ Gladys N. Partamian By /s/ John D. Doherty
- ------------------------------------ --------------------------------
Its President & CEO
EMPLOYEE
Witnessed by:
/s/ Maya Som /s/ Paul S. Feeley
- ------------------------------------ ------------------------------------
Paul S. Feeley
<PAGE>
EXHIBIT 13
1999 Annual Report
POSITIONED
for success
[PICTURE APPEARS HERE]
Central
Bancorp, Inc.
<PAGE>
Profile
In 1999, Central Bancorp, Inc. became the holding company for Central Bank,
whose legal name is Central Co-operative Bank. The Bank was founded in 1915 as a
Massachusetts chartered co-operative bank to provide savings deposits and
originate mortgage loans. Between 1970 and 1982, the Bank grew through mergers
with six other Massachusetts co-operative banks. In 1994, Central Bank acquired
Metro Bancorp, Inc., the parent company of Metropolitan Bank and Trust Company.
In October 1986, Central Bank become a public company by converting to a capital
stock co-operative bank.
Central Bank is a full-service community banking operation that provides a
variety of deposit and lending services -- including savings and checking
accounts for retail and business customers, mortgage loans for constructing,
purchasing and refinancing residential and commercial properties and loans for
education, home improvement and other purposes. The Bank operates eight
full-service offices in the Massachusetts communities of Somerville, Arlington,
Burlington, Chestnut Hill, Malden, Melrose, and Woburn (two branches).
<PAGE>
Dear
Stockholder
POSITIONED
for success
Fiscal 1999 was highlighted by the successful establishment of Central Bancorp,
Inc., as the holding company for Central Bank. This important strategic move,
which was completed in January 1999, has provided our company with a strong
foundation for future growth, prosperity and diversification.
Over the long term, the holding company will give us significantly greater
operating flexibility. It also will enable us to leverage our company's strong
capital position and broaden our revenue stream by expanding into diverse areas.
We will monitor the market on a regular basis to ensure that we take advantage
of opportune situations that may arise.
We view the increasing consolidation of larger banking institutions as a
positive development for well established community-based companies such as
Central Bank. An increasing number of consumers prefer the more personalized
service and lower fees that community banks have traditionally provided. Also,
many consumers are frustrated with the changes and uncertainties that often
result from bank mergers, such as the imposition of higher fees and the sale of
accounts and branch offices to other banks. One of our most important assets is
the fact that we have a long-term presence and respect within the communities we
serve and have been very successful over the years at meeting the personal
banking needs of our customers.
<PAGE>
1999 Annual Report
As previously announced, in May 1999, we initiated a stock repurchase program
because the common stock represented, in our judgment, an attractive investment.
We have already repurchased several thousand shares and intend to purchase
additional shares if market conditions remain favorable. Additionally, the
reduction in the number of outstanding shares resulting from the repurchases is
expected to benefit our stockholders by increasing earnings per share.
Financially, fiscal 1999 was another year of solid earnings, with net income at
$2,682,000, or $1.38 per diluted share. Our operating performance, as measured
by net interest and dividend income, increased by $249,000 in fiscal 1999
compared to fiscal 1998. Stockholders' equity was at a record $38,742,000 as of
March 31, 1999, and our capital ratio remained well above regulatory
requirements during fiscal 1999. Our overall financial results also reflected a
decrease of $471,000 in gains taken on sales of investment securities and
increased costs associated with enhancements to data processing systems to
facilitate the expansion of our product offerings and with modifications to our
computer systems to make them Year 2000 compatible.
These enhancements to our data processing systems are designed to further
strengthen the company's competitive position by enabling us to better meet the
needs of those customers who are relying more heavily on computers and other
technologies. We are actively evaluating computer-based services such as
Internet banking whereby customers can conduct many of their banking
transactions, obtain account information and pay their bills -- all on line.
Broadening
[TWO CHARTS COMPARING NET INTEREST AND DIVIDEND INCOME FROM 1995
TO 1999 AND COMPARING STOCKHOLDERS' EQUITY FROM 1995 TO 1999 APPEAR HERE]
<PAGE>
On January 8, 1999...
[PICTURE APPEARS HERE]
...Central Bancorp, Inc. became the holding company for Central Bank, marking
another important milestone for our company and a very positive development for
our stockholders. The holding company structure -- by providing greater
operating flexibility to diversify and to leverage our strong capital position
- -- strengthens Central Bank within the marketplace and provides us with a solid
foundation to enhance stockholder value as we move into the new millennium. We
are very well positioned for continued success.
Central Bank's net interest and dividend income rose by $249,000 in fiscal 1999
over fiscal 1998 despite a very competitive market for loans. Stockholders'
equity of $38,742,000 at March 31, 1999 was nearly $2,000,000 above March 31,
1998 and also represented the highest level in the company's history.
<PAGE>
Central
Bancorp, Inc.
our array of products and services to incorporate more automated elements
represents an excellent investment in our future. At the same time, we intend to
maintain our one-on-one personalized banking relationships with those customers
who are uncomfortable with the evolving technology and, consequently, prefer to
conduct their business by coming into one of our branch offices to meet with our
staff on a face-to-face basis.
The principal objective of your Board of Directors and senior management is to
continue to build sustainable, long-term value for our stockholders. The steps
we have taken to strengthen the organization through the formation of a holding
company -- along with our strong financial situation, our excellent reputation
within the community and our technology enhancements -- place our company in an
excellent position for continued success. On behalf of the Board of Directors
and the management of Central Bancorp, I want to take this opportunity to thank
you for your continued support and to reassure you that we are working very hard
to improve the value of your investment in our company.
Sincerely,
/s/ John D. Doherty
John D. Doherty
President & Chief Executive Officer
[PICTURE APPEARS HERE]
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
March 31,
(In Thousands, Except Per Share Data and Selected Ratios) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Total assets................................................... $ 364,696 $ 375,233 $ 320,950 $ 310,949 $ 320,921
Total loans.................................................... 280,346 281,724 234,935 214,421 212,438
Investments:
Available for sale......................................... 68,881 73,027 63,839 64,796 31,997
Held to maturity........................................... -- 4,000 4,000 5,651 53,006
Deposits....................................................... 266,463 276,364 259,093 257,096 261,121
Borrowings..................................................... 57,000 59,000 25,000 18,000 28,000
Total stockholders' equity..................................... 38,742 36,786 33,545 31,084 29,106
Shares outstanding............................................. 1,967 1,965 1,965 1,965 1,917
STATEMENTS OF OPERATIONS
Net interest and dividend income............................... $ 11,947 $ 11,698 $ 11,623 $ 11,075 $ 10,007
Provision for loan losses...................................... -- -- -- 120 700
Total non-interest income...................................... 1,368 1,814 888 1,347 702
Total operating expenses....................................... 8,773 8,471 8,986 10,666 8,516
Net income..................................................... 2,682 3,047 2,837 1,226 1,445
Earnings per common share, assuming dilution................... 1.38 1.56 1.46 0.64 0.76
SELECTED RATIOS
Interest rate spread........................................... 2.97% 3.11% 3.45% 3.37% 3.12%
Net yield on interest-earning assets........................... 3.29 3.45 3.78 3.64 3.86
Equity-to-assets............................................... 10.62 9.80 10.45 10.00 9.07
Return on average assets....................................... 0.72 0.88 0.89 0.39 0.54
Return on average stockholders' equity......................... 7.12 8.64 8.67 3.96 5.16
</TABLE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Central Bancorp, Inc. (the "Company") is a Bank Holding Company headquartered in
Somerville, Massachusetts. The Company is the holding company for its wholly
owned subsidiary, Central Bank (the "Bank"), a state chartered co-operative
bank. Through the Bank, the Company acquires funds in the form of deposits and
uses the funds to make mortgage loans for the construction, purchase and
refinancing of residential properties, and to make loans on commercial real
estate and business loans in its market area. The Bank also makes a limited
amount of consumer loans including education, home improvement and secured and
unsecured personal loans. The Bank has used excess funds to purchase investment
and mortgage-backed securities.
The operations of the Bank are generally influenced by overall economic
conditions, the related monetary and fiscal policies of the federal government
and the regulatory policies of financial institution regulatory authorities,
including the Banking Commissioner, the Federal Reserve Board and the Federal
Deposit Insurance Corporation ("FDIC").
The Bank monitors its exposure to earnings fluctuations resulting from
market interest rate changes. Historically the Bank's earnings have been
vulnerable to changing interest rates due to differences in the terms to
maturity or repricing of its assets and liabilities. For example, in a rising
interest rate environment, the Bank's net interest income and net income could
be negatively affected as interest-sensitive liabilities (deposits and
borrowings) could adjust more quickly to rising interest rates than the Bank's
interest-sensitive assets (loans and investments).
The following is a discussion and analysis of the Bank's results of
operations for the last three years and its financial condition at the end of
fiscal years 1999 and 1998. Management's discussion and analysis of financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and accompanying notes.
[PICTURE APPEARS HERE]
Results of Operations
The Bank reported net income of $2.7 million or $1.38 per diluted share for
fiscal 1999 as compared to $3.0 million or $1.56 per diluted share for fiscal
1998 and $2.8 million or $1.46 per diluted share for fiscal 1997, respectively.
The Bank's earnings decrease for fiscal 1999 was primarily the result of a
decrease in net gains from the sales of investment securities and an increase in
operating expenses, partially offset by an improvement in net dividend and
interest income. The Bank was able to increase net interest and dividend income
during this period despite a fiercely competitive market for loans which caused
the average yield on loans to decline. The decrease in deposits resulted from
management's decision to not aggressively price deposits in a declining interest
rate environment which caused the overall cost of funds to decrease.
The Bank's fiscal 1998 earnings were favorably affected by a reduction in
operating expenses, and net gains from sales of investment securities
Interest Rate Spread
The Bank's operating results are significantly affected by its net interest
spread, which is the difference between the yield on loans and investments and
the interest cost of deposits and borrowings. The interest spread is affected by
economic conditions and market factors which influence interest rates, loan
demand and deposit flows.
<PAGE>
The following table presents the Bank's income yield and cost of funds by their
primary components for the fiscal years ended March 31;
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans.................. $ 282,631 $ 21,250 7.52% $ 245,339 $ 19,326 7.88% $ 225,807 $ 17,917 7.93%
Other loans..................... 4,882 423 8.66 4,990 444 8.90 5,200 469 9.01
Short-term
investments................... 13,128 650 4.95 4,495 251 5.58 4,851 262 5.41
Investment securities........... 23,375 1,481 6.34 38,836 2,443 6.29 52,767 3,400 6.44
Mortgage-backed
securities.................... 37,676 2,097 5.57 44,073 2,659 6.03 17,617 1,150 6.53
The Cooperative
Central Bank
Reserve Fund.................. 1,576 95 6.03 1,576 99 6.28 1,576 111 7.04
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets........................ $ 363,268 25,996 7.16 $ 339,309 25,222 7.43 $ 307,818 23,309 7.57
========= --------- ========= --------- ========= ---------
Interest-bearing liabilities:
Deposits........................ $ 275,135 10,770 3.91 $ 270,650 11,084 4.10 $ 258,017 10,182 3.95
Advances from Federal
Home Loan Bank
of Boston..................... 59,901 3,279 5.47 42,130 2,440 5.79 25,330 1,504 5.94
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities................... $ 335,036 14,049 4.19 $ 312,780 13,524 4.32 $ 283,347 11,686 4.12
========= --------- ========= --------- ========= ---------
Net interest and
dividend income................ $ 11,947 $ 11,698 $ 11,623
========= ========= =========
Interest rate spread.............. 2.97% 3.11% 3.45%
==== ==== ====
Net yield on interest
earning assets................. 3.29% 3.45% 3.78%
==== ==== ====
</TABLE>
Rate/Volume Analysis
The effect on net interest income of changes in interest rates and changes in
the amounts of interest-earning assets and interest-bearing liabilities is shown
in the following table. Information is provided on changes for the fiscal years
indicated attributable to (i) changes in the interest rates; (ii) changes in
volume; and (iii) the combined effect of changes in interest rates and volume.
