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Filed Pursuant to Rule
424(b)(3)
Registration No. 333-12855
PROSPECTUS SUPPLEMENT
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FIRSTFED AMERICA BANCORP, INC.
FIRST FEDERAL SAVINGS BANK OF AMERICA
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the First Federal Savings Bank of America Employees'
Savings & Profit Sharing Plan of participation interests and shares of
FIRSTFED AMERICA BANCORP, INC. common stock, par value $.01 per share (the
"Common Stock"), as set forth herein.
In connection with the proposed conversion of First Federal Savings Bank of
America (the "Bank" or "Employer") from a mutual savings bank to a stock
savings bank, a holding company, FIRSTFED AMERICA BANCORP, INC. (the
"Company"), has been formed. The simultaneous conversion of the Bank to the
stock form, the issuance of the Bank's common stock to the Company and the
offer and sale of the Company's Common Stock to the public are herein referred
to as the "Conversion."
Effective as of December 1, 1970, the Bank adopted the Financial
Institutions Thrift Plan (the "Prior Plan"), which was a multiple employer
defined contribution plan sponsored by the Financial Institutions Thrift Plan.
In connection with the proposed Conversion, the Bank, effective December 1,
1996, has adopted the First Federal Savings Bank of America Employees' Savings
and Profit Sharing Plan (the "Plan"). The Plan is sponsored by Pentegra
Services, Inc., which is a corporate affiliate of Financial Institutions
Thrift Plan The Plan is offered in lieu of the Prior Plan to provide
Participants with an opportunity to invest in Common Stock.
This Prospectus Supplement relates to the initial election of a Participant
to direct the purchase of Common Stock in connection with the Conversion and
also to elections to purchase Common Stock after the Conversion.
The Prospectus dated November 12, 1996 of the Company (the "Prospectus")
which is attached to this Prospectus Supplement, includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Bank and the Company. This Prospectus
Supplement, which provides detailed information with respect to the Plan,
should be read only in conjunction with the Prospectus. Terms not otherwise
defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
A PARTICIPANT'S ELIGIBILITY TO PURCHASE COMMON STOCK IN THE CONVERSION
THROUGH THE PLAN IS SUBJECT TO THE PARTICIPANT'S GENERAL ELIGIBILITY TO
PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION, AND THE MAXIMUM AND MINIMUM
PURCHASE LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. SEE "THE CONVERSION"
AND "LIMITATIONS ON COMMON STOCK PURCHASES" IN THE PROSPECTUS.
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES 20 TO 30 IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, OR ANY OTHER AGENCY,
NOR HAS SUCH COMMISSION, DEPARTMENT, CORPORATION OR ANY STATE SECURITIES
COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT INSURED OR GUARANTEED BY THE COMPANY OR THE BANK. AN
INVESTMENT IN COMMON STOCK INVOLVES THE RISK OF THE ENTIRE LOSS OF PRINCIPAL.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 12, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, BANK OR THE PLAN. THIS PROSPECTUS
SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE BANK OR THE PLAN SINCE THE DATE HEREOF, OR THAT
THE INFORMATION HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND
SHOULD BE RETAINED FOR FUTURE REFERENCE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Offering............................................................. 5
Securities Offered..................................................... 5
Election to Purchase Common Stock in the Conversion.................... 5
Value of Participation Interests....................................... 6
Method of Directing Transfer........................................... 6
Time for Directing Transfer............................................ 6
Irrevocability of Transfer Direction................................... 6
Direction to Purchase Common Stock After the Conversion................ 6
Purchase Price of Common Stock......................................... 7
Nature of a Participant's Interest in the Common Stock................. 7
Voting and Tender Rights of Common Stock............................... 7
Description of the Plan.................................................. 8
Introduction........................................................... 8
Eligibility and Participation.......................................... 9
Contributions Under the Plan........................................... 9
Limitations on Contributions........................................... 10
Investment of Contributions............................................ 12
Benefits Under the Plan................................................ 15
Withdrawals and Distributions From the Plan............................ 15
Administration of the Plan............................................. 16
Reports to Plan Participants........................................... 17
Plan Administrator..................................................... 17
Amendment and Termination.............................................. 17
Merger, Consolidation or Transfer...................................... 17
Federal Income Tax Consequences........................................ 18
ERISA and Other Qualifications......................................... 20
Restrictions on Resale................................................. 21
SEC Reporting and Short-Swing Profit Liability......................... 21
Legal Opinions........................................................... 22
Enrollment and Investment Application.................................... 23-25
</TABLE>
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan and
up to 130,000 shares, at the actual purchase price of $10.00 per share, of
Common Stock may be acquired by the Plan for the accounts of employees
participating in the Plan. The Company is the issuer of the Common Stock. Only
employees of the Bank may participate in the Plan. Information with regard to
the Plan is contained in this Prospectus Supplement and information with
regard to the Conversion and the financial condition, results of operations
and business of the Bank and the Company is contained in the attached
Prospectus. The address of the principal executive office of the Bank is One
North Main Street, Fall River, Massachusetts 02720. The Bank's telephone
number is (508) 679-8181.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Bank has adopted the First
Federal Savings Bank of America Employees' Savings & Profit Sharing Plan and
Trust (the "Trust"), effective December 1, 1996. The Plan permits each
Participant to direct the trustee of the Plan (the "Trustee") to transfer all
or part of the funds which represent the Participant's beneficial interest in
the assets of the Plan to a fund, the assets of which will consist of the
Common Stock, (the "Employer Stock Fund") and, to the extent shares are
available, to use such funds to purchase Common Stock issued in connection
with the Conversion, and to purchase Common Stock in the open market
thereafter. If there is not enough Common Stock in the Conversion to fill all
subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In
such case, the Trustee will purchase shares in the open market after the
Conversion to fulfill Participants' requests. Such purchases may be at prices
higher than the purchase price in the Conversion. Amounts transferred will
include employee contributions, Bank matching contributions and rollover
contributions, if any. The Employer Stock Fund will consist of investments in
the Common Stock made on or after the effective date of the Conversion. Funds
not transferred to the Employer Stock Fund will remain in the other investment
funds of the Plan as directed by the Participant on the attached Enrollment
and Investment Application. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE
EMPLOYER STOCK FUND AND THE TRUSTEE'S ABILITY TO PURCHASE COMMON STOCK FOR A
PARTICIPANT IN THE CONVERSION IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION AND THE
PURCHASE LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. FOR GENERAL
INFORMATION AS TO THE ABILITY OF PARTICIPANTS TO DIRECT THE TRUSTEE TO
PURCHASE SHARES IN THE CONVERSION, SEE "THE CONVERSION--SUBSCRIPTION OFFERING
AND SUBSCRIPTION RIGHTS" IN THE ATTACHED PROSPECTUS.
5
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VALUE OF PARTICIPATION INTERESTS
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
quarterly basis. This value represents the market value of past contributions
to the Plan by the Bank and by the Participants and earnings thereon, less
previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last three pages of this Prospectus Supplement is an Enrollment and
Investment Application to enroll in the Plan and to direct a transfer to the
Employer Stock Fund (the "Enrollment and Investment Application"). If a
Participant wishes to transfer all of his or her beneficial interest in the
assets of the Prior Plan to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, he or she should indicate that
decision in Part B of the Enrollment and Investment Application.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is December 10, 1996. The Enrollment and Investment Application
should be returned to the Bank's Human Resources Department by 12:00 noon,
Eastern Time, on or before such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the reinvestment of
their accounts ("Accounts") under the Plan after the Conversion as explained
below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the Plan's assets be transferred
to the Employer Stock Fund and invested in Common Stock, or to the other
investment funds available under the Plan. Alternatively, a Participant may
direct that a certain percentage of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to the other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock (see Part D of the Enrollment and Investment
Application). Following the initial election, the allocation of a
Participant's interest in the Employer Stock Fund may be changed by the
Participant, with each change generally becoming effective on each business
day coinciding with or next following the day the Plan Administrator receives
notice for such change. Special restrictions apply to transfers directed by
those Participants who are executive officers, directors and principal
stockholders of the Company who
6
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are subject to the provisions of Section 16(b) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common
Stock will be the same price as is paid by all other persons who purchase
shares of Common Stock in the Conversion.
Any shares of Common Stock purchased by the Trustee after the Conversion
will be acquired in open market transactions. The prices paid by the Trustee
for shares of Common Stock will not exceed "adequate consideration" as defined
in Section 3(18) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan but not in any particular assets of the Plan. Accordingly, a specific
number of shares of Common Stock will not be directly attributable to the
account of any Participant. Net earnings, e.g., gains and losses, are
allocated to the Account of a Participant based on the particular investment
designations of the Participants. Therefore, earnings with respect to a
Participant's Account should not be affected by the investment designations
(including investments in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively. In the event of a tender offer for the Common Stock,
the Plan provides that each Participant will be allotted a number of tender
instruction rights reflecting such Participant's proportionate interest in the
Employer Stock Fund. The percentage of shares of Common Stock held in the
Employer Stock Fund that will be tendered will be the same as the percentage
of the total number of tender instruction rights that are exercised in favor
of tendering. The remaining shares of Common Stock held in the Employer Stock
Fund will not be tendered. The Plan makes provision for Participants to
exercise their voting instruction rights and tender instruction rights on a
confidential basis.
7
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DESCRIPTION OF THE PLAN
INTRODUCTION
Effective as of December 1, 1970, the Bank adopted the Prior Plan, which
was a multiple employer defined contribution plan sponsored by the Financial
Institutions Thrift Plan. In connection with the proposed Conversion, the
Bank, effective December 1, 1996, has adopted the Plan. The Plan is sponsored
by Pentegra Services, Inc., which is a corporate affiliate of Financial
Institutions Thrift Plan. The Plan's fiscal year is the calendar year ("Plan
Year"). The Plan is offered in lieu of the Prior Plan to provide Participants
with an opportunity to invest in Common Stock. The Prior Plan was and the Plan
is a tax-exempt trusteed savings plan established in accordance with the
requirements under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) of the Code. The Bank will adopt any
amendments to the Plan that may be necessary to ensure the qualified status of
the Plan under the Code and applicable Treasury Regulations. The Bank will
submit the Plan to the IRS for a determination that the Plan, as amended, is
qualified under Section 401(a) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA.
As such, the Plan is subject to all of the provisions of Title I (Protection
of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue
Code Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to
an individual account plan (other than a money purchase pension plan). The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither
the funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be
extended to Participants or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW CERTAIN AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT
WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain material provisions of the Plan. They are not complete and are
qualified in their entirety by the full text of the Plan, which is filed as an
exhibit to the registration statement filed with the Securities and Exchange
Commission ("SEC"). Copies of the Plan are available to all employees
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by filing a request with the Plan Administrator which in this case is the
Bank. Each employee is urged to read carefully the full text of the Plan.
ELIGIBILITY AND PARTICIPATION
Any employee of the Bank is eligible to participate and will become a
Participant in the Plan on the first day of the month following the employee's
completion of a minimum of 1,000 hours of service with the Bank within a
twelve consecutive month period of employment with the Bank. Hours of service
are determined on an elapsed time basis under which 83 1/2 hours are credited
for each month of employment. Directors who are not employees of the Bank are
not eligible to participate in the Plan.
As of January 1, 1996, there were approximately 212 employees eligible to
participate in the Prior Plan, and approximately 166 employees had elected to
contribute to the Prior Plan.
CONTRIBUTIONS UNDER THE PLAN
Participant Contributions. Each Participant in the Plan is permitted to
elect to make after-tax contributions pursuant to a salary reduction agreement
by an amount not less than 1% nor more than 15% of the Participant's monthly
Compensation (as defined below) and have that amount contributed to the Plan
on such Participant's behalf. Such amounts are credited to the Participant's
"Regular Account." For purposes of the Plan, "Compensation" means a
Participant's regular basic salary ("Basic Salary"). Due to a statutory
change, effective January 1, 1994, the annual Compensation of each Participant
taken into account under the Plan is limited to $150,000 (adjusted for
increases in the cost of living as permitted by the Code). A Participant may
elect to modify the amount contributed to the Plan under such Participant's
salary reduction agreement one time per calendar month. Such changes generally
become effective the first business day of the month following receipt by the
Employer of such change. Deferred contributions are generally transferred by
the Bank to the Trustee of the Plan monthly.
Employer Contributions. The Bank currently makes a monthly contribution to
the Plan of an amount equal to 50% of each Participant's monthly contributions
to his or her Regular Account. However, the Bank-credited contributions only
apply to the first 6% of a Participant's Compensation.
Rollover Amount from Other Plans. An employee eligible to participate in
the Plan, who has satisfied the service requirements, who, as a result of a
plan termination, termination of employment, disability, or attainment of age
59 1/2, has had distributed to such employee the entire interest in another
plan which meets the requirements of Section 401(a) of the Code (the "Other
Plan") may, in accordance with Section 402(a)(5) of the Code and procedures
approved at the discretion of the Trustee, transfer the distribution received
from the Other Plan to the Trustee. Any amounts rolled over from an Other Plan
will be contributed to the employee's "Rollover Account."
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LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of annual additions allocated
to each Participant's Regular Account during any Plan Year may not exceed the
lesser of 25% of the Participant's "Section 415 Compensation" for the Plan
Year or $30,000 (adjusted for increases in the cost of living as permitted by
the Code). Annual additions are the employer contributions, employee
contributions and forfeitures credited to the account of the employee for the
Plan Year. A Participant's "Section 415 Compensation" is a Participant's
compensation from the Bank, excluding any amount contributed to the Plan under
a compensation reduction agreement or any employer contribution to the Plan or
to any other plan of deferred compensation or any distributions from a plan of
deferred compensation. In addition, annual additions shall be limited to the
extent necessary to prevent the limitations for the combined plans of the Bank
from being exceeded. To the extent that these limitations would be exceeded by
reason of excess annual additions to the Plan with respect to a Participant,
such excess will be disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to
reduce the Bank's contributions for such Participant in the next
"Limitation Year," which is the same as the Plan Year, and each
succeeding Limitation Year if necessary;
(ii) If an excess amount still exists, and the Participant is not
covered by the Plan at the end of the Limitation Year, the excess
amount will be held unallocated in a suspense account which will
then be applied to reduce future Bank contributions for all
remaining Participants in the next Limitation Year, and each
succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of
investment gains and losses.
However, if the annual addition limitations are exceeded with respect to a
Participant in both the Plan and the defined benefit pension plan maintained
by the Bank, the Participant's annual additions under the Plan will be
reduced.
Limitation on Plan Contributions for Highly Compensated Employees. Section
401(m) of the Code limits the amount that may be contributed to the Plan in
any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amounts contributed by or on behalf of all other employees
eligible to participate in the Plan. Specifically, the actual contribution
percentage for a Plan Year (i.e., the average of the ratios calculated
separately for each eligible employee in each group, by dividing the amount of
employee and employer contributions credited to the Regular Account of such
eligible employee by such eligible employee's compensation for the Plan Year)
of the Highly Compensated Employees may not exceed the greater of (a) 125% of
the actual contribution percentage of all other eligible employees, or (b) the
lesser of (i) 200% of the actual contribution percentage of all other eligible
employees, or (ii) the actual contribution percentage of all other eligible
employees plus two percentage points.
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For the 1996 Plan Year in general, a Highly Compensated Employee includes
any employee who, during the Plan Year or the preceding Plan Year, (1) was at
any time a 5% owner (i.e., owns directly or indirectly more than 5% of the
stock of the Employer, or stock possessing more than 5% of the total combined
voting power of all stock of the Employer), (2) received compensation from the
Employer in excess of $100,000 (3) received compensation from the Employer in
excess of $66,000 and was in the group consisting of the top 20% of employees
when ranked on the basis of compensation paid during the Plan Year, or (4) was
at any time an officer of the Employer and received compensation in excess of
$60,000 (a "Highly Compensated Employee"). The dollar amounts in the foregoing
sentence are for 1995. Such amounts are adjusted periodically to reflect
increases in the cost of living. If the Employer does not have at least one
officer whose annual compensation is in excess of $60,000, then the highest
paid officer of the Employer will be treated as a Highly Compensated Employee.
In order to prevent the disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Bank will be subject
to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2 1/2 months
following the Plan Year to which such excess contributions relate. In
addition, in order to avoid disqualification of the Plan, any contributions by
Highly Compensated Employees that exceed the average contribution limitation
in any Plan Year ("excess aggregate contributions") together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the 10% excise tax will
be imposed on the Bank with respect to any excess aggregate contributions,
unless such amounts, plus any income allocable thereto, are distributed within
2 1/2 months following the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees exceeds 60% of the
aggregate balance of the Accounts of all Participants. "Key Employees"
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in the
employer, (3) a 5% owner of the employer, (i.e., owns directly or indirectly
more than 5% of the stock of the employer, or stock possessing more than 5% of
the total combined voting power of all stock of the employer) or (4) a 1%
owner of the employer having annual compensation in excess of $150,000.
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INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Trust which is administered by the Trustee. The Trustee is appointed by
the Bank's Board of Directors. The Plan provides that a Participant may direct
the Trustee to invest all or a portion of his Accounts in various managed
investment portfolios, described below. A Participant may elect to change his
investment directions with respect to both past contributions and for more
additions to the Participant's accounts invested in these investment
alternatives. These elections generally become effective on the business day
next following the day the Plan Administrator receives the Participant's
notice of the elections. Any amounts credited to a Participant's Accounts for
which investment directions are not given will be invested by the Trustee in
Fund D.
Under the Plan, prior to the effective date of the Conversion, the Accounts
of a Participant held in the Trust will be invested by the Trustee at the
direction of the Participant in the following managed portfolios:
Investment Fund A -
A passively managed, diversified equity portfolio with the
objective of simulating the performance of the Standard &
Poor's Composite Index of 500 stocks, managed by Mellon Bank,
N.A., as Trustee. An investment in Fund A provides an
opportunity for investment growth generally consistent with
that of widely traded common stocks, but with a corresponding
risk of decline in value.
Investment Fund B -
A portfolio of fixed income contracts primarily managed by
Mellon Bank, N.A. with the objective of maximizing income at
minimum risk of capital. Contributions are invested in fixed
income instruments including but not limited to guaranteed
investment contracts issued by insurance companies.
Investment Fund C -
A passively managed, diversified portfolio of stocks with the
objective of replicating the performance of the S&P MidCap
Index, managed by Mellon Bank, N.A. An investment return
generally consistent with that of smaller to medium sized
company stocks, with an above average potential for increase
or decrease in value.
Investment Fund D -
A government instrument fund with the objective of maximizing
income at minimum risk of capital with underlying investments
in obligations issued or guaranteed by the United States
government or agencies or instrumentalities thereof, selected
by Mellon Bank, N.A. as Trustee.
Investment Fund E -
A portfolio of high quality treasury, agency, corporate and
asset/mortgage-backed securities managed by Mellon Bank, N.A.
with the objective of replicating the total performance of
the Lehman Brother Aggregate Bond Index.
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Effective upon the Conversion, a Participant may invest all or a portion of
his Accounts in the portfolios described above and in Fund F, described below:
Investment Fund F -
Employer Stock Fund--invests in common stock of the parent
holding company, FIRSTFED AMERICA BANCORP, INC.
A Participant may elect (in increments of 1%), to have both past and future
contributions and additions to the Participant's Accounts invested either in
the Employer Stock Fund or in such other managed portfolios listed above.
These elections will generally be effective the last business day or next
following the plan administrators' receipt of such investment directions. Any
amounts credited to a Participant's Accounts for which investment directions
are not given will be invested in Fund D. Because investment allocations only
are required to be made in increments of 1%, Participants can invest their
Accounts in each of the six available investment funds. Lack of
diversification with respect to the investment of a Participant's Account is
not a significant risk given the six investment options available to
Participants and the ability of Participants to make investment designations
daily.
The net gain (or loss) in the Accounts from investments other than the
Employer Stock Fund (including interest payments, dividends, realized and
unrealized gains and losses on securities, and expenses paid from the Trust)
are determined daily during the Plan Year. Net gain (or loss) in the Account
from investments (including interest, dividends, realized and unrealized gain
and expenses paid) from the Employer Stock Fund will be determined weekly. For
purposes of such allocations, all assets of the Trust are valued at their fair
market value.
Prior to the adoption of the Plan, assets of the Prior Plan were invested
in the funds listed below.
Funds under the Prior Plan.
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Fund A. 28% 23%
Fund B. 63% 68%
Fund C. 2% 1%
Fund D. 6% 7%
Fund E. 1% 1%
</TABLE>
13
<PAGE>
Contributions under the Prior Plan were invested in the five Funds listed
below. The annual percentage of returns on these funds, net of any fees being
charged to the portfolio for 1993, 1994 and 1995 was:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<C> <S> <C> <C> <C>
A. PSI 500 Stock Index Fund 37.8% 0.9% 9.5%
B. PSI Stable Value Fund 6.5% 5.2% 5.7%
C. PSI MidCap Fund 30.6% (3.8%) 13.4%
D. PSI Government Money 6.4% 3.8% 2.8%
Market Fund
E. PSI Bond Index Fund 18.4% (3.1%) 8.4%
</TABLE>
The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Enrollment and Investment Application,
Participants will be able to change their investments. Any cash dividends paid
on Common Stock held in the Employer Stock Fund will be credited to a cash
dividend subaccount for each Participant investing in the Employer Stock Fund.
The Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund (except the amounts credited to cash dividend subaccounts)
to purchase shares of Common Stock. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment
in Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase
or sale. The Bank expects to pay any brokerage commissions, transfer fees and
other expenses incurred in the sale and purchase of Common Stock for the
Employer Stock Fund. A Participant's Account will be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will
consist only of the market value appreciation of the Common Stock subsequent
to its purchase. Following the conversion, the Board of the Company may
consider a policy of paying dividends on the Common Stock, however, no
decision has been made by the Board of the Company regarding the amount or
timing of dividends, if any.
14
<PAGE>
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS
ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION
OF THESE RISK FACTORS, SEE "RISK FACTORS" ON PAGES 20 TO 30 IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
Vesting. A Participant has at all times a fully vested, nonforfeitable
interest in all of his Regular Account and, Rollover Account and the earnings
thereon under the Plan. Employer matching contributions credited to a
Participant's Regular Account and the earnings thereon are also fully vested.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW CERTAIN AMOUNTS HELD FOR HIS
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK.
Withdrawals Prior to Termination of Employment. A Participant may make a
withdrawal from his Accounts under the Plan pursuant to the rules under the
Plan. A Participant may only make one withdrawal from his Accounts each
calendar year, except for withdrawals from the Participants contributions made
prior to January 1, 1987. No partial withdrawal is permitted in an amount of
less than $1,000 unless the contribution is for the full amount the
Participant's (i) pre-1987 contributions, without earning (ii) pre- and post-
1987 contributions and earnings on them, or (iii) total vested account
balance.
Notwithstanding, Bank contributions may not be available for withdrawal
prior to termination of employment until (i) such employer contributions have
been invested in the Plan for 2 years, (ii) the employee has been a Plan
Participant for at least 5 years, or (iii) the Participant attains age 59 1/2.
Distribution Upon Retirement, Disability or Termination of
Employment. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a
lump sum cash payment. At the request of the Participant, the distribution may
include an in kind distribution of Common Stock of the Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payment, to be paid in annual installments over a period of up to 20 years
(but not over a period exceeding the Participant's life
15
<PAGE>
expectancy) with the right to take a lump sum distribution of the vested
balance at any time during such period. Benefit payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
the later of the Participant's: (i) termination of employment; (ii) attainment
of age 65; (iii) 10th anniversary of commencement of participation in the
Plan; but in no event later than the April 1 following the calendar year in
which the Participant attains age 70 1/2. However, if the vested portion of
the Participant's Account balances exceeds $3,500, no distribution shall be
made from the Plan prior to the Participant's attaining age 65 unless the
Participant consents to an earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving
spouse in a lump sum by the end of the Plan Year following the date of his
death, or if the payment of his benefit had commenced before his death, in
accordance with the distribution method in effect at death. With respect to an
unmarried Participant, and in the case of a married Participant with spousal
consent to the designation of another beneficiary, payment of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump-sum
payment in cash or in Common Stock, or, if the payment of his benefit had
commenced before his death, in accordance with the distribution method in
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
Trustees. The Trustee with respect to the Plan is the named fiduciary of
the Plan for purposes of Section 402 of ERISA. The current trustee of the Plan
with respect to the Employer Stock Fund is the Bank. The Trustee with respect
to the investment funds other than the Employee Stock Fund will be the Mellon
Bank. Effective 30 days after the Conversion, it is expected that the Mellon
Bank will also be the Trustee with respect to the Employer Stock Fund.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustee
has the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust in
person or by proxy, provided, however, that the Plan Administrator shall
direct the Trustee as to voting and tendering of all Common Stock held in the
Employer Stock Fund.
16
<PAGE>
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Bank.
The Trustee must render at least annual reports to the Bank and to the
Participants in such form and containing information that the Trustee deems
necessary.
REPORTS TO PLAN PARTICIPANTS
The Administrator will furnish to each Participant a statement at least
quarterly showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Bank. A
committee of the Bank has been designated by the Board of Directors of the
Bank to act on the Bank's behalf as the Plan Administrator. The name, address
and telephone number of the current Plan Administrator is First Federal
Savings Bank of America, One North Main Street, Fall River, Massachusetts
02720. The Bank's telephone number is (508) 679-8181. The Administrator is
responsible for the administration of the Plan, interpretation of the
provisions of the Plan, prescribing procedures for filing applications for
benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all
returns and reports relating to the Plan which are required to be filed with
the U.S. Department of Labor and the IRS, and for all disclosures required to
be made to Participants, beneficiaries and others under Sections 104 and 105
of ERISA.
AMENDMENT AND TERMINATION
The Bank may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each
employee who ceases to be a Participant shall have a fully vested interest in
his Account. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust
to be used for, or diverted to, any purpose other than the exclusive benefit
of the Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan had then terminated) receive
a benefit immediately after the merger, consolidation or transfer
17
<PAGE>
which is equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Plan
or the other plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of the material federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
The Plan shall be submitted to the IRS for a determination that it is
qualified under Section 401(a) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which
include the following: (1) The sponsoring employer is allowed an immediate tax
deduction for the amount of matching contributions made to the Plan each year;
(2) Participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) Earnings of the plan are tax-exempt thereby
permitting the tax-free accumulation of income and gains on investments. The
Plan will be administered to comply in operation with the requirements of the
Code as of the applicable effective date of any change in the law. The Bank
expects to timely adopt any amendments to the Plan that may be necessary to
maintain the qualified status of the Plan under the Code. Following such an
amendment, the Plan will be submitted to the IRS for a determination that the
Plan, as amended, continues to qualify under Sections 401(a) and 501(a) of the
Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code and that the IRS issues a favorable determination as described in
the preceding paragraph, participation in the Plan under existing federal
income tax laws will have the following effects:
(a) Bank matching contributions credited to a Participant's Regular
Account and all investment earnings on this Account are not
includable in a Participant's federal taxable income until such
contributions or earnings are actually distributed or withdrawn
from the Plan. Special tax treatment may apply to the taxable
portion of any distribution that includes Common Stock or
qualifies as a Lump Sum Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable to
the Trust.
18
<PAGE>
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under the Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in
such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, a Participant who
has completed at least five years of participation in the Plan before the
taxable year in which the distribution is made, or a beneficiary who receives
a Lump Sum Distribution on account of the Participant's death (regardless of
the period of the Participant's participation in the Plan or any other profit-
sharing plan maintained by the Employer), may elect to have the ordinary
income portion of such Lump Sum Distribution taxed according to a special
averaging rule ("five-year averaging"). The election of the special averaging
rules may apply only to one Lump Sum Distribution received by the Participant
or beneficiary, provided such amount is received on or after the Participant
turns 59 1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the
special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the
extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term capital gain or long-term capital gain depending upon the length of
the holding period of the Common Stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the total
taxable amount of such distribution to the extent allowed by the regulations
to be issued by the IRS.
19
<PAGE>
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an IRA without regard to whether the distribution is a
Lump Sum Distribution or a Partial Distribution. Effective January 1, 1993,
Participants have the right to elect to have the Trustee transfer all or any
portion of an "eligible rollover distribution" directly to another plan
qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred
directly to another qualified plan or to an IRA, the distribution will be
subject to a mandatory federal withholding tax equal to 20% of the taxable
distribution. An "eligible rollover distribution" means any amount distributed
from the Plan except: (1) a distribution that is (a) one of a series of
substantially equal periodic payments made (not less frequently than annually)
over the Participant's life or the joint life of the Participant and the
Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred i.e., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant)
on or after the death of the Participant, (ii) attributable to the
Participant's being disabled within the meaning of Section 72(m)(7) of the
Code, (iii) part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and his beneficiary, (iv) made to the Participant after separation from
service on account of early retirement under the Plan after attainment of age
55, (v) made to pay medical expenses to the extent deductible for federal
income tax purposes, (vi) pursuant to a qualified domestic relations order, or
(vii) made to effect the distribution of excess contributions or excess
deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and will
be submitted to the IRS for a determination that it is qualified under Section
401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR
20
<PAGE>
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN
AND RECEIVING DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rules 144 and
405 under the Securities Act of 1933, as amended ("Securities Act") (e.g.,
directors, officers and substantial stockholders of the Company) may reoffer
or resell such shares only pursuant to a registration statement filed under
the Securities Act or, assuming the availability thereof, pursuant to Rule 144
or some other exemption of the registration requirements of the Securities
Act. Any person who may be an "affiliate" of the Company may wish to consult
with counsel before transferring any Company Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the Exchange Act which may restrict the sale of Common Stock
where acquired under the Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the time of
resale will be free to resell any shares of Common Stock distributed to them
under the Plan, either publicly or privately, without regard to the
registration and prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive
rules thereunder. An "affiliate" of the Company is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with the Company. Normally, a director, principal
officer or major shareholder of a corporation may be deemed to be an
"affiliate" of that corporation. A person who may be deemed an "affiliate" of
the Company at the time of a proposed resale will be permitted to make public
resales of the Company's Common Stock only pursuant to a "reoffer" Prospectus
or in accordance with the restrictions and conditions contained in Rule 144
under the Securities Act or some other exemption from registration, and will
not be permitted to use this Prospectus in connection with any such resale. In
general, the amount of the Company's Common Stock which any such affiliate may
publicly resell pursuant to Rule 144 in any three-month period may not exceed
the greater of one percent of the Company's Common Stock then outstanding or
the average weekly trading volume reported on the National Association of
Securities Dealers Automated Quotation System during the four calendar weeks
prior to the sale. Such sales may be made only through brokers without
solicitation and only at a time when the Company is current in filing the
reports required of it under the Exchange Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability requirements
on executive officers, directors and persons beneficially owning more than ten
percent of public companies such as the Company. Section 16(a) of the Exchange
Act requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission (the "SEC"). Certain changes in beneficial
ownership, such as purchases,
21
<PAGE>
sales, gifts and participation in savings and retirement plans must be
reported periodically, either on a Form 4 within ten days after the end of the
month in which a change occurs, or annually on a Form 5 within 45 days after
the close of the Company's fiscal year. Certain discretionary transactions in
and beneficial ownership of the Common Stock through the Employer Stock Fund
of the Plan by executive officers, directors and persons beneficially owning
more than ten percent of Common Stock of the Company are required to be
reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act provides for the recovery by the Company of profits realized
by any officer, director or any person beneficially owning more than ten
percent of the Company's Common Stock ("Section 16(b) Persons") resulting from
the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
a tax-qualified employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon
the timing of discretionary transactions in employer securities for the
accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed from the Plan for six months following such
distribution.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm is acting as special
counsel for the Company in connection with the Bank's Conversion from a mutual
savings bank to a stock savings bank and the concurrent formation of the
Company.
22
<PAGE>
ENROLLMENT AND INVESTMENT APPLICATION
EMPLOYEE MUST COMPLETE SECTIONS A, B, C, D, E AND DESIGNATION OF BENEFICIARY
A.EMPLOYEE DATA (PLEASE TYPE OR PRINT CLEARLY):
1.Social Security Number - -
2.Name _____________________________________________________________________
Last First Middle Initial
3.Current Address __________________________________________________________
StreetCity State Zip Code
4.Birth Date - - 19
MMDDYY
5.Check appropriate boxes:[_] Male [_] Female
[_] Single [_] Married
B. PRIOR PLAN (I.E. FINANCIAL
INSTITUTIONS THRIFT PLAN) ACCOUNT
BALANCE INVESTMENT
INSTRUCTIONS (COMPLETE THIS SECTION
IF YOU SELECTED TO TRANSFER ALL OF
YOUR TOTAL PRIOR PLAN ACCOUNT TO
FIRST FEDERAL SAVINGS BANK OF
AMERICA EMPLOYEES' SAVINGS & PROFIT
SHARING PLAN AND TRUST)
I hereby direct that my total Prior Plan Account to be transferred from my
Prior Plan Account to First Federal Savings Bank of America Employees'
Savings & Profit Sharing Plan and Trust be invested in whole percentages as
follows:
<TABLE>
<S> <C>
500 Stock Index Fund %
Stable Value Fund %
MidCap 400 Stock Index Fund %
Government Money Market Fund %
Bond Market Fund %
FIRSTFED AMERICA BANCORP, INC. Stock Fund %
----
100%
</TABLE>
C.EMPLOYEE CONTRIBUTIONS:
I elect to contribute the following percentage of my monthly Plan salary
and authorize such contributions to be deducted from my salary: (MUST BE A
WHOLE PERCENTAGE AND MAY NOT EXCEED 15%.)
<TABLE>
<S> <C>
% of after-tax deferrals %
</TABLE>
D. INVESTMENT INSTRUCTIONS: (Note: If no direction is made, all contributions
will be invested in the Money Market Fund.)* Amounts invested in the PSI
Stable Value Fund may not be transferred directly to this Fund. I direct
that all future contributions made on my behalf be invested in whole
percentages as follows:
<TABLE>
<S> <C>
500 Stock Index Fund %
Stable Value Fund %
MidCap 400 Stock Index Fund %
Government Money Market Fund %
Bond Market Fund* %
FIRSTFED AMERICA BANCORP, INC. Stock Fund %
----
100%
</TABLE>
(continued on reverse side)
TO BE COMPLETED BY FIRST FEDERAL SAVINGS BANK OF AMERICA'S AUTHORIZED
REPRESENTATIVES
PARTICIPATION DATE 01, 19
MMYY
SERVICE DATE 19
MMDDYY
ANNUAL GROSS SALARY $
5% STOCK OWNER OFFICER
23
<PAGE>
E.FIRST FEDERAL SAVINGS BANK OF AMERICA MUST COMPLETE THE FOLLOWING:
I hereby direct PSI to enroll the above member in First
Federal Savings Bank of America Employees' Savings & Profit
Sharing Plan and Trust based on the information contained
herein.
-------------------------------------------------- -----------
Signature of First Federal Savings Bank of America Authorized
Representative Date
DESIGNATION OF BENEFICIARY
I hereby request that any benefit under the First Federal Savings Bank of
America Employees' Savings & Profit Sharing Plan and Trust which becomes
payable in the event of my death be paid as set forth in the option(s)
completed below. This request supersedes any previous designation of a
beneficiary that I may have made.
1. SPOUSE
-
PRIMARY
BENEFICIARY
TO ______________________ _______________ , ___________
Name Relationship Social Security No.
NOTE FOR MARRIED PARTICIPANTS: FEDERAL LEGISLATION REQUIRES THAT YOUR SPOUSE
BE NAMED BENEFICIARY FOR YOUR ACCOUNT UNLESS A SIGNED WAIVER IS PROVIDED BY
YOU AND YOUR SPOUSE. (SEE YOUR PLAN ADMINISTRATOR FOR DETAILS AND COMPLETE
WAIVER SECTION BELOW.)
2. OTHER
PRIMARY
BENEFICIARIES
To the following named person(s) as are living at my death:
-------------------------- _______________ , ___________
Name and Address Relationship Social Security No.
-------------------------- _______________ , ___________
Name and Address Relationship Social Security No.
If not living at my death, to the following named persons as are
living at my death:
3. CONTINGENT BENEFICIARIES
-------------------------- _______________ , ___________
Name and Address Relationship Social Security No.
-------------------------- _______________ , ___________
Name and Address Relationship Social Security No.
-------------------------- _______________ , ___________
Name and Address Relationship Social Security No.
4. ESTATE OF INSURED
TO THE EXECUTORS OR ADMINISTRATORS OF MY ESTATE, AS NAMED BELOW
OR IN MY WILL IN EFFECT AT THE TIME OF MY DEATH.
--------------------------------- ----------------------------------
Name Address
----------------------- ----------------------- -------------------
Signature of Employee Signature of Witness Date
24
<PAGE>
WAIVER TO BE COMPLETED BY SPOUSE IF EMPLOYEE ELECTS OTHER THAN 1 ABOVE
I, the undersigned, am the employee's spouse and agree to the designation of
the above-named primary and contingent beneficiary(ies). I understand that any
death benefit payable under the First Federal Savings Bank of America
Employees' Savings & Profit Sharing Plan and Trust shall be paid in accordance
with the above designations.
----------------------------------
Signature of Spouse
State of:ss.:
County of:
On this day of , 19 personally appeared before me the said named
, to me known and known to me to be the person described in
and who
executed the foregoing instrument, and he(she) acknowledged that he(she)
executed the same.
(Seal) (Notary Public)
STAMP OR SEAL REQUIRED My commission expires
25
<PAGE>
PROSPECTUS
[FIRSTFED AMERICA BANCORP, INC. LOGO APPEARS HERE]
FIRSTFED AMERICA BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL SAVINGS BANK OF AMERICA)
7,015,000 SHARES OF COMMON STOCK
FIRSTFED AMERICA BANCORP, INC. (the "Company" or "FIRSTFED"), a Delaware
corporation, is offering up to 7,015,000 shares of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of
First Federal Savings Bank of America (the "Bank" or "First Federal") from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank pursuant to the Bank's plan of conversion, as amended, (the
"Plan" or "Plan of Conversion"). The simultaneous conversion of the Bank to
stock form, the issuance of the Bank's stock to the Company and the offer and
sale of the Common Stock by the Company are herein referred to as the
"Conversion." In certain circumstances, the Company may increase the amount of
Common Stock offered hereby to 8,067,250 shares. See Footnote 4 to the table
below.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 20.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY NOR
ARE THEY INSURED OR GUARANTEED BY THE BANK OR THE COMPANY.
THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER ESTIMATED
SUBSCRIPTION PRICE(1) FEES AND EXPENSES(2) NET PROCEEDS(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share...... $10.00 $0.36 $9.64
- -------------------------------------------------------------------------------------
Midpoint Per Share..... $10.00 $0.33 $9.67
- -------------------------------------------------------------------------------------
Maximum Per Share...... $10.00 $0.30 $9.70
- -------------------------------------------------------------------------------------
Total Minimum(1)....... $51,850,000 $1,859,000 $49,991,000
- -------------------------------------------------------------------------------------
Total Midpoint(1)...... $61,000,000 $1,989,400 $59,010,600
- -------------------------------------------------------------------------------------
Total Maximum(1)....... $70,150,000 $2,119,800 $68,030,200
- -------------------------------------------------------------------------------------
Total Maximum, as ad-
justed(4)............. $80,672,500 $2,269,800 $78,402,700
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated September 6, 1996, which states that the
aggregate estimated pro forma market value of the Common Stock ranged from
$51.9 million to $70.2 million, with a midpoint of $61.0 million (the
"Valuation Range"). The independent appraisal of Keller is based upon
estimates and projections that are subject to change and the valuation
must not be construed as a recommendation as to the advisability of
purchasing such shares nor an assurance that a purchaser will thereafter
be able to sell such shares at prices in the range of the foregoing
valuation. Based on the Valuation Range, the Board of Directors (the
"Board of Directors") established the estimated price range of $51.9
million to $70.2 million (the "Estimated Price Range"), or between
5,185,000 and 7,015,000 shares of Common Stock at the $10.00 price per
share (the "Purchase Price") to be paid for each share of Common Stock
subscribed for or purchased in the offerings. See "The Conversion--Stock
Pricing" and "--Number of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $1,144,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") estimated to be $715,000 and $975,800 at the minimum and the
maximum of the Estimated Price Range, respectively. See "The Conversion--
Marketing and Underwriting Arrangements." See "Pro Forma Data" for the
assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the offerings and other
factors. Includes the purchase of shares of Common Stock by the First
Federal Savings Bank of America Employee Stock Ownership Plan and related
trust (the "ESOP") and funded by a loan to the ESOP, by a wholly-owned
subsidiary of the Company or from a third party, which will be deducted
from the Company's stockholders' equity. See "Use of Proceeds" and "Pro
Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in market conditions or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion--Stock
Pricing." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Common
Stock Purchases."
---------------
Sandler O'Neill & Partners, L.P.
---------------
The date of this Prospectus is November 12, 1996.
<PAGE>
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK HAVE BEEN GRANTED,
IN ORDER OF PRIORITY, TO EACH OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS, WITH A
PREFERENCE GIVEN TO LOCAL ELIGIBLE ACCOUNT HOLDERS, TO THE BANK'S TAX-
QUALIFIED EMPLOYEE BENEFIT PLANS, INCLUDING THE ESOP (THE "EMPLOYEE PLANS"),
TO THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, WITH A PREFERENCE GIVEN
TO LOCAL SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS, AND TO CERTAIN OTHER MEMBERS,
WITH A PREFERENCE GIVEN TO LOCAL OTHER MEMBERS (EACH AS DEFINED HEREIN) IN A
SUBSCRIPTION OFFERING (THE "SUBSCRIPTION OFFERING"). SUBSCRIPTION RIGHTS ARE
NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Concurrently,
and subject to the prior rights of holders of subscription rights, the Company
is offering the shares of Common Stock not subscribed for in the Subscription
Offering for sale in a community offering to certain members of the general
public, with preference given to natural persons residing in the counties of
Bristol, Plymouth, Barnstable, Middlesex, Worcester, Hampden and Norfolk in
the Commonwealth of Massachusetts and the counties of Bristol, Newport,
Washington, Kent and Providence in the State of Rhode Island (the Bank's
"Local Community") (the "Community Offering") (the Subscription Offering and
Community Offering are referred to collectively as the "Subscription and
Community Offerings"). Shares not subscribed for in the Subscription and
Community Offerings will be offered to members of the general public in a
syndicated community offering (the "Syndicated Community Offering") (the
Subscription and Community Offerings and the Syndicated Community Offering are
referred to collectively as the "Offerings").
Except for the ESOP, which intends to subscribe for up to 8% of the Common
Stock issued in connection with the Conversion, including shares issued to The
FIRSTFED Charitable Foundation (the "Foundation"), no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member may, in their respective
capacities as such, purchase in the Subscription Offering more than $300,000
of Common Stock; no person, together with associates of and persons acting in
concert with such person, may purchase in the Community Offering and the
Syndicated Community Offering more than $300,000 of Common Stock; and no
person, together with associates of and persons acting in concert with such
person, may purchase in the aggregate more than the overall maximum purchase
limitation of 1.0% of the total number of shares of Common Stock offered in
the Conversion; provided, however, that the overall maximum purchase
limitation may be increased and the amount that may be subscribed for may be
increased or decreased in the sole discretion of the Bank or the Company
without further approval of the Bank's members. See "The Conversion--
Subscription Offering and Subscription Rights," "--Community Offering" and "--
Limitations on Common Stock Purchases." The minimum purchase is 25 shares.
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will be funded with shares of
Common Stock contributed by the Company, in an amount equal to 8% of the
number of shares of Common Stock sold in the Conversion. The Foundation will
be dedicated to charitable purposes within the communities in which the Bank
operates. The establishment of the Foundation is subject to the approval of
the Bank's members at the special meeting being held to consider the Plan of
Conversion. For a discussion of the Foundation and the effects on the
Conversion, including if members do not approve the establishment of the
Foundation, see "Risk Factors--Establishment of the Charitable Foundation,"
"Pro Forma Data," and "The Conversion--Establishment of the Charitable
Foundation."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 5:00 P.M., FALL
RIVER TIME, ON DECEMBER 20, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY
THE BANK AND THE COMPANY, WITH APPROVAL OF THE OTS, IF NECESSARY. Orders
submitted are irrevocable until the completion of the Conversion; provided
that, if the Conversion is not completed within 45 days after the close of the
Subscription and Community Offerings, unless such period has been extended
with the consent of the OTS, if necessary, all subscribers will have their
funds returned promptly with interest, and all withdrawal authorizations will
be cancelled. Such extensions may not go beyond December 30, 1998. See "The
Conversion--Subscription Offering and Subscription Rights" and "--Procedure
for Purchasing Shares in Subscription and Community Offerings."
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "FAB" upon
completion of the Conversion. Prior to this offering there has not been a
public market for the Common Stock, and there can be no assurance that an
active and liquid trading market for the Common Stock will develop or that the
Common Stock will trade at or above the Purchase Price. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the Common Stock. See "Risk Factors--Absence of Market for Common
Stock."
2
<PAGE>
[MAP SHOWING FOURTEEN BRANCH LOCATIONS, FIVE LOAN ORIGINATING CENTERS AND AN
OPERATION CENTER.]
3
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements of the Bank and Notes thereto appearing
elsewhere in this Prospectus.
FIRSTFED AMERICA BANCORP, INC.
FIRSTFED AMERICA BANCORP, INC. is a Delaware corporation recently organized
by the Bank for the purpose of acquiring all of the capital stock of the Bank
to be issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Company will be the capital stock of the Bank and a
wholly-owned subsidiary incorporated under the laws of Massachusetts which
intends to loan funds to the Bank's ESOP (the "ESOP Loan Subsidiary") to the
extent such loan is not funded by a third party lender, and the net proceeds of
the Offerings retained by the Company. The Company will purchase all of the
capital stock of the Bank to be issued upon Conversion in exchange for the
greater of that portion of the net proceeds sufficient to increase the Bank's
tangible capital to 10% of the Bank's total adjusted assets or up to 50% of the
net proceeds, with the remaining net proceeds to be retained by the Company.
Funds retained by the Company will be used for general business activities,
including the capitalization of the ESOP Loan Subsidiary which intends to loan
funds to the ESOP to enable the ESOP to purchase up to 8% of the Common Stock
issued in the Conversion, including shares issued to the Foundation. On an
interim basis, the net proceeds are expected to be deposited by the Company
into a deposit account at the Bank. See "Use of Proceeds." The business of the
Company will initially consist of the business of the Bank. See "Business of
the Bank" and "Regulation--Holding Company Regulation."
The Company's executive offices are located at the administrative office of
the Bank at One North Main Street, Fall River, Massachusetts 02720. The
Company's telephone number is (508) 679-8181.
FIRST FEDERAL SAVINGS BANK OF AMERICA
The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with First
Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally-chartered savings and loan association
in 1959. In 1983, the Bank became a federally-chartered savings bank and
changed its name to First Federal Savings Bank of America. In 1984, the Bank
added mortgage banking activities to its operations. The Bank conducts business
from its administrative/branch and operations offices located in Fall River,
Massachusetts and its 11 other branch offices located in the municipalities of
Fall River, Attleboro, New Bedford, Seekonk, Somerset and Taunton,
Massachusetts and Pawtucket, East Providence and Warwick, Rhode Island, and the
Bank's five loan origination centers located in Yarmouth, Auburn, Agawam and
Burlington, Massachusetts and East Greenwich, Rhode Island. See "Business of
the Bank--Market Area and Competition." At June 30, 1996, the Bank had total
assets of $802.8 million, total deposit accounts of $600.6 million and retained
earnings of $47.5 million. The Bank's deposits are insured up to the maximum
allowable amount by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
The Bank is a community-oriented savings institution whose business primarily
consists of accepting deposits from customers and investing those funds in
mortgage loans secured by one- to four-family residences within its primary
market area. The Bank also engages in mortgage banking operations whereby it
generally originates fixed-rate one- to four-family loans for sale in the
secondary market, generally retaining the servicing rights of loans sold. To a
significantly lesser extent, the Bank invests in commercial real estate,
commercial, construction and land, multi-family and consumer loans. At June 30,
1996, the Bank's loans receivable, net, totalled $727.4 million, or 90.6% of
total assets. In addition to its lending activities, the Bank, to a
significantly
4
<PAGE>
lesser extent, invests in investment securities, consisting primarily of U.S.
Government and U.S. Government sponsored agency obligations, and mortgage-
backed securities, primarily those guaranteed by governmental agencies such as
the Federal Home Loan Mortgage Corporation ("FHLMC") and Government National
Mortgage Association ("GNMA"). At June 30, 1996, the securities portfolio
totalled $29.4 million, or 3.7% of total assets, $28.6 million of which were
classified as held to maturity. At June 30, 1996, the Bank's deposit accounts
totalled $600.6 million, or 79.5% of total liabilities, of which $191.0
million, or 31.8%, were core deposits (business checking, money market, savings
and NOW accounts). The Bank also uses advances from the Federal Home Loan Bank
of Boston ("FHLB-Boston") as a source of funds. At June 30, 1996, such advances
totalled $136.6 million, or 18.1% of total liabilities. See "First Federal
Savings Bank of America" and "Business of the Bank."
Since the mid-1980s, the Bank's operating strategy has been to emphasize
controlled growth, build its loan servicing portfolio and loan servicing fee
income, manage interest rate risk and increase its one- to four-family lending
market share in its primary market area primarily through its mortgage banking
activities whereby it generally retains all adjustable-rate one- to four-family
loans and sells all fixed-rate one- to four-family loans in the secondary
market on a servicing retained basis. In late 1993, the Bank began to focus
more heavily on building its loan and deposit franchise and increasing its
level of interest-earning assets and retail deposits. The Bank has focused upon
expanding its franchise in its existing market area and other areas in
Southeastern Massachusetts and Rhode Island through the establishment of de
novo branch offices and new loan origination facilities. In this regard, since
1994, the Bank has opened four new branch offices in Seekonk, Massachusetts and
East Providence, Pawtucket and Warwick, Rhode Island, and one new loan
origination office in Burlington, Massachusetts. The Bank plans to open an
additional branch office in New Bedford, Massachusetts in early 1997 and open a
new centralized administrative and operations center and branch office in late
1997 in Swansea, Massachusetts. See "Business of the Bank--Subsidiary
Activities" and "--Properties." Additionally, the Bank, pursuant to its
expansion strategy, is currently seeking new branch sites and new loan
origination center sites in its primary market area and in areas adjacent to
its primary market area, including areas in the state of Connecticut. In order
to increase its level of interest-earning assets in fiscal 1996, the Bank
retained shorter-term, fixed-rate one- to four-family loans with terms of 15
years or less, as well as adjustable-rate loans, and focused on increasing its
level of retail deposits by competitively pricing deposit products and
increasing its marketing efforts. While the Bank has been successful in
increasing its loan and deposit base through these measures, the Bank has also
experienced an increase in noninterest expense which should continue as the
Bank expands its franchise. See "Risk Factors--Recent Increase in Noninterest
Expense and Expansion Strategy."