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
--------------------------------------- ---------------------------------------
Change due to Increase (Decrease) in: Change due to Increase (Decrease) in:
--------------------------------------- ---------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Total Volume Rate Volume Total
- ------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Mortgage loans...................... $ 2,939 $ (883) $ (132) $ 1,924 $ 1,550 $ (130) $ (11) $ 1,409
Other loans......................... (10) (12) 1 (21) (19) (6) -- (25)
------- ------ ------ ------- ------- ------ ------ -------
Total income from loans............ 2,929 (895) (131) 1,903 1,531 (136) (11) 1,384
------- ------ ------ ------- ------- ------ ------ -------
Short-term investments................ 482 (28) (55) 399 (19) 9 (1) (11)
Investment securities................. (972) 19 (9) (962) (898) (80) 21 (957)
Mortgage-backed securities............ (386) (203) 27 (562) 1,727 (87) (131) 1,509
The Co-operative Central Bank
Reserve Fund...................... -- (4) -- (4) -- (12) -- (12)
------- ------ ------ ------- ------- ------ ------ -------
Total income from investments...... (876) (216) (37) (1,129) 810 (170) (111) 529
------- ------ ------ ------- ------- ------ ------ -------
Total interest and dividend income. 2,053 (1,111) (168) 774 2,341 (306) (122) 1,913
------- ------ ------ ------- ------- ------ ------ -------
Interest expense:
Deposits............................ 184 (514) 16 (314) 499 385 18 902
Advances from Federal Home Loan
Bank of Boston................... 1,029 (135) (55) 839 997 (37) (24) 936
------- ------ ------ ------- ------- ------ ------ -------
Total interest expense............. 1,213 (649) (39) 525 1,496 348 (6) 1,838
------- ------ ------ ------- ------- ------ ------ -------
Net interest and dividend income...... $ 840 $ (462) $ (129) $ 249 $ 845 $ (654) $ (116) $ 75
====================================== =======================================
</TABLE>
<PAGE>
Interest and Dividend Income
The Bank experienced a $774 thousand overall increase in interest and dividend
income for the fiscal year ended March 31, 1999 compared to fiscal 1998.
Interest income on loans increased by $1.9 million to $21.7 million due to a
$37.2 million increase in average loan balances although total loans decreased
by $1.4 million from March 31, 1998 to March 31, 1999. Partly offsetting the
increase in average loans outstanding was a 36 basis point decrease in the
average yield on these loans. The Bank originated new loans amounting to $111.2
million, of which $51.1 million are adjustable-rate loans. Additionally,
interest and dividend income on investments decreased by $1.1 million due
primarily to a $13.2 million decrease in average total balances of investments
and by a 42 basis point decrease in the rate earned on investments during fiscal
1999. The overall total average balance of interest-earning assets increased by
$24 million from fiscal 1998 to fiscal 1999 while the average yield on all
interest-earning assets decreased by 27 basis points between the two fiscal
years.
The Bank experienced a $1.9 million overall increase in interest and
dividend income for the fiscal year ended March 31, 1998 compared to fiscal
1997. Interest income on loans increased by $1.4 million to $19.8 million due to
a $19.3 million increase in average loan balances. Partly offsetting the loan
volume increase was a 6 basis point decrease in the average yield on these
loans. The Bank originated new loans amounting to $109.7 million, of which $68.5
million are adjustable-rate loans. Additionally, interest and dividend income on
investments increased by $529 thousand due primarily to a $12.2 million increase
in average total balances of investments partly offset by a 28 basis point
decrease in the rate earned on investments during fiscal 1998. The overall total
average balance of interest-earning assets increased by $31.5 million from
fiscal 1997 to fiscal 1998 while the average yield on all interest-earning
assets decreased by 14 basis points between the two fiscal years.
[PICTURE APPEARS HERE]
Interest Expense
Interest expense on deposits decreased during the fiscal year ended March 31,
1999 by $314 thousand from $11.1 million in fiscal 1998 to $10.8 million in
fiscal 1999. The decrease can be attributed to a decrease of 19 basis points in
the interest rate paid on deposits from 4.10% during fiscal 1998 to 3.91% during
fiscal 1999, which was partly offset by an increase in the average balance of
deposits to $275.1 million during fiscal 1999 from $270.7 million during fiscal
1998. Interest expense on borrowings increased as the average balance of
borrowings rose to $59.9 million during fiscal 1999 from $42.1 million during
fiscal 1998. Partly offsetting the increase in the average balance was a 32
basis point decrease in the rate paid on these borrowings to 5.47% in fiscal
1999 from 5.79% in fiscal 1998. Both factors combined to cause a $839 thousand
increase in interest expense on borrowings during fiscal 1999. There was an
overall increase in the average balance of interest-bearing liabilities of $22.3
million during fiscal 1999 compared to fiscal 1998.
For fiscal 1998, interest expense on deposits increased by $902 thousand
from $10.2 million in fiscal 1997 to $11.1 million in fiscal 1998. The increase
can be attributed primarily to an increase in the average total balance of
deposits to $270.7 million during fiscal 1998 from $258.0 million in the prior
period and a 15 basis point increase in the interest rate paid on these deposits
from 3.95% during fiscal 1997 to 4.10% during fiscal 1998. Interest expense on
borrowings also increased as the average balance of borrowings rose to $42.1
million during fiscal 1998 from $25.3 million during fiscal 1997. Partly
offsetting the increase in the average balance was a 15 basis point decrease in
the rate paid on these borrowings to 5.79% in fiscal 1998 from 5.94% in fiscal
1997. Both factors combined to cause a $936 thousand increase in interest
expense on borrowings during fiscal 1998. There was an overall increase in the
average balance of interest-bearing liabilities of $29.4 million during fiscal
1998 compared to fiscal 1997.
Provision for Loan Losses
Due to the Bank's stable and relatively high level of asset quality, there was
no provision for loan losses during fiscal 1999, 1998 and 1997. At March 31,
1999, 1998 and 1997, problem assets totaled $420 thousand, $1.7 million and $2.8
million, representing 0.1%, 0.4% and 0.9% of total assets, respectively. Problem
assets are loans 90 days or more past due, real estate acquired by foreclosure
and impaired loans. Loans 90 days or more past due amounted to $419 thousand at
March 31, 1999, an increase of $62 thousand from $357 thousand at March 31,
1998. There were no impaired loans at March 31, 1999. At March 31, 1998,
impaired loans amounted to $1.3 million, all performing within the term of the
current agreements. There was no real estate acquired by foreclosure at March
31, 1999 or 1998 which compares with $13 thousand at March 31, 1997.
<PAGE>
Non-interest Income
Total non-interest income for fiscal 1999 was $1.4 million, compared to $1.8
million during fiscal 1998. The primary reason for the $446 thousand decrease
was a decrease in gains from the sales of investment and mortgage-backed
securities during fiscal 1999 of $580 thousand compared to $1.1 million during
fiscal 1998. In addition, during fiscal 1999, the Bank sold a non-banking
facility realizing a net gain on sale of $105 thousand.
Total non-interest income for fiscal 1998 was $1.8 million, compared to
$888 thousand during fiscal 1997. The primary reason for the $926 thousand
increase was the Bank taking advantage of favorable market prices of certain
securities and thereby realizing net gains from the sales of investment and
mortgage-backed securities during fiscal 1998 of $1.1 million which compares to
$48 thousand during fiscal 1997.
Operating Expenses
Operating expenses increased $302 thousand during the fiscal year ended March
31, 1999, as compared to the fiscal year ended March 31, 1998. This increase is
primarily attributable to increases in salaries and benefits of $179 thousand,
in occupancy and equipment of $273 thousand and in data processing service fees
of $146 thousand due to a change in computer processing systems. These increases
were partially offset by a reduction in professional fees during fiscal 1999 of
$144 thousand due to consulting fees incurred during fiscal 1998 relating to the
change in computer processing systems. Other expenses decreased during fiscal
1999 by $151 thousand due to decreased advertising and promotional activities as
compared to fiscal 1998.
During the fiscal year ended March 31, 1998, operating expenses decreased
$515 thousand, as compared to the fiscal year ended March 31, 1997. Reductions
in retirement and benefit costs during fiscal 1998 were the primary causes of
the $100 thousand decrease in salaries and employee benefits during fiscal 1998.
Foreclosure expenses for fiscal 1998 were $123 thousand less than fiscal 1997
due primarily to the removal of real estate acquired by foreclosure. Other
expenses decreased by $348 thousand during the fiscal year ended March 31, 1998
compared to fiscal 1997, primarily due to expenses incurred during fiscal 1997
relating to litigation involving a former investment fund. This litigation was
settled, on terms favorable to the Bank, during the third quarter of fiscal
1997.
Income Taxes
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Bank's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
During fiscal 1999 and 1998, the Bank's effective income tax expense
increased substantially to approximately the statutory rate. The effective rates
of income tax expense for the fiscal years ended March 31, 1999, 1998 and 1997
were 41.0%, 39.6% and 19.5%, respectively. During fiscal 1997, the change in the
valuation reserve under the asset and liability method of accounting for income
taxes allowed the Bank to record income tax expense at less than the statutory
tax rates.
Financial Condition
Total assets at March 31, 1999 amounted to $364.7 million, a decrease of $10.5
million from $375.2 million at March 31, 1998. Total assets at March 31, 1998
increased $54.2 million from $321.0 million at March 31, 1997. During fiscal
1999, proceeds from the sale and maturity of investment securities were used to
fund the decrease in the Bank's deposits.
Net loans decreased $1.4 million to $277.4 million at March 31, 1999 from
$278.8 million at March 31, 1998. At March 31, 1999, mortgage loans were $274.1
million, a $2.9 million decrease from March 31, 1998. During the fiscal year
ended March 31, 1999, the Bank originated loans totaling $111.2 million, of
which $60.1 million were fixed-rate loans and $51.1 million were adjustable-rate
loans. Total loans originated during the fiscal year ended March 31, 1998,
totaled $109.7 million, of which $41.3 million were fixed-rate loans and $68.4
million were adjustable-rate loans.
<PAGE>
Risk Elements
The improvement in the Bank's real estate portfolio continued through fiscal
1999, which resulted in a $1.3 million overall decrease in its problem assets at
March 31, 1999 as compared to March 31, 1998. Any reversal of the favorable
economic conditions experienced during fiscal 1999 could result in the Bank
experiencing increases in problem assets which would negatively affect the
Bank's results of operations.
The allowance for loan losses is maintained at a level which management
considers adequate to provide for inherent probable losses based on an
evaluation of known and inherent risks in the portfolio. Such evaluation
includes identification of adverse situations which may affect the ability of
certain borrowers to repay, a review of overall portfolio size, quality,
composition and an assessment of existing and anticipated economic conditions.
While management uses available information in establishing the allowance for
loan losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making current
evaluations. Any such adjustments to the allowance could negatively affect the
Bank's net income. Additions to the allowance are charged to earnings; realized
losses, net of recoveries, are charged to the allowance.
Investment Activities
The Bank's management believes it prudent to maintain an investment portfolio
that provides not only a source of income but also a source of liquidity to meet
lending demands and fluctuations in deposit flows.
[PICTURE APPEARS HERE]
Deposits
Total deposits at March 31, 1999 were $266.5 million, a $9.9 million decrease
from $276.4 million one year earlier. Savings accounts and other types of
deposits have traditionally been an important source of funds for lending,
investment purchases, and for other general business purposes. The decrease in
deposits resulted from management's decision to not aggressively price deposits
in a declining interest rate environment which caused the overall cost of funds
to decrease.
Advances from the Federal Home Loan Bank of Boston
Advances from the Federal Home Loan Bank of Boston decreased to $57.0 million at
March 31, 1999 from $59.0 million at March 31, 1998.