THE FIRSTFED CHARITABLE FOUNDATION
In furtherance of the Bank's long-standing commitment to its local community,
the Bank's Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will be funded the Foundation with
shares of Common Stock contributed by the Company, as further described below.
The Company and the Bank believe that the funding of the Foundation with Common
Stock of the Company is a means of establishing a common bond between the Bank
and the communities in which the Bank operates thereby enabling such
communities to share in the potential growth and success of the Company over
the long-term. By further enhancing the Bank's visibility and reputation in the
communities in which it operates, the Bank believes that the Foundation will
enhance the long-term value of the Bank's community banking franchise.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-profit
medical facilities, community groups and other types of organizations or
projects. The Foundation will be a private foundation under the Internal
Revenue Code of 1986, as amended (the "Code"). As required
5
<PAGE>
under the Code, in order to maintain its exempt status as a private foundation,
the certificate of incorporation of the Foundation provides that the earnings
of the Foundation shall not result in any private benefit for its members,
directors or officers. While this provision would not prohibit the payment of
reasonable compensation for services rendered, the Foundation does not
presently intend to pay any compensation to its directors and officers.
Pursuant to the Foundation's bylaws, the Foundation's board of directors will
be comprised of seven members, all of whom must be officers of or members of
the Boards of Directors of the Company, the Bank or any affiliate or subsidiary
of the Company or the Bank. The initial board of directors of the Foundation
will be comprised of the same individuals who are currently directors of the
Company. See "The Conversion--Establishment of the Charitable Foundation--
Structure of the Foundation."
The Company will provide office space and administrative support to the
Foundation. Initially, the Foundation will have no employees. The board of
directors of the Foundation will appoint such officers as may be necessary to
manage the operations of the Foundation and it is anticipated that any such
officers would initially be selected from the board of directors of the
Foundation.
The Company proposes to establish the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued Common Stock equal to 8% of the Common Stock sold in
the Offerings, or 414,800, 488,000 and 561,200 shares at the minimum, midpoint
and maximum, respectively, of the Estimated Price Range. Such contribution,
once made, will not be recoverable by the Company or the Bank. The Foundation
would receive working capital from any dividends that may be paid on the
Company's Common Stock in the future and, subject to applicable federal and
state laws, from loans collateralized by the Common Stock or from the proceeds
of the sale of any of the Common Stock in the open market from time to time as
may be permitted to provide the Foundation with additional liquidity. As a
private foundation under Section 501(c)(3) of the Code, the Foundation will be
required to distribute annually in grants or donations, a minimum of 5% of the
average fair market value of its net investment assets. One of the conditions
imposed on the gift of common stock by the Company is that the amount of Common
Stock that may be sold by the Foundation in any one year shall not exceed 5% of
the average market value of the assets held by the Foundation, except where the
board of directors of the Foundation, by three-fourths vote, determines that
the failure to sell an amount of Common Stock greater than such amount would
result in a long-term reduction of the value of the Foundation's assets and as
such would jeopardize the Foundation's capacity to carry out its charitable
purposes. Establishment of the Foundation is also subject to certain conditions
imposed by the OTS in connection with its approval of the conversion. See "The
Conversion--Establishment of the Charitable Foundation" and "--Regulatory
Conditions Imposed on the Foundation." Assuming the sale of shares at the
maximum of the Estimated Price Range, the Company will have 7,576,200 shares
issued and outstanding, of which the Foundation will own 561,200 shares or
7.4%. DUE TO THE ADDITIONAL ISSUANCE OF SHARES OF COMMON STOCK TO THE
FOUNDATION, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
The Company and the Bank have been advised by their independent accountants
that a contribution of Common Stock to the Foundation by the Company will be
tax deductible, subject to a limitation based on 10% of the Company's annual
taxable income. For federal tax purposes, the Company will be able to carry
forward any unused portion of the deduction for the five years following the
year in which the contribution is made. However, the Company will not be able
to carry forward any unused portion of the deduction for Massachusetts state
tax purposes. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank, and the financial condition and operations of the
Foundation.
6
<PAGE>
If the Foundation is established, the Company will recognize an expense in
the full amount of the contribution, offset in part by the corresponding tax
deduction, during the quarter in which the contribution is made, which is
expected to be the fourth quarter of fiscal 1997. Such expense will reduce
earnings and have a material adverse impact on the Company's earnings for
fiscal year 1997. Assuming a contribution of $5.6 million in Common Stock,
based on the maximum of the Estimated Price Range, the Company estimates a net
tax effected expense of $3.6 million. If the Foundation had been established at
March 31, 1996, the Bank would have reported net income of $1.0 million for
fiscal year 1996 rather than reporting net income of $4.6 million. In addition
to the contribution to the Foundation, the Bank expects in the future to
continue making ordinary charitable contributions within its local community.
Such additional contributions are expected to range from $20,000 to $30,000 per
year. For further discussion of the Foundation and its impact on purchasers in
the Conversion, see "Risk Factors--Establishment of the Charitable Foundation,"
"Pro Forma Data," and "The Conversion--Establishment of the Charitable
Foundation."
The establishment of the Foundation is subject to the approval of a majority
of the total outstanding votes of the Bank's members eligible to be cast at the
Special Meeting. The establishment of the Foundation will be considered as a
separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation,
the Bank intends to complete the Conversion without the Foundation. Failure to
approve the Foundation may materially increase the pro forma market value of
the Common Stock being offered since the Valuation Range, as set forth herein,
takes into account the dilutive impact of the issuance of shares to the
Foundation. In such an event, the Bank may establish a new Estimated Price
Range and commence a resolicitation of subscribers. See "The Conversion--Stock
Pricing."
THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
On August 2, 1996, the Board of Directors of the Bank adopted, and
subsequently amended, the Plan of Conversion. Pursuant to the Plan, the Bank is
converting from a federally-chartered mutual savings bank to a federally-
chartered stock savings bank, the Common Stock of the Company will be offered
and sold hereby and all of the outstanding capital stock of the Bank will be
acquired by the Company in exchange for the greater of that portion of the net
proceeds of the Offerings sufficient to increase the Bank's tangible capital to
10% of its total adjusted assets or up to 50% of the net proceeds from the
Offerings. The Conversion and the Offerings are subject to OTS approval, which
was received on November 12, 1996, and approval of the Bank's members at a
special meeting to be held on December 30, 1996 (the "Special Meeting"). See
"The Conversion--General."
The Bank is converting to increase its capital and to structure itself in the
holding company form of organization used by many commercial banks and other
business entities and a growing number of savings institutions. The Conversion
will enhance the Bank's ability to access capital markets, expand its current
operations, acquire other financial institutions or branch offices or diversify
into other financial services, to the extent allowable by applicable law and
regulation. The potential impact of the Conversion upon the Bank's capital base
is significant. The Conversion will significantly increase the Bank's capital
position to a level whereby the Bank will be better positioned to take
advantage of business opportunities and engage in activities which, prior to
Conversion, would have been more difficult for the Bank to engage in and still
continue to meet its status as a "well capitalized" institution. The holding
company form of organization is expected to provide additional flexibility to
diversify the Bank's business activities through existing or newly formed
subsidiaries, or through acquisitions of or mergers with other financial
institutions, as well as other companies. See "The Conversion--Purposes of
Conversion."
7
<PAGE>
Common Stock to be sold will be offered in the Subscription and Community
Offerings and, to the extent shares are available, in the Syndicated Community
Offering. Common Stock offered in the Subscription Offering will be offered in
the following order of priority: (1) depositors whose accounts in the Bank
totalled $50 or more on June 30, 1995 ("Eligible Account Holders"), with a
preference given to Eligible Account Holders residing in the Bank's Local
Community ("Local Eligible Account Holders"); (2) the Employee Plans, including
the ESOP; (3) depositors whose accounts in the Bank totalled $50 or more on
September 30, 1996 ("Supplemental Eligible Account Holders"), with a preference
given to Supplemental Eligible Account Holders residing in the Bank's Local
Community ("Local Supplemental Eligible Account Holders"); and (4) other
members of the Bank, consisting of depositors of the Bank as of November 8,
1996, the voting record date ("Voting Record Date") for the Special Meeting,
and borrowers with loans outstanding as of November 4, 1996 which continue to
be outstanding as of the Voting Record Date, other than those members who
otherwise qualify as Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members"), with a preference given to Other Members residing in
the Bank's Local Community ("Local Other Members"). Subject to the prior rights
of holders of subscription rights, Common Stock not subscribed for in the
Subscription Offering is being concurrently offered in the Community Offering
to certain members of the general public, with preference given to natural
persons residing in the Bank's Local Community. The Company and the Bank
reserve the absolute right to reject or accept any orders in the Community
Offering, in whole or in part, either at the time of receipt of an order or as
soon as practicable following the Expiration Date.
All shares of Common Stock not sold in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company
and the Bank reserve the absolute right to reject orders, in whole or part, in
their sole discretion, in the Syndicated Community Offering.
Neither Sandler O'Neill nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the Common Stock in the
Subscription Offering, Community Offering or Syndicated Community Offering.
However, Sandler O'Neill has agreed to use its best efforts in the sale of
shares in the Syndicated Community Offering. Subscription rights will expire if
not exercised by 5:00 p.m., Fall River time, on December 20, 1996, unless
extended by the Bank and the Company. See "The Conversion--Subscription
Offering and Subscription Rights" and "--Community Offering." The Bank and the
Company have hired Sandler O'Neill as conversion agent and financial advisor in
connection with the Offerings and to assist in soliciting subscriptions and
purchase orders in the Offerings. The Bank and the Company will pay a fee to
Sandler O'Neill which will be based on the aggregate Purchase Price of the
Common Stock sold in the Offerings. See "The Conversion--Marketing and
Underwriting Arrangements."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be
mailed any later than five days prior to the Expiration Date or hand delivered
any later than two days prior to such date. Stock order forms will only be
distributed with a prospectus. The Bank is not obligated to accept for
processing orders not submitted on original stock order forms. Stock order
forms unaccompanied by an executed certification form will not be accepted.
Payment by check, money order, bank draft, cash or debit authorization to an
existing account at the Bank must accompany the stock order and certification
forms. No wire transfers will be accepted. See "The Conversion--Procedure for
Purchasing Shares in Subscription and Community Offerings."
8
<PAGE>
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Following the Conversion there
generally will be no restrictions on the transfer or sale of shares by
purchasers other than affiliates of the Company and the Bank. See "Regulation--
Federal Securities Laws" and "The Conversion--Certain Restrictions on Purchase
or Transfer of Shares After Conversion."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. With the exception of the ESOP, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, in their capacity as
such, may purchase in the Subscription Offering more than $300,000 of Common
Stock; no person, together with associates of or persons acting in concert with
such person, may purchase in the Community Offering and the Syndicated
Community Offering in the aggregate more than $300,000 of Common Stock; and no
person, together with associates of or persons acting in concert with such
person, may purchase in the Offerings more than the overall maximum purchase
limitation of 1.0% of the total number of shares of Common Stock offered in the
Conversion, exclusive of any shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. At any time during the Conversion and
without further approval by the Bank's members, the Company and the Bank may in
their sole discretion decrease the maximum purchase limitation below $300,000
of Common Stock. Additionally, at any time during the Conversion and without
further approval by the Bank's members, the Company and Bank may in their sole
discretion increase the overall maximum purchase limitation and/or increase the
amount that may be subscribed for in the Subscription and Community Offering to
an amount up to 5% of the shares to be issued in the Conversion. Prior to
consummation of the Conversion, if the maximum purchase limitation is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity to
increase their subscriptions up to the then applicable limit. In the event of
an increase in the Estimated Price Range, the additional shares will be
distributed and allocated to fill unfilled orders in the Subscription and
Community Offerings, with priority given to the ESOP, without any
resolicitation of subscribers, as described in "The Conversion--Subscription
Offering and Subscription Rights," "--Community Offering" and "--Limitations on
Common Stock Purchases."
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Conversion be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. Keller & Company, Inc., an independent appraiser, has
advised the Bank that in its opinion, dated September 6, 1996, the estimated
aggregate pro forma market value of the Common Stock being offered for sale in
connection with the Conversion ranged from $51.9 million to $70.2 million, with
a midpoint of $61.0 million. For further information concerning Keller, see
"The Conversion--Stock Pricing." THE APPRAISAL OF THE COMMON STOCK IS NOT
INTENDED AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO THE
ADVISABILITY OF PURCHASING SUCH STOCK NOR CAN ANY ASSURANCE BE GIVEN THAT
PURCHASERS OF THE COMMON STOCK IN THE CONVERSION WILL BE ABLE TO SELL SUCH
SHARES AFTER THE COMPLETION OF THE CONVERSION AT OR ABOVE THE PURCHASE PRICE.
Based upon the above Valuation Range, the Board of Directors of the Bank has
established the Estimated Price Range of $51.9 million to $70.2 million,
assuming the sale of 5,185,000 shares to 7,015,000 shares of Common Stock at
the Purchase Price of $10.00 per share. All shares of Common Stock sold in the
Conversion will be sold at the Purchase Price of $10.00 per share, as
determined by the Bank and approved by the Company. The actual number of shares
to be sold in the Conversion will be determined by the Company and the Bank
9
<PAGE>
based upon the final updated estimate of the aggregate pro forma market value
of the Common Stock, giving effect to the Conversion, at the completion of the
Offerings. The maximum of the Estimated Price Range may be increased by up to
15% and the number of shares of Common Stock to be sold in the Conversion may
be increased to 8,067,250 shares due to regulatory considerations, changes in
market conditions or general financial and economic conditions. No
resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions unless the gross proceeds
from the sale of the Common Stock are less than the minimum or more than 15%
above the maximum of the current Estimated Price Range. See "Risk Factors--
Possible Increase in Estimated Price Range and Number of Shares Issued," "Pro
Forma Data," and "The Conversion--Stock Pricing" and "--Number of Shares to be
Issued."
The number of shares to be outstanding following the Conversion may be
increased to fund the Foundation. If the Foundation is approved by the Bank's
members, the Company will issue an additional 561,200 shares of its Common
Stock from authorized but unissued shares immediately following completion of
the Conversion, assuming the sale of common stock at the maximum of the
Estimated Price Range in the Offerings. In that event, the Company will have a
total of 7,576,200 shares of common stock outstanding. Of that amount, the
Foundation will own 7.4%. Funding the Foundation with authorized but unissued
shares will have the effect of diluting the ownership and voting interests of
persons purchasing shares in the Conversion by 7.4% since a greater number of
shares will be outstanding upon completion of the Conversion. See "Risk
Factors" and "Pro Forma Data."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$50.0 million and $68.0 million (or $78.4 million if the Estimated Price Range
is increased by 15%) depending on the number of shares sold and the expenses of
the Conversion. See "Pro Forma Data." The Company will purchase all of the
outstanding capital stock of the Bank to be issued upon Conversion in exchange
for the greater of that portion of the net proceeds sufficient to increase the
Bank's tangible capital to 10% of its total adjusted assets or 50% of the net
proceeds, with the remaining net proceeds to be retained by the Company. Net
proceeds to be retained by the Company after the purchase of the capital stock
of the Bank are estimated to be between $4.5 million and $20.2 million (or
$29.2 million if the Estimated Price Range is increased by 15%). The Company
will be unable to utilize any of the net proceeds until the close of the
Offerings.
Funds retained by the Company will be used for general business activities,
including the capitalization of the ESOP Loan Subsidiary which intends to loan
funds to the ESOP (to the extent such loan is not funded by a third party), the
expansion of the Bank's franchise and, subject to applicable limitations, the
possible payment of dividends and repurchases of Common Stock. The Company
intends to initially deposit net proceeds not used to fund the ESOP in an
account at the Bank. Assuming the acquisition by the ESOP of 8% of the shares
to be issued in the Conversion, and Common Stock issued to the Foundation, the
amount of the loan to the ESOP is estimated to be between $4.5 million and $6.1
million (or $7.0 million if the Estimated Price Range is increased by 15%) to
be repaid over a nine year period at the prevailing prime rate, which is
currently 8.25%. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust." Funds received by the Bank from the Company's
purchase of its capital stock will be used to repay FHLB advances, the
expansion of the Bank's franchise and for other general business purposes. The
Company and the Bank may use such funds to expand operations through the
acquisition or establishment of branch offices and the acquisition of smaller
financial institutions or assets of other financial institutions. Neither the
Bank nor the Company has any pending agreements or understandings regarding
acquisitions of any specific financial institutions, branch offices or assets
of other financial institutions. However, the Bank, consistent with its
expansion strategy, plans to open two de novo branch offices in early 1997 and
late 1997 and is currently seeking sites for additional branch offices and loan
origination centers. The Bank currently anticipates capital expenditures of
approximately $15.5 million related to the opening of its new centralized
administrative and operations center, the two new branch offices and renovation
activity. See "Use of Proceeds" and "Business of the Bank."
10
<PAGE>
DIVIDENDS
No decision has yet been made by the Board of Directors of the Company as to
the amount or timing of dividends, if any. See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors. "Risk Factors" include: "Weakness in
Regional and Local Economy;" "Sensitivity to Increases in Interest Rates;"
"Recent Decline in Net Income;" "Recent Increase in Noninterest Expense and
Expansion Strategy;" "Increased Lending Risks Associated with Multi-Family,
Commercial Real Estate and Commercial Loans;" "Establishment of the Charitable
Foundation;" "Highly Competitive Industry and Geographic Area;" "Financial
Institution Regulation and Possible Legislation;" "Stock-Based Benefits to
Management and Directors and Change in Control Payments;" "Possible Dilutive
Effect of Stock Programs and Stock Options;" "Certain Anti-Takeover Provisions
Which May Discourage Takeover Attempts;" "Absence of Market for Common Stock;"
"Possible Increase in Estimated Price Range and Number of Shares Issued;" and
"Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights."
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, AT MARCH 31,
----------------- --------------------------------------------
1996(1) 1995(1) 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED
FINANCIAL DATA:
Total assets............ $802,811 $570,489 $723,778 $560,038 $469,433 $399,752 $442,218
Loans receivable,
net(2)................. 727,401 500,407 637,592 499,977 411,773 339,825 384,180
Investment securities
available for sale(3).. 773 632 725 518 -- -- --
Investment securities
held to maturity(3).... 21,487 20,988 23,987 20,988 10,049 12,151 13,290
Mortgage-backed
securities held to
maturity(3)............ 7,138 2,627 7,248 2,721 3,437 4,828 6,060
Mortgage loans held for
sale................... 6,530 11,062 17,747 6,816 15,779 20,253 18,592
Deposits................ 600,584 465,170 583,750 440,107 360,093 329,418 335,050
FHLB advances........... 136,648 50,615 75,141 66,592 59,542 33,882 74,455
Retained earnings....... 47,521 43,033 46,418 41,697 36,469 29,554 24,490
Allowance for loan
losses................. 6,445 4,659 5,607 4,239 3,964 3,524 1,795
Non-performing loans.... 3,702 3,147 4,045 3,033 4,221 5,005 5,115
Non-performing assets... 4,140 3,411 4,688 3,329 5,160 5,469 5,700
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED MARCH 31,
--------------- ---------------------------------------
1996(1) 1995(1) 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $13,885 $10,752 $46,044 $37,487 $33,206 $33,994 $35,953
Interest expense........ 8,416 5,987 26,382 18,337 14,196 17,361 23,928
------- ------- ------- ------- ------- ------- -------
Net interest income.... 5,469 4,765 19,662 19,150 19,010 16,633 12,025
Provision for loan
losses................. 1,000 475 2,626 653 1,035 2,102 1,222
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses........... 4,469 4,290 17,036 18,497 17,975 14,531 10,803
Total noninterest
income................. 1,230 1,034 4,592 2,509 4,470 7,651 4,295
Total noninterest
expense................ 3,847 3,086 13,672 12,193 12,790 12,688 8,986
------- ------- ------- ------- ------- ------- -------
Income before income
tax expense and
cumulative effect of
change in accounting
for income taxes...... 1,852 2,238 7,956 8,813 9,655 9,494 6,112
Income tax expense...... 781 943 3,353 3,852 4,235 4,430 3,231
------- ------- ------- ------- ------- ------- -------
Net income before
cumulative effect of
change in accounting
for income taxes...... 1,071 1,295 4,603 4,961 5,420 5,064 2,881
Cumulative effect of
change in accounting
for income taxes....... -- -- -- -- 1,495 -- --
------- ------- ------- ------- ------- ------- -------
Net income............. $ 1,071 $ 1,295 $ 4,603 $ 4,961 $ 6,915 $ 5,064 $ 2,881
======= ======= ======= ======= ======= ======= =======
</TABLE>
(continued on next page)
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEAR ENDED
JUNE 30, MARCH 31,
--------------------- --------------------------------------
1996(1) 1995(1) 1996 1995 1994 1993 1992
--------- --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
RATIOS AND OTHER
DATA(4):
PERFORMANCE RATIOS:
Return on average
assets................ 0.56% 0.92% 0.76% 0.96% 1.51% 1.18% 0.72%
Return on average
retained earnings..... 9.15 12.26 10.40 12.83 20.51 18.69 12.62
Average retained
earnings to average
assets................ 6.15 7.52 7.26 7.45 7.35 6.33 5.68
Retained earnings to
total assets at end of
period................ 5.92 7.54 6.41 7.45 7.77 7.40 5.54
Average interest rate
spread(5)............. 2.46 3.00 2.79 3.39 3.85 3.70 2.69
Net interest
margin(6)............. 2.99 3.54 3.37 3.86 4.37 4.12 3.13
Average interest-
earning assets to
average interest-
bearing liabilities... 111.50 112.32 112.90 112.71 115.88 110.00 107.04
Total noninterest
expense to average
assets................ 2.02 2.20 2.24 2.35 2.79 2.96 2.24
Efficiency ratio(7).... 57.43 53.22 56.37 56.30 54.47 52.25 55.06
REGULATORY CAPITAL
RATIOS(8):
Tangible capital....... 5.87 7.49 6.36 7.40 7.77 7.40 5.54
Core capital........... 5.87 7.49 6.36 7.40 7.77 7.40 5.54
Risk-based capital..... 11.58 14.27 12.48 14.13 14.56 13.93 10.22
ASSET QUALITY RATIOS:
Non-performing loans as
a percent of
loans(9)(10).......... 0.50 0.62 0.63 0.60 1.02 1.46 1.33
Non-performing assets
as a percent of
total assets(10)...... 0.52 0.60 0.65 0.59 1.10 1.37 1.29
Allowance for loan
losses as a percent
of loans(3)(9)........ 0.88 0.92 0.87 0.84 0.95 1.03 0.47
Allowance for loan
losses as a percent of
non-performing
loans(3)(10).......... 174.14 148.05 138.62 139.76 93.91 70.41 35.09
NUMBER OF FULL-SERVICE
CUSTOMER
FACILITIES(11)......... 11 9 10 9 8 8 8
NUMBER OF LOAN
ORIGINATION CENTERS.... 5 5 5 5 5 4 2
</TABLE>
- --------
(1) The data presented for the three months ended June 30, 1996 and 1995 was
derived from unaudited consolidated financial statements and reflect, in
the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the three months
ended June 30, 1996 are not necessarily indicative of the results that may
be expected for the year ending March 31, 1997.
(2) The allowance for loan losses at June 30, 1996, June 30, 1995, March 31,
1996, 1995, 1994, 1993 and 1992 was $6.4 million, $4.7 million, $5.6
million, $4.2 million, $4.0 million, $3.5 million and $1.8 million,
respectively.
(3) The Bank classified its investment and mortgage-backed securities as "held
for investment" until April 1, 1994, at which time a portion of the Bank's
portfolio was classified as "available for sale." The Bank adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"), as of
April 1, 1994. Investment securities at June 30, 1996 do not include $7.0
million of FHLB-Boston stock.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(9) Loans include loans receivable, net, excluding the allowance for loan
losses.
(10) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of all loans 90 days or more
past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectability of interest or
principal. It is the Bank's policy to cease accruing interest on all such
loans. See "Business of the Bank."
(11) In August 1996, the Bank opened a twelfth branch office in Warwick, Rhode
Island. See "Business of the Bank--Properties."
13
<PAGE>
RECENT DEVELOPMENTS
The selected financial and other data presented below at September 30, 1996
and for the six-month periods ended September 30, 1996 and 1995 are derived
from unaudited financial data, but, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary to present fairly the results for such interim periods. The results
of operations for the six months ended September 30, 1996 are not necessarily
indicative of the results of operations that may be expected for the fiscal
year ended March 31, 1997.
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, 1996 MARCH 31, 1996
------------------ --------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets................................ $874,161 $723,778
Loans receivable, net(1).................... 774,002 637,592
Investment securities available for
sale(2).................................... 793 725
Investment securities held to maturity(2)... 22,986 23,987
Mortgage-backed securities held to
maturity(2)................................ 16,870 7,248
Mortgage loans held for sale................ 14,412 17,747
Deposit accounts............................ 636,115 583,750
FHLB advances............................... 166,997 75,141
Retained earnings........................... 46,961 46,418
Allowance for loan losses................... 7,280 5,607
Non-performing loans........................ 3,012 4,045
Non-performing assets....................... 3,638 4,688
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
-------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income............................................. $ 29,308 $ 22,144
Interest expense............................................ 18,166 12,357
--------- ---------
Net interest income....................................... 11,142 9,787
Provision for loan losses................................... 2,000 1,055
--------- ---------
Net interest income after provision for loan losses....... 9,142 8,732
Total noninterest income.................................... 2,516 2,141
Total noninterest expense................................... 10,855 6,342
--------- ---------
Income before income tax expense.......................... 803 4,531
Income tax expense.......................................... 338 1,909
--------- ---------
Net income................................................ $ 465 $ 2,622
========= =========
</TABLE>
(continued on next page)
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(3):
PERFORMANCE RATIOS:
Return on average assets......................... 0.12% 0.91%
Return on average retained earnings.............. 1.97 12.21
Average retained earnings to average assets...... 5.87 7.48
Retained earnings to total assets at end of
period.......................................... 5.37 7.42
Average interest rate spread(4).................. 2.38 2.97
Net interest margin(5)........................... 2.88 3.56
Average interest-earning assets to average
interest-earning liabilities.................... 110.56 113.00
Total noninterest expense to average assets...... 2.70 2.21
Efficiency ratio(6).............................. 79.48 53.17
REGULATORY CAPITAL RATIOS(7):
Tangible capital................................. 5.32 7.37
Core capital..................................... 5.32 7.37
Risk-based capital............................... 10.67 14.07
ASSET QUALITY RATIOS:
Non-performing loans as a percent of
loans(8)(9)..................................... 0.39 0.73
Non-performing assets as a percent of total
assets(9)....................................... 0.42 0.74
Allowance for loan losses as a percent of
loans(1)(8)..................................... 0.93 0.95
Allowance for loan losses as a percent of non-
performing loans(1)(9).......................... 241.70 130.15
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES......... 12 10
NUMBER OF LOAN ORIGINATION FACILITIES.............. 5 5
</TABLE>
- --------
(1) The allowance for loan losses at September 30, 1996 and 1995 was $7.3
million and $5.1 million, respectively.
(2) Investment securities at September 30, 1996 and March 31, 1996 do not
include $9.5 million and $6.6 million of FHLB-Boston stock.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods and are annualized
where appropriate.
(4) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income. The efficiency
ratio at September 30, 1996 includes the effect of the SAIF Special
Assessment (as defined herein) of $2.9 million on a pre-tax basis.
Excluding the effect of the SAIF Special Assessment, the efficiency ratio
at September 30, 1996 would have been 58.39%.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Federal Savings Institution
Regulation--Capital Requirements." See "Regulatory Capital Compliance" for
the Bank's pro forma capital levels as a result of the Offerings.
(8) Loans include loans receivable, net, excluding the allowance for loan
losses.
(9) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of all loans 90 days or more past due and other
loans which have been identified by the Bank as presenting uncertainty with
respect to the collectability of interest or principal. It is the Bank's
policy to cease accruing interest on all such loans. See "Business of the
Bank."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
LEGISLATIVE MATTERS
Deposits of the Bank are presently insured by the SAIF. Until 1996, members
of the Bank Insurance Fund ("BIF") and the SAIF were paying deposit insurance
premiums between 23 and 31 basis points. In 1996, in view of the BIF having
been recapitalized to a 1.25% of insured deposits ratio and the SAIF not
achieving such an insured deposits ratio, the FDIC adopted a new assessment
rate schedule of 0 to 27 basis points for BIF members and kept the insurance
assessment rates for SAIF members, such as the Bank, at 23 to 31 basis points.
Under that new schedule, approximately 92% of BIF members were required to pay
only $2,000 per year creating a substantial deposit insurance assessment
disparity between SAIF and BIF members which resulted in a substantial
competitive disadvantage to SAIF members.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a
special one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March
31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter
ended September 30, 1996 and is generally tax deductible. The SAIF Special
Assessment recorded by the Bank amounted to $2.9 million on a pre-tax basis and
$1.7 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of
20% of the rate assessed on SAIF deposits. Based on current estimates by the
FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while
SAIF deposits will pay an estimated 6.5 basis points. Full pro rata sharing of
the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act
specifies that the BIF and SAIF will be merged on January 1, 1999, provided no
savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level
of FDIC insurance assessments on an on-going basis, whether the savings
association charter will be eliminated or whether the BIF and SAIF will
eventually be merged.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND MARCH 31, 1996
Assets at September 30, 1996 totalled $874.2 million, an increase of $150.4
million, or 20.8%, as compared to $723.8 million at March 31, 1996. The growth
in assets is primarily attributable to a $136.4 million, or 21.4%, increase in
loans receivable, net. The increase in loans receivable, net, primarily
reflects an increase of $124.9 million, or 23.5%, in one- to four-family loans;
$3.9 million, or 16.5%, increase in commercial real estate loans; $1.5 million,
or 10.1%, increase in commercial loans; $616,000, or 2.4%, increase in
construction and land loans; and $8.5 million, or 16.4%, increase in consumer
loans. The increase in one- to four-family loans reflects management's
determination to increase the level of its interest-earning assets by retaining
for its portfolio fixed-rate one- to four-family loans with maturities of up to
15 years. Mortgage-backed securities held to maturity increased from $7.2
million to $16.9 million, or 132.8%, primarily due to the purchase of
adjustable-rate mortgage-backed securities. The growth in loans receivable, net
and mortgage-backed securities held to maturity was funded primarily by FHLB
advances which increased by $91.9 million to a balance of $167.0 million as of
September 30, 1996 from a balance of $75.1 million as of March 31, 1996. The
growth in loans receivable, net, and mortgage-backed securities was also funded
by deposit growth which increased by $52.4 million, or 9.0%, from a balance of
$583.8 million at March 31, 1996 to $636.1 million at September 30, 1996. The
increase in deposits resulted from the inflow of deposits from the opening of
two new branch offices and the Bank's
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continued competitive pricing strategy and increased marketing efforts. The
growth in deposits was primarily attributable to an increase of $57.7 million
in certificate of deposit accounts which grew from $392.0 million to $449.7
million, which offset a decline in other deposits of $5.4 million. Retained
earnings increased from $46.4 million to $47.0 million, or a 1.2% increase
primarily due to net income during the six months ended September 30, 1996.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
GENERAL
The Bank's net income for the six months ended September 30, 1996 declined by
$2.2 million from $2.6 million for the six months ended September 30, 1995 to
$465,000 for the same period in 1996. The reduction in net income was primarily
attributable to the recognition by the Bank of a one-time SAIF Special
Assessment imposed by the FDIC relating to the recapitalization of the SAIF,
totalling $2.9 million pursuant to enactment of federal legislation in
September 1996. Exclusive of the SAIF Special Assessment, the Bank's net income
for the six months ended September 30, 1996 would have been $2.1 million, or a
decrease of $489,000, or 18.7%, as compared to the six months ended September
30, 1995. See "Risk Factors--Recent Decline in Net Income." Net income was also
adversely affected by a $945,000 increase in the provision for loan losses.
These adverse items were partially offset by higher net interest income due to
higher balances of interest-earning assets, and an increase in noninterest
income as a result of increases in the gain on the sale of loans due to
accounting rule changes.
INTEREST INCOME
Interest income for the six months ended September 30, 1996 was $29.3 million
as compared to $22.1 million for the six months ended September 30, 1995, an
increase of $7.2 million or 32.4%. The increase in interest income was
primarily the result of an increase in the average balance of interest-earning
assets of approximately $223.7 million, or 40.7%, from an average balance of
$550.0 million for the six months ended September 30, 1995, to an average
balance of $773.7 million for the six months ended September 30, 1996. The
increase in the average balance of interest-earning assets was primarily the
result of a $212.3 million, or 40.9%, increase in the average balance of loans
receivable, net, and mortgage loans held for sale, due primarily to an increase
of one- to four-family residential mortgage loans resulting from management's
determination to increase the level of its residential mortgage loans by
retaining for its portfolio fixed-rate one- to four-family loans with
maturities of up to 15 years. Additionally, the average balance of investment
securities and the average balance of mortgage-backed securities increased from
$28.8 million and $2.6 million, respectively, for the six months ended
September 30, 1995 to average balances of $31.3 million and $11.4 million,
respectively, for the same period in 1996. These increases in interest-earning
assets were funded by deposit growth and FHLB advances. The increase in
interest income due to the increase in the average balance of interest-earning
assets during the six months ended September 30, 1996 was offset by a decrease
in the average yield on interest-earning assets from 8.05% for the 1995 period
to 7.56% for the 1996 period resulting primarily from a decrease in market
interest rates.
INTEREST EXPENSE
Interest expense for the six months ended September 30, 1996 was $18.2
million as compared to $12.4 million for the six months ended September 30,
1995, an increase of $5.8 million, or 47.0%. The increase in interest expense
was primarily due to a $220.9 million, or 42.5%, increase in the average
balance of interest-bearing liabilities from an average balance during the six
months ended September 30, 1995 of $519.5 million to an average balance of
$740.4 million during the six months ended September 30, 1996. The increase in
interest-bearing liabilities was primarily due to an increase in the average
balances of certificate of deposit accounts and FHLB advances which were used
to fund the Bank's loan growth. The average balance of deposits increased by
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$136.4 million, or 29.1%, for the six months ended September 30, 1995 compared
to the same period in 1996 and the average balance of FHLB advances increased
by $84.5 million, or 163.4%, for the six months ended September 30, 1996
compared to the same period in fiscal 1996. Interest expense also increased due
to an increase in the average cost of interest-bearing liabilities from an
average cost of 5.08% for the six month period ended September 30, 1995 to an
average cost of 5.18% for the same period in 1996 due primarily to higher
market interest rates, the Bank's competitive deposit pricing strategy, and
higher balances of FHLB advances which generally bear interest rates higher
than deposit products with similar maturities.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted to $2.0 million for the six
months ended September 30, 1996 as compared to a provision of $1.1 million for
the six months ended September 30, 1995. This increase in the provision for
loan losses is a result of management's continued review and evaluation of the
loan portfolio as well as adverse events occurring in fiscal 1997 related to a
commercial real estate loan. See "Business of the Bank--Lending Activities--
Delinquencies and Classified Assets" for a description of such loan and lending
relationship. In particular, management considered the 47.0% growth in the
overall balance of the Bank's loan portfolio from $531.3 million at September
30, 1995 to $774.0 million at September 30, 1996, which resulted in the Bank's
ratio of its allowance for loan losses to total loans declining from 0.95% at
September 30, 1995 to 0.93% at September 30, 1996. To the extent the Bank
experiences further increases in the overall balance of its loan portfolio or
increases its concentrations of loans which bear a higher degree of risk than
one- to four-family loans, the Bank anticipates that further increases in its
allowance for loan losses may be necessary through continued provisions for
loan losses. While management of the Bank believes that the current level of
its allowance for loan losses is sufficient based on information currently
available at this time, no assurances can be made that future events,
conditions or regulatory directives will not result in increased provisions for
loan losses or additions to the Bank's allowance for loan losses which may
adversely affect net income. See "Business of the Bank--Lending Activities--
Delinquencies and Classified Assets" and "--Lending Activities--Allowance for
Loan Losses."
NONINTEREST INCOME
Total noninterest income increased by $375,000, or 17.5%, from $2.1 million
for the six months ended September 30, 1995 to $2.5 million for the six months
ended September 30, 1996. The primary reason for the improvement was the
reporting of a net gain of $309,000 on the sale of loans during the six months
ended September 30, 1996 as compared to a net loss on the sale of loans of
$512,000 in the comparable period in 1995. The improvement in the gains on loan
sale activity during the 1996 period was primarily due to the recovery of
$216,000 of unrealized losses on mortgage loans held for sale and the Bank's
adoption of SFAS No. 122 "Accounting for Mortgage Servicing Rights," ("SFAS No.
122") on April 1, 1996, which resulted in the inclusion in income of $630,000,
reflecting the recognition of loan servicing rights on loans originated and
sold during the period. Other noninterest income for the six months ended
September 30, 1996 decreased to $814,000 from $1.4 million for the six months
ended September 30, 1995. This decline in other noninterest income primarily
reflects the reversal of a reserve during the six months ended September 30,
1995 which increased noninterest income in such 1995 period by $400,000. The
reserve had been established in fiscal 1994 in connection with the Bank's
reconciliation of certain loans being serviced for others and during fiscal
1996 it was determined to be no longer necessary.
NONINTEREST EXPENSE
Noninterest expense increased by $4.5 million, or 71.2%, from $6.3 million
for the six months ended September 30, 1995 to $10.9 million for the same
period in 1996. The primary reason for this increase was due to the required
recognition of the Bank's cost of the SAIF Special Assessment, which totalled
$2.9 million on a pre-tax basis. Including the SAIF Special Assessment, federal
deposit insurance premiums expense increased
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from $488,000 for the six months ended September 30, 1995 to $3.5 million for
the six months ended September 30, 1996. Excluding the SAIF Special Assessment,
deposit insurance premiums increased from $488,000 to $639,000 for the six
months ended September 30, 1996, or 30.9% due to higher deposit balances. While
the Bank incurred higher deposit insurance expense due to the SAIF Special
Assessment, the Bank expects that its deposit insurance premiums will be
reduced in future periods due to the revised deposit insurance assessment
structure enacted as part of the recently adopted legislation. Noninterest
expense also increased due to a $784,000, or 21.9%, increase in compensation
and employee benefits expense; a $207,000, or 29.9%, increase in office
occupancy and equipment expense; a $135,000, or 35.7%, increase in advertising
and business promotion expense; a $42,000, or 14.6%, increase in data
processing expense and a $314,000, or 34.4%, increase in other expense; all of
which corresponded to the Bank's franchise expansion strategy whereby it added
three new branch facilities and increased the number of personnel and increased
its marketing and promotional activities from September 30, 1995 to September
30, 1996.
INCOME TAXES
Income tax expense was $338,000 for the six months ended September 30, 1996,
compared to $1.9 million for the six months ended September 30, 1995 resulting
in an effective tax rate of 42.1% for the six months ended September 30, 1995
and 1996. The decrease in the income tax expense was the result of the decrease
in income before income taxes.
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RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
WEAKNESS IN REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, significantly affect the operations of financial institutions such as
the Bank. The New England region of the United States, including Southeastern
Massachusetts and Rhode Island (the Bank's primary market area) experienced a
significant economic decline beginning approximately in 1988. This decline
adversely affected employment levels, the real estate markets and the
financial services industry in the Bank's market area. Over the past decade,
due primarily to the reduction in manufacturing jobs in Southeastern
Massachusetts and parts of Rhode Island, these areas have generally
experienced higher unemployment rates than national averages and the levels
experienced by the Commonwealth of Massachusetts as a whole. As a result of
the decline in the regional economy, delinquencies increased and the
underlying values of properties located in the Bank's primary market area
declined. The effects of the economic downturn were especially pronounced in
the commercial real estate market, where prices declined substantially in many
cases. The declining rental market and decrease in market values of properties
in turn adversely affected the ability of some real estate developers and
borrowers to repay or refinance their commercial real estate and construction
loans. Additionally, numerous failures of financial institutions operating in
the New England region resulted in the placement of commercial and residential
properties into the hands of federal liquidators contributing to the
oversupply of properties available for sale and also contributed to a further
decline of real estate prices. The economic conditions affecting the Bank's
primary market area also resulted in reduced loan demand and increased
competition for the existing lower level of loan demand. While there have been
signs of improvement in the economies and real estate markets of some New
England areas, and there are signs that the market values of residential and
commercial properties in those areas have stabilized since the sharp declines
experienced in the late 1980s and early 1990s, the economies and real estate
markets in the Bank's primary market area have not significantly recovered.
While the Bank has not, in recent years, suffered the same detrimental impact
as other financial institutions, the poor economic conditions and depressed
real estate markets could adversely affect the financial condition and results
of operations of the Bank in the future.
SENSITIVITY TO INCREASES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the Bank's results
of operations and financial condition are largely dependent on movements in
market interest rates and its ability to manage its assets in response to such
movements.
The Bank's recent results of operations have been adversely affected by the
increase in market interest rates during 1996 and by the increase in the
average balances of higher cost certificates of deposit accounts resulting
from the Bank's recent deposit growth. In particular, during the three months
ended June 30, 1996, the Bank experienced a decrease in its average interest
rate spread, which declined to 2.46% as compared to 3.00% for the same period
in 1995, and a decrease in its net interest margin, which declined to 2.99%
from 3.54% for the same period in 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition,
during 1996, the Bank has increased its utilization of FHLB advances to fund
asset growth which such advances increased from $75.1 million at March 31,
1996 to $136.6 million at June 30, 1996. FHLB advances generally bear interest
rates higher than retail deposits and are generally more sensitive to
increases in market interest rates.
At June 30, 1996, the Bank's total interest-bearing liabilities maturing or
repricing within one year exceeded its total interest-earning assets maturing
or repricing in the same time period by $142.1 million, representing a
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cumulative one-year interest sensitivity gap as a percentage of total assets
of negative 17.7%. Accordingly, in a rapidly rising interest rate environment,
the cost of the Bank's interest-bearing liabilities will generally increase at
a rate faster than the yield on its interest-earning assets thereby adversely
affecting the Bank's net interest income. Increases in interest rates also
could adversely affect the type (fixed-rate or adjustable-rate) and amount of
loans originated by the Bank and the average life of loans and securities
which, in turn, could adversely impact the yields earned on the Bank's loan
and securities portfolios as well as the amount of secondary market activity
in which the Bank engages. The Bank attempts to manage its interest rate risk
by primarily originating for sale all longer-term, fixed-rate one- to four-
family loans, originating for portfolio shorter-term and adjustable-rate
loans, purchasing adjustable-rate mortgage-backed securities and structuring
its FHLB advances to correspond with the maturities of its interest-earning
assets.
The Bank's mortgage banking activity has resulted in the Bank building a
portfolio of loans serviced for others, which, at June 30, 1996, totalled $1.1
billion. The Bank's mortgage banking activity may also be adversely affected
by a declining interest rate environment to the extent such environment
results in increased loan prepayment activity of serviced loans. In this
regard, the Bank has incurred the cost of originating loans held for sale in
order to obtain the servicing of such loans which, if such loans are prepaid,
may result in an increased amortization of the Bank's mortgage servicing right
asset, which it began to recognize in fiscal 1997 in connection with its
implementation of SFAS No. 122. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of New Accounting
Standards." Declining interest rates may also adversely affect the Bank's
mortgage banking activity due to the effect of borrowers that may determine
not to close loans that the Bank has committed to originate due to decreases
in interest rates from the time the loan commitment is made to the time of the
closing of the loan. Additionally, increases in interest rates from the time a
borrower has selected an interest rate for a loan to the time the loan closes,
will adversely affect the pricing of the sale of such loan in the secondary
market, if not covered by a forward commitment.
In connection with its mortgage banking activities, the Bank utilizes
forward sale commitment contracts as a method of hedging such loan sales. The
Bank generally covers 70% to 100% of loan commitments and loans originated for
sale with forward commitment contracts depending on management's estimation of
the amount of such loans that are expected to close and its expectation of
future market interest rates. See "Business of the Bank--Lending Activities--
Origination, Sale and Servicing of Loans." With respect to loans originated
for sale that are not covered by forward commitment contracts, if market
interest rates rise from the time of the loan commitment to the actual time of
sale of such loans, the market value of such loans will be adversely affected,
thereby exposing the Bank to potential losses with respect to such loans. With
respect to loans originated for sale that are covered by forward commitments,
if borrowers determine not to close such loans, the Bank may be required to
fund such forward commitment contracts with loans purchased at a premium or
take other measures which may result in losses related to such activity.
Increases in interest rates would result in interest rates on the Bank's
adjustable-rate loans increasing, thereby resulting in increased loan payment
amounts by the borrowers which, in turn, may result in higher delinquencies on
such loans. Increases in the level of interest rates may also adversely affect
the value of the Bank's investment and mortgage-backed securities and other
interest-earning assets and, in turn, its results of operations or retained
earnings. At June 30, 1996, the Bank's investment securities available for
sale had an estimated fair value of $773,000, which was greater than the
amortized cost of $55,000. At the same date, the Bank's investment and
mortgage-backed securities held to maturity had an estimated fair value of
$28.8 million, which was $146,000 greater than their amortized cost of $28.6
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management of Interest Rate Risk," "Business of the
Bank--Lending Activities--One- to Four-Family Mortgage Lending" and "--
Investment Activities."
RECENT DECLINE IN NET INCOME
Over the past two fiscal years and during fiscal 1997, the Bank has
experienced a decline in its net income and earnings performance ratios. For
the fiscal years ended March 31, 1994, 1995 and 1996, the Bank's net
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income totalled $6.9 million, $5.0 million and $4.6 million, respectively,
resulting in a return on average assets of 1.51%, 0.96% and 0.76%,
respectively, and a return on average retained earnings of 20.5%, 12.8% and
10.4%, respectively. The decline in net income was primarily due to the Bank's
increased noninterest expense resulting from its expansion strategy, higher
cost of funds due to the Bank's competitive deposit pricing strategy to
attract and retain deposits, losses incurred in connection with the sale of
mortgage loans and increases in the Bank's provision for loan losses due to
the growth in the balance of its loan portfolio. While the Bank has benefitted
from its growth as reflected by higher net interest income and the growth of
interest-earning assets, it has also experienced a decrease in its net
interest margin and average interest rate spread due to higher cost of funds
resulting from the Bank's competitive deposit pricing strategy to attract and
retain deposits and due to increased borrowings in the form of higher cost
FHLB advances to fund asset growth. The Bank expects that, if it continues to
increase the balance of its loan portfolio and incur increased cost of funds
due to its deposit pricing strategy and increased noninterest expense due to
its expansion strategy, the Bank's net interest margin and average interest
spread may continue to decline which may, in turn, adversely affect net income
in the short term.
RECENT INCREASE IN NONINTEREST EXPENSE AND EXPANSION STRATEGY
In connection with the Bank's expansion strategy, since 1994, the Bank has
established four new branch office facilities and one loan origination center
and currently plans to open an additional branch office in early 1997 and a
new centralized administrative and operations center and branch office in late
1997. Additionally, the Bank is currently seeking sites for new branch offices
in its primary market area and new loan origination center locations in both
its primary market area and areas adjacent to its primary market area,
including areas of the state of Connecticut. In addition to its geographic
expansion, the Bank has increased its promotional and marketing efforts in
order to increase its lending and retail deposit market share in its primary
market area as well as surrounding areas. As a result of these efforts, and
the addition of new personnel and office infrastructure, the Bank's
noninterest expense has increased by 6.9% from $12.8 million for fiscal 1994
to $13.7 million for fiscal 1996. The Bank currently has budgeted
approximately $15.5 million of additional capital expenditures related to its
planned expansion. While the Bank's operating efficiency ratio, excluding the
effect of the SAIF Special Assessment, compares favorably to peer group
institutions, to the extent the Bank continues to expand and add office
infrastructure and personnel, the Bank's net income could be adversely
affected by further increases in noninterest expense. The Bank believes that
any short-term increase in noninterest expense due to expansion will be
beneficial in the long-term to the extent the Bank increases its geographic
customer base and market share of loans and deposits. See "Use of Proceeds"
and "Pro Forma Data."
INCREASED LENDING RISKS ASSOCIATED WITH MULTI-FAMILY, COMMERCIAL REAL ESTATE
AND COMMERCIAL LOANS
At June 30, 1996, the Bank's multi-family, commercial real estate and
commercial loan portfolios totalled $45.4 million, or 6.1% of total loans
receivable. Of this amount, $4.8 million, or 0.7%, consisted of multi-family
loans, $25.6 million, or 3.4%, consisted of commercial real estate loans, and
$15.1 million, or 2.0%, consisted of commercial loans. Multi-family,
commercial real estate and commercial loans are generally viewed as exposing
the lender to greater credit risk than one- to four-family residential loans
and typically involve higher loan principal amounts. Repayment of multi-family
and commercial real estate loans generally is dependent, in large part, on
sufficient income from the property to cover operating expenses and debt
service. The Bank attempts to offset the risks associated with multi-family
and commercial real estate lending primarily by originating such loans on a
selective basis, by lending to individuals who will be actively involved in
the management of the property and who have proven management experience, and
by making such loans with lower loan-to-value ratios than one- to four-family
loans. Additionally, the Bank generally requires personal guarantees from the
borrowers of its multi-family and commercial real estate loans. Economic
events and government regulations, which are outside the control of the
borrower or lender, could impact the value of the property securing the loan
or the future cash flow of the affected properties. Additionally, the decline
in real estate values experienced in the Bank's lending area has been more
pronounced with respect to multi-family and commercial properties as compared
to owner-occupied one- to four-family properties. See "--Weakness in Regional
and Local Economy" and "Business of the Bank--Lending Activities."
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The Bank also makes secured and unsecured commercial loans. Unsecured
commercial loans are generally considered to involve a higher degree of risk
than secured commercial loans and real estate lending, due to the absence of
collateral securing the loan. Secured commercial loans are generally secured
by equipment, leases, inventory and accounts receivable. Accordingly, the
value of the collateral securing the Bank's commercial loans may not be as
easy to ascertain as compared to real property, and such collateral may
depreciate over time and may not be as readily saleable as compared to real
property. Both secured and unsecured commercial loans are often substantially
dependent upon the success of the borrower's business. Accordingly, commercial
loans involve a greater degree of risk than a one- to four-family loan and
other types of mortgage loans. See "Business of the Bank--Lending Activities."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will establish the Foundation, which will be incorporated
under Delaware law as a non-stock corporation and will be funded with shares
of Common Stock contributed by the Company. Establishment of the Foundation is
subject to the approval of the Bank's members at the Special Meeting. If
approved by members, the establishment of the Foundation will be dilutive to
the voting and ownership interests of stockholders and will have an adverse
impact on the operating results of the Company in fiscal 1997, possibly
resulting in an operating loss in fiscal 1997, the fiscal year in which the
Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to establish the
Foundation with Company Common Stock in an amount equal to 8% of the Common
Stock sold in the Conversion. At the minimum, midpoint and maximum of the
Estimated Price Range, the contribution to the Foundation would be 414,800,
488,000 and 561,200 shares, with a value of $4.1 million, $4.9 million and
$5.6 million, respectively, based on the Purchase Price of $10.00 per share.
Upon completion of the Conversion and establishment of the Foundation, the
Company will have 7,576,200 shares issued and outstanding at the maximum of
the Estimated Price Range, of which the Foundation will own 561,200 shares, or
7.4%. AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
Negative Impact on Earnings. Assuming receipt of approval of the Bank's
members, establishment of the Foundation will have an adverse impact on the
Company's and the Bank's earnings in the year in which the contribution is
made. The Company will recognize an expense in the amount of the contribution
to the Foundation in the quarter in which it occurs, which is expected to be
the fourth quarter of fiscal 1997. Such expense will reduce earnings and have
a material adverse impact on the Company's earnings for the year. The amount
of the contribution will range from $4.1 million to $5.6 million, depending on
the amount of Common Stock sold in the Conversion. The contribution expense
will be partially offset by the tax deductibility of the expense. The Company
and the Bank have been advised by their independent accountants that the
contribution to the Foundation will be tax deductible, subject to a limitation
based on 10% of the Company's annual taxable income. Assuming a contribution
of $5.6 million in Common Stock, based on the maximum of the Estimated Price
Range, the Company estimates a net tax effected expense of $3.6 million. If
the Foundation had been established at March 31, 1996 the Bank would have
reported net income of $1.0 million for fiscal 1996 rather than reporting net
income of $4.6 million. In addition to the contribution to the Foundation, the
Bank expects in the future to continue making ordinary charitable
contributions within its community. Such additional contributions are expected
to range from $20,000 to $30,000 per year.
Possible Nondeductibility of the Contribution. The Company and the Bank have
been advised by their independent accountants that an organization created for
charitable purposes will qualify as a Section 501(c)(3) exempt organization
under the Code, and will be classified as a private foundation. In this
regard, the Foundation will submit a request to the Internal Revenue Service
("IRS") to be recognized as a tax-exempt organization. The Company and the
Bank have received an opinion of their independent accountants that the
Foundation will qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider the impact of the regulatory
condition on the gift imposed by the OTS which requires the shares of Common
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Stock of the Company held by the Foundation to be voted in the same ratio as
all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Conversion--Establishment of the
Charitable Foundation" and "--Regulatory Conditions Imposed on the
Foundation." In the event that the Company or the Foundation receives an
opinion of their tax counsel satisfactory to OTS that compliance with the
voting restriction would have the effect of causing the Foundation to lose its
tax exempt status, otherwise have material adverse tax consequences on the
Foundation or subject the Foundation to an excise tax under Section 4941 of
the Code, the OTS will waive such voting restriction upon submission of such
opinion(s) by the Company or the Foundation. The independent accountants'
opinion further provides that the Company's contribution of its own stock to
the Foundation will not constitute an act of self-dealing, and that the
Company will be entitled to a deduction in the amount of the fair market value
of the stock at the time of the contribution less the nominal par value that
the Foundation is required to pay to the Company for such stock, subject to an
annual limitation based on 10% of the Company's annual taxable income. The
Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution for federal tax purposes.
Thus, while the Company expects to receive a charitable contribution deduction
of approximately $1,000,000 in calendar year 1997, the Company is permitted
under the Code to carry over the excess contribution over a five-year period
for federal tax purposes. The Company will not be able to carry forward the
unsued portion of the deduction for Massachusetts state income tax purposes.
Assuming the sale of Common Stock at the midpoint of the Estimated Price
Range, the Company estimates that substantially all of the contribution should
be deductible for federal tax purposes over the six-year period. However, no
assurances can be made that the Company will have sufficient pre-tax income
over the five-year period following the year in which the contribution is
initially made to fully utilize the carryover related to the excess
contribution. Although the Company and the Bank have received an opinion of
their independent accountants that the Company will be entitled to the
deduction for the charitable contribution, there can be no assurances that the
IRS will recognize the Foundation as a Section 501(c)(3) exempt organization
or that the deduction will be permitted. In such event, the Company's tax
benefit related to the Foundation would have to be fully expensed, resulting
in a further reduction in earnings in the year in which the IRS makes such a
determination.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by Keller in determining the estimated pro forma market
value of the Company. The aggregate price of the shares of Common Stock being
offered in the Subscription and Community Offerings is based upon the
independent appraisal conducted by Keller of the estimated pro forma market
value of the Company. The pro forma aggregate price of the shares being
offered for sale in the Conversion is currently estimated to be between $51.9
million and $70.2 million, with a midpoint of $61.0 million. Based on the
appraisal, the pro forma market capitalization of the Bank at the midpoint,
including shares contributed to the Foundation, is $65.9 million. The pro
forma price to book ratio and the pro forma price to earnings ratio are 66.77%
and 11.00x, respectively, at the midpoint of the Estimated Price Range. In the
event that the Conversion did not include the Foundation, Keller has estimated
that the estimated pro forma market capitalization of the Bank would be
approximately $69.0 million at the midpoint based on a pro forma price to book
ratio and the pro forma price to earnings ratio that are approximately the
same as the independent appraisal at 66.06% and 11.03x, respectively. If the
Foundation were not part of the Conversion, the pro forma market value of the
shares being offered is estimated to be between $58.7 million and $79.4
million. See "Comparison of Valuation and Pro Forma Information with No
Foundation." This estimate by Keller was prepared at the request of the OTS
and is solely for purposes of providing members with sufficient information
with which to make an informed decision on the Foundation. There is no
assurance that if the Foundation is not approved the appraisal prepared at
that time would conclude that the pro forma market value of the Company would
be the same as the amount estimated herein. Any appraisal prepared at that
time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
The Bank believes that the establishment of the Foundation is in the best
interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that the Foundation will have a positive impact on the Bank's long-
term franchise value. The amount of Common Stock being offered in the
Conversion at the midpoint of the Estimated Price Range is approximately $8.0
million less
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than the estimated amount of Common Stock that would be offered in the
Conversion without the Foundation based on the estimate provided by Keller.
Accordingly, certain depositors of the Bank who subscribe to purchase Common
Stock in the Subscription Offering may receive fewer shares depending on the
appraisal valuation at that time, the number of shares sold based on that
appraisal, the size of a depositor's stock order, the amount of his or her
qualifying deposits in the Bank and the overall level of subscriptions. The
decrease in the amount of Common Stock being offered will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the
Conversion. The Bank's tangible, leverage and risk-based capital ratios at
June 30, 1996 were 5.87%, 5.87% and 11.58%, respectively. Assuming the sale of
shares at the midpoint of the Estimated Price Range, the Bank's pro forma
tangible, leverage and risk-based capital ratios at June 30, 1996 would be
10.00%, 10.00% and 18.91%, respectively. On a consolidated basis, the
Company's pro forma stockholders' equity would be $98.7 million or
approximately 11.53% of pro forma consolidated assets, assuming the sale of
shares at the midpoint of the Estimated Price Range. Pro forma stockholders'
equity per share and pro forma net earnings per share would be $14.98 and
$0.23, respectively. If the Foundation were not established in the Conversion,
based on the Keller estimate, the Company's pro forma stockholders' equity
would be approximately $104.5 million or approximately 12.13% of pro forma
consolidated assets at the midpoint of the estimate and pro forma
stockholders' equity per share and pro forma net earnings per share would be
approximately the same with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members, upon
completion of the Conversion, the Foundation will own 7.4% of the total shares
of the Company's Common Stock outstanding. Such shares will be owned solely by
the Foundation; however, pursuant to the terms of the contribution as mandated
by the OTS, the shares of Common Stock of the Company held by the Foundation
must be voted in the same ratio as all other shares of the Company's Common
Stock on all proposals considered by the stockholders of the Company. See "The
Conversion--Establishment of the Charitable Foundation" and "Regulatory
Conditions Imposed on the Foundation." The Company and the Foundation will
take the necessary steps to provide such requirement in the Foundation's
corporate governance documents. As such, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. In the event that
the OTS were to waive this voting restriction, the Foundation's board of
directors would exercise sole voting power over such shares and would no
longer be subject to the voting restriction. However, the OTS could impose
additional conditions at that time on the composition of the board of
directors of the Foundation or which otherwise relate to control of the Common
Stock of the Company held by the Foundation. See "The Conversion--
Establishment of the Charitable Foundation--Regulatory Conditions Imposed on
the Foundation." If a waiver of the voting restriction were granted by the OTS
and no further conditions were imposed on the Foundation at that time,
management of the Company and the Bank may benefit to the extent that the
board of directors of the Foundation determines to vote the shares of Common
Stock held by the Foundation in favor of proposals supported by the Company
and the Bank. Furthermore, when the Foundation's shares are combined with
shares purchased directly by officers and directors of the Company, shares
held by proposed stock benefit plans, and shares held in the Bank's ESOP, the
aggregate of such shares could exceed 20% of the Company's outstanding Common
Stock, which could enable management to defeat stockholder proposals requiring
80% approval. Consequently, this potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. Since the ESOP shares are allocated
to all eligible employees of the Bank, and any unallocated shares will be
voted by an independent trustee, and because awards under the proposed stock
benefit plans may be granted to employees other than executive officers and
directors, management of the Company does not expect to have voting control of
all shares held or to be allocated by the ESOP or other stock benefit plans.
See, "--Certain Anti-Takeover Provisions Which May Discourage Takeover
Attempts--Voting Control of Officers and Directors."
Further there will be no agreements or understandings, written or tacit,
with respect to the exercise of either direct or indirect control over the
management or policies of the Company by the Foundation, including agreements
related to voting, acquisition or disposition of the Company's Common Stock.
Finally, as the Foundation sells its shares of Common Stock over time, its
ownership interest and voting power in the Company is expected to decrease.
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Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done only on one
other occasion in connection with a conversion. As such, the Foundation may be
subject to potential challenges notwithstanding that the Boards of Directors
of the Company and the Bank have carefully considered the various factors
involved in the establishment of the Foundation in reaching its determination
to establish the Foundation as part of the Conversion. See "The Conversion--
Establishment of the Charitable Foundation--Purpose of Foundation." In
conjunction with its approval of the Conversion, the Bank determined to submit
the Foundation for a vote of members so that members have a right to vote on
whether the Foundation should be established as part of the Conversion. If
certain parties were to institute an action seeking to require the Bank to
eliminate establishment of the Foundation in connection with the Conversion,
no assurances can be made that the resolution of such action would not result
in a delay in the consummation of the Conversion or that any objecting persons
would not be ultimately successful in obtaining such removal or other
equitable relief or monetary damages against the Company or the Bank.
Additionally, if the Company and the Bank are forced to eliminate the
Foundation, the Company may be required to resolicit subscribers in the
Offerings.
Approval of Members. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered
as a separate matter from approval of the Plan of Conversion. If the Bank's
members approve the Plan of Conversion, but not the establishment of the
Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being
offered for sale in the Offerings since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to
the Foundation. If the pro forma market value of the Company without the
Foundation is either greater than $80.7 million or less than $51.9 million,
the Bank will establish a new Estimated Price Range and commence a
resolicitation of subscribers (i.e., subscribers will be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscriptions funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to increase, decrease, or cancel
their subscriptions). Any change in the Estimated Price Range must be approved
by the OTS. "See The Conversion--Stock Pricing." A resolicitation, if any,
following the conclusion of the Subscription and Community Offerings would not
exceed 45 days unless further extended by the OTS for periods of up to 90 days
not to extend beyond December 30, 1998.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its market area both in attracting
deposits and in originating loans. The Bank's primary market area,
Southeastern Massachusetts and Rhode Island, is a highly competitive market.
The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a state-wide or regional
presence, and, in some cases, a national presence. This competition arises
from commercial banks, savings banks, cooperative banks, mortgage brokers,
mortgage banking companies, credit unions, and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank. In
addition, the Bank has experienced significant competition from credit unions
in some areas within its primary market area, particularly in Fall River and
Rhode Island, some of which are significant in asset size. Federal and state
credit unions have a significant competitive advantage over banks and savings
institutions as they do not pay income taxes. This advantage, which is unique
to credit unions, places significant competitive pressure on the Bank's loan
and deposit pricing policies, which directly affects the Bank's profitability.
See "Business of the Bank--Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. In addition, the Company, as a savings association
holding company, is subject to extensive regulation and supervision. Such
regulations, which affect the Bank on a daily basis, may be changed at any
time, and the interpretation of the relevant law and regulations is also
subject to change by the authorities who examine the Bank and interpret
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<PAGE>
those laws and regulations. Any change in the regulatory structure or the
applicable statutes or regulations, whether by the OTS, the FDIC or the
Congress, could have a material impact on the Company, the Bank, its
operations or the Bank's Conversion. See "Regulation."
Recently enacted legislation provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
That legislation also requires that the Department of Treasury submit a report
to Congress that makes recommendations regarding a common financial
institutions charter, including whether the separate charters for thrifts and
banks should be abolished. Various proposals to eliminate the federal thrift
charter, create a uniform financial institutions charter and abolish the OTS
were introduced in the 104th Congress. Several of the bills that were
introduced in Congress but were not acted upon by Congress would have required
that all federal savings associations convert to national or state banks by no
later than January 1, 1998 and would have treated all state savings
associations as state banks for purposes of federal banking laws as of that
date. Subject to a narrow grandfathering, all savings and loan holding
companies would become bank holding companies under such proposals and would
be subject to the activities restrictions applicable to bank holding
companies. Under such proposals, any lawful activity in which a savings
association was engaged on September 13, 1995 would have been permitted for up
to two years following the effective date of its conversion to a bank charter,
with two additional one year extensions which may be granted at the discretion
of the regulator. Additionaly, such proposals would have grandfathered
existing thrift intrastate and interstate branches which were operated as
branches on September 13, 1995. Such legislative proposals would also abolish
the OTS and transfer its functions to three federal bank regulators and to the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
with respect to the regulation of holding companies. All state savings and
loan associations would be regulated as state banks by the FDIC. While such
legislation was not acted upon by the most recent session of Congress, no
assurances can be made that legislation similar to the proposed legislation
will not be re-introduced in the next session of Congress. Therefore, the Bank
is unable to determine the extent to which such legislation, if enacted, would
affect its business.
Legislation regarding bad debt recapture was signed into law on August 1996
effective for tax years beginning on or after January 1, 1996. The legislation
requires recapture of reserves accumulated after 1987. The recapture tax on
post-1987 reserves must be paid over a six year period starting in 1996. The
payment of the tax can be deferred in each of 1996 and 1997 if an institution
originates at least the same average annual principal amount of purchased
mortgage loans that it originated in the six years prior to 1996. See "Federal
and State Taxation--Federal Taxation--Bad Debt Reserve."
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS AND CHANGE IN CONTROL
PAYMENTS
Stock Programs. The Company intends to adopt stock-based benefit plans which
would provide for the granting of common Stock to non-employee directors,
officers and employees of the Company and its affiliates (the "Stock
Programs") and seek stockholder approval of such plans at a meeting of
stockholders following the Conversion which, under current OTS regulations,
may be held no earlier than six months after completion of the Conversion.
Assuming the receipt of stockholder approval, the Company expects to acquire
Common Stock on behalf of the Stock Programs in an amount equal to 4% of the
Common Stock issued in the Conversion, including shares issued to the
Foundation, or 223,992 shares and 303,048 shares at the minimum and maximum of
the Estimated Price Range, respectively. These shares will be acquired either
through open market purchases or from authorized but unissued Common Stock.
See "--Possible Dilutive Effect of Stock Programs and Stock Options."
Although no specific award determinations have been made, the Company
anticipates that it will provide awards to the directors, officers and
employees to the extent permitted by applicable regulations. Current OTS
regulations provide that, with respect to any such benefit plan which is
implemented within one year after consummation of the Conversion, no
individual may receive more than 25% of the shares of any such plan and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the shares awarded under any such plan. Common Stock awarded
under the Stock Programs will be awarded at no cost to the recipients. Under
the terms of the Stock Programs, an independent trustee will vote unallocated
shares in the same proportion as it receives instructions from recipients with
respect to allocated shares which have not been
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<PAGE>
earned and distributed. The trustee will not vote allocated shares which have
not been distributed if it does not receive instructions from the recipient.
The specific terms of the Stock Programs intended to be adopted and the
amounts of awards thereunder have not yet been determined by the Board of
Directors, and any such determination will consider various factors, including
but not limited to, the financial condition of the Company, current and past
performance of plan participants and tax and securities law and regulation
requirements. The stock-based benefits provided under the Stock Programs and
stock option plans, discussed below, may be provided under separate Stock
Program plans and stock option plans for officers, employees and non-employee
directors or such benefits may be provided for under a single master stock-
based benefit plan adopted by the Company which would incorporate the benefits
and features in the separate plans (the "Master Stock-Based Benefit Plan").
See "Management of the Bank--Benefits--Stock Programs."
Stock Option Plans. The Company also intends to adopt stock-based benefit
plans which would provide options to purchase Common Stock ("Stock Options")
to officers, employees and non-employee directors of the Company and its
affiliates (the "Stock Option Plans") and to seek stockholder approval of such
plans at a meeting of stockholders following the Conversion, which under
current OTS regulations may be held no earlier than six months after
completion of the Conversion. Although no specific determinations have been
made, assuming the receipt of stockholder approval, the Company expects that
executive officers and directors will be granted options to purchase an amount
of authorized but unissued Common Stock or treasury stock, if any, equal to
10% of the Common Stock issued in the Conversion, including shares issued to
the Foundation, or 559,980 shares and 757,620 shares at the minimum and
maximum of the Estimated Price Range. Under the Stock Option Plans, the
exercise price of options will be equal to the fair market value of the
underlying Common Stock on the date of grant. Such options will permit such
officers and directors to benefit from any increase in the market value of the
shares in excess of the exercise price at the time of exercise. Officers and
directors receiving such options will not be required to pay for the shares
until the date of exercise. The specific terms of the Stock Option Plans
intended to be adopted and amounts and awards thereunder have not yet been
determined by the Board of Directors and any such determination will consider
various factors, including but not limited to, the financial condition of the
Company, current and past performance of award recipients and tax and
securities law and regulation requirements. The Stock Options discussed above
may be provided under separate Stock Option Plans for officers, employees and
non-employee directors or may be provided for under the Master Stock-Based
Benefit Plan which would incorporate the features and benefits of the separate
Stock Option Plans. Although no specific award determinations have been made,
the Company anticipates that it will provide awards to the directors, officers
and employees to the extent permitted by applicable regulations. Current OTS
regulations provide that, with respect to any such benefit plan which is
implemented within one year after consummation of the Conversion, no
individual may receive more than 25% of the shares of any such plan and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the shares awarded under any such plan. See "Management of the
Bank--Benefits--Stock Option Plans."
Employment Contracts and Change In Control Provisions. Employment and change
in control agreements with certain officers and the employee severance
compensation plan provide for benefits and cash payments in the event of a
change in control of the Company or the Bank. The provisions in such
agreements and plan would provide the recipient with a change in control
payment in the event of the recipient's involuntary or, in certain
circumstances, voluntary termination of employment subsequent to a change in
control of the Company or the Bank. These provisions may have the effect of
increasing the cost of acquiring the Company, thereby discouraging future
attempts to take over the Company or the Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms
of the employment agreements, change in control agreements and an employee
severance compensation plan would be approximately $5.9 million, including a
$1.0 million payment to the Chief Executive Officer and President of the
Company and the Bank. However, the actual amount to be paid in the event of a
change in control of the Bank or the Company cannot be estimated at this time
because the actual amount is based on the average salary of the employee and
other factors existing at the time of the change in control. See "Restrictions
on Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws," "Management of the Bank--Employment
Agreements," "--Change-in-Control Agreements," "--Employee Severance
Compensation Plan," "--Benefits--Stock Option Plans" and "--Benefits--Stock
Programs."
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POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs will acquire an amount of
shares equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, either through open market
purchases or the issuance of authorized but unissued shares of Common Stock
from the Company. If the Stock Programs are funded by the issuance of
authorized but unissued shares, the voting interests of existing stockholders
at that time will be diluted by 3.8%. Also following the Conversion,
directors, officers and employees will be granted options under the Stock
Options Plans. Although no specific determinations have been made, the Company
expects that executive officers and directors will be granted options to
purchase authorized but unissued shares in an amount equal to 10% of the
Common Stock issued in the Conversion. Under certain circumstances, such
options may be exercised and sold on the same day, thereby eliminating any
risk to officers and directors in exercising options in the event that the
market price exceeds the exercise price. If all of the options were to be
exercised using authorized but unissued Common Stock and the Stock Programs
were funded with authorized but unissued shares, the voting interests of
existing stockholders at that time would be diluted by 12.3%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess
of 10% of the outstanding shares, and certain uniform price provisions for
certain business combinations. The Bank's Stock Charter also prohibits, for
five years, the acquisition or offer to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's equity securities. Any
person violating this restriction may not vote the Bank's securities in excess
of 10%. These provisions in the Bank's and the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate existing management. For a more
detailed discussion of these provisions, see "Restrictions on Acquisition of
the Company and the Bank."
Voting Control of Officers and Directors. Directors and executive officers
of the Bank and the Company expect to purchase approximately 2.8% or 2.1% of
the shares of Common Stock to be issued in the Conversion, based upon the
minimum and the maximum of the Estimated Price Range, respectively, exclusive
of shares that may be attributable to directors and officers through the Stock
Programs, the Stock Options Plans and the ESOP which may give directors,
executive officers and employees the potential to control the voting of an
additional 18.5% of the Company's Common Stock on a fully-diluted basis. In
addition, the Foundation will be funded with a contribution by the Company
equal to 8% of the Common Stock sold in the Conversion, which if a waiver of
the voting restriction imposed on such Common Stock is obtained from the OTS,
may be voted as determined by the directors of the Foundation who also will be
directors or officers of the Company and the Bank. Management's potential
voting control could, together with additional stockholder support, defeat
stockholder proposals requiring 80% approval of stockholders. As a result,
this potential voting control may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The Company has
received conditional approval to have its Common Stock listed on the AMEX
under the symbol "FAB" upon completion of the
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<PAGE>
Conversion. However, there can be no assurance that an active and liquid
trading market for the Common Stock will develop, or, once developed, will
continue, nor can there be any assurances that purchasers of the Common Stock
will be able to sell their shares at or above the Purchase Price. The absence
or discontinuance of a market for the Common Stock would have an adverse
impact on both the price and liquidity of the Common Stock. See "Market for
the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market or financial and economic conditions following the
commencement of the Subscription and Community Offerings. In the event that
the Estimated Price Range is so increased, it is expected that the Company
will issue up to 8,067,250 shares of Common Stock at the Purchase Price for an
aggregate purchase price of up to $80,672,500. An increase in the number of
shares issued will decrease a subscriber's pro forma net earnings per share
and stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion from Keller which states that, pursuant to
Keller's valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members have no value.
However, such valuation is not binding on the IRS. If the subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are deemed to have an ascertainable value, receipt of such
rights could result in taxable gain to those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who receive and/or
exercise the subscription rights in an amount equal to such value.
Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
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FIRSTFED AMERICA BANCORP, INC.
The Company was organized in September 1996 at the direction of the Board of
Directors of the Bank for the purpose of acquiring all of the capital stock to
be issued by the Bank. The Company has received approval from the OTS to
become a savings and loan holding company, and, as such, will be subject to
regulation by the OTS. See "The Conversion--General." After completion of the
Conversion, the Company will conduct business initially as a unitary savings
and loan holding company. See "Regulation--Holding Company Regulation." Upon
consummation of the Conversion, the Company's assets will consist of all of
the outstanding shares of the Bank's capital stock issued to the Company in
the Conversion and that portion of the net proceeds of the Offerings retained
by the Company. The Company intends to use part of the net proceeds it retains
to capitalize the ESOP Loan Subsidiary which intends to loan funds to the ESOP
to enable the ESOP to purchase 8% of the Common Stock issued in the
Conversion, including shares issued to the Foundation, and intends to
initially deposit the remaining proceeds with the Bank. See "Use of Proceeds."
The Company and Bank may, however, alternatively choose to fund the ESOP
through a loan to the ESOP trust by a third party financial institution.
Immediately after the Conversion, the Company will have no significant
liabilities. The management of the Company is set forth under "Management of
the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
officers of the Company who are also officers of the Bank, but will utilize
the support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands its business in the
future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so,
its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. In addition, management believes that the Company will be
in a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and
expansion opportunities that may arise. With the exception of the Bank's
current plans to open a de novo branch office in early 1997 and a centralized
administrative and operations center and branch office in late 1997, there are
no current arrangements, understandings or agreements, written or oral,
regarding any such opportunities or transactions. The initial activities of
the Company are anticipated to be funded by the net proceeds retained by the
Company and earnings thereon or, alternatively, through dividends from the
Bank.
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FIRST FEDERAL SAVINGS BANK OF AMERICA
The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with
First Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally-chartered savings and loan
association in 1959. In 1983, the Bank became a federally-chartered savings
bank and changed its name to First Federal Savings Bank of America. In 1984,
the Bank added mortgage banking activities to its operations. The Bank
conducts business from its administrative/branch and operations offices
located in Fall River, Massachusetts, its eleven other branch offices located
in the municipalities of Fall River, Attleboro, New Bedford, Seekonk, Somerset
and Taunton, Massachusetts and Pawtucket, East Providence and Warwick, Rhode
Island, and its five loan origination centers located in Yarmouth, Auburn,
Agawam and Burlington, Massachusetts and East Greenwich, Rhode Island. See
"Business of the Bank--Market Area and Competition." At June 30, 1996, the
Bank had total assets of $802.8 million, total deposit accounts of $600.6
million and retained earnings of $47.5 million. The Bank's deposits are
insured up to the maximum allowable amount by the SAIF of the FDIC.
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences
located within its primary market area. To a significantly lesser extent, the
Bank invests in multi-family, commercial real estate, construction and land,
commercial and consumer loans. The Bank originates one- to four-family loans
for investment and for sale in the secondary market, generally selling all
longer term fixed-rate loans on a servicing retained basis and retaining for
its portfolio all adjustable-rate and shorter term fixed-rate one- to four-
family loans. At June 30, 1996 the Bank's loans receivable, net totalled
$727.4 million, or 90.6% of total assets. At such date, the Bank was servicing
$1.1 billion of loans for others which servicing rights were derived from
loans sold by the Bank. To a significantly lesser extent, the Bank also
invests in investment securities, consisting of U.S. Government and agency
obligations, and mortgage-backed securities, primarily consisting of those
guaranteed by governmental agencies such as the FHLMC and GNMA. At June 30,
1996, investment and mortgage-backed securities totalled $29.4 million, or
3.7% of total assets, of which $28.6 million, or 97.4%, were classified as
held to maturity. At June 30, 1996, the Bank's deposit accounts totalled
$600.6 million, or 79.5% of total liabilities, of which $191.0 million, or
31.8%, were core deposits. The Bank also uses advances from the FHLB-Boston as
a source of funds. At June 30, 1996, such advances totalled $136.6 million, or
18.1% of total liabilities. See "Business of the Bank."
The Bank's executive offices are located at One North Main Street, Fall
River, Massachusetts 02720 and its telephone number is (508) 679-8181.
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REGULATORY CAPITAL COMPLIANCE
At June 30, 1996, the Bank exceeded all regulatory capital requirements. See
"Regulation--Federal Savings Institution Regulation--Capital Requirements."
Set forth below is a summary of the Bank's compliance with regulatory capital
standards as of June 30, 1996, on a historical and pro forma basis assuming
that the indicated number of shares were sold as of such date and receipt by
the Bank of the greater of 50% of the net proceeds or the amount of the net
proceeds sufficient to increase the Bank's tangible capital to 10% of its
total adjusted assets. For purposes of the table below, the amount expected to
be borrowed by the ESOP and the cost of the shares expected to be acquired by
the Stock Programs are deducted from pro forma regulatory capital.
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS BANK OF AMERICA
PRO FORMA AT JUNE 30, 1996 BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------------------
8,067,250 SHARES
5,185,000 SHARES 6,100,000 SHARES 7,015,000 SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF ESTIMATED
JUNE 30, 1996 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............ $47,521 5.92% $84,570 10.05% $84,570 10.05% $84,570 10.05% $84,570 10.05%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital:
Capital Level......... $47,104 5.87% $84,153 10.00% $84,153 10.00% $84,153 10.00% $84,153 10.00%
Requirement........... 12,036 1.50 12,623 1.50 12,623 1.50 12,623 1.50 12,623 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $35,068 4.37% $71,530 8.50% $71,530 8.50% $71,530 8.50% $71,530 8.50%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core Capital:
Capital Level......... $47,104 5.87% $84,153 10.00% $84,153 10.00% $84,153 10.00% $84,153 10.00%
Requirement(3)........ 24,072 3.00 25,246 3.00 25,246 3.00 25,246 3.00 25,246 3.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $23,032 2.87% $58,907 7.00% $58,907 7.00% $58,907 7.00% $58,907 7.00%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital:
Capital Level(4)(5)... $52,689 11.58% $89,738 18.91% $89,738 18.91% $89,738 18.91% $89,738 18.91%
Requirement........... 36,413 8.00 37,962 8.00 37,962 8.00 37,962 8.00 37,962 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................ $16,276 3.58% $51,776 10.91% $51,776 10.91% $51,776 10.91% $51,776 10.91%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets. Risk-
based capital levels are shown as a percentage of risk-weighted assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Savings Institution Regulation--Capital
Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to
the addition of the general valuation allowance of $6.2 million at June
30, 1996.
33
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $50.0
million and $68.0 million (or $78.4 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for the greater of that portion of
the net proceeds of the Offerings sufficient to increase the Bank's tangible
capital to 10% of its total adjusted assets, or 50% of the net proceeds, with
the remaining net proceeds to be retained by the Company. Based on net
proceeds of $50.0 million to $68.0 million and the assets of the Bank as of
June 30, 1996, the Company expects to utilize $38.7 million of net proceeds to
purchase the common stock of the Bank. Such portion of net proceeds will be
added to the Bank's general funds which the Bank currently intends to utilize
for the repayment of outstanding FHLB advances and other general corporate
purposes, including investment in one- to four-family residential mortgage
loans and other loans, investment in federal funds, short-term, investment
grade marketable securities and mortgage-backed securities and to fund the
Stock Programs or Master Stock-Based Benefit Plan. The Bank may also use such
funds for the expansion of its facilities, and to expand operations through
acquisitions of other financial institutions, branch offices or other
financial services companies, including those located within the Bank's market
area or the establishment of de novo branch offices or loan origination
facilities. Apart from the amount expected to be used to repay a portion of
currently outstanding FHLB advances, the Bank has not yet determined the
approximate amount of net proceeds to be used for any of the purposes
mentioned above.
The Company intends to use a portion of the net proceeds to capitalize the
ESOP Loan Subsidiary which intends to loan funds to the ESOP to enable the
ESOP to purchase 8% of the Common Stock issued in the Conversion, including
shares issued to the Foundation. The Company and Bank may alternatively choose
to fund the ESOP's stock purchases through a loan by a third party financial
institution. The remaining net proceeds retained by the Company will initially
be invested in a deposit account at the Bank. Based upon the sale of 5,185,000
shares or 7,015,000 shares at the minimum and maximum of the Estimated Price
Range, and the issuance of shares to the Foundation, the amount of the loan to
the ESOP would be $4.5 million or $6.1 million, respectively (or $7.0 million
if the Estimated Price Range is increased by 15%) to be repaid over a nine
year period at the prevailing prime rate of interest, which currently is
8.25%. See "Management of the Bank--Benefits--Employee Stock Ownership Plan
and Trust."
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment
of branch offices and the acquisition of smaller financial institutions or
their assets, including those located within the Bank's market area or
diversification into other banking related businesses. With the exception of
the Bank's current plans to open a de novo branch office in early 1997 and a
centralized administrative and operations center and branch office in late
1997, the Company has no current arrangements, understandings or agreements
regarding any such opportunities or transactions. However, the Bank,
consistent with its expansion strategy, is currently seeking sites for
additional branch office and loan origination center locations. The Bank
currently anticipates capital expenditures of approximately $15.5 million
related to the opening of its new centralized administrative and operations
center, the two new branch offices and renovation activity. The Company, upon
the Conversion, will be a unitary savings and loan holding company, which
under existing laws would generally not be restricted as to the types of
business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). See "Regulation--Holding Company
Regulation" for a description of certain regulations applicable to the
Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the OTS, the Company, pursuant
to OTS regulations, will be prohibited from repurchasing any shares of the
Common Stock
34
<PAGE>
for three years except (i) for an offer to all stockholders on a pro rata
basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market program not involving greater
than 5% of its outstanding capital stock during a 12 month period; (ii) the
repurchases do not cause the Bank to become "undercapitalized" within the
meaning of the OTS prompt corrective action regulation; and (iii) the Company
provides to the Regional Director of the OTS no later than 10 days prior to
the commencement of a repurchase program written notice containing a full
description of the program to be undertaken and such program is not
disapproved by the Regional Director. See "Regulation--Prompt Corrective
Regulatory Action." In addition, under current OTS policies, repurchases may
be allowed in the first year following Conversion and in amounts greater than
5% in the second and third years following Conversion provided there are valid
and compelling business reasons for such repurchases and the OTS does not
object to such repurchases.
Based upon facts and circumstances following Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness
of other investment alternatives in terms of the rate of return and risk
involved in the investment, the ability to increase the book value and/or
earnings per share of the remaining outstanding shares, and the opportunity to
improve the Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be
in excess of the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
all applicable regulatory requirements after any such repurchases and that
such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment, tax and other considerations. See "The Conversion--
Certain Restrictions on Purchase or Transfer of Shares After Conversion."
While the Company's Board of Directors intends to consider a policy of
paying cash dividends in the future, the Board has not currently formulated a
policy with respect to the payment of dividends. The payment of dividends or
repurchase of stock, however, would be prohibited if stockholders' equity
would be reduced below the amount required to maintain the Bank's liquidation
account. See "Dividend Policy" and "The Conversion--Liquidation Rights" and
"--Certain Restrictions on Purchase or Transfer of Shares After Conversion."
35
<PAGE>
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon
a number of factors, including the amount of net proceeds retained by the
Company in the Conversion, investment opportunities available to the Company
or the Bank, capital requirements, regulatory limitations, the Company's and
the Bank's financial condition and results of operations, tax considerations
and general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid.
The Bank will not be permitted to pay dividends to the Company on its
capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion--Liquidation
Rights." For information concerning federal regulations which apply to the
Bank in determining the amount of proceeds which may be retained by the
Company and regarding a savings institution's ability to make capital
distributions including payment of dividends to its holding company, see
"Federal and State Taxation--Federal Taxation--Distributions" and
"Regulation--Federal Savings Institution Regulation--Limitation on Capital
Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory restrictions
on the payment of dividends to its stockholders, although the source of such
dividends will be dependent on the net proceeds retained by the Company and
earnings thereon and may be dependent, in part, upon dividends from the Bank.
The Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of the net assets
of the Company (the amount by which total assets exceed total liabilities)
over its statutory capital (generally defined as the aggregate par value of
the outstanding shares of the Company's capital stock having a par value plus
the amount of the consideration paid for shares of the Company's capital stock
without par value) or, if there is no such excess, to its net profits for the
current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and Bank have
committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "FAB" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that
the Common Stock will be able to meet the applicable listing criteria in order
to maintain its listing on the AMEX or that an active and liquid trading
market will develop or, if developed, will be maintained. A public market
having the desirable characteristics of depth, liquidity and orderliness,
however, depends upon the presence in the marketplace of both willing buyers
and sellers of Common Stock at any given time, which is not within the control
of the Company. No assurance can be given that an investor will be able to
resell the Common Stock at or above the purchase price of the Common Stock
after the Conversion.
36
<PAGE>
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at June 30, 1996, and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, and the SAIF Special Assessment
based upon the sale of the number of shares indicated in the table and the
other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
------------------------------------------------------
5,185,000 8,067,250
SHARES 6,100,000 7,015,000 SHARES
(MINIMUM SHARES SHARES (15% ABOVE
OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts(2)..... $600,584 $600,584 $600,584 $600,584 $600,584
FHLB advances........... 136,648 136,648 136,648 136,648 136,648
-------- -------- -------- -------- --------
Total deposit accounts
and FHLB advances...... $737,232 $737,232 $737,232 $737,232 $737,232
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01
par value, 1,000,000
shares authorized;
none to be issued..... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 25,000,000
shares authorized;
shares to be issued as
reflected............. -- 56 66 76 87
Less: Expense of
contribution to
the Foundation,
net of taxes(3).. -- (2,689) (3,169) (3,649) (4,200)
Plus: Shares issued to
the Foundation... -- 4,148 4,880 5,612 6,454
Less: Common Stock
acquired by the
ESOP(4).......... -- (4,480) (5,270) (6,061) (6,970)
Additional paid-in
capital(5)............ -- 49,935 58,944 67,954 78,316
Retained earnings(6)... 47,521 47,521 47,521 47,521 47,521
Less: Common Stock
acquired by the Stock
Programs(7)........... -- (2,240) (2,635) (3,030) (3,485)
Less: SAIF Special
Assessment, net
of taxes(8)...... -- (1,670) (1,670) (1,670) (1,670)
-------- -------- -------- -------- --------
Total stockholders'
equity................. $ 47,521 $ 90,581 $ 98,667 $106,753 $116,053
======== ======== ======== ======== ========
</TABLE>
- -------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Represents the value of the contribution of Common Stock to the Foundation
at $10.00 per share reduced by the associated tax benefit of $1,459,000,
$1,711,000, $1,963,000 and $2,254,000 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively. The realization of
the federal tax benefit is limited annually to 10% of the Company's annual
taxable income, subject to the ability of the Company to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made. For state income tax purposes, the Bank will not
be able to utilize any such carry forward.
(4) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
ESOP Loan Subsidiary. The Common Stock acquired by the ESOP is reflected
as a reduction of stockholders' equity. See "Management of the Bank--
Benefits--Employee Stock Ownership Plan and Trust."
(5) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $10.00 per share or to the issuance
of additional shares pursuant to the Company's Stock Option Plans intended
to be adopted by the Company and presented for approval of stockholders at
a meeting of stockholders following the Conversion. If approved by the
stockholders of the Company, an amount equal to 10% of the shares of
Common Stock issued in the Conversion, including shares issued to the
Foundation, will be reserved for issuance upon the exercise of options to
be granted under the Stock Option Plans. See "Risk Factors--Possible
Dilutive Effect of Stock Programs and Stock Options," Footnote 3 to the
tables under "Pro Forma Data" and "Management of the Bank--Benefits--Stock
Option Plans."
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights" and "Regulation--
Federal Savings Institution Regulation--Limitations on Capital
Distributions."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock sold in the Conversion and issued to the Foundation
is purchased by the Stock Programs through open market purchases at the
offering price of $10.00 per share. The Common Stock purchased by the
Stock Programs is reflected as a reduction of stockholders' equity.
Implementation of the Stock Programs is subject to the approval of the
Company's stockholders at a meeting following the Conversion. See "Risk
Factors--Possible Dilutive Effect of Stock Programs and Stock Options,"
Footnote 2 to the tables under "Pro Forma Data" and "Management of the
Bank--Benefits--Stock Programs."
(8) Gives effect to the SAIF Special Assessment of $2.9 million on a pre-tax
basis which was recorded by the Bank as of September 30, 1996. See "Recent
Developments."
37
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $50.0 million and $68.0 million (or $78.4
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees
of the Bank and members of their immediate families (collectively, "Insiders")
will purchase an aggregate of $1.5 million of Common Stock and the ESOP will
purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation; (iii) Sandler O'Neill will receive
a fee equal to 1.56% of the aggregate Purchase Price of shares sold in the
Subscription and Community Offerings, excluding shares purchased by directors,
officers, employees and any immediate family member thereof and the ESOP for
which Sandler O'Neill will not receive a fee; and (iv) Conversion expenses,
excluding the marketing fees paid to Sandler O'Neill, will be approximately
$1.1 million. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the three months ended
June 30, 1996, and for the year ended March 31, 1996, have been calculated as
if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 6.37% and 6.50%, respectively, which
is the arithmetic average of the weighted average yield earned by the Bank on
its interest-earning assets and the weighted average rate paid on its deposits
during such periods (as required by OTS regulations). The tables below do not
reflect the effect of withdrawals from deposit accounts for the purchase of
Common Stock or the effect of any possible use of the net Conversion proceeds.
The pro forma after-tax yields for the Company and the Bank are assumed to be
3.68% for the three months ended June 30, 1996, based on an effective tax rate
of 42.2%, and 3.66% for the year ended March 31, 1996, based on an effective
tax rate of 43.7%. Historical and pro forma net earnings per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued, as adjusted to give effect
to the purchase of shares by the ESOP and the issuance of shares to the
Foundation. Historical and pro forma stockholders' equity per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock issued.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that
would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the three months ended June 30, 1996, and at or
for the year ended March 31, 1996, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give
effect to the Stock Programs, which are expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 2 to the tables and "Management of the
Bank--Benefits--Stock Programs." No effect has been given in the tables to the
possible issuance of additional shares reserved for future issuance pursuant
to the Stock Option Plans to be adopted by the Board of Directors of the
Company and presented to stockholders for approval at a meeting of
stockholders, nor does book value give any effect to the liquidation account
to be established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders or, in the event of liquidation of the Bank, to the
tax effect of the bad debt reserve and other factors. See Footnote 3 to the
tables below, "The Conversion--Liquidation Rights" and "Management of the
Bank--Benefits--Stock Option Plans." THE FOLLOWING TABLE ASSUMES THAT THE
FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE GIVES EFFECT TO
THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK
TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE
VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO
ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
38
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED JUNE 30, 1996
------------------------------------------------------
5,185,000 6,100,000 7,015,000 8,067,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $51,850 $61,000 $ 70,150 $ 80,673
Plus: Shares issued to
Foundation (equal
to 8% of the stock
sold in the
Conversion)....... 4,148 4,880 5,612 6,454
------- ------- -------- --------
Pro forma market
capitalization......... $55,998 $65,880 $ 75,762 $ 87,127
======= ======= ======== ========
Gross proceeds.......... $51,850 $61,000 $ 70,150 $ 80,673
Less: Offering expenses
and commission.... (1,859) (1,990) (2,120) (2,270)
------- ------- -------- --------
Estimated net proceeds.. 49,991 59,010 68,030 78,403
Less: Common Stock
purchased by
ESOP.............. (4,480) (5,270) (6,061) (6,970)
Common Stock
purchased by Stock
Programs............ (2,240) (2,635) (3,030) (3,485)
------- ------- -------- --------
Estimated net
proceeds, as
adjusted............. $43,271 $51,105 $ 58,939 $ 67,948
======= ======= ======== ========
Consolidated net
earnings(1):
Historical............ $ 1,071 $ 1,071 $ 1,071 $ 1,071
Pro forma earnings on
net proceeds......... 398 470 543 625
Less: Pro forma ESOP
adjustment(2)... (72) (85) (97) (112)
Pro forma Stock
Programs
adjustment(3)..... (65) (76) (88) (101)
------- ------- -------- --------
Pro forma net
earnings........... $ 1,332 $ 1,380 $ 1,429 $ 1,483
======= ======= ======== ========
Per share net
earnings(1):
Historical............ $ 0.20 $ 0.17 $ 0.14 $ 0.13
Pro forma earnings on
net proceeds......... 0.08 0.08 0.08 0.08
Less: Pro forma ESOP
adjustment(2)... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock
Programs
adjustment(3)..... (0.01) (0.01) (0.01) (0.01)
------- ------- -------- --------
Pro forma net
earnings per
share.............. $ 0.26 $ 0.23 $ 0.20 $ 0.19
======= ======= ======== ========
Stockholders' equity:
Historical............ $47,521 $47,521 $ 47,521 $ 47,521
Estimated net
proceeds............. 49,991 59,010 68,030 78,403
Plus: Shares issued to
Foundation...... 4,148 4,880 5,612 6,454
Less: After tax cost
of Foundation... (2,689) (3,169) (3,649) (4,200)
Common Stock
acquired by
ESOP(2)........... (4,480) (5,270) (6,061) (6,970)
Common Stock
acquired by Stock
Programs(3)....... (2,240) (2,635) (3,030) (3,485)
SAIF Special
Assessment, net of
taxes(4).......... (1,670) (1,670) (1,670) (1,670)
------- ------- -------- --------
Pro forma
stockholders'
equity(3)(4)(5)(6).. $90,581 $98,667 $106,753 $116,053
======= ======= ======== ========
Stockholders' equity per
share:
Historical............ $ 8.49 $ 7.21 $ 6.27 $ 5.45
Estimated net
proceeds............. 8.93 8.96 8.98 9.00
Plus: Shares issued to
Foundation...... 0.74 0.74 0.74 0.74
Less: After tax cost
of Foundation... (0.48) (0.48) (0.48) (0.48)
Common Stock
acquired by
ESOP(2)........... (0.80) (0.80) (0.80) (0.80)
Common Stock
acquired by Stock
Programs(3)....... (0.40) (0.40) (0.40) (0.40)
SAIF Special
Assessment, net of
taxes(4).......... (0.30) (0.25) (0.22) (0.19)
------- ------- -------- --------
Pro forma
stockholders'
equity per
share(3)(4)(5)(6).. $ 16.18 $ 14.98 $ 14.09 $ 13.32
======= ======= ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 61.82% 66.77% 70.97% 75.08%
Offering price to pro
forma net earnings per
share.................. 9.69x 11.00x 12.23x 13.54x
</TABLE>
39
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in the third quarter of fiscal 1997 if the establishment of the Foundation
is approved. In that event, the Company will recognize an after-tax
expense for the amount of the contribution to the Foundation which is
expected to be $2.6 million, $3.2 million, $3.6 million, and $4.2 million
at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the ESOP Loan
Subsidiary. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon nine equal annual installments of principal, with an assumed interest
rate at 8.25%. The pro forma net earnings assume: (i) that the Bank's
contribution to the ESOP is equivalent to the debt service requirement for
the three months ended June 30, 1996, and was made at the end of the
period; (ii) that 12,444, 14,640, 16,836 and 19,361 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
were committed to be released during the three months ended June 30, 1996,
at an average fair value of $10.00 per share in accordance with Statement
of Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "Management of the Bank--Benefits--Employee Stock
Ownership Plan and Trust."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock Programs intend to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock sold in the Conversion,
and issued to the Foundation, or 223,992, 263,520, 303,048 and 348,505
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares
of Common Stock or treasury stock of the Company, if any. Funds used by
the Stock Programs to purchase the shares will be contributed to the Stock
Programs by the Bank. In calculating the pro forma effect of the Stock
Programs, it is assumed that the shares were acquired by the Stock
Programs at the beginning of the period presented in open market purchases
at the Purchase Price and that 5% of the amount contributed was an
amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.25, $0.22, $0.20 and $0.18 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, and pro
forma stockholders' equity per share would be $15.94, $14.79, $13.93 and
$13.19 at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively. There can be no assurance that stockholder approval
of the Stock Programs will be obtained, or that the actual purchase price
of the shares will be equal to the Purchase Price. See "Management of the
Bank--Benefits--Stock Programs."
(4) Gives effect to the SAIF Special Assessment of $2.9 million, on a pre-tax
basis, which was recorded by the Bank on September 30, 1996 due to the
enactment of federal legislation in September 1996. See "Recent
Developments."