Asset/Liability Management and Market Risk
The Bank's earnings are largely dependent on its net interest income, which is
the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. The Bank seeks to reduce its exposure to changes
in interest rate, or market risk, through active monitoring and management of
its interest rate risk exposure. The policies and procedures for managing both
on and off balance sheet activities are established by the Bank's
asset/liability management committee (ALCO). The Board of Directors reviews and
approves the ALCO policy annually and monitors related activities on an ongoing
basis.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities.
The main objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and preserve capital, while adjusting the Bank's asset/liability structure to
control interest rate risk. However, a sudden and substantial increase or
decrease in interest rates may adversely impact earnings to the extent that the
interest rates borne by assets and liabilities do not change at the same speed,
to the same extent, or on the same basis.
The following two tables reflect different methods of disclosing the Bank's
exposure to a change in interest rates and its potential impact on the Bank's
net interest income. The gap analysis uses contractual maturities and next
repricing dates while the market risk simulation measures changes in net
interest income as a result of changes in market interest rates. The interest
rate sensitivity of the Bank's assets and liabilities in both tables would vary
substantially if different assumptions were used or if actual experience differs
from the assumptions provided.
<PAGE>
The following table sets forth maturity and repricing information
concerning the Bank's interest-sensitive assets and liabilities at March 31,
1999. The table does not reflect partial or full prepayment of loans or
mortgage-backed securities prior to contractual maturity.
<TABLE>
<CAPTION>
(Dollars In Thousands)
Time Interval from March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
0-30 31-90 91-180 181-365 1-3 3-5
Days Days Days Days Years Years Thereafter Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Short-term investments........... $ 16,939 $ -- $ -- $ -- $ -- $ -- $ -- $ 16,939
Investment securities
(including stock in the
Federal Home Loan
Bank of Boston)............... 6,422 3,350 -- 511 2,014 1,003 11,993 25,293
Adjustable-rate loans (a)........ 15,775 4,306 11,958 8,656 43,599 77,398 18,837 180,529
Fixed-rate loan
amortization (b).............. 10,092 538 1,875 1,890 10,469 7,674 67,279 99,817
Mortgage-backed securities
amortization (b).............. 8,783 2,762 2,659 2,793 360 586 12,056 29,999
The Co-Operative Central
Bank Reserve Fund............. -- -- 1,576 -- -- -- -- 1,576
----------------------------------------------------------------------------------------------
Total interest-
sensitive assets.............. 58,011 10,956 18,068 13,850 56,442 86,661 110,165 354,153
----------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW accounts (c)................. 7,164 -- -- -- -- -- 21,493 28,657
Regular, club, and 90 day
notice accounts (c)........... 15,273 6 -- -- -- -- 45,811 61,090
Money market
deposit accounts.............. 22,846 -- -- -- -- -- -- 22,846
Term deposit certificates........ 5,660 17,065 53,671 39,079 21,187 2,223 36 138,921
Advances from
FHLB of Boston................ -- -- -- 2,000 5,000 9,000 41,000 57,000
----------------------------------------------------------------------------------------------
Total interest-sensitive
liabilities................... 50,943 17,071 53,671 41,079 26,187 11,223 108,340 308,514
----------------------------------------------------------------------------------------------
Interest-sensitivity gap
(assets minus liabilities)....... $ 7,068 $ (6,115) $ (35,603) $ (27,229) $ 30,255 $ 75,438 $ 1,825 $ 45,639
==============================================================================================
Cumulative gap..................... $ 7,068 $ 953 $ (34,650) $ (61,879) $ (31,624) $ 43,814 $ 45,639
==================================================================================
Cumulative interest-sensitive
assets as a percent of
cumulative interest-
sensitive liabilities............ 113.90% 101.40% 71.50% 62.00% 83.30% 121.90% 114.80%
Cumulative gap as a percent
of total assets.................. 1.90% 0.30% (9.50)% (17.00)% (8.70)% 12.00% 12.50%
</TABLE>
(a) Adjustable-rate mortgage loan amounts and other loans subject to repricing
are accumulated as if the entire balance came due on the repricing date.
(b) Amortization is shown in the time period corresponding to the contractual
amortization or, when such information was not available, the computed
principal amortization based on weighted average maturities and weighted
average rates. Fixed-rate demand loans are shown in the "0-30 Days"
category and are usually amortized over longer periods and can be repriced
at the option of the Bank.
(c) Although NOW and regular accounts are subject to immediate withdrawal and
repricing, management considers these accounts to have significantly longer
effective maturities and repricing terms; therefore, the majority of such
accounts have been included in the "Thereafter' category. If NOW and
regular accounts had been assumed to be subject to repricing within one
year, the cumulative excess of interest-sensitive liabilities over
interest-sensitive assets would have been $129,182 or 35.4% of total
assets.
<PAGE>
The Bank quantifies its interest-rate risk exposure using a sophisticated
simulation model. Simulation analysis is used to measure the exposure of net
interest income to changes in interest rates over a specific time horizon.
Simulation analysis involves projecting future interest income and expense
under various rate scenarios. The simulation is based on actual cash flows and
assumptions of management about the future changes in interest rates and levels
of activity (loan originations, loan prepayments, deposit flows, etc). The
assumptions are inherently uncertain and, therefore, actual results will differ
from simulated results due to timing, magnitude and frequency of interest rate
changes as well as changes in market conditions and strategies. The net interest
income projection resulting from use of actual cash flows and management's
assumptions is compared to net interest income projections based on an immediate
shift of 300 basis points upward and 200 basis points downward in the first year
of the model.
The following table indicates the estimated exposure as a percentage of
estimated net interest income for the next twelve and twenty-four month periods:
Percentage Change in Estimated
Net Interest Income Over
------------------------------
12 months 24 months
------------------------------
300 basis point increase in rates............ (14.32)% (14.82)%
200 basis point increase in rates............ (4.55) (10.07)
Based on the scenario above, net interest income of the company would be
adversely affected in both the twelve and twenty-four month periods.
[PICTURE APPEARS HERE]
Liquidity
The Bank's principal sources of liquidity are customer deposits, amortization
and repayments of loan and mortgage-backed security principal, FHLB of Boston
advances and maturities of various other investments. These various sources of
liquidity, as well as the Bank's ability to sell residential mortgage loans in
the secondary market, are used to fund deposit withdrawals, loan originations
and investments.
Deposits have been a relatively stable source of funds for the Bank despite
the continued decrease in interest rates in recent years. During fiscal 1999,
deposit balances decreased by $9.9 million to $266.5 million from $276.4 million
at March 31, 1998.
The Bank is a member of the FHLB of Boston and has the ability to borrow
from the FHLB of Boston for any sound business purpose for which the Bank has
legal authority, subject to such regulations and limitations as may be
prescribed. At March 31, 1999 and 1998, the Bank had outstanding FHLB of Boston
advances of $57.0 million and $59 million, respectively. The deposits and FHLB
advances were used to fund the Bank's lending and investing activities during
the year. The FHLB of Boston advances are secured by a blanket lien on
residential first mortgage loans, investment securities and all stock in the
FHLB of Boston.
As a member of The Co-operative Central Bank, the Bank also has the right
to borrow from that organization for short-term cash needs, by pledging certain
assets. The Bank also may obtain funds from the Federal Reserve Bank of Boston
by pledging certain of the Bank's notes and drafts. The Bank has not exercised
these rights.
Loan originations, including purchases, totaled $111.2 million, $109.7
million, and $60.7 million for the fiscal years ended March 31, 1999, 1998 and
1997, respectively. At March 31, 1999, outstanding commitments to originate
mortgage loans totaled $6.4 million, and commitments for un-advanced funds on
home equity, commercial and construction loans totaled $15.9 million. Currently,
the Bank does not have any mortgage loans available for sale in the secondary
market. Management believes that the Bank has adequate sources of liquidity to
fund these commitments.
Capital Resources
Massachusetts chartered co-operative banks that are insured by the FDIC, such as
the Bank, are required to maintain minimum capital ratios pursuant to banking
regulations. The first standard establishes a risk-adjusted ratio relating
capital to different categories of balance sheet assets and off-balance sheet
obligations. Two categories of capital are defined: Tier 1 or core capital
(stockholders' equity) and Tier 2 or supplementary capital. Total capital is the
sum of both Tier 1 and Tier 2. According to the standards, Tier 1 capital must
represent at least 50% of qualifying total capital. At March 31, 1998, the
minimum total risk-based capital ratio required was 8.00%. The Bank's risk-based
total capital ratio at March 31, 1999, was 16.8%.
<PAGE>
To complement the risk-based standards, the FDIC adopted a leverage ratio
(stockholders' equity divided by total assets) of 3% for the most highly rated
banks and 4%-5% for all others. The leverage ratio is to be used in tandem with
the risk-based capital ratios as the minimum standards for banks. The Bank's
leverage ratio was 10.0% at March 31, 1999.
Year 2000 Readiness Disclosure
The impact of computer systems ability to process dates beyond 1999, or the
"Year 2000 issue," creates a significant business challenge for the Bank. The
Bank is addressing this issue as it affects all of its software, hardware and
other systems to ensure the Bank is Year 2000 compliant. The Bank has developed
a plan that is based upon the Federal Financial Institutions Examination Council
("FFIEC") recommended phases and time frames for ensuring Year 2000 compliance.
These phases include awareness, assessment, renovation, validation and
implementation.
The Bank has completed the awareness phase through development of a Year
2000 committee and reporting structure including quarterly project status
reports to the Bank's Board. The assessment phase has been completed with a
review of all software, hardware and business systems including an evaluation of
the critical nature and Year 2000 business risk that each application presents.
The Bank primarily utilizes third-party vendors for the processing of its
critical data processing applications. The Bank is working closely with these
critical vendors to monitor renovation and validation efforts to ensure that the
time frames set out in the Bank's plan are met. Based upon review of vendor-
provided Year 2000 disclosure statements, review of the applicable testing
process and verification of test results, the Bank estimates that 95% of the
critical applications were renovated at March 31, 1999. The Bank's primary data
processing vendor has informed us that because of the design of their system,
the year 2000 problem should not affect their basic system. In the mid 1990s,
their system was renovated to change the number of digits from four to five by
which they increment changes from the index date. Dates are calculated in their
system using an index date of January 1, 1968 and adding 1 for each day. For
example, June 1, 1999 would be day 11,474 since the index date. The system is
expected to properly calculate dates for 99,999 days following the index date.
This would occur in October of the year 2241. The Bank expects to have a
different data processing system before that date. The Bank's primary data
processing vendor has done extensive testing of their systems in accordance with
the FFIEC guidelines as discussed below.
The Bank has reviewed on a test basis proxy test scripts incorporating
typical transactions in order to validate the modified systems. Testing with
critical application vendors was substantially completed during fiscal 1999.
Additional testing including follow-up and interface testing will continue and
is expected to be substantially completed by June 30, 1999, although some
testing will occur after that date to ensure that any normal software changes
installed after original testing was completed did not negatively impact the
systems as they relate to the Year 2000 issue.
The implementation phase is ongoing and incorporates review of replaced or
modified and tested systems, as well as contingency planning and customer
awareness programs.
In the event that the Bank's third-party vendors do not successfully or
timely achieve Year 2000 compliance, the Bank's operations could be adversely
affected. The Bank has developed contingency plans in the event that one or all
of these significant vendors fails to meet Year 2000 operating requirements.
Plans for various failure scenarios are developed on an on going basis as such
risks are identified and incorporate the Bank's business resumption plan.
Contingency plans for unexpected Year 2000 related business interruption will be
substantially complete by June 30, 1999. Contingency plans include the use of
back-up facilities in Kansas in the event of a failure at the primary facility
in Massachusetts. Extra back-ups of the system will be done prior to the century
date change and paper records will be produced so that data will be available to
work from in the unlikely event of a complete system failure which would require
the use of paper records to continue to operate the Bank. Further, the Bank will
seek alternative vendors should one of the critical vendors fail to achieve
satisfactory Year 2000 compliance. In the event the Bank's current third party
data processing vendors were not to achieve Year 2000 compliance and the Bank
could not engage alternative vendors in a timely manner, the Bank's operations
would be adversely impacted.