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. An amount equal to
10% of the Common Stock issued in the Conversion, including shares issued
to the Foundation, or 559,980, 658,800, 757,620 and 871,263 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock Option Plans. The
issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plans will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per
share would be $0.24, $0.22, $0.19 and $0.18, respectively, and the pro
forma stockholders' equity per share would be $15.61, $14.52, $13.72 and
$13.02, respectively. See "Management of the Bank--Benefits--Stock Option
Plans."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
40
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31, 1996
------------------------------------------------------
5,185,000 6,100,000 7,015,000 8,067,250
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(7)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $51,850 $61,000 $ 70,150 $ 80,673
Plus: Shares issued to
Foundation (equal
to 8% of the stock
sold in the
Conversion)....... 4,148 4,880 5,612 6,454
------- ------- -------- --------
Pro Forma market
capitalization......... $55,998 $65,880 $ 75,762 $ 87,127
======= ======= ======== ========
Gross proceeds.......... $51,850 $61,000 $ 70,150 $ 80,673
Less:Offering expenses
and commissions........ (1,859) (1,990) (2,120) (2,270)
------- ------- -------- --------
Estimated net proceeds.. 49,991 59,010 68,030 78,403
Less: Common Stock
purchased by
ESOP.............. (4,480) (5,270) (6,061) (6,970)
Common Stock
purchased by Stock
Programs............ (2,240) (2,635) (3,030) (3,485)
------- ------- -------- --------
Estimated net
proceeds, as
adjusted............. $43,271 $51,105 $ 58,939 $ 67,948
======= ======= ======== ========
Consolidated net
earnings(1):
Historical............ $ 4,603 $ 4,603 $ 4,603 $ 4,603
Pro forma earnings on
net proceeds......... 1,582 1,869 2,155 2,485
Less: Pro forma ESOP
adjustment(2)... (280) (330) (379) (436)
Pro forma Stock
Programs
adjustment(3)..... (252) (297) (341) (392)
------- ------- -------- --------
Pro forma net
earnings........... $ 5,653 $ 5,845 $ 6,038 $ 6,260
======= ======= ======== ========
Per share net
earnings(1):
Historical............ $ 0.89 $ 0.75 $ 0.65 $ 0.56
Pro forma earnings on
net proceeds......... 0.30 0.31 0.31 0.31
Less: Pro forma ESOP
adjustment(2)... (0.05) (0.05) (0.05) (0.05)
Pro forma Stock
Programs
adjustment(3)..... (0.05) (0.05) (0.05) (0.05)
------- ------- -------- --------
Pro forma net
earnings per
share.............. $ 1.09 $ 0.96 $ 0.86 $ 0.77
======= ======= ======== ========
Stockholders' equity:
Historical............ $46,418 $46,418 $ 46,418 $ 46,418
Estimated net
proceeds............. 49,991 59,010 68,030 78,403
Plus: Shares issued to
Foundation...... 4,148 4,880 5,612 6,454
Less: After tax cost
of Foundation... (2,626) (3,095) (3,565) (4,104)
Common Stock
acquired by
ESOP(2)........... (4,480) (5,270) (6,061) (6,970)
Common Stock
acquired by Stock
Programs(3)....... (2,240) (2,635) (3,030) (3,485)
SAIF Special
Assessment, net of
taxes(4).......... (1,670) (1,670) (1,670) (1,670)
------- ------- -------- --------
Pro forma
stockholders'
equity(3)(4)(5)(6).. $89,541 $97,638 $105,734 $115,046
======= ======= ======== ========
Stockholders' equity per
share:
Historical............ $ 8.29 $ 7.05 $ 6.13 $ 5.33
Estimated net
proceeds............. 8.93 8.96 8.98 9.00
Plus: Shares issued to
Foundation...... 0.74 0.74 0.74 0.74
Less: After tax cost
of Foundation... (0.47) (0.47) (0.47) (0.47)
Common Stock
acquired by
ESOP(2)........... (0.80) (0.80) (0.80) (0.80)
Common Stock
acquired by Stock
Programs(3)....... (0.40) (0.40) (0.40) (0.40)
SAIF Special
Assessment, net of
taxes(4).......... (0.30) (0.25) (0.22) (0.19)
------- ------- -------- --------
Pro forma
stockholders'
equity per
share(3)(4)(5)(6).. $ 15.99 $ 14.83 $ 13.96 $ 13.21
======= ======= ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 62.54% 67.47% 71.65% 75.73%
Offering price to pro
forma net earnings per
share.................. 9.20x 10.47x 11.66x 12.93x
</TABLE>
41
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in the third quarter of fiscal 1997 if the establishment of the Foundation
is approved. In that event, the Company will recognize an after-tax
expense for the amount of the contribution to the Foundation which is
expected to be $2.6 million, $3.1 million, $3.6 million, and $4.1 million
at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the ESOP Loan
Subsidiary. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon nine equal annual installments of principal, with an assumed interest
rate at 8.25%. The pro forma net earnings assume: (i) that the Bank's
contribution to the ESOP is equivalent to the debt service requirement for
the year ended March 31, 1996, and was made at the end of the period; (ii)
that 49,776, 58,560, 67,344 and 77,446 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, were
committed to be released during the year ended March 31, 1996 at an
average fair value of $10.00 per share in accordance with SOP 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan and
Trust."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock Programs intend to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock sold in the Conversion,
and issued to the Foundation, or 223,992, 263,520, 303,048 and 348,505
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares
of Common Stock or treasury stock of the Company, if any. In calculating
the pro forma effect of the Stock Programs, it is assumed that the shares
were acquired by the Stock Programs at the beginning of the period
presented in open market purchases at the Purchase Price and that 20% of
the amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Company's Common Stock
to the Stock Programs instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 3.8% and pro
forma net earnings per share would be $0.96, $0.85, $0.77 and $0.69 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$15.76, $14.64, $13.80 and $13.08 at the minimum, midpoint, maximum and
15% above the maximum of the range, respectively. There can be no
assurance that stockholder approval of the Stock Programs will be
obtained, or that the actual purchase price of the shares will be equal to
the Purchase Price. See "Management of the Bank--Benefits--Stock
Programs."
(4) Gives effect to the SAIF Special Assessment of $2.9 million, on a pre-tax
basis, which was recorded by the Bank on September 30, 1996 due to the
enactment of federal legislation in September 1996. See "Recent
Developments."
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. An amount equal to
10% of the Common Stock issued in the Conversion, including shares issued
to the Foundation, or 559,980, 658,800, 757,620 and 871,263 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Price Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock Option Plans. The
issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plans will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per
share would be $1.03, $0.91, $0.82 and $0.74, respectively, and the pro
forma stockholders' equity per share would be $15.45, $14.38, $13.60 and
$12.91, respectively. See "Management of the Bank--Benefits--Stock Option
Plans."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
42
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, Keller has estimated that the pro forma market capitalization of
the Bank would be approximately $69.0 million, at the midpoint, which is
approximately $3.1 million greater than the pro forma market capitalization of
the Bank if the Foundation is approved by the members of the Bank and would
result in approximately an $8.0 million increase, or 13.11%, in the amount of
Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated Price
Range, pro forma stockholders' equity per share and pro forma earnings per
share would be substantially the same with the Foundation as without the
Foundation. In this regard, pro forma stockholders' equity and pro forma net
income per share would be $15.14 and $0.23, respectively, at the midpoint of
the estimate, assuming no Foundation, and $14.98 and $0.23, respectively, with
the Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are 66.06% and 11.03x, respectively, at the midpoint of the
estimate, assuming no Foundation and are 66.77% and 11.00x, respectively, with
the Foundation. This estimate by Keller was prepared at the request of the OTS
and is solely for purposes of providing members with sufficient information
with which to make an informed decision on the Foundation. There is no
assurance that in the event the Foundation is not approved at the Special
Meeting of members that the appraisal prepared at that time would conclude
that the pro forma market value of the Company would be the same as that
estimated herein. Any appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum,
as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at June 30, 1996.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
--------------------- --------------------- --------------------- ---------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount.................. $ 51,850 $ 58,650 $ 61,000 $ 69,000 $ 70,150 $ 79,350 $ 80,673 $ 91,253
Pro forma market
capitalization.......... 55,998 58,650 65,880 69,000 75,762 79,350 87,126 91,253
Total assets............ 847,547 852,461 855,633 861,421 863,720 870,380 873,020 880,684
Total liabilities....... 756,960 756,960 756,960 756,960 756,960 756,960 756,960 756,960
Pro forma stockholders'
equity.................. 90,581 95,495 98,667 104,455 106,753 113,413 116,053 123,717
Pro forma consolidated
net earnings............ 1,332 1,385 1,380 1,442 1,429 1,499 1,483 1,565
Pro forma stockholders'
equity per share........ 16.18 16.28 14.98 15.14 14.09 14.29 13.32 13.74
Pro forma consolidated
net earnings per share.. 0.26 0.26 0.23 0.23 0.20 0.21 0.19 0.19
Pro Forma Pricing
Ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share...... 61.82% 61.42% 66.77% 66.06% 70.97% 69.97% 75.08% 73.76%
Offering price to pro
forma net earnings per
share................. 9.69x 9.76x 11.00x 11.03x 12.23x 12.20x 13.54x 13.44x
Offering price to
assets................ 6.61% 6.88% 7.70% 8.01% 8.77% 9.12% 9.98% 10.36%
Pro Forma Financial
Ratios:
Return on assets...... 0.63% 0.65% 0.65% 0.67% 0.66% 0.69% 0.68% 0.71%
Return on
stockholders' equity.. 5.88 5.80 5.60 5.54 5.35 5.29 5.11 5.06
Stockholders' equity
to assets............. 10.69 11.20 11.53 12.13 12.36 13.03 13.29 14.05
</TABLE>
43
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank and subsidiary
for each of the years in the three fiscal year period ended March 31, 1996
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants, whose report thereon is included elsewhere in this Prospectus.
With respect to the information for the three months ended June 30, 1996 and
1995, which is unaudited, in the opinion of management, all adjustments
necessary for a fair presentation of such interim periods have been included
and are of a normal recurring nature. Results for the three months ended June
30, 1996 are not necessarily indicative of the results that may be expected
for the fiscal year ended March 31, 1997. These Consolidated Statements of
Income should be read in conjunction with the Consolidated Financial
Statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED MARCH 31,
--------------------- -------------------------
1996 1995 1996 1995 1994
---------- ---------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans.......................... $ 13,295 $ 10,231 $43,757 $35,871 $31,767
Investment securities.......... 358 346 1,519 837 645
Mortgage-backed securities..... 126 58 321 261 355
Federal Home Loan Bank stock... 106 117 447 518 439
---------- ---------- ------- ------- -------
Total interest income........ 13,885 10,752 46,044 37,487 33,206
---------- ---------- ------- ------- -------
Interest expense:
Deposit accounts (note 7)...... 6,789 4,945 23,131 13,890 10,394
Borrowed funds................. 1,627 1,042 3,251 4,447 3,802
---------- ---------- ------- ------- -------
Total interest expense....... 8,416 5,987 26,382 18,337 14,196
---------- ---------- ------- ------- -------
Net interest income before
provision for loan losses... 5,469 4,765 19,662 19,150 19,010
Provision for loan losses (note 4).. 1,000 475 2,626 653 1,035
---------- ---------- ------- ------- -------
Net interest income after
provision for loan losses... 4,469 4,290 17,036 18,497 17,975
---------- ---------- ------- ------- -------
Noninterest income:
Loan servicing income.......... 693 632 2,628 2,539 1,982
Gain (loss) on sale of mortgage
loans, net (note 5)........... 44 (196) (841) (1,879) 1,636
Other income................... 493 598 2,805 1,849 852
---------- ---------- ------- ------- -------
Total noninterest income..... 1,230 1,034 4,592 2,509 4,470
---------- ---------- ------- ------- -------
Noninterest expense:
Compensation and employee
benefits...................... 2,075 1,768 7,366 7,108 7,235
Office occupancy and
equipment..................... 420 342 1,504 1,285 1,262
Advertising and business
promotion..................... 275 142 916 691 370
Federal deposit insurance
premiums...................... 302 236 1,044 854 739
Data processing................ 180 127 570 622 603
Provision for accelerated
prepayment.................... -- -- -- -- 1,006
Other.......................... 595 471 2,272 1,633 1,575
---------- ---------- ------- ------- -------
Total noninterest expense.... 3,847 3,086 13,672 12,193 12,790
---------- ---------- ------- ------- -------
Income before income tax
expense and cumulative
effect of change in
accounting for income
taxes....................... 1,852 2,238 7,956 8,813 9,655
Income tax expense (note 11)..... 781 943 3,353 3,852 4,235
---------- ---------- ------- ------- -------
Net income before cumulative
effect of change in
accounting for income
taxes....................... 1,071 1,295 4,603 4,961 5,420
Cumulative effect of change in
accounting for income taxes..... -- -- -- -- 1,495
---------- ---------- ------- ------- -------
Net income....................... $ 1,071 $ 1,295 $ 4,603 $ 4,961 $ 6,915
========== ========== ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by
the Bank's provision for loan losses, loan sale activities and loan servicing.
The Bank's noninterest expense principally consists of compensation and
employee benefits, office occupancy and equipment expense, federal deposit
insurance premiums, data processing, advertising and business promotion and
other expenses. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities. Future
changes in applicable law, regulations or government policies may materially
impact the Bank.
MANAGEMENT STRATEGY
In recent years, the Bank's operating strategy has consisted of maintaining
profitability and managing its interest rate risk primarily by emphasizing its
one- to four-family mortgage banking operations whereby it originates longer
term fixed-rate one- to four-family loans for sale, generally on a servicing
retained basis, and originates shorter term fixed-rate and adjustable-rate
one- to four-family loans for investment. The Bank has also focused on a
growth strategy which has attempted to broaden the Bank's franchise and its
lending and deposit base by expanding its operations through the establishment
of de novo branch offices and loan origination centers in and around
Southeastern Massachusetts and Rhode Island, the utilization of loan
correspondents throughout New England to originate one- to four-family loans
and increased emphasis on its consumer, commercial and commercial real estate
lending activities. The Bank's current operating strategy consists primarily
of: (1) enhancing net income by building its loan servicing portfolio and
controlling interest rate risk by retaining shorter-term and adjustable-rate
loans and generally selling all longer-term, fixed-rate one- to four-family
loans on a servicing retained basis; (2) investing funds, not utilized for
investment in loans, primarily in shorter-term U.S. Government obligations
and, to a lesser extent, adjustable-rate mortgage-backed securities;
(3) placing increased emphasis on attracting commercial deposits, including
business checking and money market accounts, and increasing its commercial
lending activity by focusing its marketing to smaller businesses operating in
the Bank's primary market area and through the restructuring of its commercial
and commercial real estate lending division by hiring commercial business
personnel with experience in commercial lending in the Bank's primary market
area; (4) focusing on increasing its loan and deposit market share and the
retention of existing deposit accounts by offering competitive rates on its
deposit and loan products and opening new branch offices in and around its
primary market area; and (5) maintaining a low expense ratio by efficiently
utilizing personnel and banking and loan facilities to service its customers.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis.
The extent of the movement of interest rates is an uncertainty that could have
a negative impact on the earnings of the Bank. See "Risk Factors--Sensitivity
to Increase in Interest Rates."
45
<PAGE>
In recent years, the Bank has primarily utilized the following strategies to
manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate and shorter-term fixed-rate, one- to four-family mortgage
loans; (2) selling in the secondary market longer-term, fixed-rate mortgage
loans originated while generally retaining the servicing rights on such loans;
(3) investing primarily in short-term U.S. Government securities or mortgage-
backed securities with adjustable interest rates; and (4) attempting to reduce
the overall interest rate sensitivity of liabilities by emphasizing longer-
term deposits and utilizing FHLB advances to replace rate sensitive deposits.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that same time period. At June 30, 1996, the Bank's cumulative interest rate
gap (which is the difference between the amount of interest-earning assets
maturing or repricing within one year) as a percentage of total assets, was a
negative 17.70%. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position would be in a worse position to invest in higher yielding assets as
compared to an institution with a positive gap position which, consequently,
may result in the cost of its interest-bearing liabilities increasing at a
rate faster than its yield on interest-earning assets than if it had a
positive gap. During a period of falling interest rates, an institution with a
negative gap would tend to have its interest-bearing liabilities repricing
downward at a faster rate than its interest-earning assets as compared to an
institution with a positive gap which, consequently, may tend to positively
affect the growth of its net interest income.
46
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1996, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at June 30, 1996, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a
result of contractual amortization and anticipated prepayments of adjustable-
rate loans and fixed-rate loans, and as a result of contractual rate
adjustments on adjustable-rate loans. Annual prepayment rates for adjustable-
rate and fixed-rate one- to four-family and multi-family mortgage loans are
assumed to range from 5.82% to 14.34% and 6.18% to 15.78%, respectively. The
annual prepayment rate for mortgage-backed securities is assumed to be 5.16%.
Money market deposit accounts, savings accounts and negotiable order of
withdrawal ("NOW") accounts are assumed to have annual decay rates of 67.7%,
2.4% and 3.4%, respectively. See "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
-------- ----------- ----------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities... $ 4,773 $ 2,000 $ 5,996 $ 9,491 $ -- $ -- $ 22,260
Loans receivable (1).... 106,004 50,468 85,374 159,136 146,535 190,747 738,264
Mortgage-backed
securities............. 96 93 183 687 4,413 1,666 7,138
Stock in FHLB-Boston.... 6,967 -- -- -- -- -- 6,967
-------- --------- --------- --------- -------- -------- --------
Total interest-earning
assets............... 117,840 52,561 91,553 169,314 150,948 192,413 774,629
-------- --------- --------- --------- -------- -------- --------
INTEREST-BEARING
LIABILITIES:
Money market accounts... 3,445 3,011 4,929 10,501 3,567 1,833 27,286
Savings accounts........ 470 2,098 927 3,600 3,435 71,193 81,723
NOW accounts............ 324 320 633 2,429 2,272 32,847 38,825
Certificate accounts.... 93,263 79,727 76,705 70,206 14,380 -- 334,281
IRA and KEOGH accounts.. 16,521 11,370 20,806 16,984 9,654 -- 75,335
FHLB advances........... 74,516 5,000 10,000 39,083 8,000 49 136,648
-------- --------- --------- --------- -------- -------- --------
Total interest-bearing
liabilities.......... 188,539 101,526 114,000 142,803 41,308 105,922 694,098
-------- --------- --------- --------- -------- -------- --------
Interest-earning assets
less interest-bearing
liabilities............ $(70,699) $ (48,965) $ (22,447) $ 26,511 $109,640 $ 86,491 $ 80,531
======== ========= ========= ========= ======== ======== ========
Cumulative interest-rate
sensitivity gap........ $(70,699) $(119,664) $(142,111) $(115,600) $ (5,960) $ 80,531
======== ========= ========= ========= ======== ========
Cumulative interest-rate
gap as a percentage of
total assets at June
30, 1996............... (8.81)% (14.90)% (17.70)% (14.40)% (0.74)% 10.03%
Cumulative interest rate
gap as a percentage of
total interest-earning
assets at June 30,
1996................... (9.13)% (15.45)% (18.35)% (14.92)% (0.77)% 10.40%
Cumulative interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities at
June 30, 1996.......... 62.50% 58.75% 64.83% 78.86% 98.99% 111.60%
</TABLE>
- --------
(1) Includes total loans receivable and mortgage loans held for sale, net of
non-performing loans and undisbursed proceeds of construction mortgages in
process.
47
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease
in the event of an interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of a model which internally generates estimates of
the change in the Bank's net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any
interest rate scenario, is defined as the NPV in that scenario divided by the
market value of assets in the same scenario. The OTS also produces a similar
analysis using its own model, based upon data submitted on the Bank's
quarterly Thrift Financial Reports, the results of which may vary from the
Bank's internal model primarily due to differences in assumptions utilized,
including estimated loan prepayment rates, reinvestment rates and deposit
decay rates. See "Regulation--Federal Savings Institution Regulation." The
following table sets forth the Bank's NPV as of June 30, 1996, as calculated
by the OTS.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------ --------------------------
IN BASIS POINTS % NPV
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE (1)
--------------- ------- -------- ------ ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $18,926 $(61,722) (77) 2.48% (716)
300 35,394 (45,255) (56) 4.53 (511)
200 51,881 (28,768) (36) 6.48 (317)
100 67,594 (13,055) (16) 8.25 (140)
Static 80,649 -- -- 9.64 --
(100) 89,515 8,866 11 10.54 90
(200) 91,451 10,802 13 10.69 105
(300) 88,566 7,917 10 10.33 68
(400) 86,806 6,157 8 10.08 44
</TABLE>
- --------
(1) Expressed in basis points.
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV requires the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV model presented assumes that
the composition of the Bank's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
48
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Bank at and for the three months ended June 30, 1996 and 1995
and for the years ended March 31, 1996, 1995 and 1994. The average yields and
costs are derived by dividing income or expense by the average balance of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown except where noted otherwise and reflect annualized yields and
costs. Average balances are derived from average month-end balances.
Management does not believe that the use of average monthly balances instead
of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------
AT JUNE 30, 1996 1996 1995
------------------- -------------------------- --------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Loans receivable, net
and mortgage loans
held for sale(1)...... $ 733,931 7.41% $695,716 $13,295 7.66% $507,848 $10,231 8.08%
Investment
securities(2)......... 29,227 6.12 29,813 464 6.24 28,616 463 6.49
Mortgage-backed
securities............ 7,138 7.05 7,199 126 7.02 2,679 58 8.68
---------- ------ -------- ------- ---- -------- ------- ----
Total interest-earning
assets............... 770,296 7.36 732,728 13,885 7.60 539,143 10,752 8.00
------ ------- ---- ------- ----
Noninterest-earning
assets................ 32,515 31,002 24,204
---------- -------- --------
Total assets.......... $ 802,811 $763,730 $563,347
========== ======== ========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Money market accounts.. $ 27,286 2.83 $ 28,752 206 2.87 $ 26,876 192 2.87
Savings accounts....... 81,723 2.50 80,301 499 2.49 75,918 472 2.49
NOW accounts........... 38,825 1.98 37,363 181 1.94 26,998 133 1.98
Certificate accounts... 409,616 5.90 402,075 5,903 5.89 289,692 4,148 5.74
---------- ------ -------- ------- ---- -------- ------- ----
Total................. 557,450 4.98 548,491 6,789 4.96 419,484 4,945 4.73
FHLB advances.......... 136,648 5.77 108,671 1,627 6.01 60,520 1,042 6.91
---------- ------ -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 694,098 5.13 657,162 8,416 5.14 480,004 5,987 5.00
------ ------- ---- ------- ----
Noninterest-bearing
liabilities(3)........ 61,192 59,612 40,969
---------- -------- --------
Total liabilities..... 755,290 716,774 520,973
---------- -------- --------
Retained earnings...... 47,521 46,956 42,374
---------- -------- --------
Total liabilities and
retained earnings..... $ 802,811 $763,730 $563,347
========== ======== ========
Net interest rate
spread(4)............. 2.23% $ 5,469 2.46% $ 4,765 3.00%
====== ======= ==== ======= ====
Net interest
margin(5)............. 2.99% 3.54%
==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 110.98% 111.50% 112.32%
========== ======== ========
</TABLE>
- --------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.
(2) Includes investment securities available for sale and held to maturity and
stock in FHLB-Boston.
(3) Consists primarily of business checking accounts.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earnings assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
49
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Loans receivable, net
and mortgage loans
held for sale(1)...... $548,558 $43,757 7.98% $471,050 $35,871 7.62% $413,512 $31,767 7.68%
Investment
securities(2)......... 30,808 1,966 6.38 21,922 1,355 6.18 17,785 1,084 6.10
Mortgage-backed
securities............ 4,411 321 7.28 3,033 261 8.61 4,124 355 8.61
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets............... 583,777 46,044 7.89 496,005 37,487 7.56 435,421 33,206 7.63
------- ---- ------- ---- ------- ----
Noninterest-earning
assets................ 25,570 23,146 23,498
-------- -------- --------
Total assets.......... $609,347 $519,151 $458,919
======== ======== ========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Money market accounts.. $ 27,194 783 2.88 $ 33,011 885 2.68 $ 32,728 749 2.29
Savings accounts....... 76,511 1,915 2.50 81,525 2,037 2.50 82,480 2,898 3.51
NOW accounts........... 30,088 599 1.99 24,153 479 1.98 21,799 370 1.70
Certificate accounts... 332,977 19,834 5.96 230,383 10,489 4.55 170,741 6,377 3.73
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total................. 466,770 23,131 4.96 369,072 13,890 3.76 307,748 10,394 3.38
FHLB advances.......... 50,321 3,251 6.46 71,005 4,447 6.26 67,994 3,802 5.59
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities.......... 517,091 26,382 5.10 440,077 18,337 4.17 375,742 14,196 3.78
------- ---- ------- ---- ------- ----
Noninterest-bearing
liabilities(3)........ 48,015 40,415 49,469
-------- -------- --------
Total liabilities..... 565,106 480,492 425,211
-------- -------- --------
Retained earnings...... 44,241 38,659 33,708
-------- -------- --------
Total liabilities and
retained earnings..... $609,347 $519,151 $458,919
======== ======== ========
Net interest rate
spread(4)............. $19,662 2.79% $19,150 3.39% $19,010 3.85%
======= ==== ======= ==== ======= ====
Net interest
margin(5)............. 3.37% 3.86% 4.37%
==== ==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 112.90% 112.71% 115.88%
======== ======== ========
</TABLE>
- --------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.
(2) Includes investment securities available for sale and held to maturity and
stock in FHLB-Boston.
(3) Consists primarily of business checking accounts.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
50
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated on a proportional basis between changes in rate and
volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 MARCH 31, 1996 MARCH 31, 1995
COMPARED TO COMPARED TO COMPARED TO
THREE MONTHS ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1995 MARCH 31, 1995 MARCH 31, 1994
---------------------------- ----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
-------------------- -------------------- ---------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
-------------------- ------ ---------- --------- ------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities.. $ 75 $ (74) $ 1 $ 566 $ 45 $ 611 $ 257 $ 14 $ 271
Loans receivable, net
and mortgage loans
held for sale......... 6,427 (3,363) 3,064 6,127 1,759 7,886 4,356 (252) 4,104
Mortgage-backed
securities............ 140 (72) 68 105 (45) 60 (94) -- (94)
--------- ---------- ------ --------- --------- ------- --------- ---------- ------
Total interest-earning
assets................ 6,642 (3,509) 3,133 6,798 1,759 8,557 4,519 (238) 4,281
--------- ---------- ------ --------- --------- ------- --------- ---------- ------
INTEREST-BEARING
LIABILITIES:
Money market accounts.. 14 -- 14 (164) 62 (102) 6 130 136
Savings accounts....... 27 -- 27 (122) -- (122) (34) (827) (861)
NOW accounts........... 66 (18) 48 118 2 120 43 66 109
Certificate accounts... 1,644 111 1,755 5,511 3,834 9,345 2,524 1,588 4,112
--------- ---------- ------ --------- --------- ------- --------- ---------- ------
Total.................. 1,751 93 1,844 5,343 3,898 9,241 2,539 957 3,496
FHLB advances.......... 1,439 (854) 585 (1,334) 138 (1,196) 174 471 645
--------- ---------- ------ --------- --------- ------- --------- ---------- ------
Total interest-bearing
liabilities........... 3,190 (761) 2,429 4,009 4,036 8,045 2,713 1,428 4,141
--------- ---------- ------ --------- --------- ------- --------- ---------- ------
Net change in net
interest income........ $ 3,452 $ (2,748) $ 704 $ 2,789 $ (2,277) $ 512 $ 1,806 $ (1,666) $ 140
========= ========== ====== ========= ========= ======= ========= ========== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND MARCH 31, 1996
Total assets increased by $79.0 million, or 10.9%, from $723.8 million at
March 31, 1996 to $802.8 million at June 30, 1996. The growth in assets is
primarily attributable to a $89.8 million increase in loans receivable, net,
which was offset, in part, by a $11.2 million decrease in mortgage loans held
for sale. The increase in loans receivable, net primarily reflects an increase
of $82.0 million in one- to four-family loans, $2.2 million of commercial real
estate loans and $5.5 million of consumer loans. The increase in one- to four-
family loans held for investment reflects increased loan origination activity
due to favorable market interest rates in early 1996, which resulted in
increased loan closings in the three months ended June 30, 1996, and
management's determination to increase the level of its interest-earning
assets by retaining for its portfolio fixed-rate one- to four-family loans
with maturities of up to 15 years. Timing differences accounted for the
decrease in mortgage loans held for sale as origination volume levels
influenced the outstanding balances at June 30, 1996 and March 31, 1996.
Investment securities held to maturity decreased by $2.5 million due to $5
million in maturities of investment securities which exceeded purchases of
$2.5 million. As a result, at June 30, 1996, the Bank's liquidity ratio was
5.15% as compared to the minimum regulatory liquidity ratio of 5.0%. The
increase in assets was funded primarily by an increase in FHLB advances, which
increased to $136.6 million at June 30, 1996 from $75.1 million at March 31,
1996. Funding for asset growth was also provided by a $16.8 million, or 2.9%,
increase in deposits, which increased to $600.6 million at June 30, 1996 as
compared to $583.8 million at March 31, 1996, primarily due to an increase in
certificate of deposit accounts which increased from $392.0 million at March
31, 1996 to $409.6 million at June 30, 1996. Retained earnings at June 30,
1996 totalled $47.5 million, or 5.92% of assets, as compared to $46.4 million,
or 6.41% of assets, at March 31, 1996.
51
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 AND MARCH 31, 1995
Total assets increased by $163.8 million, or 29.2%, from $560.0 million at
March 31, 1995 to $723.8 million at March 31, 1996. The growth in assets is
primarily attributable to a $137.6 million increase in loans receivable, net
and a $10.9 million increase in mortgage loans held for sale. Cash on hand and
due from banks, investment securities available for sale and investment
securities held to maturity increased by a total of $6.6 million from $31.4
million at March 31, 1995 to $38.0 million at March 31, 1996. The $137.6
million increase in loans receivable, net was primarily attributable to the
increased balances of one- to four-family mortgage loans, primarily consisting
of shorter term fixed-rate loans, which reflects management's determination to
retain fixed-rate one- to four-family loans with maturities of 15 years or
less. The increase was also attributable to increased loan origination volume
in fiscal 1996 due to favorable market interest rates. As a result, the Bank's
portfolio of fixed-rate residential mortgage loans and construction and land
loans increased by $112.2 million between March 31, 1995 and March 31, 1996
while adjustable-rate residential mortgage loans and construction and land
loans increased by $12.4 million during the same period. The declining
interest rate environment during most of 1995 and the beginning of 1996
resulted in increased originations of fixed-rate loans while demand for
adjustable-rate loans diminished. Market interest rates began declining at the
beginning of fiscal year 1996 and continued to decline until the middle of the
last quarter of the fiscal year ended March 31, 1996. The mortgage-backed
securities portfolio increased by $4.5 million, from a balance of $2.7 million
at March 31, 1995 to a balance of $7.2 million at March 31, 1996 primarily due
to a $5.0 million purchase of an adjustable-rate mortgage-backed security. The
growth in assets was funded primarily by deposits which increased by $143.6
million, or 32.6%, to $583.8 million at March 31, 1996 as compared to $440.1
million as of March 31, 1995 due primarily to the favorable impact of the
Bank's continuing expansion strategy and competitive pricing strategy to
attract new deposit accounts. Deposit growth occurred primarily in higher cost
certificate of deposit accounts which increased from $280.5 million at March
31, 1995, or 54.1% of total liabilities, to $392.0 million at March 31, 1996,
or 57.9% of total liabilities. FHLB advances, which increased by $8.5 million
to $75.1 million at March 31, 1996 as compared to $66.6 million at March 31,
1995, also funded asset growth. Retained earnings at March 31, 1996 totalled
$46.4 million, or 6.41% of total assets, compared to $41.7 million, or 7.45%,
at March 31, 1995.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND
JUNE 30, 1995
GENERAL
The Bank's net income for the three months ended June 30, 1996 was $1.1
million compared to $1.3 million for the three months ended June 30, 1995. The
decline of $224,000, or 17.3%, in net income was primarily due to increased
noninterest expense, which increased due to higher office occupancy and
equipment expense, advertising and business promotion expense and compensation
and employee benefits costs associated with the Bank's branch office
expansion, and an increased provision for loan losses. The increased expense
items offset higher net interest income and higher noninterest income.
INTEREST INCOME
Interest income for the three months ended June 30, 1996 was $13.9 million
as compared to $10.8 million for the same period in 1995, an increase of $3.1
million, or 29.1%. The increase in interest income was primarily the result of
an increase in the average balance of interest-earning assets of $193.6
million, or 35.9%, from $539.1 million for the three months ended June 30,
1995 to $732.7 million for the same period in 1996. The increase in average
interest-earning assets was primarily the result of a $187.9 million increase
in the average balance of loans receivable, net, and mortgage loans held for
sale. The increase in the average balance of loans receivable, net, was due
primarily to increased one- to four-family loan origination activity resulting
in a corresponding increase in the retention of adjustable-rate and shorter
term fixed-rate one- to four-family loans. The effect of higher average
balances in interest-earning assets resulted in a total increase of $6.6
million in interest income but was offset, in part, by lower average yields on
interest-earning assets. The average yield on interest-earning assets
decreased to 7.60% during the three months ended June 30, 1996 as compared to
an
52
<PAGE>
average yield of 8.00% for the three month period ended June 30, 1995. The
decreased yield in interest-earning assets resulted in a decrease in interest
income of $3.5 million during the three months ended June 30, 1996 as compared
to the same period in 1995. Market interest rates generally declined during
the three months ended June 30, 1996, and as a result, the index rates used
for adjustments on the Bank's adjustable-rate one- to four-family loans caused
an overall decrease in the average yield of such portfolio during the three
months ended June 30, 1996. The average yield on loans receivable decreased
from 8.08% for the three months ended June 30, 1995 to 7.66% for the three
months ended June 30, 1996. The average yield on investment securities
decreased from 6.49% for the three months ended June 30, 1995 to 6.24% for the
three months ended June 30, 1996 due to the lower market interest rates.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1996 was $8.4 million
compared to $6.0 million for the three months ended June 30, 1995, an increase
of $2.4 million, or 40.6%. The increase in interest expense was primarily due
to the $177.2 million, or 36.9%, increase in the average balance of interest-
bearing liabilities from $480.0 million for the three month period ended June
30, 1995 as compared to $657.2 million for the same period in 1996 and an
increase in the weighted average cost of interest-bearing liabilities from
5.00% to 5.14%. The increase in the average balance of interest-bearing
liabilities resulted primarily from an increase in the average balance of
total deposit accounts of $129.0 million, or 30.8%, primarily due to an
increase in the average balance of certificate accounts which increased by
$112.4 million, or 38.8%. Certificate accounts increased as a result of the
competitive pricing of such deposit accounts to attract such deposit accounts
and the effect of the Bank's opening of two new branch offices. The increase
in the average balance of higher cost certificate accounts was also the
primary reason for the increase in the overall cost of deposits despite a
lower interest rate environment in the three months ended June 30, 1996 as
compared to the same period in 1995, which resulted in interest expense on
deposits increasing by $1.8 million, or 37.3%, from $4.9 million for the three
months ended June 30, 1995 to $6.8 million for the same period in 1996. The
average balance of FHLB advances increased by $48.2 million resulting in
interest expense on average FHLB advances increasing $585,000 from $1.0
million for the three months ended June 30, 1995 to $1.6 million for the same
period in 1996.
NET INTEREST INCOME
Net interest income before the provision for loan losses increased by
$704,000, or 14.8%, as the increase in the average balance of the Bank's
interest-earning assets offset a decrease in the Bank's net interest rate
spread, from 3.00% for the three months ended June 30, 1995 to 2.46% for the
same period in 1996. The decrease in the net interest rate spread was due
primarily to an increase in the average balance of higher cost certificate
accounts. The Bank's net interest margin decreased from 3.54% for the three
months ended June 30, 1995 to 2.99% for the same period in 1996.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted to $1.0 million for the three
months ended June 30, 1996, as compared to a provision of $475,000 for the
three months ended June 30, 1995. The increase in the provision for loan
losses resulted from management's review and evaluation of the loan portfolio
and the adverse classification of one commercial real estate loan during the
three months ended June 30, 1996. In particular, management considered the
overall increase in the balance of its loan portfolio as well as an increase
in higher risk commercial and commercial real estate loans. As a result of the
increased provision, the Bank's ratio of loan loss allowance to loans remained
relatively stable, declining from 0.92% at June 30, 1995 to 0.88% at June 30,
1996. The Bank establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level
which is deemed to be appropriate based upon management's assessment of the
risk inherent in its loan portfolio in light of current economic conditions,
actual loss experience, industry trends and other factors which may affect the
real estate values in the Bank's market area. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance
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for loan losses. Such agencies may require the Bank to provide additions to
the allowance based upon judgments which differ from those of management.
While management of the Bank believes that the allowance for loan losses is
sufficient based on information currently available to it, no assurances can
be made that future events, conditions or regulatory directives will not
result in increased provisions for loan losses or additions to the Bank's
allowance for loan losses which may adversely affect net income. See "Business
of the Bank--Lending Activities--Delinquencies and Classified Assets" and "--
Allowance for Loan Losses."
NONINTEREST INCOME
Total noninterest income for the three months ended June 30, 1996 increased
$196,000, or 19.0%, to $1.2 million as compared to noninterest income of $1.0
million for the three months ended June 30, 1995. The primary reasons for the
improvement were the reporting of a gain of $44,000 on the sale of loans
during the three months ended June 30, 1996 as compared to a loss on the sale
of loans of $196,000 in the comparable period in 1995 and due to the recovery
of unrealized losses on mortgage loans held for sale. The gain on the sale of
mortgage loans for the three months ended June 30, 1996 benefited from the
adoption of SFAS No. 122, "Accounting for Mortgage Servicing Rights," on April
1, 1996, which resulted in the inclusion in income of $261,000, reflecting the
recognition of loan servicing rights. Loan servicing income increased by
$61,000 to $693,000 for the three months ended June 30, 1996 from $632,000 for
the same period in 1995; the balances of loans serviced for others at June 30,
1996 and June 30, 1995 were $1.1 billion and $1.0 billion, respectively. Other
noninterest income for the three months ended June 30, 1996 decreased to
$493,000 from $598,000 for the three months ended June 30, 1995. This decline
in other noninterest income reflected the reversal in the June 1995 period of
a reserve that management had established in fiscal 1994 pertaining to the
Bank's reconciliation of certain loans being serviced for others; such reserve
was subsequently determined not to be needed and the previously established
reserve was recovered.
NONINTEREST EXPENSE
Total noninterest expense increased by $761,000, or 24.7%, from $3.1 million
for the three months ended June 30, 1995 to $3.8 million for the same period
in 1996. The increase was primarily due to increased compensation and employee
benefits expense, increased office occupancy and equipment expense and
increased advertising and business promotion expense, all of which
corresponded to the Bank's franchise expansion strategy whereby it added two
new branch facilities from June 30, 1995 to June 30, 1996, and increased the
number of personnel by a total of 37. Compensation and employee benefits
expense increased by 17.4% from $1.8 million during the three months ended
June 30, 1995 to $2.1 million for the comparable period in 1996 and office
occupancy and equipment expense and advertising and business promotion expense
increased by 22.8% and 93.7%, respectively, in the three month period ended
June 30, 1996 versus the three month period ended June 30, 1995 due to the
significant advertising and promotion, additional staffing and ongoing
subsequent operation of two new branch offices located in East Providence and
Pawtucket, Rhode Island. Noninterest expense also increased due to increased
federal deposit insurance premiums, which increased by 28.0% from $236,000
during the three months ended June 30, 1995 to $302,000 for the comparable
period in 1996 primarily due to the higher average deposit balances during the
three months ended June 30, 1996. The Bank continues to qualify for the lowest
cost FDIC assessment risk classification for its particular portion of the
financial services industry (SAIF) thereby continuing to pay FDIC insurance
premiums on insured deposits at a rate of 23 basis points. Data processing
expense increased by $53,000, or 41.7%, to $180,000 for the three months ended
June 30, 1996 from $127,000 during the comparable period in 1995 and other
expense increased by $124,000, or 26.3%, to $595,000 for the three months
ended June 30, 1996 from $471,000 during the comparable period in 1995. Both
of these increases are attributable to increases in operational costs as a
result of the significant growth in the number of customers between the
comparable periods. The Bank intends to open additional branch offices in 1996
and 1997 and anticipates the completion of a new administrative facility in
1997, which will result in further increases in the Bank's noninterest expense
in the future and on an ongoing basis. See "Risk Factors--Recent Increase in
Noninterest Expense and Expansion Strategy."
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INCOME TAXES
Income tax expense was $781,000 for the three months ended June 30, 1996
(resulting in an effective tax rate of 42.2%), compared to $943,000 for the
three months ended June 30, 1995 (resulting in an effective tax rate of
42.1%). The decrease in income tax expense was due to lower pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1996 AND MARCH
31, 1995
GENERAL
Net income for the fiscal year ended March 31, 1996 decreased by $358,000,
or 7.2%, from $5.0 million for the year ended March 31, 1995 to $4.6 million
for the year ended March 31, 1996. The decrease was primarily attributable to
a higher provision for loan losses in fiscal 1996 and an increase in
noninterest expenses which were partially offset by higher noninterest income
resulting from reduced losses on the sale of mortgage loans, net, an increase
in other income, an increase in net interest income and reduced income tax
expense.
INTEREST INCOME
Total interest income for the fiscal year ended March 31, 1996 increased by
$8.6 million to $46.0 million as compared to $37.5 million for fiscal 1995.
The increase in interest income for fiscal 1996 was primarily attributable to
increased average balances of interest-earning assets, primarily due to an
increase in the average balance of loans, which increased by $77.5 million, or
16.5%, from $471.1 million for fiscal 1995 to $548.6 million for fiscal 1996.
The increase in loans receivable primarily reflects increased one- to four-
family loan originations and the Bank's determination to retain fixed-rate
one- to four-family loans with terms of 15 years or less which it generally
originates for sale. As a result, interest income on loans increased by $7.9
million to $43.8 million, or 22.0%, for fiscal 1996 as compared to $35.9
million for fiscal 1995. The increase in interest income was also the result
of higher average yields on interest-earning assets which increased from 7.56%
for fiscal 1995 to 7.89% for fiscal 1996 due to the retention of fixed-rate
one- to four-family loans which generally bear higher rates than adjustable-
rate loans. Interest income on investment and mortgage-backed securities also
increased by $671,000 due to increased average balances.
INTEREST EXPENSE
Interest expense increased by $8.0 million, or 43.9%, for fiscal 1996 to
$26.4 million as compared to $18.3 million for fiscal 1995 primarily due to
increased average balances of deposit accounts resulting from the growth in
the Bank's certificate accounts. The growth in higher cost certificate
accounts resulted in an increase of $9.2 million, or 66.5%, in interest
expense on deposit accounts. The Bank's competitive deposit pricing strategy
resulted in an increase in the average cost of deposits of 120 basis points
from an average cost of 3.76% for fiscal 1995 to an average cost of 4.96% for
fiscal 1996. Average balances increased by $97.7 million from an average
balance of $369.1 million for the year ended March 31, 1995 to an average
balance of $466.8 million for the year ended March 31, 1996. The increase in
interest expense on deposits was offset partially by a decrease in interest
expense on FHLB advances of $1.2 million, or 26.9%, due to a decrease in the
average balance of FHLB advances from $71.0 million for fiscal 1995 to $50.3
million for fiscal 1996. Interest expense on FHLB advances decreased despite
an increase in the average cost of FHLB advances of 20 basis points, from
6.26% for fiscal 1995 to 6.46% for fiscal 1996.
NET INTEREST INCOME
Net interest income before provision for loan losses increased by $512,000,
or 2.7%, from $19.2 million to $19.7 million for fiscal 1996. Net interest
income increased despite a decrease in the net interest spread from 3.39% for
fiscal 1995 to 2.79% for fiscal 1996. The decrease in the net interest spread
was due primarily to an increase in the average balance of higher cost
certificate accounts and the Bank's competitive pricing strategy to attract
and retain certain certificate of deposit accounts. The net interest margin
for fiscal 1996 decreased to 3.37% from 3.86% for fiscal 1995 primarily due to
the increase in the average cost of certificate accounts. The
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impact of the reduced net interest margin was offset by an increase in the
average balance of interest earning assets in fiscal 1996 versus fiscal 1995
and, as a result, net interest income improved for fiscal 1996 versus fiscal
1995.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted to $2.6 million for the year
ended March 31, 1996, as compared to a provision of $653,000 for the year
ended March 31, 1995. The increase in the provision for loan losses was due
primarily to management's review and evaluation of the loan portfolio and
increased charge-off activity. In particular, management considered the
increase in loan chargeoffs which increased from $400,000 to $1.3 million
primarily due to chargeoffs related to one commercial real estate loan which
management determined to restructure and partially chargeoff as a result of
the borrowers becoming unable to repay the loan under its original terms due
to vacancy and cash flow problems. As a result, the Bank's allowance for loan
losses to loans at March 31, 1996 was 0.87% as compared to 0.84% at March 31,
1995.
NONINTEREST INCOME
Total noninterest income increased by $2.1 million, or 83.0%, from $2.5
million for fiscal 1995 to $4.6 million for fiscal 1996. The increase was
primarily attributable to a $1.0 million reduction in losses on the sale of
mortgage loans, which decreased from a $1.9 million loss for fiscal 1995 to an
$841,000 loss for fiscal 1996, as well as an increase in other income of $1.0
million from $1.8 million for fiscal 1995 to $2.8 million for fiscal 1996. The
decrease in losses on the sale of mortgage loans in fiscal 1996 was primarily
due to a less volatile market interest rate environment in fiscal 1996 and the
amount of the Bank's sales of loans which were not hedged by forward loan sale
commitments during fiscal 1995. During the year ended 1996, the Bank
maintained a higher ratio of loans for sale hedged with forward sale
commitments than in the previous fiscal year. The $1.0 million increase in
other income was composed primarily of an $813,000 benefit due to the reversal
in the fiscal 1996 period of a reserve that management had established in
fiscal 1994 pertaining to the Bank's reconciliation of certain loans serviced
for others; such reserve was subsequently determined not to be needed and the
previously established reserve was recovered.
NONINTEREST EXPENSE
Total noninterest expense for the year ended March 31, 1996 increased by
$1.5 million, or 12.1%, from $12.2 million for fiscal 1995 to $13.7 million
for fiscal 1996. The increase of $1.5 million, or 12.1%, was in part
attributable to an increase of $258,000, or 3.6%, in compensation and employee
benefits expense, an increase of $219,000, or 17.0%, in office occupancy and
equipment expense, an increase of $225,000, or 32.6%, in advertising and
business promotion expense as well as a $190,000, or 22.2%, increase in
federal deposit insurance premiums expense. The increase in compensation and
employee benefits and office occupancy and equipment expenses was primarily
due to increased personnel and facilities in connection with the Bank's
expansion strategy and the opening of two new branch facilities in fiscal
1996. The increase in federal deposit insurance resulted from higher average
balances of deposit accounts in fiscal 1996. Data processing expense decreased
by $52,000 from $622,000 for fiscal 1995 to $570,000 for fiscal 1996 primarily
due to contract adjustments negotiated with the Bank's service bureau. Other
noninterest expense was $1.6 million for the year ended March 31, 1995 as
compared to $2.3 million for the year ended March 31, 1996. The increase in
other noninterest expense was primarily due to higher costs related to the
servicing of a greater number of loan and deposit accounts.
INCOME TAXES
Income tax expense was $3.4 million for the year ended March 31, 1996
(resulting in an effective tax rate of 42.1%), compared to $3.9 million in
income tax expense for the year ended March 31, 1995 (resulting in an
effective tax rate of 43.7%). The $499,000 decrease in income tax expense is
due to decreased pre-tax income.
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1995 AND MARCH
31, 1994
GENERAL
Net income decreased by $2.0 million, or 28.3%, from $6.9 million for the
year ended March 31, 1994 to $5.0 million for fiscal 1995. The decrease was
primarily attributable to a $1.9 million loss on the sale of mortgage loans,
net, for fiscal 1995 compared to a $1.6 million gain on the sale of mortgage
loans, net, for fiscal 1994 as well as the recognition in fiscal 1994 of a
$1.5 million tax benefit due to the cumulative effect of a change in
accounting for income taxes. These events were offset, in part, by an increase
in other income of $1.0 million in fiscal 1995 and the absence of a $1.0
million provision in fiscal 1994 which related to the acceleration of
amortization of excess servicing of loans serviced for others caused by
management's consideration of loan prepayment activity which occurred in
fiscal 1994.
INTEREST INCOME
Total interest income for the year ended March 31, 1995 increased $4.3
million, or 12.9%, to $37.5 million as compared to the $33.2 million for the
year ended March 31, 1994. Interest income on loans increased by $4.1 million,
or 12.9%, to $35.9 million in the year ended March 31, 1995 as compared to
$31.8 million in the year ended March 31, 1994. The increase in interest
income on loans was attributable to an increased average balance of loans,
primarily due to an increase in one- to four-family loans. The average balance
of loans increased to $471.1 million for the year ended March 31, 1995 from
$413.5 million for the year ended March 31, 1994. This balance increase was
partially offset by a slight reduction in the average yield from 7.68% for
fiscal 1994 to an average yield of 7.62% in fiscal 1995. Interest income on
mortgage-backed securities decreased by $94,000 due to a lower average balance
during fiscal 1995. While the average yield on mortgage-backed securities
remained constant at 8.61% for each period, the average balance decreased from
$4.1 million for fiscal 1994 to $3.0 million for fiscal 1995. Interest income
on investment securities increased by $271,000 primarily due to an increase of
$4.1 million in the average balance of investment securities.
INTEREST EXPENSE
Interest expense increased by $4.1 million, or 29.2%, to $18.3 million for
the fiscal year ended March 31, 1995 as compared to $14.2 million for fiscal
1994. Interest expense on deposit accounts increased by $3.5 million, or
33.6%, for fiscal 1995 due to an increase in both average balance and average
cost of deposits. The average cost of deposits increased from 3.38% for fiscal
1994 to an average cost of deposits of 3.76% for fiscal 1995 primarily due to
a higher interest rate environment in fiscal 1995 and an increased balance of
higher cost certificate accounts and the Bank's competitive pricing of such
deposit products. The average balance of deposit accounts increased by $61.4
million from an average balance of $307.7 million for fiscal 1994 to an
average balance of $369.1 million for fiscal 1995. In addition to the
increases in deposit interest expense, interest expense on FHLB advances
increased from $3.8 million for fiscal 1994 to $4.4 million for fiscal 1995,
an increase of $645,000 or 17.0% due to a higher average balance of FHLB
advances. The average cost of FHLB advances increased by 67 basis points from
an average of 5.59% for fiscal 1994 to 6.26% for fiscal 1995 due to the higher
interest rate environment. The average balance of FHLB advances increased from
an average balance of $68.0 million for fiscal 1994 to an average balance of
$71.0 million for fiscal 1995. The increases in FHLB advances were primarily
used to fund originations of adjustable-rate one- to four-family mortgage
loans.
NET INTEREST INCOME
Net interest income remained relatively stable increasing from $19.0 million
for fiscal 1994 to $19.2 million for fiscal 1995. The Bank's net interest
spread decreased from 3.85% for fiscal 1994 to 3.39% for fiscal 1995. The
decrease in the net interest spread primarily resulted from an increase in the
average balance of higher cost certificate accounts. The net interest margin
for the year ended March 31, 1995 decreased to 3.86% from 4.37% for the year
ended March 31, 1994.
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PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted $653,000 for the year ended
March 31, 1995 as compared to a provision of $1.0 million for the year ended
March 31, 1994. The decrease in the provision for loan losses was due
primarily to management's consideration of decreased chargeoff activity and
the reduction in nonperforming loans. Chargeoffs for fiscal 1995 totalled
$400,000 as compared to $628,000 for fiscal 1994 and nonperforming loans
decreased from $4.2 million, or 1.01% of loans, at March 31, 1994 to $3.0
million, or 0.60% of loans, at March 31, 1995. The Bank's allowance for loan
losses to loans receivable, net was 0.84% at March 31, 1995 as compared to
0.95% at March 31, 1994.
NONINTEREST INCOME
Total noninterest income was $2.5 million for the year ended March 31, 1995,
a decrease from the $4.5 million for the year ended March 31, 1994. Loss on
sale of mortgage loans from secondary market activity totalled $1.9 million
for the year ended March 31, 1995 compared to gain on sale of loans of
$1.6 million for the year ended March 31, 1994. The difference between periods
was attributable to a declining interest rate environment in 1994 as compared
to a rising interest rate environment in 1995 which resulted in higher loan
sale losses due to market pricing. Loan servicing income increased to $2.5
million for the year ended March 31, 1995 compared to $2.0 million for the
year ended March 31, 1994 due to increased balances in loans serviced which
was a result of the continued sale of loans in the secondary market with
servicing retained. Other noninterest income for the year ended March 31, 1995
was $1.8 million compared to $852,000 for the year ended March 31, 1994 as a
result of a reserve established in 1994 pertaining to the Bank's
reconciliation of loans serviced for others and recognition of gains on sale
of real estate owned and other service fee income increases in 1995.
NONINTEREST EXPENSE
Total noninterest expense decreased $597,000, or 4.7%, to $12.2 million for
the year ended March 31, 1995 from $12.8 million for the year ended March 31,
1994. Compensation and employee benefits decreased $127,000 to $7.1 million
for the year ended March 31, 1995 compared to $7.2 million for the year ended
March 31, 1994 due to reduced pension expenses and reduced cash bonuses in
1995. Advertising and business promotion increased $321,000 to $691,000 for
the year ended March 31, 1995 from $370,000 for the year ended March 31, 1994
as the Bank began to more aggressively promote its expanding mortgage lending
area and, in particular, promote the new banking office located in Seekonk,
Massachusetts, which opened in June 1994. Federal deposit insurance premiums
increased by $115,000, or 15.6%, for the year ended March 31, 1995 to $854,000
as compared to $739,000 for the year ended March 31, 1994 due primarily to
increased deposit balances. Data processing and office occupancy and equipment
both remained fairly stable for the years ended March 31, 1995 and March 31,
1994, increasing by 3.2% and 1.8%, respectively. In addition, the year ended
March 31, 1994 included a $1.0 million provision to reduce the balance of
previously capitalized excess servicing fees due to the accelerated prepayment
of loans serviced for others as a result of the decreasing interest rate
environment during 1994. There was no corresponding provision for accelerated
prepayment for the year ended March 31, 1995.
INCOME TAXES
Income tax expense was $3.9 million for the year ended March 31, 1995
(resulting in an effective tax rate of 43.7%), compared to $4.2 million for
the year ended March 31, 1994 (resulting in an effective tax rate of 43.9%).
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, mortgage-backed and investment securities and FHLB
advances. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. Due
to the success of the expansion of the Bank's branch network,
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as well as the Bank's competitive pricing strategy to attract and retain new
deposit accounts, the Bank experienced strong deposit inflows over the past
several years. For a discussion of the Bank's recent deposit growth and
deposits, including its use of brokered deposits, see "Business of the Bank--
Sources of Funds--Deposits." Coupled with that growth, the Bank has grown in
assets during the past several years as well. The Bank has continued to
maintain the required levels of liquid assets as defined by OTS regulations.
This requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's currently
required liquidity ratio is 5%. At June 30, 1996 and 1995, the Bank's
liquidity ratios were 5.15% and 7.17%, respectively, and at March 31, 1996,
1995, 1994, 1993 and 1992, the Bank's liquidity ratios were 6.31%, 6.67%,
5.53%, 7.78% and 6.89%, respectively. Management's strategy is to maintain
liquidity as close as possible to the minimum regulatory requirement and to
invest any excess liquidity in higher yielding interest-earning assets.
At June 30, 1996, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $47.1 million, or 5.87%, of
total adjusted assets, which is above the required level of $12.0 million, or
1.5%; core capital of $47.1 million, or 5.87%, of total adjusted assets, which
is above the required level of $24.1 million, or 3.0%; and risk-based capital
of $52.7 million, or 11.58%, of risk-weighted assets, which is above the
required level of $36.4 million, or 8.0%. See "Regulatory Capital Compliance."
The Bank's most liquid assets are cash and investment securities. The levels
of these assets are dependent on the Bank's operating, financing, lending and
investing activities during any given period. At June 30, 1996, cash and
investment securities totalled $36.1 million, or 4.5% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At June 30, 1996, the Bank had $136.6 million
in advances outstanding from the FHLB, and at June 30, 1996, had an additional
overall borrowing capacity from the FHLB of $303.3 million. During the six
months ended December 31, 1995, the Bank used deposit growth as its primary
source of funds for its increased level of loan originations, and for the last
quarter of fiscal 1996 and three months ended June 30, 1996, the Bank used
continued growth in deposits and significantly increased FHLB advances to
continue to fund loan originations. The Bank expects to repay a portion of its
outstanding FHLB advances with net Conversion proceeds. Depending on market
conditions, the pricing of deposit products and FHLB advances, the Bank may
continue to rely on FHLB advances to fund asset growth.
At June 30, 1996, the Bank had commitments to originate loans and unused
outstanding lines of credit and undisbursed proceeds of construction mortgages
totalling $111.4 million. The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate
accounts, including IRA and KEOGH accounts, which are scheduled to mature in
less than one year from June 30, 1996, totalled $296.9 million. The Bank
expects that substantially all of the maturing certificate accounts will be
retained by the Bank at maturity.
Additionally, in connection with the Bank's strategy to expand its
operations and facilities, the Bank plans to open a new branch office in New
Bedford, Massachusetts in early 1997 and a branch office and centralized
operations facility in Swansea, Massachusetts in late 1997 and enlarge its
downtown Fall River branch office in mid 1977. The Bank has budgeted
approximately $15.5 million of additional capital expenditures related to this
planned expansion activity. The Bank is also seeking sites for other branch
offices in its market area and for a new loan origination center in
Connecticut and the Board has authorized management to establish a trust
department. The establishment of additional branch offices and trust services
by the Bank would result in additional capital expenditures and other costs
associated with the establishment of such branch offices and services which
the Bank has not yet currently estimated.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in
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terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In March 1995, the FASB issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long Lived Assets
to be Disposed of" ("SFAS No. 121"). This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Statement requires that long-lived assets and certain identifiable intangibles
to be held and used by an institution be reviewed for impairment whenever
events change and circumstances indicate the carrying amount of the asset may
not be recoverable. This Statement became effective for the Bank on April 1,
1996. Adoption of this Statement did not have a material impact on the
earnings or financial position of the Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB issued
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Bank to choose either a new fair
value based method or the current Accounting Principles Board ("APB") Opinion
25 intrinsic value based method of accounting for its stock-based compensation
arrangements. SFAS No. 123 requires pro forma disclosures of net earnings and
earnings per share computed as if the fair value based method had been applied
in financial statements of companies that continue to follow current practice
in accounting for such arrangements under APB Opinion 25. SFAS No. 123 applies
to all stock-based employee compensation plans in which an employer grants
shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock, (e.g., stock option plans, stock purchase plans,
restricted stock plans, and stock appreciation rights). The statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or
to acquire goods or services from outside suppliers or vendors. The
recognition provisions of SFAS No. 123 for companies choosing to adopt the new
fair value based method of accounting for stock-based compensation
arrangements may be adopted immediately and will apply to all transactions
entered into in fiscal years that begin after December 15, 1995, however,
disclosure of the pro forma net earnings and earnings per share, as if the
fair value method of accounting for stock-based compensation had been elected,
is required for all awards granted in fiscal years beginning after December
31, 1994. Any effect that this statement will have on the Bank will be
applicable upon the consummation of the Conversion. The Bank has elected to
continue to follow the APB Opinion 25 method upon adoption, but will provide
pro forma disclosure as if the fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components of financial
assets that existed prior to the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
a pledge of collateral. The Statement
60
<PAGE>
is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and should
be applied prospectively. Earlier or retroactive application of this Statement
is not permitted. The Company has not yet determined the impact that this
Statement will have on the Company's consolidated financial statements.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business has been and continues to be attracting retail
deposits from the general public in the areas surrounding its branch offices
and investing those deposits, together with funds generated from operations
and borrowings, primarily in adjustable-rate and shorter-term fixed-rate one-
to four-family residential mortgage loans. Through its 12 branch offices and
five loan origination offices, the Bank originates loans for investment and
loans for sale in the secondary market, generally retaining the servicing
rights to all loans sold. To a lesser extent, the Bank invests in multi-
family, commercial real estate, construction and land, commercial and consumer
loans. Loan sales are made from loans designated as being held for sale or
originated for sale during the period. The Bank's revenues are derived
principally from interest on its mortgage loans, and to a lesser extent,
interest and dividends on its investment and mortgage-backed securities and
loan servicing income. The Bank's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities, FHLB
advances and proceeds from the sale of loans. Additionally, the Bank's Board
of Directors has authorized management to establish a trust department of the
Bank which is to offer a variety of trust services to its customers. The Bank
expects to establish such trust department in late 1997.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a variety of
financial products and services to meet the needs of the communities it
serves. The Bank's deposit gathering is concentrated in the communities
surrounding its 12 full service branch offices located in the Southeastern
Massachusetts municipalities of Fall River, Attleboro, New Bedford, Seekonk,
Somerset and Taunton and the Rhode Island municipalities of Pawtucket, East
Providence and Warwick. The Bank also maintains loan origination centers in
the municipalities of Yarmouth, Auburn, Agawam and Burlington, Massachusetts
and East Greenwich, Rhode Island. The Bank invests primarily in loans secured
by first or second mortgages on properties located in Southeastern
Massachusetts and Rhode Island and, to a lesser extent, other areas of
Massachusetts and Connecticut.
The Bank's main office is located in Fall River, Massachusetts. Fall River
is located in the Southeastern region of Massachusetts and is adjacent to
Rhode Island. All of the Bank's 12 branch offices are located within 30 miles
of Fall River. The Southeastern Massachusetts and Rhode Island suburbs are
primarily low to middle income residential communities with individuals
employed primarily in Fall River and New Bedford, Massachusetts and
Providence, Rhode Island and areas along Interstates 195, 95 and 495 and Route
24.
Southeastern New England has generally lagged behind the rest of the nation
in coming out of the recession of the late 1980s and early 1990s. However,
with the exception of the Fall River and New Bedford, Massachusetts areas,
which continue to experience unemployment rates higher than the national
average, over the past two years the regional economy in the Bank's primary
market area has stabilized and begun to strengthen. Small businesses, service
firms and tourism form the backbone of the region's economy. Cuts to the
defense industry, changes in the costume jewelry industry and uncertainty in
the technology industry have resulted in decreased employment opportunities in
the region. However, many well-known manufacturers, such as The Acushnet
Company, Textron, American Power Conversion, Globe Manufacturing, Electric
Boat and Hasbro, are still located in the region. See "Risk Factors--Weakness
in Regional and Local Economy."
With the economic downturn experienced during the 1990s, the market value of
many one- to four-family residences declined throughout the region. Loan
demand diminished and competition for such loans increased.
61
<PAGE>
During and subsequent to the recession of the late 1980s and early 1990s, a
number of bank closings and mergers also occurred. These events also served to
raise regional unemployment. Except for the areas of Fall River and New
Bedford, Massachusetts, which continue to experience the recessionary impact
of the early 1990s, the region's economy now appears to be stable and a number
of recent initiatives have been introduced. These initiatives include the
proposed extension of the Greater Boston area's commuter rail line to both
Fall River and New Bedford, Massachusetts and the construction of a third rail
which would serve the industrial firms located in Rhode Island.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases,
a national presence. Many of these financial institutions are significantly
larger and have greater financial resources than the Bank. The Bank's
competition for loans comes principally from commercial banks, savings banks,
credit unions, mortgage brokers, mortgage banking companies and insurance
companies. Its most direct competition for deposits has historically come from
savings, cooperative and commercial banks and credit unions, particularly in
Fall River and New Bedford. In addition, the Bank faces increasing competition
for deposits from non-bank institutions such as brokerage firms and insurance
companies in such instruments as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition may also
increase as a result of the lifting of restrictions on the interstate
operations of financial institutions. In the areas of Fall River and Rhode
Island, the Bank has experienced significant competition from credit unions
which have a competitive advantage as they do not pay state or federal income
taxes. Such competitive advantage has placed increased pressure on the Bank
with respect to its loan and deposit pricing. See "Risk Factors--Highly
Competitive Industry and Geographic Area."
Since the mid-1980s, the Bank's operating strategy has been to emphasize
controlled growth, build its loan servicing portfolio and loan servicing fee
income, manage interest rate risk and increase its one- to four-family lending
market share in its primary market area primarily through its mortgage banking
activities whereby it generally retains all adjustable-rate one- to four-
family mortgages and sells all longer-term fixed-rate one- to four-family
loans in the secondary market on a servicing retained basis. In late 1993, the
Bank began to focus more heavily on building its loan and deposit franchise
and increasing its level of interest-earning assets and retail deposits. The
Bank has focused upon expanding its franchise in its existing market area and
other areas in Southeastern Massachusetts and Rhode Island through the
establishment of de novo branch offices and new loan origination facilities.
In this regard, since 1994, the Bank has opened four new branch offices in
Seekonk, Massachusetts and East Providence, Pawtucket and Warwick, Rhode
Island and one new loan origination office in Burlington, Massachusetts. The
Bank plans to open an additional branch office in New Bedford, Massachusetts
in early 1997 and a new centralized administrative and operations center and
branch office in late 1997 in Swansea, Massachusetts. See "--Subsidiary
Activities" and "--Properties." Additionally, the Bank, pursuant to its
expansion strategy, is currently seeking new branch sites and new loan
origination center sites within its primary market area and in areas adjacent
to its primary market area, including areas in the state of Connecticut.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
first mortgage loans secured by one- to four-family residences. At June 30,
1996, loans receivable, net totalled $727.4 million, of which $613.9 million
were one- to four-family, residential mortgage loans, or 82.6% of the Bank's
total loans receivable. At such date, the remainder of the loan portfolio
consisted of: $4.8 million of multi-family residential loans, or 0.7% of total
loans receivable; $25.6 million of commercial real estate loans, or 3.4% of
total loans receivable; $26.8 million of construction and land loans, or 3.6%
of total loans receivable; $15.1 million of commercial loans, or 2.0% of total
loans receivable; and $57.4 million of consumer loans, or 7.7% of total loans
receivable, consisting of $26.5 million of home equity lines of credit, $24.7
million of second mortgages and $6.1 million of other consumer loans. The Bank
had $6.5 million of mortgage loans held for sale at June 30, 1996 consisting
of one- to four-family fixed-rate mortgage loans. At that same date, 47.5% of
the Bank's
62
<PAGE>
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed
to the one-year Constant Maturity Treasury ("CMT") Index.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies
of the federal government, including the Federal Reserve Board, and
legislative tax policies.
63
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
1996
------------------
PERCENT
AMOUNT OF TOTAL
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage Loans:
Residential:
One- to four-
family........... $613,860 82.57%
Multi-family..... 4,798 0.65
Commercial real
estate........... 25,567 3.44
Construction and
land............. 26,792 3.60
-------- ------
Total mortgage
loans........... 671,017 90.26
-------- ------
Commercial........ 15,051 2.03
-------- ------
Consumer Loans:
Home equity
lines............ 26,542 3.57
Second
mortgages........ 24,732 3.32
Other consumer
loans............ 6,080 .82
-------- ------
Total consumer
loans........... 57,354 7.71
-------- ------
Total loans
receivable........ 743,422 100.00%
======
Less:
Allowance for
loan losses...... (6,445)
Undisbursed
proceeds of
construction
mortgages in
process.......... (7,986)
Deferred loan
origination fees,
net............... (1,590)
--------
Loans receivable,
net............... 727,401
Mortgage loans
held for sale..... 6,530
--------
Loans receivable,
net and mortgage
loans held for
sale............. $733,931
========
AT MARCH 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-
family........... $531,849 81.63% $405,747 79.20% $335,374 78.84% $263,911 76.42% $305,495 78.84%
Multi-family..... 4,703 0.72 5,157 1.00 5,257 1.24 3,948 1.14 4,206 1.09
Commercial real
estate........... 23,368 3.59 19,968 3.90 14,849 3.49 11,932 3.46 9,348 2.41
Construction and
land............. 25,297 3.88 26,337 5.14 20,142 4.73 13,091 3.79 12,371 3.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... 585,217 89.82 457,209 89.24 375,622 88.30 292,882 84.81 331,420 85.53
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial........ 14,473 2.22 12,756 2.49 10,269 2.41 7,396 2.14 7,550 1.95
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity
lines............ 27,995 4.30 29,373 5.73 30,409 7.15 33,492 9.70 35,096 9.06
Second
mortgages........ 18,064 2.77 9,111 1.78 5,438 1.28 7,371 2.13 8,308 2.14
Other consumer
loans............ 5,813 .89 3,874 .76 3,672 .86 4,215 1.22 5,110 1.32
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans........... 51,872 7.96 42,358 8.27 39,519 9.29 45,078 13.05 48,514 12.52
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable........ 651,562 100.00% 512,323 100.00% 425,410 100.00% 345,356 100.00% 387,484 100.00%
====== ====== ====== ====== ======
Less:
Allowance for
loan losses...... (5,607) (4,239) (3,964) (3,524) (1,795)
Undisbursed
proceeds of
construction
mortgages in
process.......... (6,568) (5,511) (6,758) (810) (632)
Deferred loan
origination fees,
net............... (1,795) (2,596) (2,915) (2,854) (2,876)
-------- -------- -------- -------- --------
Loans receivable,
net............... 637,592 499,977 411,773 338,168 382,181
Mortgage loans
held for sale..... 17,747 6,816 15,779 20,253 18,592
-------- -------- -------- -------- --------
Loans receivable,
net and mortgage
loans held for
sale............. $655,339 $506,793 $427,552 $358,421 $400,773
======== ======== ======== ======== ========
</TABLE>
64
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Bank's loans at June 30, 1996. The table does not include the effect of
future principal prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
---------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
-------- ------ ----------- ------------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less....... $ 402 $ -- $ 1,646 $10,776 $ 7,346 $29,955 $ 50,125
-------- ------ ------- ------- ------- ------- --------
After one year:
More than one year to
three years........... 2,756 125 6,129 15 2,891 2,704 14,620
More than three years
to five years......... 7,099 104 12,549 -- 3,658 5,422 28,832
More than five years to
10 years.............. 81,661 566 2,890 608 1,011 12,132 98,868
More than 10 years to
20 years.............. 224,022 2,551 1,767 8,143 145 7,110 243,738
More than 20 years..... 297,920 1,452 586 7,250 -- 31 307,239
-------- ------ ------- ------- ------- ------- --------
Total due after one
year.................. 613,458 4,798 23,921 16,016 7,705 27,399 693,297
-------- ------ ------- ------- ------- ------- --------
Total amount due....... $613,860 $4,798 $25,567 $26,792 $15,051 $57,354 743,422
======== ====== ======= ======= ======= =======
Less:
Allowance for loan losses.................................................. (6,445)
Undisbursed proceeds of construction mortgages in process.................. (7,986)
Deferred loan origination fees, net........................................ (1,590)
---------
Loans receivable, net........................................................ $727,401
=========
</TABLE>
The following table sets forth, at June 30, 1996, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after June
30, 1997, and whether such loans have fixed interest rates or adjustable
interest rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1997
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.............................. $335,921 $277,537 $613,458
Multi-family..................................... 507 4,291 4,798
Commercial real estate........................... 12,914 11,007 23,921
Construction and land............................ 1,521 14,495 16,016
-------- -------- --------
Total mortgage loans........................... 350,863 307,330 658,193
Commercial loans................................... 3,411 4,294 7,705
Consumer loans..................................... 27,399 -- 27,399
-------- -------- --------
Total loans.................................... $381,673 $311,624 $693,297
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its 12
branch offices and five loan origination centers and through a network of
approximately 65 active loan correspondents, wholesale loan brokers and other
financial institutions approved by the Bank. All loans originated by the Bank,
either through internal sources or through loan correspondents are
underwritten by the Bank pursuant to the Bank's policies and procedures. For
fiscal 1996, and the three months ended June 30, 1996, the Bank's loan
correspondents originated $100.6 million and $84.5 million in loans,
respectively. The Bank originates both adjustable-rate and fixed-rate loans.
The Bank's ability to originate fixed- or adjustable-rate loans is dependent
upon the relative customer demand for such loans, which is affected by the
current and expected future level of interest rates.
Generally, all loans originated by the Bank are originated for investment
with the exception of longer-term fixed-rate one- to four-family mortgage
loans. While the Bank has in the past, from time to time, retained fixed-
65
<PAGE>
rate one- to four-family loans and sold adjustable-rate one-to four-family
loans, it is currently the general policy of the Bank to sell substantially
all of the one- to four-family fixed-rate mortgage loans with maturities over
12 years that it originates and to retain substantially all fixed-rate loans
with maturities of up to 12 years and all adjustable-rate one- to four-family
mortgage loans which it originates. The one- to four-family loan products
currently originated for sale by the Bank include a variety of mortgage loans
which conform to the underwriting standards specified by the Federal National
Mortgage Association ("FNMA") and FHLMC ("conforming loans") and, to a lesser
extent, loans which do not conform to FNMA or FHLMC standards due to loan
amounts ("jumbo loans"), or due to the substandard credit quality of the
borrowers ("B and C loans"). The Bank also sells all mortgage loans insured by
FHA and VA. All one- to four-family loans sold by the Bank are sold pursuant
to master commitments negotiated with FNMA, FHLMC and other investors to
purchase loans meeting such investors' defined criteria. Although the Bank has
entered into such master commitment contracts, such contracts generally do not
require the purchasers to buy or the Bank to deliver a specific amount of
mortgage loans. The Bank currently sells all longer-term fixed-rate conforming
mortgage loans it originates to FNMA and FHLMC. Sales of loans are made
without recourse to the Bank in the event of default by the borrower, except,
in the case of VA loans, which are subject to limitations on the VA's loan
guarantees. The Bank generally retains the servicing rights on the mortgage
loans sold to FNMA and FHLMC but generally sells all VA, FHA, jumbo loans and
B and C loans to institutional investors on a servicing released basis.
Between the time the Bank issues loan commitments and the time such loans or
the securities into which they are converted are sold, the Bank is exposed to
movements in the market price due to changes in market interest rates. The
Bank attempts to manage this risk by utilizing forward cash sales of loans or
mortgage-backed securities primarily to FNMA and FHLMC (such forward sales of
loans or mortgage-backed securities are collectively referred to as "forward
sale commitments"). Generally, the Bank attempts to cover between 70% and 100%
of the principal amount of the loans that it has committed to fund at
specified interest rates with forward sale commitments. However, the type,
amount and delivery date of forward sale commitments the Bank will enter into
is based upon anticipated movements in market interest rates, bond market
conditions and management's estimates as to closing volumes and the length of
the origination or purchase commitments. Differences between the volume and
timing of actual loan originations and purchases and management's estimates
can expose the Bank to losses. If the Bank is not able to deliver the mortgage
loans or mortgage-backed securities during the appropriate delivery period
called for by the forward sale commitment, the Bank may be required to pay a
non-delivery fee, repurchase the delivery commitments at current market prices
or purchase whole loans at a premium for delivery. The above activity is
managed continually; however, there can be no assurances that the Bank will be
successful in its efforts to eliminate the risk of interest rate fluctuation
between the time origination or purchase commitments are issued and the
ultimate sale of the loan. At June 30, 1996, the Bank had $13.4 million of
forward sale commitments representing 71.7% of closed mortgage loans held for
sale and loan commitments at specified interest rates at such date. See "Risk
Factors--Sensitivity to Increases in Interest Rates."
At June 30, 1996, the Bank was servicing its portfolio of $733.9 million of
loans receivable, net and mortgage loans held for sale and $1.1 billion of
loans for others, primarily consisting of conforming fixed-rate loans sold by
the Bank. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, contacting delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults, making certain insurance and tax payments on behalf of the borrowers
and generally administering the loans. In the past, the Bank has recognized
gains from excess servicing, which is the present value of any difference
between the interest rate charged to the borrower and the interest rate paid
to the purchaser after deducting a normal servicing fee, and is recognizable
as an adjustment to the cash gain or loss. The excess servicing gain or loss
is dependent on prepayment estimates and discount rate assumptions. All of the
loans currently being serviced for others are loans which have been sold by
the Bank. The gross servicing fee income from loans originated and purchased
is generally 0.25% to 0.38% of the total balance of the loan serviced. In the
past, the Bank recognized the present value of the income attributable to
excess servicing rights upon the sale of loans. The Bank has amortized all of
the excess servicing fees. Currently, the Bank has elected to sell the excess
servicing through the pricing received from FNMA and FHLMC.
66
<PAGE>
During the fiscal years ended March 31, 1996 and March 31, 1995, the Bank
originated $375.1 million and $230.4 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $190.9 million and $89.4
million, respectively, were retained by the Bank. The fixed-rate loans
retained by the Bank consisted primarily of loans with terms of 15 years or
less. The Bank recognizes, at the time of sale, the cash gain or loss on the
sale of the loans based on the difference between the net cash proceeds
received and the carrying value of the loans sold. On April 1, 1996, the Bank
implemented SFAS No. 122 pursuant to which the value of servicing rights are
recognized as an asset of the Bank. See "--Lending Activities--Origination,
Sale and Servicing of Loans." At June 30, 1996, the Bank had $6.5 million of
mortgage loans held for sale consisting of fixed-rate one- to four-family
loans. The Bank has, in the past, from time to time, purchased loans or
participations in loans, primarily one- to four-family mortgage loans, and had
$9.3 million of purchased loans at June 30, 1996. With the exception of
purchases of loans from correspondent financial institutions, which are
underwritten pursuant to the Bank's policies and closed in the name of the
correspondent financial institution but immediately purchased by the Bank for
its mortgage banking activities, the Bank currently does not purchase loans or
participations in loans.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED MARCH 31,
---------------------- --------------------------------
1996 1995 1996 1995 1994
---------- ---------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance(1).... $ 655,339 $ 506,793 $ 506,793 $ 427,552 $ 358,449
Loans originated:
Mortgage loans:
One- to four-family.. 132,299 34,679 375,063 230,433 664,046
Multi-family......... 189 -- 40 68 --
Commercial real
estate.............. 3,316 2,399 6,839 8,408 5,067
Construction and
land................ 8,922 7,207 29,519 33,270 31,591
---------- ---------- --------- --------- ----------
Total mortgage
loans.............. 144,726 44,285 411,461 272,179 700,704
---------- ---------- --------- --------- ----------
Commercial............ 2,286 1,345 8,660 8,289 7,805
---------- ---------- --------- --------- ----------
Consumer loans:
Home equity lines.... 1,414 2,265 10,695 8,253 11,394
Second mortgages..... 8,260 3,754 13,868 6,252 1,871
Other consumer
loans............... 751 834 2,688 1,085 1,052
---------- ---------- --------- --------- ----------
Total consumer
loans.............. 10,425 6,853 27,251 15,590 14,317
---------- ---------- --------- --------- ----------
Total loans
originated............ 157,437 52,483 447,372 296,058 722,826
---------- ---------- --------- --------- ----------
Total............... 812,776 559,276 954,165 723,610 1,081,275
Less:
Principal repayments
and other, net........ (33,869) (23,256) (112,546) (73,931) (107,013)
Loan charge-offs, net.. (162) (55) (1,258) (378) (595)
Proceeds from sale of
mortgage loans........ (44,647) (24,496) (184,207) (141,043) (544,510)
Transfer of mortgage
loans to REO.......... (167) -- (815) (1,465) (1,605)
---------- ---------- --------- --------- ----------
Loans receivable, net
and mortgage loans held
for sale............... 733,931 511,469 655,339 506,793 427,552
Mortgage loans held for
sale.................. (6,530) (11,062) (17,747) (6,816) (15,779)
---------- ---------- --------- --------- ----------
Ending balance, loans
receivable, net........ $ 727,401 $ 500,407 $ 637,592 $ 499,977 $ 411,773
========== ========== ========= ========= ==========
</TABLE>
- --------
(1) Includes mortgage loans held for sale.
67
<PAGE>
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
adjustable-rate mortgage loans ("ARM") secured by one- to four-family
residences with maturities of up to 30 years. Substantially all of such loans
are secured by property located in the Bank's primary market area. Loan
originations are generally obtained from the Bank's commissioned loan
representatives, correspondent banking relationships and wholesale brokers and
their contacts with the local real estate industry, existing or past
customers, and members of the local communities. At June 30, 1996, one- to
four-family mortgage loans totalled $613.9 million, or 82.6% of the Bank's
total loans receivable. Of the Bank's mortgage loans secured by residential
mortgage loans and construction and land loans, $341.4 million, or 52.9%, were
fixed-rate loans and $304.0 million, or 47.1%, were adjustable-rate loans.
The Bank's fixed-rate mortgage loans currently are made for terms from seven
to 30 years. The Bank sells substantially all of the 30-year, fixed-rate
residential mortgage loans that it originates and retains the servicing on all
loans sold to FNMA and FHLMC. All other loans are sold on a servicing released
basis. The Bank generally retains for its portfolio shorter-term, fixed-rate
loans with maturities of 15 years or less and all adjustable-rate one- to
four-family loans.
The Bank currently offers a number of ARM loan programs with interest rates
which are fixed for a period of one, three, four, five or seven years and
adjust annually thereafter. The Bank's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the
increase or decrease in the interest rate at any adjustment date and over the
life of the loan. The interest rate adjustment on these loans is indexed to
the one-year U.S. Treasury CMT Index.
The Bank's policy is to originate one- to four-family residential mortgage
loans in amounts up to 80% of the lower of the appraised value or the selling
price of the property securing the loan and up to 95% of the appraised value
or selling price if private mortgage insurance is obtained with the exception
of FHA and VA loans. Mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio
and the Bank has generally exercised its rights under these clauses.
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing
the potential for default. Periodic and lifetime caps on interest rate
increases help to reduce the credit risk associated with its adjustable-rate
loans but also limit the interest rate sensitivity of its adjustable-rate
mortgage loans.
In an effort to provide financing for first-time and moderate income home
buyers, the Bank offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans
to qualified individuals. These loans are offered with terms of up to 30
years. Such loans must be secured by a one- to four-family owner-occupied
unit. These loans are originated using modified underwriting guidelines with
reduced down payments and loan fees. Such loans are originated in amounts up
to 97% of the lower of the property's appraised value or the sale price.
Private mortgage insurance is normally required. With respect to loans
originated under the first time home buying program, because the Bank
typically charges a lower rate of interest, lower mortgage origination fees or
a discount on closing costs on such loan programs, the Bank expects to achieve
a lower rate of return on such loans, as compared to other residential
mortgage loans.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by owner-occupied properties used for
business purposes such as light manufacturing, small office buildings or
retail facilities located in the Bank's primary market area. The Bank's
commercial real estate underwriting policy provides that commercial real
estate loans may be made in amounts up to 80% of the appraised value of the
property. The Bank's commercial real estate lending is limited by the
regulatory loans-to-one borrower limit which at June 30, 1996 was $7.1
million. The Bank currently originates commercial real
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<PAGE>
estate loans, generally with terms of up to five years and amortizations of 20
years with the outstanding balance due and payable at the end of the loan
term. The Bank's adjustable-rate loans have interest rates that adjust daily
and are indexed to the Bank's prime rate of interest. In reaching its decision
on whether to make a commercial real estate loan, the Bank considers the net
operating income of the property, the borrower's expertise, credit history and
profitability and the value of the underlying property. The Bank has generally
required that the properties securing commercial real estate loans have debt
service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.25x. In addition, environmental impact surveys are
required for all commercial real estate loans in excess of $500,000.
Generally, all commercial real estate loans made to corporations, partnerships
and other business entities require personal guarantees by the principals. On
an exception basis, the Bank may not require a personal guarantee on such
loans depending on the creditworthiness of the borrower and the amount of the
downpayment and other mitigating circumstances. The Bank's commercial real
estate loan portfolio at June 30, 1996 was $25.6 million, or 3.4% of total
loans receivable. The largest commercial real estate loan in the Bank's
portfolio at June 30, 1996 had an outstanding carrying balance of $995,000 and
is secured by an industrial building located in New Bedford, Massachusetts.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Because payments on loans secured by commercial real estate properties
are often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to the then
prevailing conditions in the real estate market or the economy. The Bank seeks
to minimize these risks through its underwriting standards. See "Risk
Factors--Increased Lending Risks Associated with Multifamily, Commercial Real
Estate and Commercial Loans."
Commercial Lending. The Bank also originates commercial loans to businesses
operating in the Bank's primary market area. Such loans are generally secured
by equipment, leases, inventory and accounts receivable. The Bank offers
commercial loans in the form of term loans and lines of credit. Term loans are
generally offered with either fixed or adjustable rates of interest and terms
of up to 10 years. All term loans fully amortize during the term of such loan.
Business lines of credit have terms of one-year which adjust on a daily basis,
are indexed to the Bank's prime rate of interest or the prime rate as
published in The Wall Street Journal and are renewable annually.
In making commercial loans, the Bank considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Bank's lending history with the borrower and the value
of the collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required.
However, personal guarantees may not be required on such loans depending on
the creditworthiness of the borrower and other mitigating circumstances. The
Bank's largest commercial loan at June 30, 1996 was an $800,000 line of credit
of which $600,000 was advanced as of June 30, 1996. At such date, the Bank had
$7.8 million of unadvanced commercial lines of credit, including a $2.1
million unadvanced line of credit to one borrower. At June 30, 1996, the Bank
had $15.1 million of commercial loans which amounted to 2.0% of the Bank's
total loans receivable.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Multi-Family Lending. The Bank originates adjustable-rate multi-family
mortgage loans generally secured by five to 12 unit residential apartment
buildings located in the Bank's primary market area. Such loans adjust
annually, have a 25 year term and are indexed to the one year FHLB advance
rate. As a result of uncertain market conditions in its primary market area,
the Bank currently originates multi-family loans on a limited and highly
selective basis. In reaching its decision on whether to make a multi-family
loan, the Bank considers the value of the underlying property as well as the
qualifications of the borrower. Other factors relating to the property to be
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considered are: the net operating income of the mortgaged premises before debt
service and depreciation; the debt service ratio; and the ratio of the loan
amount to appraised value. Pursuant to the Bank's current underwriting
policies, a multi-family mortgage loan may only be made in an amount up to 60%
of the appraised value of the underlying property. The maximum amount of a
multi-family loan is limited by the Bank's loans-to-one borrower limit which,
at June 30, 1996, was $7.1 million.
When evaluating the qualifications of the borrower for a multi-family loan,
the Bank considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property, and the
Bank's lending experience with the borrower. The Bank's underwriting
guidelines require that the borrower be able to demonstrate strong management
skills and the ability to maintain the property from current rental income.
The borrower is required to present evidence of the ability to repay the
mortgage and a history of making mortgage payments on a timely basis. In
making its assessment of the creditworthiness of the borrower, the Bank
generally reviews the financial statements, employment and credit history of
the borrower, as well as other related documentation. All multi-family loans
made to corporations, partnerships and other business entities require
personal guarantees by the principal borrowers. The Bank's multi-family loan
portfolio at June 30, 1996, totalled $4.8 million, or 0.7% of total loans
receivable. At June 30, 1996, the Bank had no multi-family loans with an
outstanding carrying balance in excess of $250,000.
Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. The Bank
seeks to minimize these risks through its underwriting policies.
Construction and Land Lending. The Bank originates construction and land
loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence and, to a
lesser extent, to licensed and experienced developers known to the Bank in its
primary market area for the construction of single-family developments. The
Bank generally does not originate loans secured by raw land. In the case of
construction and land mortgage loans to individuals building their primary
residence, such loans are originated in amounts up to 90% of the appraised
value of the property, as improved. Construction and land loans to commercial
developers are originated in amounts up to 70% of the lesser of the appraised
value of the property, as improved, or the sales price. Proceeds of
construction and land loans are dispersed as phases of the construction are
completed. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principals are required. The
Bank's largest construction and land loan at June 30, 1996 was a performing
loan with a $480,000 carrying balance secured by a single-family residence
located in Harvard, Massachusetts. At June 30, 1996, the Bank had $26.8
million of construction and land loans which amounted to 3.6% of the Bank's
total loans receivable.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the Bank may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Consumer Lending. Consumer loans at June 30, 1996 amounted to $57.4 million,
or 7.7% of the Bank's total loans receivable, and consisted primarily of home
equity lines of credit and second mortgage loans, and, to a significantly
lesser extent, secured and unsecured personal loans and new and used
automobile loans. Such loans are generally originated in the Bank's primary
market area and generally are secured by real estate, deposit accounts,
personal property and automobiles. These loans are typically shorter term and
generally have higher interest rates than one- to four-family mortgage loans.
The Bank offers "open-end line of credit" and "second mortgage" home equity
loans. Substantially all of the Bank's home equity loans are primarily secured
by second mortgages on one- to four-family residences
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located in the Bank's primary market area. At June 30, 1996, these loans
totalled $51.3 million, or 6.9% of the Bank's total loans and 89.4% of
consumer loans. Home equity lines of credit generally have adjustable-rates of
interest which adjust on a monthly basis. The adjustable-rate of interest
charged on such loans is indexed to the prime rate as reported in The Wall
Street Journal. Adjustable-rate home equity loans generally have an 18%
lifetime limit on interest rates. Generally, the maximum combined loan-to-
value ratio ("LTV") on home equity loans is 80%; however, with respect to
second mortgage loans up to $25,000, the Bank will allow an LTV of up to 100%
if the Bank holds the first mortgage lien on the property and other
underwriting criteria are satisfied. At June 30, 1996, the Bank had $51.1
million of home equity lines of credit of which $26.5 million, or 3.6% of
total loans receivable, was drawn upon such loans at such date. Second
mortgage loans are generally offered with terms of up to 15 years and only
with fixed-rates of interest which rates will vary depending on the
amortization period chosen by the borrower. At June 30, 1996, second mortgage
loans totalled $24.7 million, or 3.3% of the Bank's total loans receivable and
43.1% of consumer loans. The underwriting standards employed by the Bank for
home equity lines and second mortgage loans include a determination of the
applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan and the value of
the collateral securing the loan. The stability of the applicant's monthly
income may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Bank also originates other types of consumer loans consisting of secured
and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Personal loans are secured by deposits or readily marketable collateral.
Unsecured personal loans generally have a maximum borrowing limitation of
$5,000 and generally require a debt ratio (the ratio of debt service to net
earnings) of 40%. Automobile loans have a maximum borrowing limitation of 90%
of the sale price of a new automobile and 80% of the fair market value of a
used automobile. At June 30, 1996, personal loans totalled $3.7 million, or
0.5% of the Bank's total loans receivable and 6.4% of consumer loans; and
automobile loans totalled $2.4 million, or 0.3% of total loans receivable and
4.2% of consumer loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections on these loans are
dependent on the borrower's continuing financial stability and, therefore, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans in the event of a default. At June
30, 1996, consumer loans 90 days or more delinquent totalled $666,000.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. In connection with
one- to four-family mortgage loans, the Board of Directors has authorized the
following persons and committees to approve loans up to the amounts indicated:
owner-occupied mortgage loans that meet the general underwriting standards of
FNMA and FHLMC, with a 75% LTV ratio and which do not exceed $150,000 may be
approved by the Bank's underwriters; all other mortgage loans which meet the
general underwriting standards of FNMA and FHLMC may be approved by the Bank's
Director of Retail Loan Production; loans in amounts up to $250,000 and which
cannot be approved by the Bank's underwriters or Director of Retail Loan
Production must be approved by the Bank's Senior Vice President of Mortgage
Banking Group; mortgage loans in excess of $250,000 and up to $500,000 require
the approval of the Bank's Retail Loan Committee; and loans in excess of
$500,000 require the approval of the Board of Directors' Executive Committee.
With respect to all other real estate loans, the Board of Directors has
authorized the following persons and committees to approve loans up to the
amounts indicated: mortgage loans in amounts up to $175,000 must be approved
by the Bank's Senior Vice President of Mortgage Banking Group; mortgage loans
in excess of
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$175,000 and up to $250,000 require the approval of the Bank's Retail Loan
Committee; loans in excess of $250,000 require the approval of the Board of
Directors' Executive Committee.
In connection with consumer loans, the Board of Directors has authorized the
following persons and committees to approve loans up to the amounts indicated:
consumer loans up to $100,000 and which meet certain lending criteria may be
approved by the Bank's Consumer Loan Manager; any consumer loan up to $150,000
may be approved by either the Bank's Senior Vice President of Mortgage Banking
Group, Senior Vice President of Banking Group or Director of Retail Loan
Production; loans in excess of $150,000 and up to $250,000 must be approved by
the Bank's Retail Loan Committee; and loans in excess of $250,000 must be
approved by the Board of Directors' Executive Committee.
With respect to non-real estate commercial loans, the Board of Directors has
authorized the following persons and committees to approve loans up to the
amounts indicated: loans up to $50,000, $150,000 and $250,000 must be approved
by the Bank's Senior Business Development Officer, Director of Commercial
Services and Senior Vice President of Banking Group, respectively; loans in
excess of $250,000 and up to $500,000 must be approved by the Bank's
Commercial Loan Committee; and loans in excess of $500,000 must be approved by
the Board of Directors' Executive Committee. Pursuant to OTS regulations,
loans-to-one borrower cannot, subject to certain exceptions, exceed 15% of the
Bank's unimpaired capital and surplus. At June 30, 1996, the loans-to-one
borrower limit was $7.1 million.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED.
Delinquencies and Classified Assets. Reports listing all delinquent accounts
are generated and reviewed by management on a monthly basis and the Board of
Directors performs a monthly review of all loans or lending relationships
delinquent 90 days or more and all REO. The procedures taken by the Bank with
respect to delinquencies vary depending on the nature of the loan, period and
cause of delinquency and whether the borrower is habitually delinquent. When a
borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of non-
payment after the loan is first past due. The Bank's guidelines provide that
telephone, written correspondence and/or face-to-face contact will be
attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment, offer to provide
budget and finance counseling services, work out a repayment schedule with the
borrower to avoid foreclosure or, in some instances, accept a deed in lieu of
foreclosure. In the event payment is not then received or the loan not
otherwise satisfied, additional letters and telephone calls generally are
made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Bank will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Bank, becomes real
estate owned.
Federal regulations and the Bank's Asset Classification Policy require that
the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific
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loss reserve is not warranted. Assets which do not currently expose the
insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are required to be designated
"Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth
in the policy statement. Although management believes that, based on
information currently available to it at this time, its allowance for loan
losses is adequate, actual losses are dependent upon future events and, as
such, further additions to the level of allowances for loan losses may become
necessary.
The Bank's Asset Classification Committee reviews and classifies the Bank's
assets on a monthly basis and the Board of Directors reviews the results of
the reports on a quarterly basis. The Bank classifies assets in accordance
with the management guidelines described above. At June 30, 1996, the Bank had
$6.5 million of assets designated as Substandard, and $985,000 of assets
designated as Doubtful which consisted of one commercial real estate loan,
which is discussed below. At that same date the Bank had no loans designated
as Loss. As of June 30, 1996, the Bank had a total of three one- to four-
family loans, totalling $158,000, designated as Special Mention. These loans
are designated as Special Mention because such loans were originated to
facilitate the sale of REO. At June 30, 1996, the largest loan designated as
Special Mention had a carrying balance of $66,000, and was secured by a one-
to four-family property.
At June 30, 1996, the Bank had only one loan with a balance of $500,000 or
more which had been adversely classified or identified as a problem loan. In
1989 the Bank made a $2.1 million first mortgage loan secured by two adjacent
buildings located in the downtown business district of Fall River, containing
retail space as well as multiple office units with an aggregate of
approximately 43,000 square feet of rentable space. As of June 30, 1996 the
outstanding carrying balance of this loan was $985,000. Vacancy rates have
negatively impacted the property's cash flow and, accordingly, have affected
the borrower's ability to make debt service payments. In late 1995, the
original loan was restructured whereby the loan was bifurcated and $969,000,
representing one portion of the bifurcated loan, was charged-off. However, the
terms of the restructuring agreement enable the Bank to retain its rights to
collect the charged-off portion of the loan under certain circumstances. The
remaining portion of the loan, with a then principal balance of $1.0 million
remained classified as Substandard. Terms of the restructured debt required
the borrower to make principal and interest payments so that the carrying
balance is amortized over a 20-year period. The borrower is current with
respect to payments. Based on an internal Bank appraisal performed in July
1996, the Bank reclassified the loan as Doubtful as of June 30, 1996.
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The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1996 AT MARCH 31, 1996
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family.... 8 $ 269 33 $2,493 24 $1,589 31 $2,469
Multi-family........... 1 206 3 289 -- -- 3 334
Commercial real
estate................ 2 480 1 228 1 231 -- --
Construction and land.. -- -- -- -- 1 37 -- --
--- ------ --- ------ --- ------ --- ------
Total mortgage loans.. 11 955 37 3,010 26 1,857 34 2,803
--- ------ --- ------ --- ------ --- ------
Commercial Loans........ -- -- 2 26 -- -- 1 87
--- ------ --- ------ --- ------ --- ------
Consumer Loans:
Home equity lines...... 6 174 15 495 16 231 12 956
Second mortgages....... 1 1 5 157 -- -- 12 196
Other consumer loans... 1 1 8 14 4 12 4 3
--- ------ --- ------ --- ------ --- ------
Total consumer loans: 8 176 28 666 20 243 28 1,155
--- ------ --- ------ --- ------ --- ------
Total loans............. 19 $1,131 67 $3,702 46 $2,100 63 $4,045
=== ====== === ====== === ====== === ======
Delinquent loans to
loans receivable, net.. 0.16% 0.51% 0.33% 0.63%
<CAPTION>
AT MARCH 31, 1995 AT MARCH 31, 1994
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-family.... 20 $1,044 29 $2,501 18 $ 768 43 $3,649
Multi-family........... 1 76 1 51 -- -- -- --
Commercial real
estate................ -- -- 1 85 -- -- -- --
Construction and land.. -- -- -- -- -- -- 1 26
--- ------ --- ------ --- ------ --- ------
Total mortgage loans.. 21 1,120 31 2,637 18 768 44 3,675
--- ------ --- ------ --- ------ --- ------
Commercial Loans........ 1 3 -- -- 2 20 2 15
--- ------ --- ------ --- ------ --- ------
Consumer Loans:
Home equity lines...... 11 354 12 386 15 637 14 483
Second mortgages....... 2 46 -- -- -- -- 3 34
Other consumer loans... 4 12 5 10 2 14 6 14
--- ------ --- ------ --- ------ --- ------
Total consumer loans.. 17 412 17 396 17 651 23 531
--- ------ --- ------ --- ------ --- ------
Total loans............. 39 $1,535 48 $3,033 37 $1,439 69 $4,221
=== ====== === ====== === ====== === ======
Delinquent loans to
loans receivable, net.. 0.31% 0.61% 0.35% 1.03%
</TABLE>
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Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and REO. At June 30, 1996,
restructured loans totalled $985,000, consisting of one loan, and REO totalled
$439,000 consisting of seven one- to four-family properties. It is the policy
of the Bank to cease accruing interest on loans 90 days or more past due and
to charge off all accrued interest. For the three months ended June 30, 1996
and the year ended March 31, 1996, the amount of additional interest income
that would have been recognized on non-accrual loans if such loans had
continued to perform in accordance with their contractual terms was $59,000
and $124,000, respectively. For the same periods, the difference between the
amount of interest income which would have been recognized on restructured
loans if such loans were performing in accordance with their regular terms and
amounts recognized was $63,000 and $67,000, respectively.
<TABLE>
<CAPTION>
AT JUNE 30, AT MARCH 31,
-------------- --------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family... $2,493 $2,484 $2,469 $2,501 $3,649 $4,345 $4,633
Multi-family.......... 289 125 334 51 -- -- --
Commercial real
estate............... 228 74 -- 85 -- 277 --
Construction and
land................. -- -- -- -- 26 -- --
------ ------ ------ ------ ------ ------ ------
Total mortgage
loans............... 3,010 2,683 2,803 2,637 3,675 4,622 4,633
------ ------ ------ ------ ------ ------ ------
Commercial loans....... 26 -- 87 -- 15 1 298
------ ------ ------ ------ ------ ------ ------
Consumer loans:
Home equity lines..... 495 448 956 386 483 262 156
Second mortgages...... 157 10 196 -- 34 120 28
Other consumer loans.. 14 6 3 10 14 -- --
------ ------ ------ ------ ------ ------ ------
Total consumer
loans............... 666 464 1,155 396 531 382 184
------ ------ ------ ------ ------ ------ ------
Total nonaccrual
loans............... 3,702 3,147 4,045 3,033 4,221 5,005 5,115
Real estate owned,
net(1)................. 439 264 643 296 939 464 585
------ ------ ------ ------ ------ ------ ------
Total non-performing
assets(2)............ $4,141 $3,411 $4,688 $3,329 $5,160 $5,469 $5,700
====== ====== ====== ====== ====== ====== ======
Allowance for loan
losses as a percent of
loans(3)............... 0.88% 0.92% 0.87% 0.84% 0.95% 1.03% 0.47%
Allowance for loan
losses as a percent of
non-performing
loans(4)............... 174.14% 148.05% 138.62% 139.76% 93.91% 70.41% 35.09%
Non-performing loans as
a percent
of loans(3)(4)......... 0.50% 0.62% 0.63% 0.60% 1.02% 1.46% 1.33%
Non-performing assets as
a percent of
total assets(5)........ 0.52% 0.60% 0.65% 0.59% 1.10% 1.37% 1.29%
</TABLE>
- --------
(1) REO balances are shown net of related valuation allowances.
(2) Does not include a restructured commercial real estate loan with a balance
of $985,000 as of June 30, 1996.
(3) Loans include loans receivable, net, excluding allowance for loan losses.