The total cost of the Year 2000 project is estimated at $50,000 to $100,000
with the majority of the cost expended during fiscal 1999. Additional minimum
costs will be incurred during fiscal 2000. Through the end of fiscal 1999, the
Bank has incurred direct outside costs totaling $42 thousand.
Based on the remediation, testing and monitoring efforts to date, the Bank
expects that most of its critical systems will operate successfully through the
century date change. Therefore, the Bank believes that internal system failures
are not likely to adversely affect the Bank's operations or financial condition.
The Bank has already successfully tested with many of its critical application
ven-
<PAGE>
dors and will continue to monitor and validate the remainder, including the
Bank's electrical power and telecommunications providers in 1999. At this time,
the Bank believes the most likely "worst case" Year 2000 scenarios are temporary
and localized disruptions in infrastructure services which could disrupt the
ability of the Bank to provide services to its customers and/or the ability of
external service providers to provide services to the Bank.
The Bank's evaluation of Year 2000 readiness is based upon management's
best estimates and projections which are derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
[PICTURE APPEARS HERE]
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31,
In Thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks.................................................................................. $ 4,964 $ 5,718
Short-term investments................................................................................... 16,939 3,321
Investments available for sale:
Investment securities (amortized cost of $21,182 at 1999 and $23,536 at 1998) (notes 2 and 12)...... 21,943 24,524
Mortgage-backed securities (amortized cost of $30,190 at 1999 and $45,263 at 1998) (note 2)......... 29,999 45,182
Investments held to maturity:
Investment securities (market value of $3,963 at 1998) (notes 2 and 12)............................. -- 4,000
Stock in Federal Home Loan Bank of Boston, at cost (note 8).............................................. 3,350 3,150
The Co-operative Central Bank Reserve Fund (note 9)...................................................... 1,576 1,576
---------------------
Total investments.............................................................................. 73,807 81,753
---------------------
Loans:
Mortgage loans (notes 3 and 5)...................................................................... 274,146 277,025
Other loans (notes 4 and 5)......................................................................... 6,200 4,699
---------------------
280,346 281,724
Less allowance for loan losses (note 6)............................................................. 2,913 2,886
---------------------
Net loans...................................................................................... 277,433 278,838
---------------------
Accrued interest receivable.............................................................................. 1,614 1,910
Office properties and equipment, net (note 10)........................................................... 2,550 2,942
Deferred tax asset, net (note 13)........................................................................ 744 456
GoodwiIl, net............................................................................................ 3,096 3,384
Other assets............................................................................................. 488 232
---------------------
Total assets................................................................................... $364,696 $375,233
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 11).................................................................................. $266,463 $276,364
Advances from Federal Home Loan Bank of Boston (note 12)............................................ 57,000 59,000
Advance payments by borrowers for taxes and insurance............................................... 1,389 1,229
Accrued interest payable............................................................................ 291 483
Accrued expenses and other liabilities.............................................................. 811 1,371
---------------------
Total liabilities.............................................................................. 325,954 338,447
---------------------
Commitments and contingencies (notes 10, 14 and 17)
Stockholders' equity (note 15):
Preferred stock $1.00 par value, authorized 5,000,000 shares: none issued or outstanding............ -- --
Common stock $1.00 par value, authorized 15,000,000 shares; 1,967,000 issued at 1999 and
1,965,000 at 1998.............................................................................. 1,967 1,965
Additional paid-in capital.......................................................................... 11,171 11,159
Retained income..................................................................................... 25,894 23,841
Accumulated other comprehensive income.............................................................. 327 544
Unearned compensation - ESOP (note 16).............................................................. (617) (723)
---------------------
Total stockholders' equity..................................................................... 38,742 36,786
---------------------
Total liabilities and stockholders' equity..................................................... $364,696 $375,233
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
(In Thousands, Except Per Share Data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Mortgage loans................................................................ $ 21,250 $ 19,326 $ 17,917
Other loans................................................................... 423 444 469
Short-term investments........................................................ 650 251 262
Investment securities......................................................... 1,481 2,443 3,400
Mortgage-backed securities.................................................... 2,097 2,659 1,150
The Co-operative Central Bank Reserve Fund.................................... 95 99 111
----------------------------------------
Total interest and dividend income..................................... 25,996 25,222 23,309
----------------------------------------
Interest expense:
Deposits...................................................................... 10,770 11,084 10,182
Advances from Federal Home Loan Bank of Boston................................ 3,279 2,440 1,504
----------------------------------------
Total interest expense................................................. 14,049 13,524 11,686
----------------------------------------
Net interest and dividend income....................................... 11,947 11,698 11,623
Provision for loan losses (note 6)............................................... -- -- --
----------------------------------------
Net interest and dividend income after provision for loan losses....... 11,947 11,698 11,623
----------------------------------------
Non-interest income:
Deposit service charges....................................................... 431 493 525
Net gain from sales of investment securities (note 2)......................... 580 1,051 48
Gain on sale of building...................................................... 105 -- --
Other income.................................................................. 252 270 315
----------------------------------------
Total non-interest income.............................................. 1,368 1,814 888
----------------------------------------
Operating expenses:
Salaries and employee benefits................................................ 4,379 4,200 4,300
Occupancy and equipment (note 10)............................................. 1,468 1,195 1,236
Data processing service fees.................................................. 543 397 375
Professional fees............................................................. 756 900 825
Foreclosure expenses, net..................................................... 1 2 125
Goodwill amortization......................................................... 288 288 288
Other expenses................................................................ 1,338 1,489 1,837
----------------------------------------
Total operating expenses............................................... 8,773 8,471 8,986
----------------------------------------
Income before income taxes............................................. 4,542 5,041 3,525
Income tax expense (note 13).................................................. 1,860 1,994 688
----------------------------------------
Net Income............................................................. $ 2,682 $ 3,047 $ 2,837
========================================
Earnings per common share (note 1)............................................ $ 1.38 $ 1.57 $ 1.46
========================================
Earnings per common share assuming dilution (note 1).......................... $ 1.38 $ 1.56 $ 1.46
========================================
Weighted average common shares outstanding (note 1)........................... 1,938 1,937 1,937
Weighted average common shares outstanding, assuming dilution (note 1)........ 1,946 1,948 1,940
</TABLE>
See accompanying notes to consolidated financial statements.
[PICTURE APPEARS HERE]
<PAGE>
Consolidated Statement of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Compensation Stockholders'
(In Thousands, Except Per Share Data) Stock Capital Income Income ESOP Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996.......................... $ 1,965 $ 11,159 $ 18,901 $ 1 $ (942) $ 31,084
Net income......................................... -- -- 2,837 -- -- 2,837
Other comprehensive income, net of tax: ...........
Unrealized gain (loss) on securities, net of
reclassification adjustment................... -- -- -- (157) -- (157)
--------------
Comprehensive income.......................... 2,680
--------------
Dividends paid ($0.16 per share)................... -- -- (315) -- -- (315)
Amortization of unearned compensation - ESOP....... -- -- -- -- 96 96
------------------------------------------------------------------------------
Balance at March 31, 1997.......................... 1,965 11,159 21,423 (156) (846) 33,545
Net income......................................... -- -- 3,047 -- -- 3,047
Other comprehensive income, net of tax: ...........
Unrealized gain (loss) on securities, net of
reclassification adjustment................... -- -- -- 700 -- 700
--------------
Comprehensive income.......................... 3,747
--------------
Dividends paid ($0.32 per share)................... -- -- (629) -- -- (629)
Amortization of unearned compensation - ESOP....... -- -- -- -- 123 123
------------------------------------------------------------------------------
Balance at March 31, 1998.......................... 1,965 11,159 23,841 544 (723) 36,786
Net income......................................... -- -- 2,682 -- -- 2,682
Other comprehensive income, net of tax: ...........
Unrealized gain (loss) on securities, net of
reclassification adjustment................... -- -- -- (217) -- (217)
--------------
Comprehensive income.......................... 2,465
--------------
Proceeds from exercise of stock options............ 2 12 -- -- -- 14
Dividends paid ($0.32 per share)................... -- -- (629) -- -- (629)
Amortization of unearned compensation - ESOP....... -- -- -- -- 106 106
------------------------------------------------------------------------------
Balance at March 31, 1999.......................... $ 1,967 $ 11,171 $ 25,894 $ 327 $ (617) $ 38,742
==============================================================================
</TABLE>
The Bank's other comprehensive income and related tax effect for the fiscal
years ending March 31 are as follows:
<TABLE>
<CAPTION>
1999
--------------------------------------------
Before-
Tax Tax (Benefit) After-Tax
Amount Expense Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period................................... $ 199 $ 85 $ 114
Less: reclassification adjustment for (gains) realized in net income............. (580) (249) (331)
--------------------------------------------
Other comprehensive (loss)..................................................... $ (381) $ (164) $ (217)
============================================
<CAPTION>
1998
--------------------------------------------
Before-
Tax Tax (Benefit) After-Tax
Amount Expense Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period.................................. $ 2,199 $ 858 $ 1,341
Less: reclassification adjustment for (gains) realized in net income............ (1,051) (410) (641)
--------------------------------------------
Other comprehensive income.................................................... $ 1,148 $ 448 $ 700
============================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................................. $ 2,682 $ 3,047 $ 2,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................ 729 447 467
Amortization of premiums, fees and discounts............................................. 461 209 18
Amortization of goodwill................................................................. 288 288 288
(Increase) decrease in deferred tax assets............................................... (175) (388) 257
Net gains from sales of investment and mortgage-backed securities........................ (580) (1,051) (48)
Net gain from sale of building........................................................... (105) -- --
Proceeds from sales of loans................................................................ -- 193 1,160
Proceeds from sales of real estate acquired by foreclosure.................................. -- 141 1,916
Decrease (increase) in accrued interest receivable.......................................... 296 (1) (43)
(Increase) decrease in other assets......................................................... (256) 175 9
Increase in advance payments by borrowers for taxes and insurance........................... 160 105 171
(Decrease) increase in accrued interest payable............................................. (192) 167 60
Increase (decrease) in accrued expenses and other liabilities............................... (560) 329 (1,688)
------------------------------
Net cash provided by operating activities................................................ 2,748 3,661 5,404
------------------------------
Cash flows from investing:
Principal collected on loans................................................................ 112,825 62,384 38,457
Loan originations........................................................................... (111,231) (109,736) (60,692)
Principal payments on mortgage-backed securities, available for sale........................ 14,942 12,454 2,709
Purchase of mortgage-backed securities, available for sale.................................. -- (29,528) (21,745)
Proceeds from sales of mortgage-backed securities, available for sale....................... -- -- 3,872
Purchase of investment securities, available for sale....................................... (16,622) (3,915) (12,479)
Proceeds from sales of investment securities, available for sale............................ 4,049 3,955 17,112
Maturities of investment securities held to maturity........................................ 4,000 -- 1,650
Maturities of investment securities, available for sale..................................... 15,100 13,300 11,400
Net (increase) decrease in short-term investments........................................... (13,618) (283) 6,745
Purchase of stock in Federal Home Loan Bank of Boston....................................... (200) (818) --
Proceeds from sale of land and building..................................................... 239 -- --
Purchase of office properties and equipment................................................. (576) (516) (476)
------------------------------
Net cash provided (used) by investing activities......................................... 8,908 (52,703) (13,447)
------------------------------
</TABLE>
[PICTURE APPEARS HERE]
Continued
<PAGE>
Continued
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
(In Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits..................................... (9,901) 17,271 1,997
Proceeds from advances from FHLB of Boston.............................. 43,495 95,000 28,000
Payments on advances from FHLB of Boston................................ (45,495) (61,000) (21,000)
Proceeds from exercise of stock options................................. 14 -- --
Payments of dividends on common stock................................... (629) (629) (315)
Payments on ESOP loan................................................... 106 123 96
----------------------------------------
Net cash (used) provided by financing activities..................... (12,410) 50,765 8,778
----------------------------------------
Net (decrease) increase in cash and due from banks................... (754) 1,723 735
Cash and due from banks at beginning of year......................... 5,718 3,995 3,260
----------------------------------------
Cash and due from banks at end of year............................... $ 4,964 $ 5,718 $ 3,995
========================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................. $ 14,241 $ 13,357 $ 11,626
Income taxes......................................................... 2,413 2,100 946
Schedule of noncash investing activities:
Transfer from mortgage loans to real estate acquired by foreclosure..... $ -- $ 128 $ 391
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
Fiscal Years Ended March 31, 1999, 1998 and 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Central Bancorp, Inc. (the "Company"), a Massachusetts corporation, was
organized by Central Bank (the "Bank") to be a bank holding company. The Company
was organized at the direction of the Bank on September 30, 1998, to acquire all
of the capital stock of the Bank upon the consummation of the reorganization of
the Bank into the holding company form of ownership, which was completed on
January 8, 1999. The Company's common stock, par value $1.00 per share (the
"Common Stock"), became registered under the Securities Exchange Act of 1934 on
January 8, 1999. The Company has no significant assets other than the common
stock of the Bank and various other liquid assets which it invests in the
ordinary course of business. For that reason, substantially all of the
discussion in these consolidated financial statements relates to the operations
of the Bank and its subsidiaries.