(4) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectability of interest or principal.
(5) Non-performing assets consist of non-performing loans and REO.
The Bank adopted a new accounting method for measuring loan impairment on
April 1, 1995. Adoption of this accounting standard did not have a material
effect on the comparability of the above tables. See Notes 1 and 4 to the
Consolidated Financial Statements included elsewhere herein.
At June 30, 1996 and March 31, 1996, total impaired loans were $985,000 and
$991,000, respectively. At June 30, 1996, impaired loans of $985,000 required
an impairment allowance of $493,000. In the opinion of management, none of
these impaired loans required a specific valuation allowance at March 31,
1996. All
75
<PAGE>
impaired loans are commercial real estate loans which have been measured using
the fair value of the collateral method. During the three months ended June
30, 1996, the average recorded value of impaired loans was $986,000. For these
loans, $30,000 of interest income was recognized while $63,000 of interest
income would have been recognized under the original terms. During the year
ended March 31, 1996, the average recorded value of impaired loans was
$580,000. For these loans, $128,000 of interest income was recognized while
$195,000 of interest income would have been recognized under their original
terms.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable based on information currently known to management. The allowance is
based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, 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 make
additional provisions for estimated loan losses based upon judgments different
from those of management. As of June 30, 1996, the Bank's allowance for loan
losses was 0.88% of total loans receivable as compared to 0.87% as of March
31, 1996. The Bank had non-accrual loans of $3.7 million and $4.0 million at
June 30, 1996 and March 31, 1996, respectively. The Bank will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Bank's allowance for loan losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Bank's level of allowance for loan losses will be sufficient to
cover future loan losses incurred by the Bank or that future adjustments to
the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods set forth in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED MARCH 31,
----------------------- --------------------------------------
1996 1995 1996 1995 1994 1993 1992
--------- --------- ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $ 5,607 $ 4,239 $4,239 $3,964 $3,524 $1,795 $1,405
Provision for loan
losses................. 1,000 475 2,626 653 1,035 2,102 1,222
Charge-offs:
Mortgage loans:
One- to-four-family.... 75 -- 218 168 324 240 175
Multi-family........... -- -- -- -- 55 -- --
Commercial real
estate................ 87 -- 967 25 121 18 693
Construction and land.. -- -- -- -- 25 10 --
Commercial loans....... -- -- -- 15 38 40 --
Consumer loans:
Home equity lines...... -- 48 68 113 20 31 28
Second mortgages....... -- -- -- -- -- -- --
Other consumer loans... 2 7 35 79 45 69 --
--------- --------- ------ ------ ------ ------ ------
Total................. 164 55 1,288 400 628 408 896
Recoveries.............. 2 -- 30 22 33 35 64
--------- --------- ------ ------ ------ ------ ------
Balance at end of
period................. $ 6,445 $ 4,659 $5,607 $4,239 $3,964 $3,524 $1,795
========= ========= ====== ====== ====== ====== ======
Ratio of net charge-offs
during the period to
average loans
outstanding during the
period................. 0.09%(1) 0.04%(1) 0.23% 0.08% 0.14% 0.11% 0.25%
========= ========= ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Annualized.
76
<PAGE>
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN ALLOWANCE LOANS IN
TO TOTAL EACH CATEGORY TO TOTAL EACH CATEGORY
AMOUNT ALLOWANCE TO TOTAL LOANS AMOUNT ALLOWANCE TO TOTAL LOANS
------ ---------- -------------- ------ ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential............ $2,445 37.94% 86.82% $1,259 27.02% 84.40%
Commercial............. 1,528 23.71 3.44 1,334 28.63 4.24
------ ------ ------ ------ ------ ------
Total.................. 3,973 61.65 90.26 2,593 55.65 88.64
Commercial loans........ 696 10.80 2.03 566 12.15 2.50
Consumer loans.......... 1,089 16.89 7.71 739 15.87 8.86
Unallocated............. 687 10.66 -- 761 16.33 --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses............ $6,445 100.00% 100.00% $4,659 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------
1996
--------------------------
PERCENT
OF LOANS
PERCENT OF IN EACH
ALLOWANCE CATEGORY
TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS
------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgages:
Residential..... $2,175 38.79% 86.23%
Commercial...... 1,195 21.31 3.59
------ ------ ------
Total........... 3,370 60.10 89.82
Commercial....... 621 11.08 2.22
Consumer......... 829 14.79 7.96
Unallocated...... 787 14.03 --
------ ------ ------
Total allowance
for
loan losses..... $5,607 100.00% 100.00%
====== ====== ======
AT MARCH 31,
-----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential..... $1,223 28.85% 85.34% $1,144 28.86% 84.81% $1,149 32.60% 81.35% $ 689 38.38% 83.12%
Commercial...... 1,265 29.84 3.90 1,063 26.82 3.49 941 26.70 3.46 205 11.42 2.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........... 2,488 58.69 89.24 2,207 55.68 88.30 2,090 59.30 84.81 894 49.80 85.53
Commercial....... 600 14.16 2.49 426 10.75 2.41 383 10.87 2.14 218 12.14 1.95
Consumer......... 473 11.16 8.27 454 11.45 9.29 559 15.86 13.05 402 22.40 12.52
Unallocated...... 678 15.99 -- 877 22.12 -- 492 13.97 -- 281 15.66 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for
loan losses..... $4,239 100.00% 100.00% $3,964 100.00% 100.00% $3,524 100.00% 100.00% $1,795 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
77
<PAGE>
Real Estate Owned. At June 30, 1996, the Bank had $439,000 of real estate
owned consisting of seven one- to four-family properties. When the Bank
acquires property through foreclosure or deed in lieu of foreclosure, it is
initially recorded at the lower of the recorded investment in the
corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance
and charges operations for the diminution in value. It is the policy of the
Bank to have obtained an appraisal on all real estate subject to foreclosure
proceedings prior to the time of foreclosure. It is the Bank's policy to
require appraisals on a periodic basis on foreclosed properties and conduct
inspections on foreclosed properties.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally-chartered
savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally-chartered savings institution is
otherwise authorized to make directly. Additionally, the Bank must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. See "Regulation--Federal Savings Institution Regulation--
Liquidity." Historically, the Bank has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Bank, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk
and to complement the Bank's lending activities. The Bank primarily utilizes
investments in securities for liquidity management and as a method of
deploying excess funding not utilized for loan originations or sales.
Generally, the Bank's investment policy is more restrictive than the OTS
regulations allow and, accordingly, the Bank has invested primarily in U.S.
Government and agency securities, which qualify as liquid assets under the OTS
regulations, federal funds and U.S. Government sponsored agency issued
mortgage-backed securities. As required by SFAS No. 115, the Bank has
established an investment portfolio of securities that are categorized as held
to maturity, available for sale or held for trading. The Bank generally
invests in securities as a method of utilizing funding not utilized for loan
origination activity and as a method of maintaining liquidity at levels deemed
appropriate by management. The Bank does not currently maintain a portfolio of
securities categorized as held for trading. The substantial majority of the
Bank's investment and mortgage-backed securities are purchased for the held to
maturity portfolio which such portfolio totalled $28.6 million, or 3.6% of
assets. At June 30, 1996, the available for sale securities portfolio totalled
$773,000. As of June 30, 1996, $21.5 million, or all of the Bank's investment
securities held to maturity consisted of U.S. Government and related
obligations with a weighted average maturity of 11.3 months.
At June 30, 1996, the Bank had invested $7.1 million in mortgage-backed
securities, or 0.9% of total assets, which were insured by either GNMA or
FHLMC, all of which were classified as held to maturity. Of the $7.1 million,
$4.9 million were adjustable-rate with maximum interest rate adjustments of 2%
annually or 6% over the life of the security. Investments in mortgage-backed
securities involve a risk that actual prepayments may differ from estimated
prepayments over the life of the security, which may require adjustments to
the amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in
the event such securities are redeemed by the issuer. In addition, the market
value of such securities may be adversely affected by changes in interest
rates. All of the Bank's investment in mortgage-backed securities at June 30,
1996 were being held to maturity.
78
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT JUNE 30, -----------------------------------------------------
1996 1996 1995 1994
----------------- ----------------- ----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
Held to maturity:
U.S. Government and
agency obligations.... $21,486 $21,501 $22,986 $23,061 $19,988 $19,877 $ 8,994 $ 8,909
Federal Home Loan Bank
note.................. -- -- 1,000 999 1,000 974 1,000 979
Other investment
securities............ 1 1 1 1 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total held to
maturity............. 21,487 21,502 23,987 24,061 20,988 20,851 9,994 9,888
------- ------- ------- ------- ------- ------- ------- -------
Available for
sale:(1).............. 55 773 55 725 55 518 55 384
------- ------- ------- ------- ------- ------- ------- -------
Total investment
securities........... $21,542 $22,275 $24,042 $24,786 $21,043 $21,369 $10,049 $10,272
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Consists of marketable equity securities.
79
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT JUNE 30, -----------------------------------------------------------------------------------
1996 1996 1995 1994
--------------------------- --------------------------- --------------------------- ---------------------------
AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR
COST TOTAL(2) VALUE COST TOTAL(2) VALUE COST TOTAL(2) VALUE COST TOTAL(2) VALUE
--------- ---------- ------ --------- ---------- ------ --------- ---------- ------ --------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
Fixed-rate:
GNMA............. $1,833 25.68% $1,917 $1,901 26.23% $1,998 $2,199 80.82% $2,283 $2,768 80.54% $2,885
FHLMC(1)......... 377 5.28 394 401 5.53 423 522 19.18 535 669 19.46 710
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total fixed-
rate............ 2,210 30.96 2,311 2,302 31.76 2,421 2,721 100.00 2,818 3,437 100.00 3,595
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Adjustable-rate:
FHLMC(1)......... 4,928 69.04 4,958 4,946 68.24 4,965 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage-
backed
securities held
to maturity..... $7,138 100.00% $7,269 $7,248 100.00% $7,386 $2,721 100.00% $2,818 $3,437 100.00% $3,595
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----
(1) Includes $23,000 of unamortized premiums related to FHLMC securities as of
June 30, 1996 and $24,000, $0 and $0 as of March 31, 1996, 1995 and 1994,
respectively.
(2) Based on amortized cost.
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE YEAR
ENDED JUNE 30, ENDED MARCH 31,
---------------- -----------------------
1996 1995 1996 1995 1994
------- ------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance.................... $ 7,248 $ 2,721 $2,721 $3,437 $ 4,828
Purchases........................... -- -- 4,960 -- --
Principal repayments................ (109) (94) (433) (716) (1,391)
Accretion of premium................ (1) -- -- -- --
------- ------- ------ ------ -------
Ending balance....................... $ 7,138 $ 2,627 $7,248 $2,721 $ 3,437
======= ======= ====== ====== =======
</TABLE>
80
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's investment
securities and mortgage-backed securities as of June 30, 1996.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO 10 YEARS MORE THAN 10 YEARS TOTAL
----------------- --------------------- ----------------- --------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ---------- --------- -------- -------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities(1):
Held to maturity:
U.S. Government and
agency obligations..... $11,997 6.52% $ 9,490 5.64% $-- -- % $ -- -- % $21,487 6.13%
------- ---- ---------- -------- ---- ---- ---------- -------- ------- ----
Total investment
securities held to
maturity............. $11,997 6.52% $ 9,490 5.64% $-- -- % $ -- -- % $21,487 6.13%
======= ==== ========== ======== ==== ==== ========== ======== ======= ====
Mortgage-backed
securities:
Held to maturity:
Adjustable-rate:
FHLMC................. $ -- -- % $ -- -- % $-- -- % $ 4,928 6.30% $ 4,928 6.30%
Fixed-rate:
GNMA.................. -- -- 41 8.00 309 8.21 1,483 8.79 1,833 8.67
FHLMC................. -- -- -- -- 252 5.64 125 5.64 377 5.64
------- ---- ---------- -------- ---- ---- ---------- -------- ------- ----
Total mortgage-backed
securities held to
maturity................ $ -- -- % $ 41 8.00% $561 7.06% $ 6,536 6.85% $ 7,138 6.78%
======= ==== ========== ======== ==== ==== ========== ======== ======= ====
</TABLE>
- ----
(1) Does not include $773,000 of marketable equity securities available for
sale at fair value at June 30, 1996.
81
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, cash flows generated from operations and FHLB advances are the primary
sources of the Bank's funds for use in lending, investing and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the three months
ended June 30, 1996, core deposits represented 32.0% of total average
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank has historically relied
primarily on customer service and long-standing relationships with customers
to attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits. The Bank uses traditional means of
advertising its deposit products, including radio and print media and
generally does not solicit deposits from outside its market area. While the
Bank does not actively solicit certificate accounts in excess of $100,000 or
use brokers to obtain deposits, the Bank will solicit, from time to time, such
deposits or utilize brokered deposits depending upon market conditions. In
recent years, the Bank, in connection with its growth strategy, has
significantly increased its deposit base by establishing new branch offices in
and around its primary market area, primarily in Rhode Island, and
competitively pricing its deposit products to attract and retain deposit
accounts and build its market share of deposits. The majority of the recent
deposit growth has been in shorter-term certificate of deposit accounts which
generally bear yields higher than the Bank's core deposits. As a result, the
Bank's certificate of deposit accounts increased from $186.2 million, or 51.7%
of total deposits, at March 31, 1994 to $409.6 million, or 68.2% of total
deposits, at June 30, 1996. The Bank's cost of interest-bearing liabilities
increased from 3.78% for the fiscal year ended March 31, 1994 to 5.13% for the
three months ended June 30, 1996. At June 30, 1996, the weighted average
remaining maturity of the Bank's certificate of deposit accounts was 10.6
months. Further increases in short-term certificate of deposit accounts, which
tend to be more sensitive to movements in market interest rates than core
deposits, may result in the Bank's deposit base being less stable than if it
had a large amount of core deposits which, in turn, may result in further
increases in the Bank's cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED MARCH 31,
--------------- ------------------------------
1996 1995 1996 1995 1994
------- ------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits................... $10,049 $20,125 $ 120,527 $ 66,117 $ 20,307
Interest credited on deposit
accounts...................... 6,785 4,938 23,116 13,897 10,368
------- ------- ---------- --------- ---------
Total increase in deposit
accounts...................... $16,834 $25,063 $ 143,643 $ 80,014 $ 30,675
======= ======= ========== ========= =========
</TABLE>
At June 30, 1996, the Bank had $48.2 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................... $ 18,134 5.50%
Over 3 through 6 months............................ 9,485 5.88
Over 6 through 12 months........................... 10,120 5.91
Over 12 months..................................... 10,472 6.37
------------
Total............................................ $ 48,211 5.85%
============
</TABLE>
82
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize average month-end balances.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED MARCH 31,
ENDED JUNE 30, --------------------------------------------------------------------------------
1996 1996 1995 1994
-------------------------- -------------------------- -------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business checking
accounts......... $ 42,887 7.25% -- % $ 35,587 7.08% -- % $ 28,783 7.23% -- % $ 37,427 10.84% -- %
Money market
accounts......... 28,752 4.86 2.82 27,194 5.41 2.83 33,011 8.30 2.83 32,728 9.48 2.59
Savings
accounts......... 80,301 13.58 2.50 76,511 15.23 2.50 81,525 20.49 2.50 82,480 23.89 2.50
NOW accounts..... 37,363 6.32 1.98 30,088 5.99 1.98 24,154 6.07 1.98 21,799 6.32 1.98
-------- ------ -------- ------ -------- ------ -------- ------
Total........... 189,303 32.01 1.88 169,380 33.71 1.82 167,473 42.09 2.02 174,434 50.53 1.96
-------- ------ -------- ------ -------- ------ -------- ------
Certificate
accounts(1):
Less than six
months.......... 169,854 28.72 5.61 125,491 24.98 5.66 96,932 24.37 5.16 73,030 21.16 3.60
Over six through
12 months....... 78,202 13.22 5.83 64,743 12.89 5.91 40,981 10.30 5.75 26,512 7.68 4.01
Over 12 through
36 months....... 64,454 10.90 6.19 61,698 12.28 6.37 27,622 6.94 6.39 10,739 3.11 4.42
Over 36 months.. 15,406 2.61 6.72 14,558 2.90 6.74 7,850 1.97 6.78 2,166 0.63 5.22
IRA and KEOGH... 74,159 12.54 6.21 66,487 13.24 6.17 56,998 14.33 5.12 58,294 16.89 4.14
-------- ------ -------- ------ -------- ------ -------- ------
Total
certificate
accounts........ 402,075 67.99 5.90 332,977 66.29 5.95 230,383 57.91 5.56 170,741 49.47 3.95
-------- ------ -------- ------ -------- ------ -------- ------
Total average
deposits........ $591,378 100.00% 4.62 $502,357 100.00% 4.59 $397,856 100.00% 4.27 $345,175 100.00% 2.99
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- ----
(1) Based on remaining maturity of certificates.
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at June 30, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM JUNE 30, 1996 AT MARCH 31,
----------------------------------------------------- --------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO AT JUNE 30,
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1996 1996 1995 1994
--------- --------- ----------- ---------- ---------- ----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ -- $ 255 $ -- $ -- $ -- $ 255 $ 253 $ 19,822 $136,815
4.01 to 5.00%.......... 17,371 631 50 -- -- 18,052 31,913 74,008 44,589
5.01 to 6.00%.......... 186,097 38,257 4,746 427 2,157 231,684 178,891 91,477 2,187
6.01 to 7.00%.......... 76,742 14,569 17,785 4,531 5,701 119,328 140,863 66,856 969
7.01 to 8.00%.......... 16,718 10,389 1,972 11,194 21 40,294 40,027 28,198 907
8.01 to 9.00%.......... -- -- -- 3 -- 3 4 4 511
Over 9.01%............. -- -- -- -- -- -- -- 169 223
-------- ------- ------- ------- ------ -------- -------- -------- --------
Total.................. $296,928 $64,101 $24,553 $16,155 $7,879 $409,616 $391,951 $280,534 $186,201
======== ======= ======= ======= ====== ======== ======== ======== ========
</TABLE>
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<PAGE>
Borrowings. The Bank utilizes advances from the FHLB as an alternative to
retail deposits to fund its operations as part of its operating strategy.
During the quarter ended June 30, 1996, the Bank determined to utilize FHLB
borrowings to a greater extent to fund its asset growth, primarily its
origination of adjustable-rate one- to four-family loans. These FHLB advances
are collateralized primarily by certain of the Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank's investment in capital
stock of the FHLB. FHLB advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including
the Bank, fluctuates from time to time in accordance with the policies of the
OTS and the FHLB. See "Regulation--Federal Home Loan Bank System." At June 30,
1996, the Bank had $136.6 million in outstanding advances from the FHLB and
had no other borrowings as compared to $75.1 million at March 31, 1996. The
Bank intends to utilize the net conversion proceeds provided to the Bank to
repay FHLB advances and may repay additional FHLB borrowing with funds
deposited by the Company with the Bank.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED AT OR FOR THE YEAR
JUNE 30, ENDED MARCH 31,
------------------- -------------------------
1996 1995 1996 1995 1994
---------- --------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance
outstanding............... $ 108,671 $ 60,520 $50,321 $71,005 $67,994
========== ========= ======= ======= =======
Maximum amount outstanding
at any month-end during
the period................ $ 136,648 $ 66,663 $75,141 $99,724 $81,133
========== ========= ======= ======= =======
Balance outstanding at end
of period................. $ 136,648 $ 50,615 $75,141 $66,592 $59,542
========== ========= ======= ======= =======
Weighted average interest
rate during the period.... 6.01% 6.91% 6.46% 6.26% 5.59%
========== ========= ======= ======= =======
Weighted average interest
rate at end of period..... 5.77% 6.75% 5.94% 6.96% 5.86%
========== ========= ======= ======= =======
</TABLE>
SUBSIDIARY ACTIVITIES
FIRSTFED MORTGAGE CORPORATION ("FMC") is a wholly-owned subsidiary of the
Bank. FMC does not currently conduct any activities other than holding a
parcel of real estate located in Swansea, Massachusetts (the "Swansea
Property"). The Swansea Property is the primary asset of FMC and is the site
of the Bank's proposed centralized administrative and operations center and
branch office, which is anticipated to open for operations in late 1997. The
Bank has budgeted approximately $10 million for the construction of the
facility and for furniture, fixtures and equipment. See "--Properties."
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<PAGE>
PROPERTIES
The Bank currently conducts its business through an administrative and full
service branch office and an operations office located in Fall River and 11
other full service branch offices and five loan origination centers, most of
which are located in Southeastern Massachusetts and Rhode Island. In September
1996, the Bank began development of the Swansea Property for the purpose of
constructing a new centralized administrative and operations center and branch
office. The development and construction costs for the Swansea Property are
estimated to be approximately $10 million. Once this project is completed, the
Company believes that the Bank's facilities will be adequate to meet the then
present and immediately foreseeable needs of the Bank and the Company. See "--
Subsidiary Activities."
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
LEASED ORIGINAL YEAR LEASED DATE OF IMPROVEMENTS
LOCATION OR OWNED OR ACQUIRED LEASE EXPIRATION AT JUNE 30, 1996
-------- -------- -------------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/CORPORATE/BRANCH
OFFICE:
1 North Main Street Owned 1956 -- $ 551
Fall River, MA 02720
OPERATIONS CENTER:
186 South Main Street Leased 1987 August 1997(1) 21
Fall River, MA 02721
Route 118 (Swansea Mall Owned 1994 -- 567
Drive)(2)
Swansea, MA 02777
BRANCH OFFICES: (3)
27 Park Street Owned 1990 -- 1,789
Attleboro, MA 02703
33 Sullivan Drive Owned 1979 -- 382
Fall River, MA 02721
1450 Plymouth Avenue Owned 1972 -- 368
Fall River, MA 02721
278 Union Street Owned 1972 -- 553
New Bedford, MA 02740
254 Rockdale Avenue Owned 1983 -- 10
New Bedford, MA 02740
265 Newport Avenue Owned 1996 -- 774
Pawtucket, RI 02860
741 Willett Avenue Owned 1995 -- 700
East Providence, RI 02915
1519 Newman Avenue Owned 1994 -- 514
Seekonk, MA 02771
149 Grand Army Highway Owned 1963 -- 94
Somerset, MA 02725
2 Washington Street Owned 1976 -- 333
Taunton, MA 02780
2100 Warwick Avenue(4) Owned 1996 -- 328
Warwick, RI 02889
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL LEASEHOLD
LEASED YEAR LEASED DATE OF IMPROVEMENTS
LOCATION OR OWNED OR ACQUIRED LEASE EXPIRATION AT JUNE 30, 1996
- ----------------------- -------- ----------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN ORIGINATION
CENTERS:
12 White's Path, Unit Leased 1992 October 1996(1) --
7
Yarmouth, MA 02664
62 Auburn Street Leased 1990 June 1997 --
Auburn, MA 01501
1325 Springfield Leased 1992 June 1997(1) --
Street
Agawam, MA 01089
10 Wall Street Leased 1994 December 1997(1) --
Burlington, MA 01803
333 Main Street Leased 1990 September 1998(1) --
East Greenwich, RI
02818
------
Total.................................................... $6,984
======
</TABLE>
- --------
(1) The Bank has options to renew this lease which range from 1 to 10 years.
(2) The Bank's current expansion plans include the development of a new
centralized administrative and operations center and branch office on this
property which is expected to become operational in late 1997. Total
development and construction costs for the property are estimated to be
approximately $10 million.
(3) Does not reflect a lease agreement entered into by the Bank for vacant
land located in New Bedford, Massachusetts which such lease has a
commencement date of November 1, 1996 and a term of 20 years. The Bank
intends to utilize this property to construct a de novo branch office,
which is currently scheduled to open in early 1997.
(4) Reflects branch office which opened in August 1996. The net book value of
such branch represents expenditures for construction in progress as of
June 30, 1996.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Such routine
legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of June 30, 1996, the Bank had 239 authorized full-time employee
positions and 48 authorized part-time employee positions. The employees are
not represented by a collective bargaining unit and the Bank considers its
relationship with its employees to be good. See "Management of the Bank--
Benefits" for a description of certain compensation and benefit programs
offered to the Bank's employees.
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<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a calendar
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the IRS in
1983 and has never been audited by the Massachusetts Department of Revenue
("DOR").
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted addition to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
In August, 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Bank has
previously recorded a deferred tax liability equal to the bad debt recapture
and as such, the new rules will have no effect on net income or federal income
tax expense. For taxable years beginning after December 31, 1995, the Bank's
bad debt deduction will be equal to net charge-offs. The new rules allow an
institution to suspend the bad debt reserve recapture for the 1996 and 1997
tax years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only
home purchase and home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to
postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year. The unrecaptured base year 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 continue to be subject to provision of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for
such losses exceeds the amount that would have been allowed under the
experience method, or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will
be included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income
tax purposes would create a tax liability for the Bank. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Bank makes a
"non-dividend distribution," then approximately one and one-half times the
amount so used would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" and "Dividend Policy" for limits on the
87
<PAGE>
payment of dividends of the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank
currently has none. AMTI is increased by an amount equal to 75% of the amount
by which the Bank's adjusted current earnings exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating
losses). In addition, for taxable years beginning after March 31, 1986 and
before January 1, 1996, an environmental tax of .12% of the excess of AMTI
(with certain modifications) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.
The Bank does not expect to be subject to the AMT, but may be subject to the
environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank own more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
Commonwealth of Massachusetts. On July 27, 1995, the Governor of
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net
income to 10.50% on their net income apportioned to Massachusetts. The reduced
rate is to be phased-in over a five year period whereby the rate was 12.13%
for 1995, and will be 11.72% for 1996, 11.32% for 1997, 10.91% for 1998 and
10.50% for 1999. Net income for years beginning before January 1, 1999
includes gross income as defined under the provisions of the Code, plus
interest from bonds, notes and evidences of indebtedness of any state,
including Massachusetts, less the deductions, excluding the deductions for
dividends received, state taxes, and net operating losses, as defined under
the provisions of the Code. For taxable years beginning on or after January 1,
1999, the definition of state taxable income is modified to allow a deduction
for 95% of dividends received from stock where the Bank owns 15% or more of
the voting stock of the institution paying the dividend and to allow
deductions from certain expenses allocated to federally tax exempt
obligations. Subsidiary corporations of the Bank conducting business in
Massachusetts must file separate Massachusetts state tax returns and are taxed
as financial institutions, with certain modifications and grandfathering for
taxable years before 1996. The net worth or tangible property of such
subsidiaries is taxed at a rate of 0.26%. Such subsidiaries may file
consolidated tax returns on the net earnings portion of the corporate tax.
Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. The Company is expected to qualify for this reduced tax rate provided
that it is exclusively engaged in activities of a "securities corporation."
The Bank has received an opinion from KPMG Peat Marwick LLP that the Company
will qualify as a securities corporation, provided that if called upon by the
Bank to make a loan to the ESOP, the Company will create a separate subsidiary
for that purpose and provided that all of the Company's other activities
qualify as activities permissible for a securities corporation. If the Company
fails to so qualify, however, it will be taxed as a financial institution at a
rate of 10.50% beginning in 1996 rather than at the phased-in rates.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
88
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured
up to applicable limits by the SAIF managed by the FDIC. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which
an institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Assuming that
the holding company form of organization is utilized, the Company, as a
savings and loan holding company, will also be required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS
and of the Securities and Exchange Commission (the "SEC") under the federal
securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, their operations or the Bank's
Conversion. Congress is expected to consider in 1997 the elimination of the
federal thrift charter and the abolishment of the OTS. The results of such
consideration, including possible enactment of legislation, is uncertain.
Therefore, the Bank is unable to determine the extent to which the results of
such consideration or possible legislation, if enacted, would affect its
business. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans
and consumer loans, are limited to a specified percentage of the institution's
capital or assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial
instruments and bullion. At June 30, 1996, the Bank's general limit on loans-
to-one borrower was $7.1 million. At June 30, 1996, the Bank's largest
aggregate amount of loans-to-one borrower consisted of an unadvanced $2.1
million commercial line of credit.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of
its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month
89
<PAGE>
period. A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of June 30, 1996, the
Bank maintained 92.5% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test. Recent legislation has expanded the extent
to which education loans, credit card loans and small business loans may be
considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier 1 Bank") and has not
been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of: (i) 100%
of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar
year; or (ii) 75% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In the
event the Bank's capital fell below its capital requirements or the OTS
notified it that it was in need of more than normal supervision, the Bank's
ability to make capital distributions could be restricted. In addition, the
OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage (currently 5%) of its net withdrawable deposit accounts
plus short-term borrowings. OTS regulations also require each savings
institution to maintain an average daily balance of short-term liquid assets
at a specified percentage (currently 1%) of the total of its net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's average liquidity ratio for the three months ended June 30, 1996 was
5.37%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Reserves."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general
assessment, paid on a semi-annual basis, is based upon the savings
institution's total assets, including consolidated subsidiaries, as reported
in the Bank's latest quarterly Thrift Financial Report. The assessments paid
by the Bank for the year ended March 31, 1996 totalled $125,000.
Branching. OTS regulations permit federally chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
For a discussion of the impact of possible legislation, see "Risk Factors--
Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish)
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and
also limits the aggregate amount of transactions with all affiliates to 20% of
the savings institution's capital and surplus. Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in Section 23A and the purchase of low quality assets from
affiliates is generally prohibited. Section 23B generally requires that
certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
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<PAGE>
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity (including
retained earnings), certain non-cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain mortgage servicing rights
("MSRs") and credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. In addition, the
OTS prompt corrective action regulation provides that a savings institution
that has a leverage capital ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by
the OTS capital regulation based on the risks OTS believes are inherent in the
type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance
for loan and lease losses. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk is measured
by the decline in the net portfolio value of its assets (i.e., the difference
between incoming and
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<PAGE>
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate component in calculating its
total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its risk-
based capital requirement. Under the rule, there is a two quarter lag between
the reporting date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings association with
assets of less than $300 million and risk-based capital ratios in excess of
12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. The OTS has postponed the date that the component will first be
deducted from an institution's total capital to provide it with an opportunity
to review the interest rate risk approaches taken by the other federal banking
agencies.
At June 30, 1996, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Regulatory Capital Compliance" for a
table which sets forth in terms of dollars and percentages the OTS tangible,
leverage and risk-based capital requirements, the Bank's historical amounts
and percentages at June 30, 1996, and pro forma amounts and percentages based
upon the issuance of the shares within the Estimated Price Range and assuming
that a portion of the net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of
a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment
rate depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from
23 basis points to 31 basis points. However, the FDIC has recently proposed to
lower assessment rates for SAIF member institutions to 0 to 27 basis points
effective January 1, 1997. See "Recent
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<PAGE>
Developments--Management's Discussion and Analysis of Recent Developments--
Legislative Matters." The FDIC is authorized to raise the assessment rates in
certain circumstances. The FDIC has exercised this authority several times in
the past and may raise insurance premiums in the future. If such action is
taken by the FDIC, it could have an adverse effect on the earnings of the
Bank. The Bank's assessment rate for the years ended March 31, 1996, 1995 and
1994 was .23% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. The management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at June 30, 1996 of
$7.0 million. FHLB advances must be secured by specified types of collateral
and all long-term advances may only be obtained for the purpose of providing
funds for residential housing finance. At June 30, 1996, the Bank had $136.6
million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest
on advances to their members. For the years ended March 31, 1996, 1995 and
1994, dividends from the FHLB to the Bank amounted to approximately $447,000,
$518,000 and $439,000, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no
assurance that the impact of recent or future legislation on the FHLBs will
not also cause a decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be
maintained against aggregate transaction accounts as follows: for accounts
aggregating $52.0 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$52.0 million, the reserve requirement is $1.6 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $52.0 million. The first
$4.3 million of otherwise reservable balances (subject to adjustment by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow
from the Federal Reserve "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings and loan
holding company within the meaning of the HOLA. As such, the Company will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
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<PAGE>
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage, provided that the Bank continues to be a QTL. See "--
Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have
treated all savings and loan holding companies as bank holding companies and
limit the activities of such companies to those permissible for bank holding
companies. See "Risk Factors--Financial Institution Regulation and Possible
Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution, or holding company
thereof, without prior written approval of the OTS; from acquiring or
retaining, with certain exceptions, more than 5% of a non-subsidiary holding
company or savings association. The HOLA also prohibits a savings and loan
holding company from acquiring more than 5% of a company engaged in activities
other than those authorized for savings and loan holding companies by the
HOLA; or acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition
of a savings institution in another state if the laws of the state of the
target savings institution specifically permit such acquisitions. The states
vary in the extent to which they permit interstate savings and loan holding
company acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant
to the Conversion. Upon completion of the Conversion, the Company's Common
Stock will be registered with the SEC under the Exchange Act. The Company will
then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
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MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company is divided into three classes, each
of which contains approximately one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Thomas A. Rodgers, Jr. and Anthony L. Sylvia, has a term
of office expiring at the first annual meeting of stockholders, a second
class, consisting of Messrs. Robert F. Stoico and John S. Holden, Jr., has a
term of office expiring at the second annual meeting of stockholders, and a
third class, consisting of Messrs. Gilbert C. Oliveira, Richard W. Cederberg
and Paul A. Raymond, has a term of office expiring at the third annual meeting
of stockholders. Their names and biographical information are set forth under
"Management of the Bank--Directors."
The following individuals are the executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH COMPANY
---- -----------------------------
<S> <C>
Robert F. Stoico........ President, Chief Executive Officer and Chairman of the Board
Kevin J. McGillicuddy... Senior Vice President
Frederick R. Sullivan... Senior Vice President
Terrence M. Tyrrell..... Senior Vice President, Treasurer and Chief Financial Officer
Cecilia R. Viveiros..... Corporate Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal at the discretion of the Board of Directors.
Except for directors' meeting fees, since the formation of the Company, none
of the executive officers, directors or other personnel has received
remuneration from the Company. Information concerning the principal
occupations, employment and other information concerning the directors and
officers of the Company during the past five years is set forth under
"Management of the Bank--Biographical Information."
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK(2) SINCE EXPIRES
- ---- ------ --------------------------------- -------- -------
<S> <C> <C> <C> <C>
Robert F. Stoico........ 56 Director, President and Chief 1980 1998
Executive Officer
Gilbert C. Oliveira..... 71 Director and Chairman of the 1960 1999
Board
Thomas A. Rodgers, 82 Director and Vice Chairman of 1963 1997
Jr. ................... the Board
Stanley A. Baker........ 89 Director 1965 1998
Richard W. Cederberg.... 68 Director 1982 1999
John S. Holden, Jr. .... 66 Director 1982 1998
Gerhard S. Lowenstein... 79 Director 1968 1997
Willard E. Olmsted...... 78 Director 1982 1997
Paul A. Raymond, DDS.... 52 Director 1981 1999
Roger K. Richardson..... 86 Director 1982 1999
Anthony L. Sylvia....... 64 Director 1984 1997
</TABLE>
- --------
(1) As of June 30, 1996.
(2) Messrs. Stoico, Oliveira, Rodgers, Cederberg, Holden, Raymond and Sylvia
are also directors of the Company.
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<PAGE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
- ---- ------ ------------------------------
<S> <C> <C>
Kevin J. McGillicuddy... 56 Senior Vice President, Director of Mortgage
Banking Group
Frederick R. Sullivan... 54 Senior Vice President, Director of Banking Group
Terrence M. Tyrrell..... 46 Senior Vice President and Treasurer, Director of
Administrative Services
</TABLE>
- --------
(1) As of June 30, 1996.
Each of the executive officers of the Bank will retain his/her office in the
converted Bank until their re-election at the annual meeting of the Board of
Directors of the Bank, held immediately after the first annual meeting of
stockholders subsequent to Conversion, and until their successors are elected
and qualified or until they are removed or replaced. Officers are subject to
re-election by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
DIRECTORS
Robert F. Stoico joined the Bank in 1972 as Vice President and Treasurer and
was elected Executive Vice President in 1974 and President and Chief Executive
Officer in 1977. He has been a member of the Board of Directors since 1980.
Mr. Stoico serves in a number of leadership roles in the thrift industry and
in local civic and charitable organizations. Prior to joining the Bank, Mr.
Stoico, a Certified Public Accountant, was employed by KPMG Peat Marwick LLP
and specialized in the banking industry.
Gilbert C. Oliveira is the Chairman, President and Treasurer of Gilbert C.
Oliveira Insurance Agency, Inc. and a partner in Oliveira Associates Realtors.
He has been a member of the Bank's Board of Directors since 1960 and Chairman
of the Board since 1989.
Thomas A. Rodgers, Jr. is founder, Chairman and Chief Executive Officer of
Globe Manufacturing Co., Inc., a manufacturer of extruded latex thread and
spandex fibers. He has been a member of the Bank's Board of Directors since
1963 and Vice Chairman of the Board since 1989.
Stanley A. Baker has served on the Bank's Board of Directors since 1965. He
is the former President of Baker Tractor, Corp. Mr. Baker is now retired.
Richard W. Cederberg prior to his retirement was Chairman of Larson Tool and
Stamping Company. He has served on the Bank's Board of Directors since 1982
and was on the Board of Directors of First Federal Savings and Loan
Association of Attleboro prior to its merger with First Federal Savings Bank
of America.
John S. Holden, Jr. is President and Treasurer of Automatic Machine Products
Co. He has served on the Bank's Board of Directors since 1982 and was on the
Board of Directors of First Federal Savings and Loan Association of Attleboro
prior to its merger with First Federal Savings Bank of America.
Gerhard S. Lowenstein prior to his retirement was President and Treasurer of
Lowenstein Dress Corp. He has served on the Bank's Board of Directors since
1968 and is the current Chairman of the Bank's Audit Committee.
Willard E. Olmsted has served on the Bank's Board of Directors since 1982.
Mr. Olmsted was on the Board of Directors and served as Chief Executive
Officer of First Federal Savings and Loan Association of Attleboro prior to
its merger with First Federal Savings Bank of America.
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<PAGE>
Paul A. Raymond, DDS was appointed to the Bank's Board of Directors in 1981.
He is a dentist in the town of Swansea, Massachusetts.
Roger K. Richardson has served on the Bank's Board of Directors since 1982.
Mr. Richardson was on the Board of Directors of First Federal Savings and Loan
Association of Attleboro prior to its merger with First Federal Savings Bank
of America. He is the Chairman of Richardson/Cuddy Insurance Agency, Inc.
Anthony L. Sylvia has served on the Bank's Board of Directors since 1984.
Mr. Sylvia is President and Treasurer of The Baker Manufacturing Co., Inc., a
commercial printing company.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Kevin J. McGillicuddy has served as Senior Vice President, Director of
Mortgage Banking Group, since 1995. Mr. McGillicuddy is responsible for the
mortgage banking operations of the Bank. Previously, Mr. McGillicuddy served
in the capacity of president of a mortgage company as well as chief operating
and financial officer at two financial institutions. Mr. McGillicuddy is a
Certified Public Accountant.
Frederick R. Sullivan has been with the Bank since 1988. He is the Senior
Vice President, Director of Banking Group. In this position, Mr. Sullivan is
responsible for the banking operations of the Bank. Mr. Sullivan has been in
the financial services industry for 29 years and prior to 1988 he served as a
vice president at a large regional financial institution.
Terrence M. Tyrrell, Senior Vice President and Treasurer, Director of
Administrative Services Group, has been with the Bank since 1980. Mr. Tyrrell
is responsible for the administrative services and financial reporting of the
Bank. Prior to joining the Bank, Mr. Tyrrell was the manager of accounting for
a large manufacturer and served for a time as president of the company's
credit union.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets once per month and may have additional
special meetings called in the manner specified in the By-laws. During fiscal
year 1995, no current Director attended less than 75% of the aggregate of the
total number of Board meetings and the total number of committee meetings of
the Board of Directors on which they served.
The Board of Directors of the Bank has established the following committees:
The Audit Committee consists of Messrs. Lowenstein, Holden and Sylvia. The
Bank's Internal Auditor reports to this committee. The purposes of this
committee are to review audit reports and management's actions regarding the
implementation of audit findings and to review compliance with all relevant
laws and regulations. The committee meets on a quarterly basis.
The Management and Personnel Committee consists of Messrs. Oliveira, Stoico,
Olmsted and Rodgers. This Committee is responsible for all matters regarding
compensation and fringe benefits. The committee meets on an as needed basis.
The Executive Committee consists of Messrs. Oliveira, Stoico, Rodgers,
Olmsted and Cederberg. The purposes of this Committee are to review and
establish the Bank's loan policies, approve large loans, evaluate issues of
major importance to the Bank and to review recommendations for internal policy
changes prior to presentation to the full Board for approval. The committee
meets on a bi-monthly basis.
Additionally, the Bank has a number of other management committees including
the Asset Classification Committee, Asset/Liability Management Committee,
Commercial Loan Committee, Compliance Committee, Retail Loan Committee and
Fair Lending Committee.
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<PAGE>
The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Holden,
Raymond and Sylvia; the Pricing Committee consisting of Messrs. Stoico,
Oliveira, Rodgers and Cederberg; and the Compensation Committee consisting of
Messrs. Stoico, Oliveira and Rodgers.
DIRECTOR COMPENSATION
The Chairman of the Board currently receives a fee of $1,200 for each board
meeting attended and a fee of $750 to $850 (depending on the Committee) for
each Committee meeting attended. All other directors of the Bank currently
receive a fee of $750 for each Board meeting they attend and a fee of $450 to
$600 (depending on the Committee) for each Committee meeting they attend.
EXECUTIVE COMPENSATION
Cash Compensation. The following table sets forth the cash compensation paid
by the Bank for services rendered in all capacities during the fiscal year
ended March 31, 1996, to the Chief Executive Officer and the three highest
paid executive officers of the Bank who received cash compensation in excess
of $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------- ------------------------- -------
SECURITIES (I)
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS(2) YEAR ($) ($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
------------------ ------ -------- ------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F. Stoico........ 1996 $282,045 $75,000 -- -- -- -- $149,364
President and Chief
Executive Officer
Kevin J. McGillicuddy... 1996 96,846 8,000 -- -- -- -- 771
Senior Vice President
Frederick R. Sullivan... 1996 99,923 8,000 -- -- -- -- 16,167
Senior Vice President
Terrence M. Tyrrell..... 1996 91,846 8,000 -- -- -- -- 11,625
Senior Vice President
and Treasurer
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees for the named President and Chief Executive Officer.
(2) For fiscal year 1996, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year;
(b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements;
or (e) preferential discounts on stock. For fiscal year 1996, the Bank had
no restricted stock or stock related plans in existence.
(3) Does not include awards pursuant to the Stock Programs, which may be
granted in conjunction with a meeting of stockholders of the Company,
subject to OTS and stockholder approval, as such awards were not earned,
vested or granted in fiscal year 1996. For a discussion of the terms of
the Stock Programs, see "--Benefits--Stock Programs." For fiscal year
1996, the Bank had no restricted stock plans in existence.
(4) Does not include options, which may be granted in conjunction with a
meeting of stockholders of the Company, subject to OTS and stockholder
approval, because such options were not earned or granted in fiscal year
1996. For a discussion of the terms of grants and vesting of options, see
"--Benefits--Stock Option Plans."
(5) For fiscal year 1996, there were no payouts or awards under any long-term
incentive plan.
(6) Includes employer contributions of $5,293, $771, $2,967 and $2,625 and
$11,800, $0, $13,000 and $9,000 to the Bank's Thrift and Retirement Plans
for Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell, respectively. Also
includes employer contributions of $132,271 contributed to Mr. Stoico
pursuant to the Bank's Supplemental Retirement Plan for fiscal year 1996.
See "--Benefits--Thrift Plan," "--Retirement Plan" and "--Supplemental
Retirement Plan."
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<PAGE>
EMPLOYMENT AGREEMENTS
Upon the consummation of the Conversion, the Bank and the Company intend to
enter into employment agreements (collectively, the "Employment Agreements")
with Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell (individually, the
"Executive"). The Employment Agreements are subject to the review and approval
of the OTS and may be amended as a result of such OTS review. Review of
compensation arrangements by the OTS does not indicate, and should not be
construed to indicate, that the OTS has passed upon the merits of such
arrangements. The Employment Agreements are intended to ensure that the Bank
and the Company will be able to maintain a stable and competent management
base after the Conversion. The continued success of the Bank and the Company
depends to a significant degree on the skills and competence of Messrs.
Stoico, McGillicuddy, Sullivan and Tyrrell.
The Employment Agreements provide for a three-year term for Mr. Stoico and a
two-year term for Messrs. McGillicuddy, Sullivan and Tyrrell. The Bank
Employment Agreements provide that, commencing on the first anniversary date
and continuing each anniversary date thereafter, the Board of Directors may
extend the agreement for an additional year so that the remaining term shall
be three years, in the case of Mr. Stoico, and two years, in the case of
Messrs. McGillicuddy, Sullivan and Tyrrell, unless written notice of non-
renewal is given by the Board of Directors after conducting a performance
evaluation of the Executive. The terms of the Company Employment Agreements
shall be extended on a daily basis unless written notice of non-renewal is
given by the Board of the Company. The Bank and Company Employment Agreements
provide that the Executive's base salary will be reviewed annually. The base
salaries which will be effective for the Employment Agreements for Messrs.
Stoico, McGillicuddy, Sullivan and Tyrrell will be $320,000, $115,000,
$115,000 and $100,000, respectively. In addition to the base salary, the
Employment Agreements provide for, among other things, participation in stock
benefit plans and other fringe benefits applicable to similarly situated
executive personnel. The Employment Agreements provide for termination by the
Bank or the Company for cause as defined in the agreements at any time. In the
event the Bank or the Company chooses to terminate the Executive's employment
for reasons other than for cause, or in the event of the Executive's
resignation from the Bank and the Company upon: (i) failure to re-elect the
Executive to his current offices; (ii) a material change in the Executive's
functions, duties or responsibilities; (iii) a relocation of the Executive's
principal place of employment by more than 25 miles; (iv) liquidation or
dissolution of the Bank or the Company; or (v) a breach of the Employment
Agreements by the Bank or the Company, the Executive or, in the event of
death, his beneficiary would be entitled to receive an amount equal to the
remaining base salary payments due to the Executive and the contributions that
would have been made on the Executive's behalf to any employee benefit plans
of the Bank or the Company during the remaining term of the Employment
Agreements. The Bank and the Company would also continue and pay for the
Executive's life, health and disability coverage for the remaining term of the
Employment Agreements. Upon any termination of the Executive, the Executive is
subject to a covenant not to compete with the Company or the Bank for one
year.
Under the agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company, the Executive or, in the event
of the Executive's death, his beneficiary, would be entitled to a severance
payment equal to the greater of: (i) the payments due for the remaining terms
of the agreement; or (ii) three times the average of the five preceding
taxable years' annual compensation. The Bank and the Company would also
continue the Executive's life, health, and disability coverage for thirty-six
months in the case of Mr. Stoico and twenty-four months in the cases of
Messrs. McGillicuddy, Sullivan and Tyrrell. Notwithstanding that both
agreements provide for a severance payment in the event of a change in
control, the Executive would only be entitled to receive a severance payment
under one agreement.
Payments to the Executive under the Bank Employment Agreements will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company Employment Agreement would be made by
the Company. All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to
the Employment Agreements shall be paid by the Bank or Company, respectively,
if the Executive is successful on the merits pursuant to a legal judgment,
arbitration or settlement. The Employment Agreements also provide that the
Bank and Company shall indemnify the Executive to the fullest extent allowable
under federal and Delaware law, respectively. In the event of a
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<PAGE>
change in control of the Bank or Company, the total amount of payments due
under the Employment Agreements, based solely on the base salaries to be paid
to Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell effective upon the
consummation of the Conversion and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $2.0 million.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Company and the Bank intend to enter into two-year
Change in Control Agreements (the "CIC Agreements") with seven of the Bank's
Vice Presidents and the Bank's and Company's Corporate Secretary, none of whom
will be covered by an Employment Agreement. Only officers who serve as an
employee of the Company will be provided with a Company CIC Agreement. The
terms of the Company CIC Agreements shall be extended on a daily basis unless
written notice of non-renewal is given by the Board of Directors of the
Company. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the Bank CIC Agreements may be renewed by the Board of
Directors of the Bank for an additional year. The Company CIC Agreements will
provide that in the event voluntary or involuntary termination follows a
change in control of the Bank or the Company, the officer would be entitled to
receive a severance payment equal to two times the officer's compensation for
the twelve months preceding termination. The Bank's CIC Agreement has a
similar change in control provision; however, the officer would only be
entitled to receive a severance payment under one agreement. The Company and
Bank would also continue and pay for the officer's life, health and disability
coverage for 24 months following termination. Payments to the officer under
the Bank's CIC Agreements will be guaranteed by the Company in the event that
payments or benefits are not paid by the Bank. In the event of a change in
control of the Bank or Company, the total payments that would be due under the
CIC Agreement, based solely on the current annual compensation paid to the
eight officers covered by the CIC Agreement and excluding any benefits under
any employee benefit plan which may be payable, would be approximately $1.1
million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon consideration of the
Conversion, establish the First Federal Savings Bank of America Employee
Severance Compensation Plan ("Severance Plan") which will provide eligible
employees with severance pay benefits in the event of a change in control of
the Bank or the Company. Management personnel with employment or CIC
agreements are not eligible to participate in the Severance Plan. Generally,
employees are eligible to participate in the Severance Plan if they have
completed at least one year of service with the Bank. The Severance Plan vests
in each participant a contractual right to the benefits such participant is
entitled to thereunder. Under the Severance Plan, in the event of a change in
control of the Bank or the Company, eligible employees who are terminated from
or terminate their employment within one year (for reasons specified under the
Severance Plan), will be entitled to receive a severance payment. If the
participant, whose employment has terminated, has completed at least one year
of service, the participant will be entitled to a cash severance payment equal
to one-twelfth of annual compensation for each year of service up to a maximum
of 199% of annual compensation. Such payments may tend to discourage takeover
attempts by increasing costs to be incurred by the Bank in the event of a
takeover. In the event the provisions of the Severance Plan were triggered,
the total amount of payments that would be due thereunder, based solely upon
current salary levels, would be approximately $2.8 million. However, it is
management's belief that substantially all of the Bank's employees would be
retained in their current positions in the event of a change in control, and
that any amount payable under the Severance Plan would be considerably less
than the total amount that could possibly be paid under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medical and long-term disability insurance.