Central Bank (the "Bank") was organized as a Massachusetts chartered co-
operative bank in 1915 and converted from mutual to stock form in 1986. The
primary business of the Bank is to acquire funds in the form of deposits and use
the funds to make mortgage loans for the construction, purchase and refinancing
of residential properties, and to a lesser extent, to make loans on commercial
real estate in its market area. The Bank also makes a limited amount of consumer
loans including education, home improvement and secured and unsecured personal
loans. The Bank is subject to competition from other financial institutions. The
Company is subject to the regulations of, and periodic examinations by, the
Federal Reserve Bank ("FRB"). The Bank is also subject to the regulations of,
and periodic examination by, the Federal Deposit Insurance Corporation ("FDIC")
and the Massachusetts Division of Banks. The Bank's deposits are insured by the
Bank Insurance Fund of the FDIC for deposits up to $100,000 and the Share
Insurance Fund (SIF) for deposits in excess of $100,000.
The Company conducts its business through one operating segment, the Bank.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and income and expenses for the year. Actual results could differ
from those estimates, if the conditions change.
Material estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses. In connection with the
determination of the allowance for loan losses and the valuation of real estate
acquired by foreclosure, management obtains independent appraisals for
significant properties.
Certain prior fiscal year amounts have been reclassified to conform to the
current year's presentation.
The following is a summary of the significant accounting policies adopted
by the Bank:
[PICTURE APPEARS HERE]
CASH AND DUE FROM BANKS
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based upon deposit levels and amounted
to approximately $1,215,000 at March 31, 1999.
INVESTMENT
Investments are classified as either held to maturity, available for sale or
trading. Investments classified as trading securities are reported at fair
value, with unrealized gains and losses included in earnings. Investments
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as other comprehensive income within stockholders'
equity. Securities that the Bank has the positive intent and ability to hold to
maturity are classified as held to maturity and reported at amortized cost.
Gains and losses on sales of securities are recognized when realized with
the cost basis of investments sold determined on a specific-identification
basis. Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted to interest income over the actual or expected lives of
the securities using the level-yield method.
If a decline in fair value below the amortized cost basis of an investment
or mortgage-backed security is judged to be other than temporary, the cost basis
of the investment is written down to fair value as a new cost basis and the
amount of the write-down is included as a charge against gain on sale of
investment and mortgage-backed securities.
LOANS
Loans are reported at the principal amount outstanding, adjusted by unamortized
discounts, premiums, and net deferred loan origination fees. Loans classified as
held for sale in the secondary market are stated at the lower of aggregate cost
or market value. Market value is estimated based on outstanding investor
commitments or, in the absence of cash commitments, current investor yield
requirements. Net unrealized losses, if any, are provided for in a valuation
allowance by charges to operations.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans and amortization of net
deferred loan fees or costs are discontinued either when reasonable doubt exists
as to the full and timely
<PAGE>
collection of interest or principal, or when a loan becomes contractually past
due 90 days with respect to interest or principal. The accrual on some loans,
however, may continue even though they are more than 90 days past due if
management deems it appropriate, provided that the loans are well secured and in
the process of collection. When a loan is placed on nonaccrual status, all
interest previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgment of management, the loans are estimated to be fully collectible as to
both principal and interest. The Bank records interest income on nonaccrual and
impaired loans on the cash basis of accounting.
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest rate yield and are amortized into interest
income over the loan term using the level-yield method. When loans are sold in
the secondary market, the remaining balance of the amount deferred is included
in determining the gain or loss on the sale.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due in
accordance with the contractual terms of the loan agreement. Impaired loans,
except those loans that are accounted for at fair value or at lower of cost or
fair value, are accounted for at the present value of the expected future cash
flows discounted at the loan's effective interest rate or as a practical
expedient in the case of collateral dependent loans, the lower of the fair value
of the collateral or the recorded amount of the loan. Management considers the
payment status, net worth and earnings potential of the borrower, and the value
and cash flow of the collateral as factors to determine if a loan will be paid
in accordance with its contractual terms. Management does not set any minimum
delay of payments as a factor in reviewing for impaired classification. Impaired
loans are charged off when management believes that the collectibility of the
loan's principal is remote.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which management
considers adequate to provide for inherent probable losses based on an
evaluation of known and inherent risks in the portfolio. Such evaluation
includes identification of adverse situations which may affect the ability of
certain borrowers to repay, a review of overall portfolio size, quality and
composition, and an assessment of existing and anticipated economic conditions.
While management uses available information in establishing the allowance for
loan losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluations. Additions to the allowance are charged to earnings; realized
losses, net of recoveries, are charged to the allowance. Management believes
that the allowance for loan losses is adequate.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on their
judgments of information available to them at their examination date.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Bank's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Bank's deferred tax asset is reviewed periodically and
adjustments to such asset are recognized as deferred income tax expense or
benefit based on management's judgments relating to the realizability of such
asset.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost, less allowances for
depreciation and amortization. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets or terms of
the leases, if shorter.
GOODWILL
Goodwill arising from acquisitions is amortized on a straight-line basis over 15
years. On an ongoing basis management evaluates the valuation of the remaining
balance of goodwill.
PENSION AND OTHER BENEFITS
The Bank provides pension benefits for its employees in a multi-employer pension
plan through membership in the Co-operative Banks Employees Retirement
Association. The pension costs are funded as they are accrued.
<PAGE>
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of comprehensive
income and its components in financial statements. Comprehensive income is
defined by the Statement as net income plus revenues, expenses, gains, and
losses that under generally accepted accounting principles are excluded from net
income. SFAS 130 has been adopted in the current year consolidated financial
statements and reclassification of financial statements for earlier periods has
been made for comparative purposes. This Statement only affects presentation in
the financial statements. It did not impact the Bank's results of operation.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. SFAS 132 suggests combined
formats for presentation of pension and other postretirement benefit
disclosures. SFAS 132 has been adopted in the current year consolidated
financial statements and prior year disclosures have been restated for
comparative purposes. This Statement only affects presentation in the
consolidated financial statements. It did not impact the Bank's results of
operation.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 also provides for matching the timing of gain or loss recognition on
the hedged asset or liability that is attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. SFAS 133 applies to all
entities and is effective April 1, 2000. The adoption of this Statement is not
expected to have a material impact on the Bank.
[PICTURE APPEARS HERE]
NOTE 2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES (Dollars in Thousands)
The amortized cost and fair value of investments and mortgage-backed securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------
Amortized Gross Unrealized Fair
------------------
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common and preferred stocks................................. $ 5,682 $ 844 $(105) $ 6,421
U.S. Government and federal agency obligations.............. 15,500 22 -- 15,522
-----------------------------------------------------
Total................................................. $21,182 $ 866 $(105) $ 21,943
=====================================================
Mortgage-backed securities:
GNMA..................................................... $ 698 $ 2 $ (7) $ 693
FNMA..................................................... 19,988 99 (194) 19,893
FHLMC.................................................... 4,588 10 (73) 4,525
CMOs..................................................... 4,916 1 (29) 4,888
-----------------------------------------------------
Total................................................. $30,190 $ 112 $(303) $ 29,999
=====================================================
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------------
Amortized Gross Unrealized Fair
------------------
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common and preferred stocks................................. $ 5,026 $1,045 $ (61) $ 6,010
U.S. Government and federal agency obligations.............. 18,510 27 (23) 18,514
-----------------------------------------------------
Total................................................. $23,536 $1,072 $ (84) $24,524
=====================================================
Mortgage-backed securities:
GNMA..................................................... $ 1,218 $ 10 $ -- $ 1,228
FNMA..................................................... 29,622 82 (202) 29,502
FHLMC.................................................... 9,050 41 (22) 9,069
CMOs..................................................... 5,373 13 (3) 5,383
-----------------------------------------------------
Total................................................. $45,263 $ 146 $(227) $45,182
=====================================================
</TABLE>
<PAGE>
The maturity distribution (based on contractual maturities) and annual yields of
mortgage-backed securities at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------------
Amortized Fair Annual
Cost Value Yield
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due within one year................................... $ 942 $ 925 6.13%
Due after one year but within five years.............. 943 946 6.57
Due after five years but within ten years............. 4,656 4,687 7.19
Due after ten years................................... $23,649 $23,441 6.87
-----------------------
Total............................................ $30,190 $29,999 6.80%
=======================
Weighted average remaining life (in years)............ 17.90
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------
Amortized Fair Annual
Cost Value Yield
- -------------------------------------------------------------------------------------------------
<S>................................................... <C> <C> <C>
Due within one year................................... $ 266 $ 259 6.50%
Due after one year but within five years.............. 4,055 4,035 6.70
Due after five years but within ten years............. 968 957 5.92
Due after ten years................................... 39,974 39,931 7.16
-----------------------
Total............................................ $45,263 $45,182 7.09%
=======================
Weighted average remaining life (in years)............ 20.69
</TABLE>
Maturities on mortgage-backed securities are based on contractual maturities and
do not take into consideration scheduled amortization or prepayments. Actual
maturities will differ from contractual maturities due to scheduled amortization
and prepayments.
The amortized cost and fair value of adjustable-rate federal agency
obligations and mortgage-backed securities classified as available for sale
amounted to $16,309 and $16,072, respectively, in 1999. The amortized cost and
fair value of adjustable-rate federal agency obligations and mortgage-backed
securities classified as available for sale amounted to $14,282 and $14,303,
respectively, in 1998.
The Bank had securities classified as available for sale with callable
features that can be called prior to final maturity with an amortized cost of
$10,994 and a fair value of $11,001 at March 31, 1999.
Net realized gains on sales of investment securities classified as
available for sale for the fiscal years ended March 31, 1999, 1998 and 1997
amounted to $580, $1,051 and $41, respectively.
Net realized gains on sales of mortgage-backed securities classified as
available for sale for the fiscal year ended March 31, 1997 were $7. There were
no sales of mortgage-backed securities classified as available for sale during
the fiscal years ended March 31, 1998 and 1999.
The amortized cost and fair value of investment securities classified as
held to maturity at March 31, 1998 are summarized as follows:
INVESTMENTS HELD TO MATURITY
<TABLE>
<CAPTION>
March 31, 1998
---------------------------------------
Amortized Gross Unrealized Fair
------------------
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agency obligations......... $ 4,000 $ -- $ (37) $ 3,963
</TABLE>
There were no investments held to maturity as of March 31, 1999. The amortized
cost and fair value of adjustable-rate federal agency obligations classified as
held to maturity amounted to $4,000 and $3,963, respectively, in 1998.
<PAGE>
The maturity distribution (based on contractual maturities) and annual
yields of mortgage-backed securities at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------
Amortized Fair Annual
Cost Value Yield
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due within one year.................................................. $ 505 $ 511 7.75%
Due after one year but within five years............................. 3,001 3,017 6.39
Due after five years but within ten years............................ 11,994 11,994 6.22
-----------------------
Total............................................................. $15,500 $ 15,522 6.30%
=======================
Weighted average remaining life (in years)........................... 6.20
<CAPTION>
March 31, 1998
---------------------------------------
Amortized Fair Annual
Cost Value Yield
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due within one year.................................................. $12,001 $ 11,966 4.97%
Due after one year but within five years............................. 8,509 8,508 6.23
Due after five years but within ten years............................ 2,000 2,003 6.59
-------------------------
Total............................................................. $22,510 $ 22,477 5.59%
=========================
Weighted average remaining life (in years)........................... 2.24
</TABLE>
A Federal Home Loan Bank bond with an amortized cost of $1,999 and $2,000 and
fair value of $1,999 and $1,971 at March 31, 1999 and 1998, respectively, were
pledged to provide collateral for customers and for the Bank's employee tax
withholdings that are to be remitted to the federal government in excess of the
$100 of withholdings insured by the FDIC.
[PICTURE APPEARS HERE]
NOTE 3. MORTGAGE LOANS (In Thousands)
Mortgage loans as of March 31 are summarized below:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential
Fixed.......................................................................... $ 72,115 $ 47,584
Adjustable..................................................................... 140,523 160,276
Commercial........................................................................... 48,756 52,491
Construction......................................................................... 5,269 8,256
Second mortgage and home equity...................................................... 7,462 8,369
FHA and VA........................................................................... 21 49
----------------------
$274,146 $277,025
======================
</TABLE>
At March 31, 1999 and 1998, net deferred loan costs of $81 and $334,
respectively, are reflected as an addition to the appropriate loan
categories.
Mortgage and other loans on which the accrual of interest had been
discontinued at March 31, 1999, 1998 and 1997 were $419, $357, and $2,145,
respectively. Interest income not recognized on such loans amounted to $16, $11,
and $93 in fiscal 1999, 1998 and 1997, respectively.
At March 31, 1999 and 1998, total impaired loans were $0 and $1,306,
respectively. In the opinion of management, no impaired loans required a
specific valuation allowance at March 31, 1998. All impaired loans have been
measured using the fair value of collateral. The average recorded value of
impaired loans was $761 during fiscal 1999 and $1,582 during fiscal 1998. The
Bank follows the same policy for recognition of income on impaired loans as it
does for all other loans. During fiscal 1999 and 1998 there was no interest
forgone on impaired loans that were not non-accrual loans.
Mortgage loans serviced by the Bank for others amounted to $8,676 and $10,806
at March 31, 1999 and 1998, respectively.
The Bank's lending activities are conducted principally in communities in the
suburban Boston area. The Bank grants mortgage loans on residential property,
commercial real estate, construction of residential homes, second mortgages,
home equity and other
<PAGE>
loans. Substantially all loans granted by the Bank are secured by real estate
collateral. The ability and willingness of residential mortgage borrowers to
honor their repayment commitments are generally impacted by the level of overall
economic activity within the borrowers' geographic areas and real estate values.
The ability and willingness of commercial real estate and construction loan
borrowers to honor their repayment commitments are generally impacted by the
health of the real estate market in the borrowers' geographic area and the
general economy.
NOTE 4. OTHER LOANS (In Thousands)
Other loans at March 31 are summarized below:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Other loans:
Commercial............................................................ $ 4,391 $ 2,530
Education............................................................. -- 31
Secured by deposits................................................... 1,225 1,357
Consumer.............................................................. 40 48
Unsecured............................................................. 544 733
-----------------------
$ 6,200 $ 4,699
=======================
</TABLE>
NOTE 5. LOANS TO DIRECTORS AND OFFICERS (In Thousands)
The following summarizes the activity with respect to loans included in.mortgage
and other loans made to directors and officers and their related interests for
the fiscal years ended March 31:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period.......................................... $ 900 $ 823
New loans............................................................. 29 125
New officers with loans outstanding................................... 94 --
Repayment of principal................................................ (165) (48)
No longer a director.................................................. (295) --
-----------------------
Balance at end of period................................................ $ 563 $ 900
=======================
</TABLE>
Loans included above were made in the Bank's ordinary course of business,
on substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
unrelated persons. All loans included above are performing in accordance with
the terms of the respective loan.
NOTE 6. ALLOWANCE FOR LOAN LOSSES (In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period................................................. $ 2,886 $ 2,900 $ 3,032
Provision charged to expense................................................. -- -- --
Less:
Amounts charged-off....................................................... (99) (97) (224)
Recoveries on accounts previously charged-off............................. 126 83 92
--------------------------------------
Net recoveries (charge-offs)........................................... 27 (14) (132)
--------------------------------------
Balance at end of period....................................................... $ 2,913 $ 2,886 $ 2,900
======================================
</TABLE>
<PAGE>
NOTE 7. REAL ESTATE ACQUIRED BY FORECLOSURE (In Thousands)
The Bank did not hold any real estate acquired by foreclosure as of March 31,
1999 and 1998.
An analysis of real estate acquired by foreclosure for the fiscal years ended
March 31 follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period, net.......................................... $ -- $ 13
Foreclosures and properties substantively repossessed..................... -- --
Reduction through sales, net of recoveries and losses..................... -- $ (13)
----------------------
Balance at end of period, net................................................ $ -- $ --
======================
</TABLE>
NOTE 8. STOCK IN FEDERAL HOME LOAN BANK OF BOSTON (In Thousands)
As a member of the Federal Home Loan Bank of Boston ("FHLB of Boston"), the Bank
is required to invest in $100 par value stock of the FHLB of Boston in an amount
equal to 1% of its outstanding home loans or 1/20th of its outstanding advances
from the FHLB of Boston, whichever is higher. The Bank's investment exceeded the
required level by $500 and $200 at March 31, 1999 and 1998, respectively. If
such stock is redeemed, the Bank will receive from the FHLB of Boston an amount
equal to the par value of the stock.
NOTE 9. THE CO-OPERATIVE CENTRAL BANK RESERVE FUND
The Co-operative Central Bank Reserve Fund was established for liquidity
purposes and consists of deposits required of all insured co-operative banks in
Massachusetts. The Fund is used by The Co-operative Central Bank to advance
funds to member banks or to make other investments.
NOTE 10. OFFICE PROPERTIES AND EQUIPMENT (In Thousands)
A summary of cost, accumulated depreciation and amortization of office
properties and equipment at March 31 follows:
[PICTURE APPEARS HERE]
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Land......................................................................... $ 589 $ 691
Buildings.................................................................... 2,270 2,420
Furniture, fixtures and equipment............................................ 5,301 4,761
Leasehold improvements....................................................... 459 439
----------------------
8,619 8,311
Less accumulated depreciation and amortization............................... (6,069) (5,369)
----------------------
$ 2,550 $ 2,942
======================
</TABLE>
A summary of minimum rentals for future periods under noncancellable operating
leases follows:
<TABLE>
<CAPTION>
Minimum
Rentals
- ---------------------------------------------------------------------------------------------------
Years Ending March 31,
<S> <C>
2000........................................................................................ $92
2001........................................................................................ 92
2002........................................................................................ 92
2003........................................................................................ 78
2004........................................................................................ 78
Thereafter.................................................................................. 0
</TABLE>
Rental expense for the fiscal years ended March 31, 1999, 1998 and 1997 was
$118, $119 and $137, respectively.
<PAGE>
NOTE 11. DEPOSITS (Dollars in Thousands)
Deposits at March 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
Amount Interest Rates Amount Interest Rates
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand (non interest-bearing)........................... $ 14,949 --% $ 14,747 --%
NOW accounts............................................ 28,657 1.00-1.50 27,163 1.00-1.50
Regular, club and 90-day notice......................... 61,090 2.00 58,471 2.50
Money market deposit accounts........................... 22,846 2.15-2.35 22,317 2.60-3.10
--------- --------
127,542 122,698
--------- --------
Term deposit certificates:
Six-month money market............................... 16,293 4.00-5.00 11,973 5.00-5.25
Other................................................ 122,628 2.00-6.81 141,693 2.50-7.00
--------- --------
Total term deposit certificates................... 138,921 153,666
--------- --------
$266,463 $276,364
========= ========
Weighted average interest rate.......................... 3.45% 4.14%
========= ========
</TABLE>
Contractual maturities of term deposit certificates at March 31, 1999 are
summarized as follows:
<TABLE>
- -------------------------------------------------------------------------------------------------
<S> <C>
2000.................................................................................... $115,475
2001.................................................................................... 17,009
2002.................................................................................... 4,178
2003.................................................................................... 1,246
2004.................................................................................... 1,013
--------
$138,921
========
</TABLE>
The aggregate amount of individual term deposit certificates with a minimum
denomination of $100 or more was $22,367 and $24,687 at March 31, 1999 and 1998,
respectively. Interest expense on these deposits was $934, $1,351 and $1,157 for
fiscal years ended March 31, 1999, 1998 and 1997, respectively.
NOTE 12. ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON (Dollars in Thousands)
Advances from FHLB of Boston, by year of maturity, at March 31 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------
Interest Rate Due in Year Ending March 31,
<S> <C>.............................. <C> <C>
4.99% - 5.81% 1999............................. $ -- $26,000
6.05% 2000............................. 2,000 2,000
6.24% 2001............................. 1,000 1,000
6.35% - 6.67% 2002............................. 4,000 4,000
5.19% - 5.71% 2003............................. 4,000 12,000
4.99% 2004............................. 5,000 --
4.89% - 4.99% 2008............................. 14,000 14,000
4.49% - 5.52% 2009............................. 20,000 --
5.49% - 5.69% 2013............................. 7,000 --
----------------
$57,000 $59,000
================
Weighted average interest rate.................... 5.34% 5.51%
================
</TABLE>
The FHLB of Boston is authorized to make advances to its members subject to such
regulations and limitations as the Federal Home Loan Bank Board may prescribe.
The advances are secured by FHLB of Boston stock and a blanket lien on certain
qualified collateral, defined principally as 90% of the fair value of U.S.
Government and federal agency obligations and 75% of the carrying
<PAGE>
value of first mortgage loans on owner-occupied residential property. Applying
these ratios, the Bank's overall borrowing capacity was approximately $174,500
and $138,000 at March 31, 1999 and 1998, respectively.
The highest month-end balance of FHLB of Boston advances outstanding was
$64,000, $63,000, and $33,000 during the fiscal years ended March 31, 1999, 1998
and 1997, respectively.
NOTE 13. INCOME TAXES (Dollars in Thousands)
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Bank's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
Income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense
Federal.................................................................. $1,669 $1,101 $ 289
State.................................................................... 366 451 142
--------------------------------------
Total current tax expense........................................... 2,035 1,552 431
Deferred income tax expense (benefit)......................................... (175) 564 310
Change in valuation reserve................................................... -- (122) (53)
--------------------------------------
Total income tax expense (benefit).................................. $1,860 $1,994 $ 688
======================================
</TABLE>
[PICTURE APPEARS HERE]
Income tax expense for the periods presented is different from the amounts
computed by applying the statutory Federal income tax rate to income before
income taxes. The differences between expected tax rates and effective tax rates
are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate............................................. 34.0% 34.0% 34.0%
Items affecting Federal income tax rate:
Dividends received deduction............................................. (0.6) (0.9) (2.1)
Goodwill amortization.................................................... 2.2 1.9 2.8
Bad debts................................................................ -- -- (6.8)
Partnerships............................................................. -- -- (11.0)
State income taxes, net of Federal income tax benefit.................... 4.7 8.0 4.2
Other.................................................................... 0.7 (1.0) (0.1)
Change in valuation reserve.............................................. -- (2.4) (1.5)
-------------------------------------
41.0% 39.6% 19.5%
=====================================
</TABLE>
The components of gross deferred tax assets and gross deferred tax liabilities
that have been recognized as of March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan losses.............................................................. $ 545 $ 530
Deferred loan origination fees........................................... 274 227
Depreciation............................................................. 215 153
Post-employee retirement benefit accrual................................. 201 207
Other.................................................................... 89 116
--------------------------------------
Gross deferred tax asset...................................................... 1,324 1,233
Valuation reserve........................................................ -- --
--------------------------------------
Net deferred tax asset.............................................. 1,324 1,233
--------------------------------------
Deferred tax liabilities:
Accrued dividend receivable.............................................. 22 20
Deferred loan origination costs.......................................... 308 394
Unrealized appreciation on securities.................................... 250 363
--------------------------------------
Gross deferred tax liability.................................................. 580 777
--------------------------------------
Net deferred tax asset.............................................. $ 744 $ 456
======================================
</TABLE>
<PAGE>
Based on the Bank's historical and current pretax earnings, management believes
it is more likely than not that the Bank will realize the net deferred tax asset
existing at March 31, 1999. Further, management believes the existing net
deductible temporary differences will reverse during periods in which the Bank
generates net taxable income. At March 31, 1999, recoverable income taxes, plus
estimated taxes for fiscal 2000, exceed the amount of the net deferred tax
asset. There can be no assurance, however, that the Bank will generate any
earnings or any specific level of continuing earnings.