BENEFITS
Thrift Plan. The Bank maintains the Financial Institutions Thrift Plan (the
"Thrift Plan") to encourage eligible employees to save and invest on a
regular, long term basis. The Thrift Plan permits eligible employees
100
<PAGE>
to make monthly contributions of 2%-15% of their base monthly salary on an
after-tax basis to the Thrift Plan. The Bank makes monthly employer
contributions to each participant's account in the Thrift Plan equal to 50% of
the participant's contribution up to 6% of the participant's annual base
salary. Participants are 100% vested in the amounts credited to their Thrift
Plan accounts.
Employees are eligible to participate in the Thrift Plan after the
completion of a 12 consecutive month period of employment with the Bank in
which they complete at least 1,000 hours of employment.
Participants may direct their Thrift Plan accounts in five different
investment fund alternatives. In connection with the Conversion, a sixth
investment fund, which will consist of the Common Stock, will be added to
permit participants to invest some or all of their account in Common Stock.
The Thrift Plan is a tax qualified plan. Participants in the Thrift Plan do
not recognize taxable income on Bank contributions or investment income
credited to their accounts under the Thrift Plan until such amounts are
distributed to them.
Retirement Plan. The Bank maintains the Financial Institutions Retirement
Fund (the "Retirement Plan") to provide retirement benefits for eligible
employees. Employees are eligible to participate in the Retirement Plan after
the completion of 12 consecutive months of employment with the Bank and the
attainment of age 21. Hourly paid employees are excluded from participation in
the Retirement Plan. Benefits payable to a participant under the Retirement
Plan are based on the participant's years of service and salary. The formula
for normal retirement benefits payable annually under the Retirement Plan is
2% multiplied by years of benefit service multiplied by the average of the
participant's highest three years of salary paid by the Bank. A participant
may elect early retirement as early as age 45. However, such participant's
normal retirement benefits will be reduced by an early retirement factor based
on age at early retirement. The Bank may, in the future, amend the Retirement
Plan to reduce or eliminate the early retirement benefit reduction in the
event of a change in control of the Company or the Bank.
Participants generally have no vested interest in Retirement Plan benefits
prior to the completion of five years of service with the Bank. Following the
completion of five years of vesting service, or in the event of a
participant's attainment of age 65, death or termination of employment due to
disability, a participant will become 100% vested in the accrued benefit under
the Retirement Plan. The table below reflects the pension benefit payable, and
any payment due under the Supplemental Retirement Plan, discussed below, to a
participant assuming various levels of earnings and years of service. The
amounts of benefits paid under the Retirement Plan are not reduced for any
social security benefit payable to participants. As of January 1, 1996,
Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell had credited years of
service of 24 years, six months, 9 years and 16 years, respectively.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
--------------------------------------------
FINAL AVERAGE
EARNINGS 15 20 25 30 35
- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000
$ 75,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 70,000
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
$150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $105,000
$200,000(1) $ 60,000 $ 80,000 $100,000 $120,000 $140,000
$250,000(1) $ 75,000 $100,000 $125,000 $150,000 $175,000
$300,000(1) $ 90,000 $120,000 $150,000 $180,000 $210,000
$350,000(1) $105,000 $140,000 $175,000 $210,000 $245,000
$400,000(1) $120,000 $160,000 $200,000 $240,000 $280,000
</TABLE>
- --------
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Code is $150,000.
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<PAGE>
Supplemental Retirement Plan. The Bank currently maintains a Supplemental
Retirement Plan under which a specified amount of money is annually credited
to the account of plan participants to be paid following the participants'
termination of employment. In addition, participants may direct that a
percentage of their annual pay be deferred into a subaccount under the
Supplemental Retirement Plan. The benefits provided under the Supplemental
Retirement Plan are intended to make the participants whole for reductions in
benefits payable under the terms of the tax qualified thrift plan and pension
plan maintained by the Bank due to limitations imposed by the Code, and to
provide additional retirement benefits for the participants (see discussion
under Supplemental Executive Retirement Plan, below). The amounts credited to
the Participants' accounts are credited with interest annually at a rate.
Participants vest in the amounts credited to the Supplemental Retirement Plan
after completing five years of employment with the Bank. Participants will
also vest immediately should the Participant incur a disability or die. In
connection with the Conversion, the Supplemental Retirement Plan will be
amended to permit Participants to direct that all or a portion of the amounts
currently (and/or future amounts) credited to their accounts be converted into
stock units that are based on the value of the Common Stock. The Bank
currently maintains an irrevocable grantor's trust (also known as a "rabbi
trust") to hold assets of the Bank for the exclusive purpose of paying
benefits under the Supplemental Retirement Plan, provided that in the event of
the insolvency of the Bank, the assets of the trust are subject to the claims
of the Bank's creditors. The assets of this trust may be used to acquire
shares of Common Stock to be used to satisfy the obligations of the Bank for
the payment of benefits under the Supplemental Retirement Plan.
Supplemental Executive Retirement Plan. The Code limits the amount of
compensation that may be considered when determining benefits that are payable
under tax-qualified plans, such as the ESOP, (the "Code Limit"), and further
limits the amount that can be contributed on behalf of any employee in any
year with respect to tax-qualified deferred contribution plans, such as the
ESOP and Thrift Plan. To provide benefits to make up for the reduction in
benefits flowing from these limits. the Bank intends to implement a
Supplemental Executive Retirement Plan ("SERP"). The SERP is an "unfunded"
plan which is subject to the creditors of the employer. Accordingly, many
employers use an irrevocable grantor trust to hold Bank assets to satisfy the
obligations of the plan to participants and allows the trust to invest in
employer stock. The Bank intends to amend the trust established for the
Supplemental Retirement Plan to hold assets to satisfy the Bank's SERP
obligations.
Employee Stock Ownership Plan and Trust. The Bank has established for
eligible employees an ESOP and related trust to become effective upon
Conversion. Employees employed with the Bank as of February 1, 1996 and
employees of the Company or the Bank employed after such date, who have been
credited with at least 1,000 hours during a twelve month period, and who have
attained the age of 21 will become participants. The ESOP intends to purchase
8% of the Common Stock issued in the Conversion, including the issuance of
shares to the Foundation. As part of the Conversion and in order to fund the
ESOP's purchase of the Common Stock to be issued in the Conversion, the ESOP
intends to borrow funds, either from ESOP Loan Subsidiary or a third party
lender, equal to 100% of the aggregate purchase price of the Common Stock. In
either case, the loan will be repaid principally from the Company's or the
Bank's contributions to the ESOP over a period of nine years and the
collateral for the loan will be the Common Stock purchased by the ESOP.
Subject to receipt of any necessary regulatory approvals or opinions, the Bank
may make contributions to the ESOP for repayment of the loan since the
participants are all employees of the Bank or to reimburse the Company for
contributions made by it. Contributions to the ESOP will be discretionary;
however, the Company or the Bank intend to make annual contributions to the
ESOP in an aggregate amount at least equal to the principal and interest
requirement on the debt. The interest rate for the loan is expected to be the
prime rate.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan, and will be held in a suspense account until released for allocation
among participants as the loan is repaid. The pledged shares will be released
annually from the suspense account in an amount proportional to the repayment
of the ESOP loan for each plan year. The released shares will be allocated
among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Participants will vest in their ESOP
account at a rate of 20% annually commencing after the completion of one year
of credited service, with credit for prior service, or completely if their
service was terminated due to death, early retirement, permanent disability or
a change in
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<PAGE>
control. Prior to the completion of one year of credited service, a
participant who terminates employment for reasons other than death,
retirement, disability, or change in control of the Bank or Company will not
receive any benefit. Forfeitures will be reallocated among remaining
participating employees, in the same proportion as contributions. Benefits may
be payable upon death, retirement, early retirement, disability or separation
from service. The contributions to the ESOP are not fixed, so benefits payable
under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a Committee of the Board
of Directors was appointed to administer the ESOP (the "ESOP Committee"). An
unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to its fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Under the ESOP, unallocated shares and allocated shares for which no
instructions are given will be voted by the trustee in a manner calculated to
most accurately reflect the instructions it has received from participants
regarding the allocated stock provided that such vote is in accordance with
the provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
Stock Option Plans. Following the conversion, the Board of Directors of the
Company intends to adopt stock-based benefit plans which would provide for the
granting of stock options to eligible officers, employees and directors of the
Company and Bank. Stock options are intended to be granted under either a
separate stock option plan for officers and employees (the "Incentive Option
Plan") and a separate option plan for outside directors (the "Directors'
Option Plan") (collectively, the "Option Plans") or under a single Master
Stock-Based Benefit Plan which would incorporate the benefits and features of
the Incentive Option Plan and Directors' Option Plan. At a meeting of
stockholders of the Company following the Conversion, which under applicable
OTS regulations may be held no earlier than six months after the completion of
the Conversion, the Board of Directors intends to present the Option Plans or
the Master Stock-Based Benefit Plan to stockholders for approval and intends
to reserve an amount equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, or 757,620 shares
(based upon the issuance of 7,576,200 shares), for issuance under the Option
Plans or Master Stock-Based Benefit Plan. OTS regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
options granted under the Option Plans or Master Stock-Based Benefit Plan and
non-employee directors may not receive more than 5% individually, or 30% in
the aggregate of the options granted under the Option Plans.
The stock option benefits provided under the Incentive Option Plan or Master
Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the
success of the Company and reward key employees for outstanding performance.
All employees of the Company and its subsidiaries will be eligible to
participate in the Incentive Option Plan. The Incentive Option Plan or Master
Stock-Based Benefit Plan will provide for the grant of: (i) options to
purchase the Company's Common Stock intended to qualify as incentive stock
options under Section 422 of the Code ("Incentive Stock Options"); (ii)
options that do not so qualify ("Non-Statutory Stock Options"); and (iii)
Limited Rights. Limited Rights are exercisable only upon a change in control
of the Bank or the Company. Upon exercise of "Limited Rights" in the event of
a change in control, the employee will be entitled to receive a lump sum cash
payment equal to the difference between the exercise price of the related
option and the fair market value of the shares of common stock subject to the
option on the date of exercise of the right in lieu of purchasing the stock
underlying the option. It is anticipated that all options granted
contemporaneously with stockholder approval of the Incentive Option Plan will
be intended to be Incentive Stock Options to the extent permitted under
Section 422 of the Code. Unless sooner terminated, the Incentive Option Plan
or Master Stock-Based Benefit Plan will be in effect for a period of ten years
from the earlier of adoption by the Board of Directors or approval by the
Company's Stockholders. Subject to stockholder approval, the Company intends
to grant options with Limited Rights under the Incentive Option Plan or Master
Stock-Based Benefit Plan at an exercise price equal to the fair market value
of the underlying Common Stock on the date of grant.
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<PAGE>
Under the Incentive Option Plan or Master Stock-Based Benefit Plan, it is
expected that the Management and Personnel Committee will determine which
officers and employees will be granted options and Limited Rights, whether
such options will be incentive or non-statutory stock options, the number of
shares subject to each option, the exercise price of each non-statutory stock
option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable. It is expected that the
per share exercise price of an incentive stock option will be required to be
at least equal to the fair market value of a share of Common Stock on the date
the option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not disposed
of by the employee for at least one year after the date the stock is received
in connection with the option exercise and two years after the date of grant
of the option. No compensation deduction would be able to be taken by the
Company as a result of the grant or exercise of Incentive Stock Options,
provided such shares are not disposed of before the expiration of the period
described above (a "disqualifying disposition"). In the case of a Non-
Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an employee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which
the exercise price is exceeded by the fair market value of the Common Stock
purchased by exercising the option on the date of exercise. The amount of any
ordinary income deemed to be received by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option would be a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise, the option holder would
have to include the amount paid to him or her upon exercise in his gross
income for federal income tax purposes in the year in which the payment is
made and the Company would be entitled to a deduction for federal income tax
purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by the Company, subject to applicable OTS regulations,
which require that options begin vesting no earlier than one year from the
date of shareholder approval of the Incentive Option Plan or Master Stock-
Based Benefit Plan and thereafter vest at a rate of no more than 20% per year.
Options granted in connection with the Incentive Option Plan or Master Stock-
Based Benefit Plan could be exercisable for three months following the date on
which the employee ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. However, any Incentive Stock
Options exercised more than three months following the date the employee
ceases to perform services as an employee would be treated as a Non-Statutory
Stock Option as described above. In the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf of the
Bank, the Company or an affiliate, unvested options would continue to vest in
accordance with their original vesting schedule until the optionee ceases to
serve as a consultant or director. If the Incentive Stock Option Plan or
Master Stock-Based Benefit Plan is adopted in the form described above, in the
event of death, disability or normal retirement, the Company, if requested by
the optionee, could elect, in exchange for vested options, to pay the
optionee, or beneficiary in the event of death, the amount by which the fair
market value of the Common Stock exceeds the exercise price of the options on
the date of the employee's termination of employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted may be equal
to the fair market value of the shares of Common Stock on the date the option
is granted. All Options granted to outside directors under the Directors'
Option Plan or Master Stock-Based Benefit Plan would be Non-Statutory Stock
Options and, pursuant to applicable OTS regulations, would vest and become
exercisable commencing one year after the date of shareholder approval of the
Directors Option Plan or Master Stock-Based Benefit Plan at the rate of 20%
per year, and would expire upon the earlier of ten years following the date of
grant or one year following the date the optionee ceases to be a director or
consulting director. In the event of the death or disability of a participant,
all previously granted options would immediately vest and become fully
exercisable.
104
<PAGE>
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of stock options granted under a plan adopted
within one year after conversion. If permitted by OTS regulations in effect at
the time a change in control occurs, the Incentive Option Plan and the
Directors Option Plan or Master Stock-Based Benefit Plan described above
provide for accelerated vesting of previously granted options in the event of
a change in control of the Company or the Bank. A change in control would be
defined in the contemplated Incentive Option Plan, Master Stock-Based Benefit
Plan or the Directors Option Plan generally to occur when a person or group of
persons acting in concert acquires beneficial ownership of 20% or more of any
class of equity security of the Company or the Bank or in the event of a
tender or exchange offer, merger or other form of business combination, sale
of all or substantially all of the assets of the Company or the Bank or
contested election of directors which resulted in the replacement of a
majority of the Board of Directors by persons not nominated by the directors
in office prior to the contested election.
Stock Programs. Following the Conversion, the Bank intends to establish
performance based Stock Programs as a method of providing officers, employees
and non-employee directors of the Bank and Company with a proprietary interest
in the Company in a manner designed to encourage such persons to remain with
the Bank. The benefits intended to be granted under the Stock Programs may be
provided for under either a separate plan for officers and employees and a
separate plan for outside directors or under the Master Stock-Based Benefit
Plan which would incorporate the benefits and features of such separate Stock
Program plans. The Company intends to present the Stock Programs or Master
Stock-Based Benefit Plan for stockholder approval at a meeting of
stockholders, which pursuant to applicable OTS regulations, may be held no
earlier than six months after the completion of the Conversion.
The Bank expects to contribute funds to the Stock Programs or Master Stock-
Based Benefit Plan to enable the plans to acquire, in the aggregate, an amount
equal to 4% of the shares of Common Stock issued in the Conversion, including
shares issued to the Foundation, or 303,048 shares (based upon the issuance of
7,576,200 shares). These shares would be acquired through open market
purchases, if permitted, or from authorized but unissued shares. Although no
specific award determinations have been made, the Company anticipates that it
would provide awards to its directors and employees to the extent permitted by
applicable regulations. OTS regulations provide that no individual employee
may receive more than 25% of the shares of any plan and non-employee directors
may not receive more than 5% of any plan individually or 30% in the aggregate
for all directors.
The Management and Personnel Committee of the Bank's Board of Directors
would administer the Stock Programs or Master Stock-Based Benefit Plan
described above. The Stock Programs or Master Stock-Based Benefit Plan are
expected to be self-administered for grants or allocations made to non-
employee directors, which would not be performance-based. Under the Stock
Programs or Master Stock-Based Benefit Plan, awards would be granted in the
form of shares of Common Stock held by the plans. Awards will be non-
transferable and non-assignable. The Board intends to appoint an independent
fiduciary to serve as trustee of the trust to be established pursuant to the
Stock Programs or Master Stock-Based Benefit Plan. Allocations and grants to
officers and employees under the Stock Programs or Master Stock-Based Benefit
Plan may be made in the form of base grants and allocations based on
performance goals established by the Management and Personnel Committee. In
establishing such goals, the Committee may utilize the annual financial
results of the Bank, actual performance of the Bank as compared to targeted
goals such as the ratio of the Bank's net worth to total assets, the Bank's
return on average assets, or such other performance standards as determined by
the Committee with the approval of the Board of Directors. Performance
allocations would be granted upon the achievement of performance goals and
base grants and performance allocations would vest in annual installments
established by the Committee. Pursuant to applicable OTS regulations, base
grants and allocations will commence vesting one year after the date of
shareholder approval of the plan and thereafter at the rate of 20% per year.
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the
event of retirement, if the participant continues to perform services as a
Director or consultant on behalf of the
105
<PAGE>
Bank, the Company or an affiliate or, in the case of a retiring Director, as a
consulting director, unvested grants would continue to vest in accordance with
their original vesting schedule until the recipient ceases to perform such
services at which time any unvested grants would lapse.
Applicable OTS regulations currently do not permit accelerated vesting in
the event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan described above. If permitted by OTS
regulations at the time a change in control occurs, the Stock Programs or
Master Stock-Based Benefit Plan would provide for accelerated vesting in the
event of a change in control of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan. A change in control is expected to be defined
in the Stock Programs or Master Stock-Based Benefit Plan generally to occur
when a person or group of persons acting in concert acquires beneficial
ownership of 20% or more of a class of equity securities of the Company or the
Bank or in the event of a tender or exchange offer, merger or other form of
business combination, sale of all or substantially all of the assets of the
Company or the Bank or contested election of directors which results in the
replacement of a majority of the Board of Directors by persons not nominated
by the directors in office prior to the contested election.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Bank. When shares become vested and are actually
distributed in accordance with the Stock Programs or Master Stock-Based
Benefit Plan, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants could
direct the voting of the shares awarded to them. Shares not subject to grants
and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or Master
Stock-Based Benefit Plan in proportion to the directions provided with respect
to shares subject to grants. Vested shares are distributed to recipients as
soon as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion,
the interests of existing shareholders would be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of the Bank's capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested
members of the Board of Directors.
The Bank currently makes loans to its executive officers, directors and
employees on the same terms and conditions offered to the general public. The
Bank's policy provides that all loans made by the Bank to its executive
officers and directors be made in the ordinary course of business, on
substantially the same terms, including collateral, as those prevailing at the
time for comparable transactions with other persons and may not involve more
than the normal risk of collectibility or present other unfavorable features.
As of June 30, 1996, nine of the Bank's executive officers or directors had
loans with outstanding balances totalling $617,000 in the aggregate. All such
loans were made by the Bank in the ordinary course of business, with no
favorable terms and such loans do not involve more than the normal risk of
collectibility or present unfavorable features.
The Company intends that all transactions in the future between the Company
and its executive officers, directors, holders of 10% or more of the shares of
any class of its common stock and affiliates thereof, will contain terms no
less favorable to the Company than could have been obtained by it in arm's
length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any
interest in the transaction.
106
<PAGE>
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock the
Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range, including the effect of shares issued to the Foundation, and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE(1) PRICE RANGE(1)
---------------------- ----------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES ISSUED OF SHARES ISSUED
- ---- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Robert F. Stoico........ $ 300,000 30,000 0.54% 30,000 0.40%
Gilbert C. Oliveira..... 250,000 25,000 0.45 25,000 0.33
Thomas A. Rodgers, Jr... 150,000 15,000 0.27 15,000 0.20
Stanley A. Baker........ 250,000 25,000 0.45 25,000 0.33
Richard W. Cederberg.... 80,000 8,000 0.14 8,000 0.11
John S. Holden, Jr...... 50,000 5,000 0.09 5,000 0.07
Gerhard S. Lowenstein... 20,000 2,000 0.04 2,000 0.03
Willard E. Olmsted...... 8,000 800 0.01 800 0.01
Paul A. Raymond, DDS.... 50,000 5,000 0.09 5,000 0.07
Roger K. Richardson..... 50,000 5,000 0.09 5,000 0.07
Anthony L. Sylvia....... 75,000 7,500 0.13 7,500 0.10
Kevin J. McGillicuddy... 75,000 7,500 0.13 7,500 0.10
Frederick R. Sullivan... 75,000 7,500 0.13 7,500 0.10
Terrence M. Tyrrell..... 100,000 10,000 0.18 10,000 0.13
Cecilia R. Viveiros..... 5,000 500 0.01 500 0.01
---------- ------- ---- ------- ----
All Directors and Execu-
tive Officers as
a group (15 persons)... $1,538,000 153,800 2.75% 153,800 2.06%
========== ======= ==== ======= ====
</TABLE>
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(1) Includes proposed subscriptions, if any, by associates. Also includes
funds from the Bank's Thrift Plan which may be used to purchase shares of
Common Stock under such plan's new employer stock fund investment option.
See "--Benefits--Profit Sharing and Thrift Plan." Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including shares
issued to the Foundation.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE PLAN OF
CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO VOTE ON
THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS HAS NEITHER APPROVED NOR DISAPPROVED THE
ESTABLISHMENT OF THE FIRSTFED CHARITABLE FOUNDATION.
GENERAL
On August 2, 1996 the Bank's Board of Directors unanimously adopted the
Plan, which was subsequently amended on September 17, 1996 and November 11,
1996 pursuant to which the Bank will be converted from a federally-chartered
mutual savings bank to a federally-chartered capital stock savings bank. It is
currently intended that all of the outstanding capital stock of the Bank will
be held by the Company, which is incorporated under Delaware law. The Plan was
approved by the OTS, subject to, among other things, approval of the Plan by
the Bank's members. A special meeting of members has been called for this
purpose to be held on December 30, 1996.
The Company has received the approval of the OTS to become a savings and
loan holding company and to acquire all of the Common Stock of the Bank to be
issued in the Conversion. The Company plans to purchase the shares of issued
and outstanding capital stock of the Bank in exchange for the greater of that
portion of the net proceeds from the sale of the Common Stock which would
increase the Bank's tangible capital to 10% of its adjusted assets or up to
50% of the net proceeds and retain the remaining net proceeds. The Conversion
will be effected only upon completion of the sale of all of the shares of
Common Stock of the Company or the Bank, if the holding company form of
organization is not utilized, to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at any time
prior to the issuance of the Common Stock and for any reason, decide not to
use a holding company form. Such reasons may include possible delays resulting
from overlapping regulatory processing or policies which could adversely
affect the Bank's or the Company's ability to consummate the Conversion and
transact its business as contemplated herein and in accordance with the Bank's
operating policies. In the event such a decision is made, the Bank will
withdraw the Company's registration statement from the SEC and take steps
necessary to complete the Conversion without the Company, including filing any
necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the Common Stock of the Bank and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their funds will be promptly refunded with interest
at the Bank's passbook rate of interest; or be permitted to modify or rescind
their subscriptions), and notified of the time period within which the
subscriber must affirmatively notify the Bank of his intention to affirm,
modify or rescind his subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to
the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, with a preference given to Local Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders, with a preference
given to Local Supplemental Eligible Account Holders, and Other Members, with
a preference given to Local Other Members. Concurrently, shares will be
offered in a Community Offering with preference given to natural persons
residing in the Bank's Local Community. It is anticipated that all shares not
subscribed for in the Subscription and Community Offerings will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
The Bank
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has the right to accept or reject, in whole or in part, any orders to purchase
shares of the Common Stock received in the Community Offering or in the
Syndicated Community Offering. See "--Community Offering" and "--Syndicated
Community Offering."
The aggregate price of the shares of Common Stock to be issued in the
Conversion within the Estimated Price Range, currently estimated to be between
$51.9 million and $70.2 million, will be determined based upon an independent
appraisal, prepared by Keller & Company, Inc. of the estimated pro forma
market value of the Common Stock of the Company. All shares of Common Stock to
be issued and sold in the Conversion will be sold at the same price. The
independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
appraisal has been performed by Keller, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "--Stock Pricing" for
additional information as to the determination of the estimated pro forma
market value of the Common Stock.
The following is a brief summary of pertinent aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at each branch of the
Bank and at the Northeast Region and Washington, D.C. offices of the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to its local
community, the Bank's Plan of Conversion provides for the establishment of a
charitable foundation in connection with the Bank's Conversion. The Plan
provides that the Bank and the Company will establish the Foundation, which
will be incorporated under Delaware law as a non-stock corporation, and will
fund the Foundation with Common Stock of the Company, as further described
below. The Company and the Bank believe that the funding of the Foundation
with Common Stock of the Company is a means of establishing a common bond
between the Bank and the communities in which the Bank operates and thereby
enables such communities to share in the potential growth and success of the
Company and the Bank over the long term. By further enhancing the Bank's
visibility and reputation in the communities in which it operates, the Bank
believes that the Foundation will enhance the long-term value of the Bank's
community banking franchise.
The Foundation would be dedicated to the promotion of charitable purposes
within the communities in which the Bank operates, including, but not limited
to, providing grants or donations to support housing assistance, not-for-
profit medical facilities, community groups and other types of organizations
or projects. Establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the Special Meeting. The Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the Foundation, the Bank intends to complete
the Conversion without the establishment of the Foundation. Failure to approve
the establishment of the Foundation may materially affect the pro forma market
value of the Common Stock. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the
event of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "--Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable purposes within the communities in which the
Bank operates. The Bank has long emphasized community lending and community
development activities and currently has an outstanding Community Reinvestment
Act ("CRA") rating. The Foundation is being formed as a complement to the
Bank's existing community activities, not as a replacement for such
activities. Indeed, the Bank intends to continue to emphasize community
lending and community development activities following the Conversion.
However, such activities are not the Bank's sole corporate purpose. The
Foundation, conversely, will be completely dedicated to community activities
and the promotion of charitable causes, and may be able to support such
activities in ways that are not presently available to the Bank. Since the
Bank has an outstanding record of serving its community under the CRA and
already
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engages in community development activities, the Bank believes that the
Foundation will enable the Company and the Bank to assist their local
community in areas beyond community development and lending. In this regard,
the Board of Directors believes the establishment of a charitable foundation
is consistent with the Bank's commitment to community service. The Boards of
Directors of the Bank and Company also believe that the funding of the
Foundation with Common Stock of the Company is a means of enabling the
communities in which the Bank operates to share in the potential growth and
success of the Company long after completion of the Conversion. The Foundation
accomplishes that goal by providing for continued ties between the Foundation
and Bank, thereby forming a partnership with the Bank's community. The
establishment of the Foundation would also enable the Company and the Bank to
develop a unified charitable donation strategy and would centralize the
responsibility for administration and allocation of corporate charitable
funds. The Bank, however, does not expect the contribution to the Foundation
to take the place of the Bank's traditional community lending and charitable
activities. The Bank expects in future periods to continue making its ordinary
charitable contributions within its communities. Such ordinary contributions
typically range between $20,000 and $30,000 per year.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of seven members, all of
whom must be officers of or members of the Boards of Directors or officers of
the Company or the Bank or an affiliate or subsidiary of the Company or the
Bank. The initial board of directors of the Foundation will be comprised of
the same individuals who are currently directors of the Company. On an on-
going basis, a Nominating Committee of the board of directors of the
Foundation, which is to be comprised of a minimum of any three members of the
board, will nominate individuals eligible for election to the board of
directors of the Foundation. The members of the Foundation, who are comprised
of its board members, will elect the directors at the annual meeting of the
Foundation from those nominated by the Nominating Committee. Only persons
serving as directors of the Foundation qualify as members of the Foundation
with voting authority. Directors will be divided into three classes with each
class appointed for three-year terms. The certificate of incorporation of the
Foundation provides that the corporation is organized exclusively for
charitable purposes as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further provides that no part of the
net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors
will adopt such a policy upon establishment of the Foundation. The directors
will also be responsible for directing the assets of the Foundation. Pursuant
to the terms of the contribution as mandated by the OTS, all shares of Common
Stock held by the Foundation must be voted in the same ratio as all other
shares of the Company's Common Stock on all proposals considered by
stockholders of the Company; provided, however, that the OTS will waive this
voting restriction under certain circumstances if compliance with the
restriction would: (i) cause a violation of the law of the State of Delaware
and the OTS determines that federal law would not preempt the application of
the laws of the State of Delaware to the Foundation; (ii) would cause the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) would cause the Foundation
to be subject to an excise tax under Section 4941 of the Code. In order for
the OTS to waive such voting restriction, the Company's or the Foundation's
legal counsel must render an opinion satisfactory to OTS that compliance with
the voting restriction would have the effect described in clauses (i), (ii) or
(iii) above. Under those circumstances, the OTS will grant a waiver of the
voting restriction upon submission of such legal opinion(s) by the Company or
the Foundation. In the event that the OTS waived the voting restriction, the
directors would direct the voting of the Common Stock held by the Foundation.
However, a condition to the OTS approval of the Conversion provides that in
the event such voting restriction is waived or becomes unenforceable, the
Director of the OTS, or his designees, at that time may impose conditions on
the composition of the board of directors of the Foundation or such other
conditions or restrictions relating to the control of the Common Stock held by
the Foundation, any of which could limit the ability of the board of directors
of the Foundation to control the voting of the Common Stock held by the
Foundation. There
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will be no agreements or understandings with directors of the Foundation
regarding the exercise of control, directly or indirectly, over the management
or policies of the Company or the Bank, including agreements related to
voting, acquisition or disposition of the Company's stock. As directors of a
nonprofit corporation, directors of the Foundation will at all times be bound
by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with
the charitable purpose for which the Foundation is established.
The Company will provide office space and administrative support services to
the Foundation. Initially, the Foundation is expected to have no employees.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. It is anticipated that
initially such officers will be selected from the board of directors of the
Foundation. Any transaction between the Bank and the Foundation will comply
with the affiliate transaction restrictions set forth in Sections 23A and 23B
of the Federal Reserve Act, as amended.
The Company proposes to capitalize the Foundation with Common Stock in an
amount equal to 8% of the total amount of Common Stock sold in connection with
the Conversion. At the minimum, midpoint and maximum of the Estimated Price
Range, the contribution to the Foundation would equal 414,800, 488,000 and
561,200 shares, which would have a market value of $4.1 million, $4.9 million
and $5.6 million, respectively, based on the Purchase Price of $10.00 per
share. Such contribution, once made, will not be recoverable by the Company or
the Bank. The Company and the Bank determined to fund the Foundation with
Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation since,
as a shareholder, the Foundation will share in the potential growth and
success of the Company. As such, the contribution of stock to the Foundation
has the potential to provide a self-sustaining funding mechanism which reduces
the amount of cash that the Company, if it were not making the stock
contribution, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock in the future, and subject to applicable federal and
state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time to time as
may be permitted to provide the Foundation with additional liquidity. As a
private foundation under Section 501(c)(3) of the Code, the Foundation will be
required to distribute annually in grants or donations, a minimum of 5% of the
average fair market value of its net investment assets. One of the conditions
imposed on the gift of Common Stock by the Company is that the amount of
Common Stock that may be sold by the Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation, by three-fourths vote,
determines that the failure to sell an amount of common stock greater than
such amount would result in a long-term reduction of the value of the
Foundation's assets and as such would jeopardize the Foundation's capacity to
carry out its charitable purposes. While there may be greater risk associated
with a one-stock portfolio in comparison to a diversified portfolio, the
Company believes any such risk is mitigated by the ability of the Foundation's
directors to sell more than 5% of its stock in such circumstances. Upon
completion of the Conversion and the contribution of shares to the Foundation
immediately following the Conversion, the Company would have 5,599,800,
6,588,000 and 7,576,200 shares issued and outstanding at the minimum, midpoint
and maximum of the Estimated Price Range. Because the Company will have an
increased number of shares outstanding, the voting and ownership interests of
shareholders in the Company's common stock would be diluted by 7.4%, as
compared to their interests in the Company if the Foundation was not
established. For additional discussion of the dilutive effect, see "Comparison
of Valuation and Pro Forma Information With No Foundation" and "Pro Forma
Data."
Tax Considerations. The Company and the Bank have been advised by their
independent accountants that an organization created for the above purposes
will qualify as a 501(c)(3) exempt organization under the Code,
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and will be classified as a private foundation rather than a public charity. A
private foundation typically receives its support from one person or one
corporation whereas a public charity receives its support from the public. The
Foundation will submit a request to the IRS to be recognized as an exempt
organization after approval of the Foundation by the Bank's members at the
Special Meeting being held to consider the Conversion. As long as the
Foundation files its application for tax-exempt status within 15 months from
the date of its organization, and provided the IRS approves the application,
the effective date of the Foundation's status as a Section 501(c)(3)
organization will be the date of its organization. The Company's independent
accountants, however, have not rendered any advice on the condition of the
gift which requires that all shares of Common Stock of the Company held by the
Foundation must be voted in the same ratio as all other shares of the
Company's Common Stock, on all proposals considered by stockholders of the
Company. In the event that the Company or the Foundation receives an opinion
of their tax counsel satisfactory to the OTS that compliance with the voting
restriction would cause the Foundation to lose its tax-exempt status,
otherwise have a material adverse tax consequence on the Foundation or subject
the Foundation to an excise tax under Section 4941 of the Code, the OTS will
waive such condition upon submission of such opinion(s) by the Company or the
Foundation. See "--Regulatory Conditions Imposed on the Foundation."
A legal opinion of the OTS which addresses the establishment of charitable
foundations by savings associations opines that as a general rule funds
contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code, and if an association's contributions
exceed the deductible limit, such action must be justified by the board of
directors. In addition, under Delaware law, the Company is authorized by
statute to make charitable contributions and case law has recognized the
benefits of such contributions to a Delaware corporation. In this regard,
Delaware case law provides that a charitable gift must merely be within
reasonable limits as to amount and purpose to be valid. Under the Code, the
Company may deduct up to 10% of its taxable income in any one year and any
contributions made by the Company in excess of the deductible amount will be
deductible for federal tax purposes over each of the five succeeding taxable
years. The Company and the Bank believe that the Conversion presents a unique
opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, the Company and the Bank considered the dilutive
impact of the Foundation on the amount of Common Stock available to be offered
for sale in the Conversion. See "Comparison of Valuation and Pro Forma
Information with No Foundation." Based on such consideration, the Company and
Bank believe that the contribution to the Foundation in excess of the 10%
annual limitation is justified given the Bank's capital position and its
earnings, the substantial additional capital being raised in the Conversion
and the potential benefits of the Foundation to the Bank's community. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $98.7
million, or 11.53% of consolidated assets and the Bank's pro forma tangible,
core and risk-based capital ratios would be 10.00%, 10.00% and 18.91%,
respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Foundation." Thus,
the amount of the contribution will not adversely impact the financial
condition of the Company and the Bank and the Company and the Bank therefore
believe that the amount of the charitable contribution is reasonable given the
Company and the Bank's pro forma capital positions. As such, the Company and
the Bank believe that the contribution does not raise safety and soundness
concerns.
The Company and the Bank have received an opinion of their independent
accountants that the Company's contribution of its own stock to the Foundation
will not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay to the Company for such stock, subject to a limitation based
on 10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made for federal tax purposes.
Thus, while the Company expects to receive a charitable contribution deduction
of approximately $1,000,000 in calendar year 1997, the Company is permitted
under the Code to carryover the excess contribution over a five-year period
for federal income tax purposes. The Company would not be able to utilize such
carryover for Massachusetts state income tax purposes. Assuming the close of
the Offerings at the
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midpoint of the Estimated Price Range, the Company estimates that
substantially all of the deduction should be deductible over the six-year
period. However, no assurances can be made that the Company will have
sufficient pre-tax income over the five year period following the year in
which the contribution is made to fully utilized the carryover related to the
excess contribution. Neither the Company nor the Bank expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Company and the Bank may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Company and the Bank at that time, the interests of shareholders and
depositors of the Company and the Bank, and the financial condition and
operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's contribution to
the Foundation would be expensed without tax benefit, resulting in a reduction
in earnings in the year in which the IRS makes such a determination. See "Risk
Factors--Establishment of the Charitable Foundation." In cases of willful,
flagrant or repeated acts or failures to act which result in violations of the
IRS rules governing private foundations, a private foundation's status as a
private foundation may be involuntarily terminated by the IRS. In such event,
the managers of a private foundation could be liable for excise taxes based on
such violations and the private foundation could be liable for a termination
tax under the Code. The Foundation's certificate of incorporation provides
that it shall have a perpetual existence. In the event, however, the
Foundation were subsequently dissolved as a result of a loss of its tax exempt
status, the Foundation would be required under the Code and its certificate of
incorporation to distribute any assets remaining in the Foundation at that
time for one or more exempt purposes within the meaning of Section 501(c)(3)
of the Code, or to distribute such assets to the federal government, or to a
state or local government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale of Common
Stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains,
will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions imposed by the OTS: (i) the
Foundation will be subject to examination by the OTS, at the Foundation's own
expense; (ii) the Foundation must comply with supervisory directives imposed
by the OTS; (iii) the Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation will operate
in accordance with written policies adopted by the board of directors,
including a conflict of interest policy; (v) unless required by another
condition imposed by the OTS, the Foundation will not engage in self-dealing
and will comply with all laws necessary to maintain its tax-exempt status; and
(vi) any shares of Common Stock of the Company held by the Foundation must be
voted in the same ratio as all other shares of the Company's Common Stock on
all proposals considered by stockholders of the Company; provided, however,
that the OTS will waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (a) cause a violation of the law
of the State of Delaware and the OTS determines the federal law does not
preempt the application of the laws of the State of Delaware to the
Foundation; (b) cause the Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Foundation; or
(c) cause the Foundation to be subject to an excise tax under Section 4941 of
the Code. In order for the OTS to waive such voting restriction, the Company's
or the Foundation's legal counsel must render an opinion satisfactory to OTS
that compliance with the voting restriction would have the effect described in
clauses
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(a), (b) or (c) above. Under those circumstances, the OTS will grant a waiver
of the voting restriction upon submission of such opinion(s) by the Company or
the Foundation. There can be no assurances that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In this regard, a
condition to the OTS approval of the Conversion provides that in the event
such voting restriction is waived or becomes unenforceable, the Director of
the OTS, or his designees, at that time may impose conditions on the
composition of the board of directors of the Foundation or such other
conditions or restrictions relating to the control of the Common Stock held by
the Foundation, any of which could limit the ability of the board of directors
of the Foundation to control the voting of Common Stock held by the
Foundation. In no event will the voting restriction survive the sale of shares
of the Common Stock held by the Foundation.
In addition, establishment of the Foundation is subject to the approval of a
majority of the total outstanding votes of the Bank's members eligible to be
cast at the special meeting being held to consider the Conversion. The
Foundation will be considered as a separate matter from approval of the Plan
of Conversion. If the Bank's members approve the Plan of Conversion, but not
the Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being
offered for sale in the Offering since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to
the Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings bank, does not have
shareholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form
used by commercial banks, other business entities and a growing number of
savings institutions. The Conversion will enhance the Bank's ability to access
capital markets, expand its current operations, acquire other financial
institutions or branch offices, provide affordable home financing
opportunities to the communities it serves or diversify into other financial
services to the extent allowable by applicable law and regulation. The
Conversion would also position the Bank for a conversion to a commercial bank
charter if the Board of the Bank chooses to do so in the future. In
determining whether to convert to a commercial bank charter, the Bank may
consider, among other things, the differences in the regulatory and
supervisory structure applicable to the Bank as a commercial lending
institution as opposed to a thrift lending institution. In particular, a
conversion to a commercial bank charter would provide the Bank with added
lending flexibility in that the Bank would not be restricted in the types or
amounts of commercial loans in which it may not currently be able to invest
due to regulations applicable to federal savings institutions. However, the
Bank does not expect to convert to a commercial bank charter at this time.
The holding company form of organization, if used, would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock institutions, as well as other companies. Although there are
no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Conversion, subject
to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base is
significant. Due to the Bank's capital position, it has sought to limit its
asset growth to a level sustainable by its capital position. The Conversion
will significantly increase the Bank's capital position to a level whereby the
Bank will be better positioned to take advantage of business opportunities and
engage in activities which, prior to Conversion, would have been more
difficult for the Bank to engage in and still continue to meet its status as a
"well capitalized" institution. At June 30, 1996, the Bank had retained
earnings, determined in accordance with GAAP, of $47.5 million, or 5.9% of
total assets, which approximates the Bank's regulatory tangible capital
requirement which it must satisfy in order to be classified as a "well-
capitalized" institution. An institution with a ratio of tangible capital to
total assets of greater than or equal to 5.0% is considered to be "well-
capitalized" pursuant to OTS regulations.
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Assuming that the Company uses 50% of the net proceeds at the maximum of the
Estimated Price Range or that portion of net proceeds to purchase the stock of
the Bank which would be sufficient to increase the Bank's tangible capital to
10% of its adjusted assets, the Bank's GAAP capital will increase to $84.6
million or a ratio of GAAP capital to adjusted assets, on a pro forma basis,
of 10.05% after the Conversion. In the event that the holding company form of
organization is not utilized and all of the net Conversion proceeds, at the
midpoint of the Estimated Price Range, are retained by the Bank, the Bank's
ratios of tangible and core capital to adjusted assets, on a pro forma basis,
will both increase to 12.13% after Conversion. The investment of the net
proceeds from the sale of the Common Stock is expected to provide the Bank
with additional income to increase further its capital position. The
additional capital may also assist the Bank in offering new programs and
expanded services to its customers. See "Use of Proceeds."
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and regulatory approval of an offering,
to raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares upon exercise of
stock options under the Stock Option Plans or Master Stock-Based Benefit Plan
or the possible issuance of authorized but unissued shares to the Stock
Programs under the Stock Option Plans or Master Stock-Based Benefit Plan.
Following the Conversion, the Company will also be able to use stock-related
incentive programs to attract and retain executive and other personnel for
itself and its subsidiaries. See "Management of the Bank--Executive
Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. However, this ownership interest
is tied to the depositor's account and has no tangible market value separate
from such deposit account. Any depositor who opens a deposit account obtains a
pro rata ownership interest in the net worth of the institution without any
additional payment beyond the amount of the deposit. A depositor who reduces
or closes his account receives a portion or all of the balance in the account
but nothing for his ownership interest in the net worth of the institution,
which is lost to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings institution is liquidated or in
the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual surplus
and reserves after other claims, including claims of depositors to the amounts
of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
capital stock. The stock certificates are transferable and, therefore, the
stock may be sold or traded if a purchaser is available with no effect on any
account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the OTS
and the FDIC. After the Conversion, the Bank will continue to provide services
for depositors and borrowers under current policies by its present management
and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board
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of Directors of the Bank. All officers of the Bank at the time of Conversion
will retain their positions immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and certain
borrowers of the Bank are members of, and have voting rights in, the Bank as
to all matters requiring membership action. Upon Conversion, depositors and
borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors and borrowers of the Bank will not have voting rights after
the Conversion except to the extent that they become stockholders of the
Company through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation and an opinion from KPMG Peat Marwick LLP with regard
to Massachusetts taxation which provide that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for federal or
Massachusetts tax purposes to the Bank, its Eligible Account Holders, or its
Supplemental Eligible Account Holders or the Company, except as discussed
below. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to certain depositors (see "--
Liquidation Rights"), with any assets remaining thereafter distributed to the
Company as the holder of the Bank's capital stock. Pursuant to the rules and
regulations of the OTS, a post-Conversion merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation and, in such a transaction,
the liquidation account would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The Bank
and the Company have retained Keller to make such valuation. For its services
in making such appraisal, Keller will receive a fee of $23,000, plus
reasonable expenses not to exceed $1,000. The Bank and the Company have agreed
to indemnify Keller and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where Keller's
liability results from its negligence, willful misconduct or bad faith.
An appraisal has been made by Keller in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
Keller also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other
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information relating to the Bank; a comparative evaluation of the operating
and financial statistics of the Bank with those of other similarly situated
publicly-traded savings banks and savings institutions located in the Bank's
primary market area and northeastern United States; the aggregate size of the
offering of the Common Stock; the impact of Conversion on the Bank's net worth
and earnings potential; the proposed dividend policy of the Company and the
Bank; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.
On the basis of the foregoing, Keller has advised the Company and the Bank
that, in its opinion, dated September 6, 1996, the estimated pro forma market
value of the Common Stock ranged from a minimum of $51.9 million to a maximum
of $70.2 million with a midpoint of $61.0 million. Based upon the Valuation
Range and the Purchase Price of $10.00 per share for the Common Stock
established by the Board of Directors, the Board of Directors has established
the Estimated Price Range of $51.9 million to $70.2 million, with a midpoint
of $61.0 million, and the Company expects to issue between 5,185,000 and
7,015,000 shares of Common Stock. The Board of Directors of the Company and
the Bank have reviewed the appraisal of Keller and, in determining the
reasonableness and adequacy of such appraisal consistent with OTS regulations
and policies, have reviewed the methodology and reasonableness of the
assumptions utilized by Keller in the preparation of such appraisal. The
Estimated Price Range may be amended with the approval of the OTS (if
required), if necessitated by subsequent developments in the financial
condition of the Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK
IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID
KELLER VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE
APPRAISAL CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED
AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE
CAN BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL COMMON STOCK AT PRICES AT OR ABOVE THE PURCHASE
PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE
THEREOF. SEE "RISK FACTORS--ABSENCE OF MARKET FOR COMMON STOCK."
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock to be issued in the Conversion may be increased to
8,067,250 shares due to regulatory considerations, changes in the market and
general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the
event of an increase in the Estimated Price Range to fill unfilled orders in
the Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Bank and the OTS that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, would cause Keller to conclude that the value of
the Common Stock at the price so determined is incompatible with its estimate
of the pro forma market value of the Common Stock at the conclusion of the
Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
OTS, may terminate the Plan and return all funds promptly with interest at the
Bank's passbook rate of interest on payments made by check, bank draft or
money order, extend or hold a new Subscription and Community Offering,
establish a new Estimated Price Range, commence a resolicitation of
subscribers or take such other actions as permitted by the OTS in order to
complete the Conversion. In the event that a resolicitation is commenced,
unless an affirmative response is received within a reasonable period of time,
all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the
OTS for periods of up to 90 days not to extend beyond December 30, 1998.
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If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community Offerings
but may commence during the Subscription and Community Offerings subject to
prior rights of subscribers. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the
Subscription and Community Offerings. See "--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Keller confirms to the Bank, the Company and the OTS that, to
the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which
is below or more than 15% above the Estimated Price Range would be subject to
OTS approval. If such confirmation is not received, the Bank may extend the
Conversion, extend, reopen or commence new Subscription and Community
Offerings or Syndicated Community Offering, establish a new Estimated Price
Range and commence a resolicitation of all subscribers with the approval of
the OTS or take such other actions as permitted by the OTS in order to
complete the Conversion, or terminate the Plan and cancel the Subscription and
Community Offerings and/or the Syndicated Community Offering. In the event
market or financial conditions change so as to cause the aggregate purchase
price of the shares to be below the minimum of the Estimated Price Range or
more than 15% above the maximum of such range, and the Company and the Bank
determine to continue the Conversion, subscribers will be resolicited (i.e.,
be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
decrease or cancel their subscriptions). Any change in the Estimated Price
Range must be approved by the OTS. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days, or if following the Syndicated Community Offering, 90 days, unless
further extended by the OTS for periods up to 90 days not to extend beyond
December 30, 1998. If such resolicitation is not effected, the Bank will
return all funds promptly with interest at the Bank's passbook rate of
interest on payments made by check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
issued in the Conversion may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number
of shares times the price per share is not below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range.
Based on a fixed purchase price of $10.00 per share and Keller's estimate of
the pro forma market value of the Common Stock ranging from a minimum of
$51,850,000 to a maximum, as increased by 15%, of $80,672,500, the number of
shares of Common Stock expected to be issued in the Conversion is between a
minimum of 5,185,000 shares and a maximum, as adjusted by 15%, of 8,067,250
shares. The actual number of shares issued between this range will depend on a
number of factors and shall be determined by the Bank and Company subject to
OTS approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the OTS, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their
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subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for
the maximum number of shares will not be given the opportunity to subscribe
for an adjusted maximum number of shares, except for the ESOP which will be
able to subscribe for such adjusted amount. See "--Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of the
Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 8% of the Common
Stock sold in the Conversion. Assuming the sale of shares in the Offerings at
the maximum of the Estimated Price Range, the Company will issue 561,200
shares of its Common Stock from authorized but unissued shares to the
Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
7,576,200 shares. Of that amount, the Foundation will own 7.4%. Funding the
Foundation with authorized but unissued shares will have the effect of
diluting the ownership and voting interests of persons purchasing shares in
the Conversion by 7.4% since a greater number of shares will be outstanding
upon completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders
of deposit accounts with a balance of $50 or more as of June 30, 1995
("Eligible Account Holders") with a preference given to Eligible Account
Holders residing in the Bank's Local Community ("Local Eligible Account
Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance of $50
or more as of September 30, 1996 ("Supplemental Eligible Account Holders")
with a preference given to Supplemental Eligible Account Holders residing in
Bank's Local Community ("Local Supplemental Eligible Account Holders"); and
(4) members of the Bank, consisting of depositors of the Bank as of November
8, 1996, the Voting Record Date, and borrowers with loans outstanding as of
November 4, 1996 which continue to be outstanding as of the Voting Record Date
other than Eligible Account Holders and Supplemental Eligible Account Holders
("Other Members") with a preference given to Other Members residing in Bank's
Local Community ("Local Other Members"). All subscriptions received will be
subject to the availability of Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion and as described below under "--Limitations on Common Stock
Purchases." The residence of a depositor for the purposes of assessing whether
a depositor or community member resides in the Bank's Local Community will be
based on the account records of the Bank as of the Eligibility Record Date,
Supplemental Eligibility Record Date and Voting Record Date (whichever may be
applicable). Only to the extent a depositor's mailing address as of the
Eligibility Record Date, Supplemental Eligibility Record Date or Voting Record
Date (whichever may be applicable) is located within the Bank's Local
Community, will such depositor be presumed to reside in the Bank's Local
Community. However, the Company and Bank reserve the sole right to consider a
depositor with a mailing address located in the Bank's Local Community to be a
nonresident of the Bank's Local Community to the extent other information has
come to the attention of the Company and Bank which indicates such depositor
is not a bona fide resident of the Bank's Local Community.