The unrecaptured base year tax bad debt reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continues to
be subject to provision of present law that requires recapture in the case of
certain excess distributions to shareholders. The tax effect of pre-1988 bad
debt reserves subject to recapture in the case of certain excess distributions
is approximately $1,300.
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (In Thousands)
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include unused lines of credit, unadvanced portions of
commercial and construction loans, and commitments to originate loans. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets. The amounts of
those instruments reflect the extent of the Bank's involvement in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to its financial instruments is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Financial instruments with off-balance sheet risk as of March 31 follow:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Unused lines of credit.............................................. $9,873 $10,142
Unadvanced portions of construction loans........................... 2,294 2,025
Unadvanced portions of commercial loans............................. 3,773 1,893
Commitments to originate residential mortgage loans:
Fixed rate........................................................ 3,220 5,444
Adjustable rate................................................... 3,221 5,813
</TABLE>
Commitments to originate loans, unused lines of credit and unadvanced portions
of commercial and construction loans are agreements to lend to a customer,
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower.
NOTE 15. STOCKHOLDERS' EQUITY (Dollars in Thousands)
The Bank may not declare or pay cash dividends on its common stock if
the effect thereof would cause its equity to be reduced below regulatory capital
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
On October 24, 1991, the Bank adopted a Shareholder Rights Plan. The plan
entitles each shareholder to purchase the Bank's stock at a discount price in
the event any person or group of persons exceeds predetermined ownership
limitations of the Bank's outstanding common stock and, in certain
circumstances, engages in specific activities deemed adverse to the interests of
the Bank's shareholders. This plan expires on October 24, 2001.
The minimum core (leverage) capital ratio (stockholders' equity divided by
total assets) required for banks with a Camel rating of 1 is 3.00% and 4.00%-
5.00% for all others. The Bank must have a minimum total risk-based capital
ratio of 8.00% (of which 4.00% must be Tier 1 capital, consisting of common
stockholders' equity). At March 31, 1999 and 1998, the Bank's capital ratios
were in excess of all required standards.
<PAGE>
The Bank is subject to various regulatory capital requirements administered
by the federal banking services. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulations that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of risk-weighted, core and tangible capital (as defined).
Management represents, as of March 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
The most recent notification from the FDIC categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized" the Bank must maintain minimum risk-weighted
capital, core capital and tangible ratios as set forth in the table. As of March
31, 1999, the Bank is categorized as "well capitalized" based on its ratios of
risk-weighted core and tangible capital. There are no conditions or events,
since that notification, that management believes would cause a change in the
Bank's categorization.
The Bank's actual capital amounts and ratios are presented in the table. No
deduction was taken from capital for interest-rate risk.
The Bank's core/leverage, Tier 1 risk-based and total risk-based capital
together with related regulatory minimum requirements are summarized below:
[PICTURE APPEARS HERE]
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------
Core Tier 1 Total
Leverage Risk-based Risk-based
Capital Capital Capital
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regulatory capital measure:
Amount.................................................. $36,441 $33,115 $35,932
Ratio................................................... 10.00% 15.50% 16.82%
Adequately capitalized requirement:
Amount.................................................. $14,578 $ 8,544 $17,088
Ratio................................................... 4.00% 4.00% 8.00%
Well capitalized requirement:
Amount.................................................. $18,223 $12,816 $21,360
Ratio................................................... 5.00% 6.00% 10.00%
<CAPTION>
March 31, 1998
------------------------------------------
Core Tier I Total
Leverage Risk-based Risk-based
Capital Capital Capital
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regulatory capital measure:
Amount.................................................. $36,786 $33,402 $36,274
Ratio................................................... 9.78% 14.54% 15.79%
Adequately capitalized requirement:
Amount.................................................. $15,043 $ 9,190 $18,380
Ratio................................................... 4.00% 4.00% 8.00%
Well capitalized requirement:
Amount.................................................. $18,803 $13,785 $22,975
Ratio................................................... 5.00% 6.00% 10.00%
</TABLE>
<PAGE>
NOTE 16 EMPLOYEE BENEFITS (Dollars in Thousands, Except Per Share Data)
PENSION PLAN
As a participating employer in the Co-operative Banks Employees' Retirement
Association ("CBERA"), a multi-employer plan, the Bank has in effect a
noncontributory defined benefit plan ("Pension Plan") and a defined contribution
plan ("Savings Plan") covering substantially all eligible officers and
employees.
Benefits under the Pension Plan are determined at the rate of 1% and 1.5%,
respectively, of certain elements of final average pay times years of credited
service and are generally provided at age 65 based on years of service and the
average of the participants' three highest consecutive years of compensation
from the Bank. Employee contributions are made to a revised Savings Plan which
qualifies under section 401(k) of the Internal Revenue Code of 1986, as amended.
Such contributions are matched on a one half-for-one basis by the Bank up to a
maximum of 5% of each employee's salary. Pension benefits and employer
contributions to the Savings Plan become vested over six years.
Expenses for the Pension Plan and the Savings Plan were $202, $350 and $365
for the fiscal years ended March 31, 1999, 1998 and 1997, respectively.
Forfeitures are used to reduce expenses of the plans.
STOCK OPTION PLAN
The Bank has adopted a Stock Option Plan for the benefit of officers and other
employees and reserved 184,000 shares of authorized but unissued common stock
for issuance under the Plan. The exercise price of any option granted will not
be less than the fair market value of the common stock on the date of grant of
the option. During fiscal 1999, 2000 options were exercised resulting in an
additional $14 of capital being recorded. Of the 28,000 options outstanding at
March 31, 1999, all were exercisable with an average exercise price per share of
$15.27.
EMPLOYEE STOCK OWNERSHIP PLAN
During fiscal 1991, the Bank established an Employee Stock Ownership Plan (ESOP)
which is authorized to purchase shares of outstanding common stock of the Bank
from time to time in the open market or in negotiated transactions. The ESOP is
a tax-qualified defined contribution plan established for the exclusive benefit
of the Bank's employees.
During fiscal 1995 and fiscal 1996, the ESOP purchased 10,000 shares and
18,000 shares of the Bank's outstanding common stock, respectively. The ESOP is
repaying its loan to the Bank with funds from the Bank's contributions to the
plan and earnings from the ESOP's assets. Repayments of $184, $185 and $34 were
made during fiscal 1999, 1998 and 1997, respectively. The scheduled repayment of
the amount outstanding at March 31, 1999 is as follows:
<TABLE>
- ----------------------------------------------------------------------------
<S> <C>
2000................................................................... $130
2001................................................................... 130
2002................................................................... 130
2003................................................................... 130
Thereafter............................................................. 97
</TABLE>
Compensation expense is recognized as the ESOP shares are allocated to
participants in the plan and was $51, $68 and $16 for fiscal 1999, 1998 and
1997, respectively.
<PAGE>
As amended by SFAS 132, the components of the life plan and medical plan for
the years ended March 31, 1999 and 1998, respectively, follow:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------
Life Medical Life Medical
Plan Plan Plan Plan
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefits obligation:
Retirees............................................................ $ (206) $ (533) $ (192) $ (498)
Fully eligible participants......................................... (50) (248) (47) (232)
Other plan participants............................................. -- -- -- --
-------------------------------------------------
Total............................................................. $ (256) $ (781) $ (239) $ (730)
=================================================
Change in projected benefit obligation:
Accumulated benefit obligation at prior year-end................... $ (239) $ (730) $ (209) $ (661)
Service cost less expense component................................. -- -- -- --
Interest cost....................................................... (17) (51) (17 (53)
Actuarial gain (loss)............................................... (2) (28) (24) (61)
Benefits paid....................................................... 2 28 11 45
-------------------------------------------------
Accumulated benefit obligation at year-end........................ $ (256) $ (781) $ (239) $ (730)
=================================================
Change in plan assets:
Fair value of plan assets at prior fiscal year-end.................. $ -- $ -- $ -- $ --
Actual return on plan assets........................................ -- -- -- --
Employer contributions.............................................. 2 28 11 45
Benefits paid and expenses.......................................... (2) (28) (11) (45)
-------------------------------------------------
Fair value of plan assets at current fiscal year-end................ $ -- $ -- $ -- $ --
=================================================
Funded status.......................................................... $ (256) $ (781) $ (239) $ (730)
Unrecognized net obligation............................................ 121 347 130 372
Unrecognized prior service cost........................................ 8 -- 25 --
Unrecognized net (loss) gain........................................... (32) 193 (35) 171
-------------------------------------------------
(Accrued) benefit cost recognized in financial position................ $ (159) $ (241) $ (119) $ (187)
=================================================
Reconciliation of (accrued) prepaid:
(Accrued) prepaid pension cost at prior year-end.................... (119) (186) (91) (151)
Minus net periodic cost............................................. (41) (83) (39) (81
Plus employee contributions......................................... 1 28 11 45
-------------------------------------------------
(Accrued) prepaid cost............................................ $ (159) $ (241) $ (119) $ (187)
=================================================
Benefit obligation weighted-average assumption as of fiscal year-end:
Discount rate....................................................... 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets...................................... 7.00 7.00 7.00 7.00
Rate of compensation increase....................................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
1 Percentage Point Increase
-------------------------------------------------
1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Impact of 1% change in health care trend rates:
Effect on total service and interest cost components................ n/a $ (9) $ n/a 8
Effect on the post retirement benefit obligation................... n/a $ 67 $ n/a (73)
Components of net periodic benefit cost:
Service cost........................................................ $ -- $ -- $ -- $ --
Interest cost....................................................... 17 51 17 53
Expected return on plan assets...................................... -- -- -- --
Amortization of prior service cost.................................. 25 25 26 25
Recognized actuarial (gain) loss.................................... (1) 7 (3) 3
-------------------------------------------------
Net periodic benefit cost for fiscal year ending.................. $ 41 $ 83 $ 40 81
=================================================
Periodic benefit cost weighted average assumptions:
Discount rate....................................................... 7.00% 7.00% 8.00% 8.00%
Expected return on plan assets...................................... 7.00 7.00 8.00 8.00
Rate of compensation................................................ -- -- -- --
</TABLE>
[PICTURE APPEARS HERE]
For measurement purposes: a 10% annual rate of increase in the per capita cost
of covered health care benefits was assumed for the fiscal year ended March 31,
1998. The rate was assumed to decrease gradually to 4% for the fiscal year
ending March 31, 2005 and remain at that level thereafter.
<PAGE>
NOTE 17. LEGAL PROCEEDINGS
The Bank is a party to certain litigation in the normal course of business.
Management and counsel are of the opinion that the aggregate liability, if any,
resulting from such litigation would not be material to the Bank's financial
position.
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS (In Thousands)
The FASB issued SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Fair value estimates are based on existing
on- and off-balance sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments.
Other significant assets and liabilities that are not considered financial
assets or liabilities include real estate acquired by foreclosure and office
properties and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair values and have not been considered in any of the estimates. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair values of its financial instruments:
CASH AND DUE FROM BANKS
The carrying values reported in the balance sheet for cash and due from banks
approximate their fair value because of the short maturity of these instruments.
SHORT-TERM INVESTMENTS
The carrying values reported in the balance sheet for short-term investments
approximate fair value because of the short maturity of these investments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The fair values presented for investment and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS
The fair values of loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
ACCRUED INTEREST RECEIVABLE
The carrying value reported in the balance sheet for accrued interest receivable
approximates its fair value because of the short maturity of these accounts.
STOCK IN FHLB OF BOSTON
The carrying amount reported in the balance sheet for FHLB stock approximates
its fair value. If redeemed, the Bank will receive an amount equal to the par
value of the stock.
THE CO-OPERATIVE CENTRAL BANK RESERVE FUND
The carrying amount reported in the balance sheet for the Co-operative Central
Bank Reserve Fund approximates its fair value.
DEPOSITS
The fair values of deposits (excluding term deposit certificates) are, by
definition, equal to the amount payable on demand at the reporting date. Fair
values for term deposit certificates are estimated using a discounted cash flow
technique that applies interest rates currently being offered on certificates to
a schedule of aggregated monthly maturities on time deposits with similar
remaining maturities.
OFF-BALANCE-SHEET INSTRUMENTS
The Bank's commitments for unused lines of credit and unadvanced portions of
loans are at floating rates, which approximate current market rates, and,
therefore, no fair value adjustment has been made.
ADVANCES FROM FHLB OF BOSTON
Fair values of advances from FHLB of Boston are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
advances to a schedule of aggregated monthly maturities on FHLB advances.
<PAGE>
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE AND ACCRUED INTEREST
PAYABLE
The carrying values reported in the balance sheet for advance payments by
borrowers for taxes and insurance and accrued interest payable approximate their
fair value because of the short maturity of these accounts.The estimated
carrying amounts and fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------
At March 3l, 1999 At March 3l, 1998
---------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks......................................... $ 4,964 $ 4,964 $ 5,718 $ 5,718
Short-term investments.......................................... 16,939 16,939 3,321 3,321
Investments available for sale:
Investment securities........................................ 21,943 21,943 24,524 24,524
Mortgage-backed securities................................... 29,999 29,999 45,182 45,182
Investments held to maturity:
Investment securities........................................ -- -- 4,000 3,963
Loans, net...................................................... 277,433 281,421 278,838 279,878
Accrued interest receivable..................................... 1,614 1,614 1,910 1,910
Stock in FHLB of Boston......................................... 3,350 3,350 3,150 3,150
The Co-operative Central Bank Reserve Fund...................... 1,576 1,576 1,576 1,576
LIABILITIES
Deposits........................................................ $ 266,463 $ 267,340 $ 276,364 $ 276,546
Advances from FHLB of Boston.................................... 57,000 55,575 59,000 58,177
Advance payments by borrowers for taxes and insurance........... 1,389 1,389 1,229 1,229
Accrued interest payable........................................ 291 291 483 483
</TABLE>
[PICTURE APPEARS HERE]
NOTE 19. PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS (In Thousands)
The following are the condensed financial statements for Central Bancorp, Inc.
(the "Parent") only:
<TABLE>
<CAPTION>
BALANCE SHEET March 31,
1999
- -------------------------------------------------------------------------
<S> <C>
ASSETS
Cash deposit in subsidiary bank................................ $ 2,081
Investment in subsidiary, at equity............................ 36,441
Other assets................................................... 235
-------
Total assets.............................................. $38,757
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities......................... $ 15
Total stockholders' equity..................................... 38,742
-------
Total liabilities and stockholders' equity................ $38,757
=======
Fiscal Period
Ended
STATEMENT OF INCOME March 31,
1999
- -------------------------------------------------------------------------
Non-interest expense........................................... $ 62
-------
Net loss before income taxes.............................. 62
Income tax benefit............................................. (20)
-------
Net loss.................................................. 42
Equity in net income of subsidiaries........................... 2,724
-------
Net income................................................ $ 2,682
=======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal
Period
Ended
STATEMENT OF CASH FLOWS March 31,
1999
- -------------------------------------------------------------------------------------------------------
<S> <C>
Net cash flows from operating activities:
Net income $ 2,682
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary......................................... (2,724)
(Increase) in other assets............................................................. (235)
Increase in accrued expenses and other liabilities..................................... 15
-------
Net cash provided by operating activities........................................... (262)
Cash flow from investing activities:
Cash dividend from subsidiary............................................................. 2,500
Cash flow from financing activities:
Cash dividends paid....................................................................... (157)
-------
Cash at end of year.......................................................................... $ 2,081
=======
</TABLE>
NOTE 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In Thousands, Except Per
Share Data)
<TABLE>
<CAPTION>
1999 Quarters
---------------------------------------------------
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income....................................... $ 6,563 $ 6,649 $ 6,619 $ 6,165
Interest expense................................................... 3,661 3,688 3,521 3,179
---------------------------------------------------
Net interest and dividend income................................ 2,902 2,961 3,098 2,986
Non-interest income................................................ 331 188 358 491
Operating expenses................................................. 2,111 2,210 2,331 2,121
---------------------------------------------------
Income before income taxes...................................... 1,122 939 1,125 1,356
Income tax......................................................... 451 375 454 580
===================================================
Net income...................................................... $ 671 $ 564 $ 671 $ 776
===================================================
Earnings per common share.......................................... $ 0.35 $ 0.29 $ 0.35 $ 0.40
===================================================
Earnings per common share-assuming dilution........................ $ 0.34 $ 0.29 $ 0.35 $ 0.40
===================================================
<CAPTION>
1998 Quarters
---------------------------------------------------
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and dividend income....................................... $ 5,805 $ 6,213 $ 6,602 $ 6,602
Interest expense................................................... 2,993 3,363 3,561 3,607
---------------------------------------------------
Net interest and dividend income................................ 2,812 2,850 3,041 2,995
Non-interest income................................................ 195 526 204 889
Operating expenses................................................. 2,025 2,145 2,156 2,145
---------------------------------------------------
Income before income taxes...................................... 982 1,231 1,089 1,739
Income tax......................................................... 376 486 426 706
---------------------------------------------------
Net income...................................................... $ 606 $ 745 $ 663 $ 1,033
===================================================
Earnings per common share.......................................... $ 0.31 $ 0.38 $ 0.34 $ 0.53
===================================================
Earnings per common share-assuming dilution........................ $ 0.31 $ 0.38 $ 0.34 $ 0.53
===================================================
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Central Bancorp, Inc.:
We have audited the consolidated balance sheets of Central Bancorp, Inc. and
subsidiary as of March 31, 1999 and 1998, and the related consolidated financial
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended March 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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 financial position of Central
Bancorp, Inc. and subsidiary as of March 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
[PICTURE APPEARS HERE]
/s/ KPMG LLP
Boston, Massachusetts
April 30, 1999
<PAGE>
<TABLE>
<CAPTION>
Directors and Officers
<S> <C> <C>
Board of Directors John F. Gilgun, Jr. Executive Officers
President
Joseph R. Doherty John F. Gilgun Agency Joseph R. Doherty
Chairman Chairman
Central Bancorp, Inc. Terence D. Kenney
Assessor John D. Doherty
John D. Doherty City of Woburn President & Chief Executive Officer
President & Chief Executive Officer
Central Bancorp, Inc. John G. Quinn Paul S. Feeley
President Senior Vice President & Treasurer/
Gregory W. Boulos Quinn Printing Company Chief Financial Officer
Partner
The Boulos Company Marat E. Santini David W. Kearn
Consultant Senior Vice President of Retail & Lending
George L. Doherty, Jr. Santini, Inc.
President William P. Morrissey
George L. Doherty Funeral Service, Inc. Senior Vice President of Public Affairs
</TABLE>
Honorary Director
Philbert L. Pellegrini, Esq.
The directors and officers of Central Bancorp, Inc. also serve as directors and
officers of Central Bank.
STOCKHOLDER INFORMATION
ANNUAL MEETING. The Annual Meeting of Stockholders of Central Bancorp, Inc. will
be held at 11:00 a.m. on July 29, 1999, in the Main Auditorium of BankBoston,
100 Federal Street, Boston, Massachusetts.
INVESTOR INQUIRIES. Investors and other parties interested in obtaining
information or who have questions about the Bank should contact Gladys N.
Partamian, Vice President, 846 Main Street, Melrose, MA 02176, (617) 628-4000.
The Bank's Annual Report on Form 10-K for the fiscal year ended March 31,
1999, is available without charge.
COMMON STOCK. On January 8, 1999, Central Bancorp, Inc. became the holding
company for Central Bank, whose legal name is Central Co-operative Bank. The
Bank became a public company on October 24, 1986 by issuing 1,840,000 shares of
common stock at $7.50 a share. Central Bancorp's common stock is traded over-
the-counter on the NASDAQ National Market System under the symbol CEBK. At March
31, 1999, there were approximately 300 holders of record of the common stock.
This total does not reflect the number of persons or entitiles who held the
stock in nominee or "street name" through various brokerage firms. In October
1996, the Company established a quarterly cash dividend policy and made its
first dividend distribution on November 15, 1996; It has paid cash dividends on
a quarterly basis since initiating the dividend program.
The following tables list the high and low prices for Central Bancorp's
common stock during each quarter of fiscal 1999 and fiscal 1998 as reported by
NASDAQ, and the amounts and payable dates of the cash dividends paid during each
quarter of fiscal 1999 and fiscal 1998. The stock quotations constitute
interdealer prices without retail markups, markdowns or commissions, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Prices Cash Dividends
Fiscal 1999 High Low Fiscal 1998 High Low Fiscal 1999 Payable Dates Amount Fiscal 1998 Payable Dates Amount
- --------------------------- --------------------------- --------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6/30/98 32.375 25.000 6/30/97 18.625 15.750 5/23/98 $ .08 5/23/97 $ .08
9/30/98 27.000 19.000 9/30/97 23.250 18.000 8/21/98 .08 8/22/97 .08
12/31/98 20.250 16.734 12/31/97 30.250 20.500 11/20/98 .08 11/21/97 .08
3/31/99 21.000 15.750 3/31/98 34.250 23.000 2/19/99 .08 2/20/98 .08
</TABLE>
<TABLE>
<S> <C> <C>
TRANSFER AGENT INDEPENDENT AUDITORS SPECIAL LEGAL COUNSEL
State Street Bank and Trust Company KPMG LLP Housley Kantarian & Bronstein, P.C.
c/o EquiServe Limited Partnership 99 High Street 1220 19th Street N.W., Suite 700
P.O. Box 8200 Boston, MA 02110-2371 Washington, DC 20036
Boston, MA 02266-8200
(800)426-5523 DEPOSIT INSURANCE WEBSITE HOME PAGE
Federal Deposit Insurance http://www.centralbk.com
Corporation (FDIC)
Share Insurance Fund (SIF)
</TABLE>
<PAGE>
---------------------
CENTRAL BANCORP, INC.
---------------------
399 Highland Avenue
Somerville, MA 02144
(617) 628-4000
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
---------------------------
Central Co-operative Bank 100% owned by the Company, Incorporated under
the laws of the Commonwealth of
Massachusetts.
Central Securities Corporation 100% owned by the Bank, Incorporated under
the laws of the Commonwealth of
Massachusetts.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Central Bancorp, Inc.
We consent to incorporation by reference in the Registration Statements on Form
S-8 (333-71165) of Central Bancorp, Inc. of our report, dated April 30, 1999,
incorporated by reference in the March 31, 1999 Annual Report on Form 10-K of
Central Bancorp, Inc.
/s/ KPMG LLP
Boston, Massachusetts
June 28, 1999
<TABLE> <S> <C>
<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
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