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Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $300,000 of Common Stock, one-tenth of one percent (.10%) of the
total offering of shares of Common Stock or fifteen times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the Eligible Account Holder's Qualifying Deposit (defined by the
Plan as any deposit account in the Bank with a balance of $50 or more as of
June 30, 1995) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%. See "--Limitations on Common Stock Purchases." A preference will be
provided to Local Eligible Account Holders whereby the subscription of such
Local Eligible Account Holders shall, to the extent possible, be filled in
full before filling the subscriptions of remaining Eligible Account Holders.
In the event that Local Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total
number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Local Eligible Account Holders
so as to permit each subscribing Local Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation of Conversion Stock equal to the lesser of 100 shares or the number
of shares subscribed for by the Local Eligible Account Holder. Any shares
remaining after that allocation will be allocated among the subscribing Local
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion that the amount of the Qualifying Deposit of each Local Eligible
Account Holder whose subscription remains unsatisfied bears to the total
amount of the Qualifying Deposits of all Local Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Local Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those Local
Eligible Account Holders whose subscriptions are still not fully satisfied on
the same principle until all available shares have been allocated or all
subscriptions satisfied.
In the event that shares remain available for subscriptions after all
subscriptions by Local Eligible Account Holders have been filled in full and
remaining Eligible Account Holders exercise subscription rights for a number
of shares in excess of the total number of shares eligible for subscription,
the shares will be allocated so as to permit each subscribing Eligible Account
Holder to purchase a number of shares sufficient to make his total allocation
equal to the lesser of 100 shares or the number of shares subscribed for.
Thereafter, unallocated shares will be allocated among the remaining
subscribing Eligible Account Holders whose subscriptions remain unfilled in
the proportion that the amounts of their respective eligible deposits bear to
the total amount of eligible deposits of all remaining Eligible Account
Holders whose subscriptions remain unfilled, exclusive of any increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to
15%.
To ensure proper allocation of stock, each Eligible Account Holder must list
on his subscription order form all accounts in which he has an ownership
interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account Holders who are also Directors or Officers of the Bank or
their associates will be subordinated to the subscription rights of other
Eligible Account Holders to the extent attributable to increased deposits in
the 12 months preceding June 30, 1995.
Priority 2: Employee Stock Ownership Plan. To the extent that there are
sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including
shares contributed to the Foundation and any increase in the number of shares
of Common Stock to be issued in the Conversion after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Price
Range. The ESOP intends to purchase 8% of the shares to be issued in the
Conversion, including shares issued to the Foundation, or 447,984 shares and
606,096 shares, based on the
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issuance of 5,599,800 shares and 7,576,200 shares, respectively. Subscriptions
by the ESOP will not be aggregated with shares of Common Stock purchased
directly by or which are otherwise attributable to any other participants in
the Subscription and Community Offerings, including subscriptions of any of
the Bank's directors, officers, employees or associates thereof. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third
priority, nontransferable subscription rights to subscribe for in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $300,000 of Common Stock, one-
tenth of one percent (.10%) of the total offering of shares of Common Stock or
fifteen times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date, subject to the overall purchase
limitation and exclusive of an increase in the shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. See "--Limitations on
Common Stock Purchases." A preference will be given to Local Supplemental
Eligible Account Holders whereby the subscriptions of Local Supplemental
Eligible Account Holders shall be filled in full first before filling
subscriptions of remaining Supplemental Eligible Account Holders.
In the event that Local Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of
the total number of such shares eligible for subscription, the shares of
Conversion Stock shall be allocated among the subscribing Local Supplemental
Eligible Account Holders so as to permit each subscribing Local Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make his or her total allocation of Conversion Stock
equal to the lesser of 100 shares or the number of shares subscribed for by
the Local Supplemental Eligible Account Holder. Any shares remaining after
that allocation will be allocated among the subscribing Local Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion that the amount of the Qualifying Deposit of each Local
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Local Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Local
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Local Supplemental Eligible Account
Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
In the event that shares remain available for subscription after all
subscriptions by Local Supplemental Eligible Account Holders have been filled
and remaining Supplemental Eligible Account Holders exercise subscription
rights for a number of shares in excess of the total number of shares eligible
for subscription, the shares will be allocated so as to permit each
subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation equal to
the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled in
the proportion that the amounts of their respective eligible deposits bear to
the total amount of eligible deposits of all remaining Supplemental Eligible
Account Holders whose subscriptions remain unfilled, exclusive of any increase
in the shares issued pursuant to an increase in the Estimated Price Range of
up to 15%.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his subscription order form all accounts in which he has
an ownership interest. Failure to list an account could result in less shares
being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
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Priority 4: Other Members. To the extent that there are sufficient shares
remaining after satisfaction of subscriptions by the Eligible Account Holders,
the ESOP and the Supplemental Eligible Account Holders, each Other Member will
receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $300,000 of Common Stock, or one-tenth of one percent
(.10%) of the total offering of shares of Common Stock, subject to the overall
purchase limitation and exclusive of an increase in shares issued pursuant to
an increase in the Estimated Price Range of up to 15%. A preference will be
given to Local Other Members whereby the subscriptions of Local Other Members
shall be filled in full first before filling the subscriptions of remaining
Other Members.
In the event that Local Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock
subscribed for by the Eligible Account Holders, the Employee Plans and the
Supplemental Eligible Account Holders is in excess of the total number of
shares of Conversion Stock being issued, the subscriptions of such Local Other
Members will be allocated among the subscribing Local Other Members so as to
permit each subscribing Local Other Member, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation of
Conversion Stock equal to the lesser of 100 shares or the number of shares
subscribed for by the Local Other Member. Any shares remaining after that
allocation will be allocated among the subscribing Local Other Members whose
subscriptions remain unsatisfied pro rata in the same proportion that the
number of votes of a subscribing Local Other Member on the Voting Record Date
bears to the total votes on the Voting Record Date of all subscribing Local
Other Members whose subscriptions remain unsatisfied. If the amount so
allocated exceeds the amount subscribed for by any one or more remaining Local
Other Members, the excess shall be reallocated (one or more times as
necessary) among those remaining Local Other Members whose subscriptions are
still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
In the event that shares remain available for subscription after all
subscriptions by Local Other Members have been filled in full and remaining
Other Members exercise subscription rights for a number of shares in excess of
the total number of shares eligible for subscription, the shares will be
allocated so as to permit each subscribing Other Member, to the extent
possible, to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be allocated among the
remaining subscribing Other Members whose subscriptions remain unfilled on a
pro rata basis in the same proportion as a subscribing Other Member's total
votes on the Voting Record Date for the Special Meeting bears to the total
votes of all subscribing Other Members on such date.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on December 20, 1996, unless extended for up to 45 days by the
Bank or such additional periods with the approval of the OTS. Subscription
rights which have not been exercised prior to the Expiration Date will become
void.
The Bank will not execute orders until all shares of Common Stock have been
subscribed for or otherwise sold. If all shares have not been subscribed for
or sold within 45 days after the Expiration Date, unless such period is
extended with the consent of the OTS, all funds delivered to the Bank pursuant
to the Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be cancelled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond December 30, 1998.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the Eligible Account Holders, the ESOP, the
Supplemental Eligible Account Holders and Other Members, the Bank has
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determined to offer shares pursuant to the Plan to certain members of the
general public and may reserve a number of shares equal to the lesser of 25%
of the Common Stock offered or the Common Stock not subscribed for in the
Subscription Offering for institutional investors who need not be residents of
any county in which the Bank maintains an office. Any excess of shares
available will be available for purchase by the general public, with
preference given to natural persons (such natural persons referred to as
"Preferred Subscribers") residing in the counties in which the Bank maintains
an office, subject to the right of the Company to accept or reject any such
orders, in whole or in part, in their sole discretion. Such persons, together
with associates of and persons acting in concert with such persons, may
purchase up to $300,000 of Common Stock subject to the maximum purchase
limitation and exclusive of shares issued pursuant to an increase in the
Estimated Price Range by up to 15%. See "--Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $300,000 at the sole discretion of the Company and the Bank. THE
OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING
CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE
DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT
THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of Preferred Subscribers after completion of the
Subscription and Community Offerings and the filling of institutional orders,
such stock will be allocated first to each Preferred Subscriber whose order is
accepted by the Bank, in an amount equal to the lesser of 100 shares or the
number of shares subscribed for by each such Preferred Subscriber, if
possible. Thereafter, unallocated shares will be allocated among the Preferred
Subscribers whose order remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to
other persons of the general public who purchase in the Community Offering
applying the same allocation described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or
resides in a state of the United States with respect to which both of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares of Common Stock reside in such state; and (ii) the Company or the
Bank determines that compliance with the securities laws of such state would
be impracticable for reasons of cost or otherwise, including but not limited
to a request that the Company and the Bank or their officers, directors or
trustees register as a broker, dealer, salesman or selling agent, under the
securities laws of such state, or a request to register or otherwise qualify
the subscription rights or Common Stock for sale or submit any filing with
respect thereto in such state. Where the number of persons eligible to
subscribe for shares in one state is small, the Bank and the Company will base
their decision as to whether or not to offer the Common Stock in such state on
a number of factors, including the size of accounts held by account holders in
the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offerings. Based upon
negotiations between the Bank and the Company concerning fee structure,
Sandler O'Neill will receive a fee equal to 1.56% of the aggregate Purchase
Price of the shares sold in the Subscription and Community Offerings,
excluding shares purchased by directors, officers, employees, and any
immediate family member thereof, and any employee benefit plan of the Company
or Bank, including the ESOP for which Sandler O'Neill will not receive a fee.
In the event that a selected dealers agreement is entered into in connection
with a Syndicated Community Offering, the Bank will pay a fee (to be
negotiated at such time under such
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agreement) to such selected dealers, any sponsoring dealers fees, and a
management fee to Sandler O'Neill of 1.5% for shares sold by National
Association of Securities Dealers, Inc. member firms pursuant to a selected
dealers agreement; provided, however, that any fees payable to Sandler O'Neill
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed 1.56% of the Purchase Price and provided, further, however,
that the aggregate fees payable to Sandler O'Neill and the selected dealers
will not exceed 7.0% of the aggregate purchase price of the Common Stock sold
by selected dealers. Fees to Sandler O'Neill and to any other broker-dealer
may be deemed to be underwriting fees, and Sandler O'Neill and such broker-
dealers may be deemed to be underwriters. Sandler O'Neill will also be
reimbursed for its reasonable out-of-pocket expenses, including legal fees, in
an amount not to exceed $75,000. Notwithstanding the foregoing, in the event
the Offerings are not consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are commenced, to
provide assistance to the Company, Sandler O'Neill will be entitled to a fee
for its management advisory services in an amount to be agreed upon by the
Bank and Sandler O'Neill, and based upon the amount of services performed by
Sandler O'Neill and will also be reimbursed for its reasonable out-of-pocket
expenses as described above. The Company and the Bank have agreed to indemnify
Sandler O'Neill for reasonable costs and expenses in connection with certain
claims or liabilities, including certain liabilities under the Securities Act.
Sandler O'Neill has received advances towards its fees totalling $50,000.
Total marketing fees to Sandler O'Neill are expected to be $715,000 and
$975,000 at the minimum and the maximum of the Estimated Price Range,
respectively. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
Sandler O'Neill will perform proxy solicitation services, conversion agent
services and records management services for the Bank in the Conversion and
will receive a fee for these services of $35,000, plus reimbursement of
reasonable out-of-pocket expenses which shall not exceed $10,000.
Directors and executive officers of the Company and Bank may participate in
the solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or provide clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales
of Common Stock will be conducted within the requirements of Rule 3a4-1, so as
to permit officers, directors and employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Bank will
be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by 5:00 p.m., Fall River Time, on the Expiration Date. Stock order
forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank and Company are not obligated
to accept orders submitted on photocopied or facsimilied stock order forms and
will not accept stock order forms unaccompanied by an executed certification
form.
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Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion, to permit institutional investors to submit irrevocable orders
together with a legally binding commitment for payment and to thereafter pay
for the shares of Common Stock for which they subscribe in the Community
Offering at any time prior to 48 hours before the completion of the
Conversion. The Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent
that they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1995) and/or the Supplemental Eligibility Record Date (September 30, 1996)
and/or the Voting Record Date (November 8, 1996) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided,
that there is in force from the time of its subscription until such time, a
loan commitment from an unrelated financial institution or the Company to lend
to the ESOP, at such time, the aggregate Purchase Price of the shares for
which it subscribed.
Owners of self-directed IRAs and Qualified Plans may use the assets of such
IRAs and Qualified Plans to purchase shares of Common Stock in the
Subscription and Community Offerings, provided that such IRAs are not
maintained at the Bank. Persons with self-directed IRAs and Qualified Plans
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of Common Stock in the Subscription
and Community Offerings. In addition, the provisions of ERISA and IRS
regulations require that officers, directors and ten percent shareholders who
use self-directed IRA funds and Qualified Plans to purchase shares of Common
Stock in the Subscription and Community Offerings, make such purchases for the
exclusive benefit of the IRAs and Qualified Plans.
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP, the Supplemental Eligible Account Holders and Other Members
of the Bank, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights
issued under the Plan or the shares of Common Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale
or transfer of such shares. The regulations also prohibit any person from
offering or making an announcement of an offer or intent to make an offer to
purchase such subscription rights or shares of Common Stock prior to the
completion of the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company
and the Bank have the right to reject orders in whole or in part in their sole
discretion in the Syndicated Community Offering. Neither Sandler O'Neill nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to
overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $300,000 of the Common Stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons
acting in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of 1.0% of the shares offered, exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Bank for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of
the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of
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the order to its customer in writing on the following business day and will
debit such customer's account on the third business day after the customer has
confirmed his intent to purchase (the "debit date") and on or before noon of
the next business day following the debit date will send order forms and funds
to the Bank for deposit in a segregated account. Although purchasers' funds
are not required to be in their accounts with selected dealers until the debit
date in the event that such alternative procedure is employed once a
confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Expiration Date, unless extended by the Company with the
approval of the OTS. Such extensions may not be beyond December 30, 1998. See
"--Stock Pricing" above for a discussion of rights of subscribers, if any, in
the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of the amount permitted to be
purchased in the Community Offering, currently $300,000 of Common Stock,
one-tenth of one percent (.10%) of the total offering of shares of Common
Stock or fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Eligible Account Holder and the denominator is the total
amount of Qualifying Deposits of all Eligible Account Holders in each case
on the Eligibility Record Date subject to the overall maximum purchase
limitation in (8) below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10% of the
shares of Common Stock issued in the Conversion, including shares issued in
the event of an increase in the Estimated Price Range of 15% and intends to
purchase 8% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently $300,000 of
Common Stock, one-tenth of one percent (.10%) of the total offering of
shares of Common Stock or fifteen times the product (rounded down to the
next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the
amount of the Qualifying Deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of Qualifying Deposits of
all Supplemental Eligible Account Holders in such case on the Supplemental
Eligibility Record Date subject to the overall maximum purchase limitation
in (8) below and exclusive of an increase in the total number of shares
issued due to an increase in the Estimated Price Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $300,000 of Common Stock, or one-tenth of one
percent (.10%) of the total offering of shares of Common Stock subject to
the overall maximum purchase limitation in (8) below and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%;
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(6) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase in the Community Offering up to $300,000 of
Common Stock subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with
such persons, may purchase in the Syndicated Offering up to $300,000 of
Common Stock subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of shares issued due
to an increase in the Estimated Price Range of up to 15% and, provided
further that shares of Common Stock purchased in the Community Offering by
any persons, together with associates of and persons acting in concert with
such persons, will be aggregated with purchases in the Syndicated Community
Offering in applying the $300,000 purchase limitation;
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members may purchase stock in the Community Offering and Syndicated
Community Offering subject to the purchase limitations described in (6) and
(7) above, provided that, except for the ESOP, the overall maximum number
of shares of Common Stock subscribed for or purchased in all categories of
the Conversion by any person, together with associates of and groups of
persons acting in concert with such persons, shall not exceed 1.0% of the
shares of Common Stock offered in the Conversion and exclusive of an
increase in the total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; and
(9) No more than 25% of the total number of shares offered for sale in
the Conversion may be purchased by directors and officers of the Bank and
their associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members
of the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5%
at the sole discretion of the Company and the Bank. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit. In addition,
the Boards of Directors of the Company and the Bank may, in their sole
discretion, increase the maximum purchase limitation referred to above up to
9.99%, provided that orders for shares exceeding 5% of the shares being
offering in the Subscription and Community Offerings shall not exceed, in the
aggregate, 10% of the shares being offered in the Subscription and Community
Offerings. Requests to purchase additional shares of Common Stock under this
provision will be determined by the Boards of Directors and, if approved,
allocated on a pro rata basis giving priority in accordance with the priority
rights set forth herein.
The overall maximum purchase limitation may not be reduced to less than 1%
but the individual amount permitted to be subscribed for may be reduced by the
Bank to less than $300,000, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make
such purchase, together with associates of and persons acting in concert with
such person, by also purchasing in other available categories of the
Conversion, subject to availability of shares and the overall maximum purchase
limit for purchases in the Conversion.
In the event of an increase in the total number of shares offered in the
Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order or priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock sold in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account
Holders, to fill unsatisfied subscriptions of Eligible Account Holders,
exclusive of the Adjusted Maximum and with a preference
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to Local Eligible Account Holders; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unsatisfied
subscriptions of Supplemental Eligible Account Holders, exclusive of the
Adjusted Maximum and with a preference to Local Supplemental Eligible Account
Holders; (iv) in the event that there is an oversubscription by Other Members,
to fill unsatisfied subscriptions of Other Members exclusive of the Adjusted
Maximum and with a preference to Local Other Members; and (v) to fill
unsatisfied subscriptions in the Community Offering to the extent possible,
exclusive of the Adjusted Maximum, with a preference to institutional
investors and then a preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer, partner or 10% stockholder; (ii) any trust or other
estate in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person,
or any relative of such spouse, who either has the same home as such person or
who is a director or officer of the Bank. Directors are not treated as
associates of each other solely because of their Board membership. For a
further discussion of limitations on purchases of a converting institution's
stock at the time of Conversion and subsequent to Conversion, see "Management
of the Bank--Subscriptions by Executive Officers and Directors," "--Certain
Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would receive his pro rata share of any assets of
the Bank remaining after payment of claims of all creditors (including the
claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as
a creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank
above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the surplus and reserves of the Bank as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Bank after the Conversion,
to an interest in the liquidation account prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including regular accounts, transaction
accounts such as NOW accounts, money market deposit accounts, and certificates
of deposit, with a balance of $50 or more held in the Bank on June 30, 1995
and September 30, 1996, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the
total liquidation account based on the proportion that the balance of his
Qualifying Deposits on the Eligibility Record Date or Supplemental Eligibility
Record Date, respectively, bore to the total amount of all Qualifying Deposits
of all Eligible Account Holders and Supplemental Eligible Account Holders in
the Bank. For deposit accounts in existence at both dates separate subaccounts
shall be determined on the basis of the Qualifying Deposits in such deposit
accounts on such respective record dates.
If, however, on any annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, the amount of the Qualifying
Deposit of an Eligible Account Holder or Supplemental Eligible Account Holder
is less than the amount of the Qualifying Deposit of such Eligible Account
Holder or Supplemental Eligible Account Holder as of the Eligibility Record
Date or Supplemental Eligibility Record Date,
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respectively, or less than the amount of the Qualifying Deposits as of the
previous annual closing date, then the interest in the liquidation account
relating to such Qualifying Deposit would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if
such Qualifying Deposit accounts are closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related Qualifying Deposit. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Company as the sole
stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation, and an opinion of an independent
accountant with respect to Massachusetts, to the effect that the Conversion
will not be a taxable transaction to the Company, the Bank, Eligible Account
Holders, or Supplemental Eligible Account Holders except as noted below. The
federal and Massachusetts tax consequences will remain unchanged in the event
that a holding company form of organization is not utilized.
No private ruling will be received from the IRS with respect to the proposed
Conversion. Instead, the Bank has received an opinion of its counsel, Muldoon,
Murphy & Faucette, to the effect that for federal income tax purposes, among
other matters: (i) the Bank's change in form from mutual to stock ownership
will constitute a reorganization under section 368(a)(1)(F) of the Code and
neither the Bank nor the Company will recognize any gain or loss as a result
of the Conversion; (ii) no gain or loss will be recognized to the Bank or the
Company upon the purchase of the Bank's capital stock by the Company or to the
Company upon the purchase of its Common Stock in the Conversion; (iii) no gain
or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's and
Supplemental Eligible Account Holder's interest in the liquidation account
will be zero; (vi) no gain or loss will be recognized by Eligible Account
Holders or Supplemental Eligible Account Holders upon the distribution to them
of nontransferable subscription rights to purchase shares of the Common Stock,
provided that the amount to be paid for the Common Stock is equal to the fair
market value of such stock; and (vii) the tax basis to the stockholders of the
Common Stock of the Company purchased in the Conversion will be the amount
paid therefore and the holding period for the shares of Common Stock purchased
by such persons will begin on the date on which their subscription rights are
exercised. KPMG Peat Marwick LLP has opined that the Conversion will not be a
taxable transaction to the Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders for Massachusetts income and/or
franchise tax purposes. Certain portions of both the federal and the state and
local tax opinions are based upon the assumption that the subscription rights
issued in connection with the Conversion will have no value.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOR and the IRS or DOR
could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS or DOR would not prevail
in a judicial or administrative proceeding.
Keller has issued an opinion stating that, pursuant to its valuation, Keller
is of the opinion that the subscription rights do not have any value, based on
the fact that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to its estimated fair
market value, which will be the same price as the Purchase Price for the
shares of Common Stock sold in the Community Offering. Such valuation is not
binding on the IRS or DOR. If the subscription rights granted to Eligible
Account Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, receipt of such rights could be taxable to those Eligible
Account Holders or Supplemental Eligible Account Holders who receive and/or
exercise the subscription rights in an amount equal
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to such value and the Bank could recognize gain on such distribution. Eligible
Account Holders and Supplemental Eligible Account Holders are encouraged to
consult with their own tax advisor as to the tax consequences in the event
that such subscription rights are deemed to have an ascertainable value.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
director or an executive officer of the Bank will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such director or executive officer. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by directors,
executive officers (or any person who was an executive officer or director of
the Bank after adoption of the Plan of Conversion) and their associates during
the three-year period following Conversion may be made only through a broker
or dealer registered with the SEC, except with the prior written approval of
the OTS. This restriction does not apply, however, to negotiated transactions
involving more than 1.0% of the Company's outstanding Common Stock or to the
purchase of stock pursuant to any stock option plan to be established after
the Conversion.
Unless approved by the OTS, the Company, pursuant to OTS regulations, will
be prohibited from repurchasing any shares of the Common Stock for three years
except: (i) for an offer to all stockholders on a pro rata basis; or (ii) for
the repurchase of qualifying shares of a director. Notwithstanding the
foregoing, beginning one year following completion of the Conversion the
Company may repurchase its Common Stock so long as: (i) the repurchases within
the following two years are part of an open-market program not involving
greater than 5% of its outstanding capital stock during a twelve-month period;
(ii) the repurchases do not cause the Company to become undercapitalized; and
(iii) the Company provides to the Regional Director of the OTS no later than
10 days prior to the commencement of a repurchase program written notice
containing a full description of the program to be undertaken and such program
is not disapproved by the Regional Director. In addition, under current OTS
policies, repurchases may be allowed in the first year following Conversion
and in amounts greater than 5% in the second and third years following
Conversion, provided there are valid and compelling business reasons for such
repurchases and the OTS does not object to such repurchases.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, a
new Federal Stock Charter and Bylaws to be adopted by members of the Bank. The
Plan also provides for the concurrent formation of a holding company, which
form of organization may or may not be utilized at the option of the Board of
Directors of the Bank. See "The Conversion--General." In the event that the
holding company form of organization is utilized, as described below, certain
provisions in the Company's Certificate of Incorporation and Bylaws and in its
management remuneration entered into in connection with the Conversion,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In the event that the holding company form of organization is not
utilized, the Bank's Stock Charter and Bylaws and management remuneration
entered into in connection with the Conversion may have anti-takeover effects
as described below. In addition, regulatory restrictions may make it difficult
for persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to
which such person and his affiliates have or share investment or voting power,
but shall not include shares beneficially owned by the ESOP or directors,
officers and employees of the Bank or Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially owned, or deemed by
the Company to be beneficially owned, by such person and his affiliates. The
Certificate of Incorporation of the Company further provides that this
provision limiting voting rights may only be amended upon the vote of 80% of
the outstanding shares of voting stock (after giving effect to the limitation
on voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected
each year. The Company's Certificate of Incorporation and Bylaws provide that
the size of the Board shall be determined by a
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majority of the directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created
by an increase in the number of directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office. The classified Board is
intended to provide for continuity of the Board of Directors and to make it
more difficult and time consuming for a stockholder group to fully use its
voting power to gain control of the Board of Directors without the consent of
the incumbent Board of Directors of the Company. The Certificate of
Incorporation of the Company provides that a director may be removed from the
Board of Directors prior to the expiration of his term only for cause, upon
the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by the Board of Directors of the Company. The Certificate of
Incorporation also provides that any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 25,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock.
The shares of Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also
be used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also
has sole authority to determine the terms of any one or more series of
Preferred Stock, including voting rights, conversion rates, and liquidation
preferences. As a result of the ability to fix voting rights for a series of
Preferred Stock, the Board has the power, to the extent consistent with its
fiduciary duty, to issue a series of Preferred Stock to persons friendly to
management in order to attempt to block a post-tender offer merger or other
transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board of Directors currently
has no plans for the issuance of additional shares, other than the issuance of
additional shares pursuant to the terms of the Stock Programs and upon
exercise of stock options to be issued pursuant to the terms of the Stock
Option Plans or Master Stock-Based Benefit Plan, all of which are to be
established and presented to stockholders at the first annual meeting after
the Conversion.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock to
approve certain "Business Combinations," as defined therein, and related
transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved in advance by a majority of those
members of the Company's Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the shareholders a fair price in consideration for their
shares in which case, if a stockholder vote is required, approval of only a
majority of the outstanding shares of voting stock would be sufficient. The
term "Interested Stockholder" is defined to include any individual,
corporation, partnership or other entity (other than the Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of the
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Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Stockholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or
combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash
or securities the value of which equals or exceeds 25% of the fair market
value of the Common Stock of the Company; (iv) the adoption of any plan for
the liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class
of equity or convertible securities of the Company owned directly or
indirectly by an Interested Stockholder or Affiliate thereof. The directors
and executive officers of the Bank are purchasing in the aggregate
approximately 2.1% of the shares of the Common Stock at the maximum of the
Estimated Price Range. In addition, the ESOP intends to purchase 8% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation. Additionally, if at a meeting of stockholders following the
Conversion stockholder approval of the proposed Stock Programs and Stock
Option Plans or Master Stock-Based Benefit Plan is received, the Company
expects to acquire 4% of the Common Stock issued in connection with the
Conversion on behalf of the Stock Programs or Master Stock-Based Benefit Plan
and expects to issue an amount equal to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
under the Stock Option Plans or Master Stock-Based Benefit Plan to directors
and executive officers. As a result, assuming the Master Stock-Based Benefit
Plan or Stock Programs and Stock Option Plans are approved by Stockholders,
directors, executive officers and employees have the potential to control the
voting of approximately 21.8% of the Company's Common Stock, thereby enabling
them to prevent the approval of the transactions requiring the approval of at
least 80% of the Company's outstanding shares of voting stock described
hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein) to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity, or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company, the Bank and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance
of such offer on the Company's customers and the Bank's present and future
account holders, borrowers and employees; on the communities in which the
Company and the Bank operate or are located; and on the ability of the Company
to fulfill its corporate objectives as a savings and loan holding company and
on the ability of the Bank to fulfill the objectives of a federally-chartered
stock savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and
amendment of the Company's Bylaws and Certificate of Incorporation. The
Company's Bylaws may be amended by its Board of Directors, or by a vote of 80%
of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
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Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least
90 days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly,
a stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
The provisions of the Employment Agreements, CIC Agreements, Employee
Severance Compensation Plan, Stock Programs, Stock Option Plans or Master
Stock-Based Benefit Plan to be established may also discourage takeover
attempts by increasing the costs to be incurred by the Bank and the Company in
the event of a takeover. See "Management of the Bank--Employment Agreements"
and "--Benefits--Stock Option Plans."
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of
Directors' view that these provisions should not discourage persons from
proposing a merger or other transaction at a price that reflects the true
value of the Company and that otherwise is in the best interest of all
stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had
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received other acquisition proposals and which are approved or not opposed by
a majority of certain continuing members of the Board of Directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its Certificate of Incorporation or Bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after the Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions
permitted by federal regulations to protect the interests of the converted
Bank and its stockholders from any hostile takeover. Such provisions may,
indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Certain Anti-Takeover Provisions."
The Bank's Federal Stock Charter will contain a provision whereby the
acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity securities of the
Bank by any person (i.e., any individual, corporation, group acting in
concert, trust, partnership, joint stock company or similar organization),
either directly or through an affiliate thereof, will be prohibited for a
period of five years following the date of completion of the Conversion. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. This
limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors,
to cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could
indirectly result in a change in control of the Bank, the Board of Directors
of the Bank will be able to assert this provision of the Bank's Federal Stock
Charter against such holders. Although the Board of Directors of the Bank is
not currently able to determine when and if it would assert this provision of
the Bank's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its stockholders. It is unclear,
however, whether this provision, if asserted, would be successful against such
persons in a proxy contest which could result in a change in control of the
Bank indirectly through a change in control of the Company. Finally, for five
years, stockholders will not be permitted to call a special meeting of
stockholders relating to a change of control of the Bank or a charter
amendment or to cumulate their votes in the election of directors.
Furthermore, the staggered terms of the Board of Directors could have an anti-
takeover effect by making it more difficult for a majority of shares to force
an immediate change in the Board of Directors since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion.
Although the Bank has no arrangements, understandings or plans at the
present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of
undesignated Preferred Stock proposed to be authorized, the Board of Directors
believes that the availability of such shares will provide the Bank with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which may arise. In the
event of a proposed merger, tender offer or other attempt to gain control of
the Bank of which management does not approve, it might be possible for the
Board of Directors to authorize the issuance of one or more series of
Preferred Stock with rights and preferences which could impede the completion
of such a transaction. An effect of the possible issuance of such Preferred
Stock, therefore, may be to deter a future takeover attempt. The Board of
Directors does not intend to issue any Preferred Stock except on terms which
the Board deems to be in the best interest of the Bank and its then existing
stockholders.
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REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion of the
Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of
an offer or intent to make an offer, to purchase such subscription rights or
Common Stock.
For three years following the Conversion, OTS regulations prohibit any
person from acquiring or making an offer to acquire more than 10% of the stock
of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or other tax qualified plans of the Bank or
the Company; or (iii) offers which are not opposed by the Board of Directors
of the Bank and which receive the prior approval of the OTS. Such prohibition
is also applicable to the acquisition of the stock of the Company. Such
acquisition may be disapproved by the OTS if it is found, among other things,
that the proposed acquisition (a) would frustrate the purposes of the
provisions of the regulations regarding conversions; (b) would be manipulative
or deceptive; (c) would subvert the fairness of the conversion; (d) would be
likely to result in injury to the savings institution; (e) would not be
consistent with economical home financing; (f) would otherwise violate law or
regulation; or (g) would not contribute to the prudent deployment of the
savings institution's conversion proceeds. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% shall not be counted as shares entitled
to vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to a vote of stockholders. The
definition of beneficial ownership for this regulation extends to persons
holding revocable or irrevocable proxies for the Company's stock under
circumstances that give rise to a conclusive or rebuttable determination of
control under the OTS regulations.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the OTS under the Change
in Bank Control Act. The OTS requires all persons seeking control of a savings
institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among
other things, that (i) the acquisition would substantially lessen competition;
(ii) the financial condition of the acquiring person might jeopardize the
financial stability of the savings institution or prejudice the interests of
its depositors; or (iii) the competency, experience or integrity of the
acquiring person or the proposed management personnel indicates that it would
not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of holding company stock are not limited to three years after
conversion but will apply for as long as the regulations are in effect.
Persons holding revocable or irrevocable proxies may be deemed to be
beneficial owners of such securities under OTS regulations and therefore
prohibited from voting all or the portion of such proxies in excess of the 10%
aggregate beneficial ownership limit. Such regulatory restrictions may prevent
or inhibit proxy contests for control of the Company or the Bank which have
not received prior regulatory approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 25,000,000 shares of Common Stock having
a par value of $.01 per share and 1,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). Based on the sale of
Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 8% of the Common stock sold in the
Conversion to the Foundation, the Company currently expects to issue up to
7,576,200 shares of Common Stock (or 8,712,630 in the event of an
137
<PAGE>
increase of 15% in the Estimated Price Range) and no shares of Preferred Stock
in the Conversion. Except as discussed above in "Restriction on Acquisition of
the Company and the Bank," each share of the Company's Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock. Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan, all such stock will be duly authorized,
fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the Company
will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to
be presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and
who fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the
owners of the shares of capital stock of the Bank, which will be the Company,
and voted at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available
for distribution. In the event of liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive,
after payment or provision for payment of all its debts and liabilities, all
of the assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock
with voting, dividend, liquidation and conversion rights which could dilute
the voting strength of the holders of the Common Stock and may assist
management in impeding an unfriendly takeover or attempted change in control.
138
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the Conversion,
authorizes the issuance of capital stock consisting of 25,000,000 shares of
common stock, par value $1.00 per share, and 1,000,000 shares of preferred
stock, par value $1.00 per share, which preferred stock may be issued in
series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common
Stock of the Bank will have the same relative rights as, and will be identical
in all respects with, each other share of common stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of Common
Stock up to the amount authorized by the Federal Stock Charter without the
approval of the Bank's stockholders. Assuming that the holding company form of
organization is utilized, all of the issued and outstanding common stock of
the Bank will be held by the Company as the Bank's sole stockholder. THE
CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE
AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held,
subject to the right of shareholders to cumulate their votes for the election
of directors. During the five-year period after the effective date of the
Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the
Company's Certificate of Incorporation and Bylaws and Management Remuneration
Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If preferred stock is issued subsequent to the Conversion,
the holders thereof may also have priority over the holders of common stock in
the event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. The common stock will not be subject to redemption. Upon
receipt by the Bank of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
March 31, 1996 and 1995 and for each of the three years in the period ended
March 31, 1996, have been included in this Prospectus, in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
139
<PAGE>
Keller & Company, Inc. has consented to the publication herein of the
summary of its report to the Bank and Company setting forth its opinion as to
the estimated pro forma market value of the Common Stock upon Conversion and
its valuation with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Company by Muldoon,
Murphy & Faucette, Washington, D.C., special counsel to the Bank and the
Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The
Commonwealth of Massachusetts tax consequences of the Conversion and certain
matters related to the Foundation will be passed upon for the Bank and the
Company by KPMG Peat Marwick LLP. Certain legal matters will be passed upon
for Sandler O'Neill by Breyer & Aguggia, Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can
be examined without charge at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including the Company. This Prospectus contains a
description of the material terms and features of all material contracts,
reports or exhibits to the Registration Statement required to be described.
The statements contained in this Prospectus as to the contents of any contract
or other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
The Bank has filed an application for conversion with the OTS with respect
to the Conversion. Pursuant to the rules and regulations of the OTS, this
Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the OTS under Section 12(b) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Federal Stock Charter and Bylaws of the Bank and the Certificate of
Incorporation and Bylaws of the Foundation are available without charge from
the Bank.
140
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of June 30, 1996 (unaudited) and March 31,
1996 and 1995............................................................. F-3
Consolidated Statements of Income for the three months ended June 30, 1996
and 1995 (unaudited) and the years ended March 31, 1996, 1995 and 1994.... 44
Consolidated Statements of Retained Earnings for the three months ended
June 30, 1996 (unaudited) and the years ended March 31, 1996, 1995 and
1994...................................................................... F-4
Consolidated Statements of Cash Flows for the three months ended June 30,
1996 and 1995 (unaudited) and the years ended March 31, 1996, 1995 and
1994...................................................................... F-5
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
- --------
(1) The financial statements for FIRSTFED AMERICA BANCORP, INC. have been
omitted because FIRSTFED AMERICA BANCORP, INC. has not yet issued any
stock, has no liabilities, and has not conducted any business other than
of an organizational nature.
(2) All schedules have been omitted either because they are not required, not
applicable, or are included in the Notes to Consolidated Financial
Statements
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Federal Savings Bank of America:
We have audited the accompanying consolidated balance sheets of First
Federal Savings Bank of America and subsidiary (the "Bank") as of March 31,
1996 and 1995, and the related consolidated statements of income, retained
earnings and cash flows for each of the years in the three-year period ended
March 31, 1996. These consolidated financial statements are the responsibility
of the Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Federal Savings Bank of America and subsidiary at March 31, 1996 and 1995, and
the results of their operations and cash flows for each of the years in the
three-year period ended March 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
June 25, 1996, except for note 2
which is as of September 30, 1996
Boston, Massachusetts
F-2
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ---------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash on hand and due from banks................... $ 13,885 13,277 9,891
Mortgage loans held for sale...................... 6,530 17,747 6,816
Investment securities available for sale
(amortized cost of $55, $55 and $55) (notes 3 and
8)............................................... 773 725 518
Investment securities held to maturity (fair value
of $21,502, $24,061 and $20,851) (notes 3 and
8)............................................... 21,487 23,987 20,988
Mortgage-backed securities held to maturity (fair
value of $7,269, $7,386 and $2,818) (notes 3 and
8)............................................... 7,138 7,248 2,721
Stock in Federal Home Loan Bank of Boston, at cost
(notes 3 and 8).................................. 6,967 6,630 6,630
Loans receivable, net of allowance for loan losses
of $6,445, $5,607 and $4,239 (notes 4 and 8)..... 727,401 637,592 499,977
Accrued interest receivable....................... 4,182 3,711 2,864
Office properties and equipment, net (note 6)..... 9,166 8,329 6,440
Real estate owned, net............................ 439 643 296
Deferred income tax asset, net (note 11).......... 2,128 1,960 1,339
Income tax receivable (note 11)................... 215 206 61
Mortgage servicing rights......................... 258 -- --
Prepaid expenses and other assets................. 2,242 1,723 1,497
-------- ------- -------
Total assets.................................. $802,811 723,778 560,038
======== ======= =======
LIABILITIES AND RETAINED EARNINGS
Liabilities:
Deposits (note 7)............................... $600,584 583,750 440,107
FHLB advances (note 8).......................... 136,648 75,141 66,592
Advance payments by borrowers for taxes and
insurance...................................... 4,544 4,167 3,415
Accrued interest payable........................ 649 304 401
Accrued income taxes (note 11).................. 374 897 1,013
Other liabilities............................... 12,491 13,101 6,813
-------- ------- -------
Total liabilities............................. 755,290 677,360 518,341
-------- ------- -------
Commitments and contingencies (notes 2, 4, 6, 9
and 10)
Retained earnings (notes 2 and 11)................ 47,104 46,033 41,430
Unrealized gain on investment securities available
for sale, net of tax (note 3).................... 417 385 267
Total retained earnings........................ 47,521 46,418 41,697
-------- ------- -------
Total liabilities and retained earnings....... $802,811 723,778 560,038
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
INVESTMENT
SECURITIES
AVAILABLE
RETAINED FOR SALE,
EARNINGS NET OF TAX TOTAL
-------- ---------- ------
<S> <C> <C> <C>
Balance at March 31, 1994........................... $36,469 -- 36,469
Change in accounting for investment securities as
of April 1, 1994................................. -- 198 198
Net income........................................ 4,961 -- 4,961
Change in unrealized gain on investment securities
available for sale,
net.............................................. -- 69 69
------- --- ------
Balance at March 31, 1995........................... 41,430 267 41,697
Net income........................................ 4,603 -- 4,603
Change in unrealized gain on investment securities
available for sale, net.......................... -- 118 118
------- --- ------
Balance at March 31, 1996........................... 46,033 385 46,418
Net income (unaudited)............................ 1,071 -- 1,071
Change in unrealized gain on investment securities
available for sale, net (unaudited).............. -- 32 32
------- --- ------
Balance at June 30, 1996 (unaudited)................ $47,104 417 47,521
======= === ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED JUNE 30, ENDED MARCH 31,
---------------------- -------------------------------
1996 1995 1996 1995 1994
---------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 1,071 1,295 4,603 4,961 6,915
ADJUSTMENTS TO RECONCILE
NET INCOME TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Amortization
(accretion) of:
Premium on
investment and
mortgage-backed
securities held to
maturity........... 1 -- 2 (6) 3
Premium on sale of
loans.............. -- -- -- -- 651
Deferred loan
origination fees... (94) (179) (626) (639) (223)
Mortgage servicing
rights............. 3 -- -- -- --
Provisions for:
Loan losses......... 1,000 475 2,626 653 1,035
Deferred income
taxes.............. (184) -- (710) 1,134 (609)
Accelerated
prepayment on loans
sold............... -- -- -- -- 1,006
(Gains) losses on
sales of:
Real estate owned... (22) -- (1) (142) 6
Mortgage loans...... (44) 196 841 1,879 (1,636)
Office properties
and equipment...... -- -- -- -- (1)
Cumulative effect of
change in accounting
for income taxes..... -- -- -- -- (1,495)
Net proceeds from
sales of mortgage
loans................ 44,691 24,300 183,366 139,164 546,146
Payments received on
mortgage-backed
securities........... 109 94 433 716 1,391
Origination of loans
held for sale........ (33,430) (28,742) (195,138) (132,080) (540,003)
Real estate owned
valuation write-
downs................ 90 32 65 45 180
Loan sale premium
resulting from
interest rate
differential......... -- -- -- (2) (366)
Capitalized mortgage
servicing rights..... (261) -- -- -- --
Depreciation of office
properties and
equipment............ 147 157 671 344 606
Increase or decrease
in:
Accrued interest
receivable......... (471) (148) (847) (217) (174)
Income tax
receivable......... (9) 61 (145) (61) --
Prepaid expenses and
other assets....... (519) (501) (226) (208) (346)
Accrued interest
payable............ 345 (76) (97) 110 38
Accrued income taxes
and other
liabilities........ (1,133) 271 6,172 (1,172) 5,386
---------- ---------- --------- --------- ---------
Net cash provided
by (used in)
operating
activities....... 11,290 (2,765) 989 14,479 18,510
---------- ---------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED JUNE 30, ENDED MARCH 31,
---------------------- ------------------------------
1996 1995 1996 1995 1994
---------- ---------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of Federal
Home Loan Bank
stock................ $ (337) -- -- -- (2,590)
Proceeds from
redemption of Federal
Home Loan Bank
stock................ -- -- -- -- 1,529
Purchases of
investment securities
held to maturity..... (2,500) (3,000) (10,001) (10,988) (8,995)
Purchases of mortgage-
backed securities
held to maturity..... -- -- (4,960) -- --
Maturities of
investment securities
held to maturity..... 5,000 3,000 7,000 -- 11,094
Net decrease in
loans................ (90,882) (726) (140,430) (90,320) (76,027)
Proceeds from sales of
real estate owned.... 303 -- 404 2,205 944
Purchases of office
properties and
equipment............ (984) (482) (2,560) (992) (646)
---------- --------- -------- -------- ----------
Net cash used in
investing activi-
ties............. (89,400) (1,208) (150,547) (100,095) (74,691)
---------- --------- -------- -------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net increase in
deposits............. 16,834 25,063 143,643 80,014 30,675
FHLB advances......... 205,910 109,119 297,905 650,958 1,155,448
Repayments on FHLB
advances............. (144,403) (125,096) (289,356) (643,908) (1,129,788)
Advance payments by
borrowers for taxes
and insurance........ 377 (166) 752 (623) 1,007
---------- --------- -------- -------- ----------
Net cash provided
by financing
activities....... 78,718 8,920 152,944 86,441 57,342
---------- --------- -------- -------- ----------
Net increase in cash and
cash equivalents....... 608 4,947 3,386 825 1,161
Cash and cash
equivalents at
beginning of period.... 13,277 9,891 9,891 9,066 7,905
---------- --------- -------- -------- ----------
Cash and cash
equivalents at end of
period................. $ 13,885 14,838 13,277 9,891 9,066
========== ========= ======== ======== ==========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
year for:
Interest............ $ 7,134 4,848 26,505 18,323 14,158
---------- --------- -------- -------- ----------
Income taxes........ $ 1,500 1,350 4,325 4,219 5,345
========== ========= ======== ======== ==========
SUPPLEMENTAL DISCLOSURES
OF NONCASH INVESTING
ACTIVITIES:
Property acquired in
settlement of loans.. $ 167 -- 815 1,465 1,605
========== ========= ======== ======== ==========
Transfer of investment
securities to
investment securities
available for sale... $ -- -- -- 55 --
========== ========= ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
First Federal Savings Bank of America (the "Bank") is a federally chartered
mutual savings bank with its headquarters located in Fall River,
Massachusetts. The Bank provides a full range of banking services to
individual and business customers in Massachusetts, Rhode Island, and to a
lesser degree in Connecticut. The Bank is subject to competition from other
financial institutions, mortgage banking companies and other financial service
providers doing business in this area. The Bank is subject to regulations of,
and periodic examination by, the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the Savings Association Insurance Fund of the FDIC up to $100,000.
To provide protection for customers' retirement account balances in excess of
FDIC coverage, the Bank participates in the "Deposit Collateralization Bailee
Program" of the Federal Home Loan Bank of Boston. To participate, the Bank
must pledge investment securities and mortgage loans as collateral with the
Federal Home Loan Bank of Boston.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the 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 revenues and expenses for the period. Actual results could
differ from those estimates.
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, management obtains independent
appraisals for significant properties and assesses other factors associated
with these assets.
Substantially all of the Bank's loans are secured by residential real estate
located in Massachusetts, Rhode Island and Connecticut. Accordingly, the
ultimate collectibility of a substantial portion of the Bank's loan portfolio
is susceptible to changes in market conditions in this area.
The information at June 30, 1996 and for the three months ended June 30,
1996 and 1995 is unaudited but in the opinion of management of the Bank,
reflects all adjustments (which are comprised of only normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations at the dates and for the periods then ended.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
First Federal Savings Bank of America and its wholly owned subsidiary,
FIRSTFED MORTGAGE CORPORATION. Currently, the principal activity of FIRSTFED
MORTGAGE CORPORATION is to retain a parcel of undeveloped commercial land to
accommodate the Bank's future expansion plans. All material intercompany
balances and transactions have been eliminated in consolidation. Certain
amounts in the prior years' financial statements have been reclassified to
conform with the current period's presentation.
Investment and Mortgage-backed Securities
Effective April 1, 1994, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Under SFAS No. 115, securities are classified at the time
of purchase, based on management's intention, as securities available for sale
or held to maturity. Securities available for sale are reported at fair value
with any unrealized gains and losses excluded from earnings and reported as a
separate component of retained earnings, net of tax, until realized.
Securities held to maturity are stated at amortized cost. Any decline in fair
value below the amortized cost basis of an individual security deemed to be
other than temporary is recognized as a realized loss in the accounting period
in which the determination is made. The fair value of the security at the time
of the write-down becomes the new cost basis of the security.
Gains and losses on sales of securities are accounted for when realized on a
specific identification basis.
F-7
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans
Loans are reported at the principal amount outstanding, reduced by net
deferred loan origination fees. Mortgage loans held for sale are carried at
the lower of aggregate cost or market value considering loan production, sales
commitments and deferred fees. Generally, all longer term (typically mortgage
loans with terms in excess of fifteen years) fixed-rate residential single-
family mortgage loans are originated for sale and adjustable-rate loans are
originated both for portfolio and for sale. Occasionally, the Bank generates
fixed-rate loans which are designated for portfolio at the time of
origination.
Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and amortized over
the contractual life of the related loans using the interest method. When
loans are sold in the secondary market, the remaining balance of the amount
deferred is included in the determination of gain or loss on sale.
On April 1, 1995, the Bank adopted SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosure. These statements require changes
in both the disclosure and impairment measurement of certain loans. Adoption
of these statements had no material impact on the Bank's financial position or
results of operations.
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
according to the contractual terms of the loan agreement. The definition of
"impaired loans" is not the same as the definition of "nonaccrual loans,"
although the two categories overlap. Nonaccrual loans include impaired loans
and are those on which the accrual of interest is discontinued when
collectibility of principal or interest is uncertain or payments of principal
of interest have been contractually past due 90 days. The Bank may choose to
place a loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loans as impaired, if (i) it is not
probable that the Bank will not collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial or a
commercial real estate loan. Interest received on nonaccrual loans is
recognized in interest income on a cash basis. Factors considered by
management in determining impairment include payment status and collateral
value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and
its recorded value, or, as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the
recorded amount of the loans. When foreclosure is probable, impairment is
measured based on the fair value of the collateral. Impaired loans are
charged-off when management believes that the collectibility of the loan's
principal is remote. Residential mortgage and consumer loans are measured for
impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the principal and interest
owed.
Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired unless such loans are
not performing according to the restructured terms upon adoption of SFAS No.
114. Loan restructurings entered into after adoption of SFAS No. 114 are
reported as impaired loans, and impairment is measured as described above
using the loan's premodification rate of interest.
SFAS No. 114 also changes the criteria for classification of a loan as an
in-substance foreclosure. Beginning April 1, 1995, loans are classified as in-
substance foreclosures only when the Bank is in possession of the collateral.
F-8
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Provision and Allowance for Loan Losses
The allowance for loan losses is available for future credit losses inherent
in the portfolio. The level of the allowance is based on management's ongoing
review of the composition and growth of the loan portfolio, net charge-off
experience, current and expected economic conditions, and other pertinent
factors. Loans (or portions thereof) deemed to be uncollectible are charged
against the allowance and recoveries of amounts previously charged-off are
added to the allowance. The provisions for loan losses charged to earnings are
added to the allowance to bring it to the desired level.
While management believes that the allowance for loan losses is adequate to
absorb probable loan losses, future additions to the allowance may be
necessary based on changes in the above factors. In addition, various
regulatory agencies periodically review the Bank's allowance for loan losses.
Such agencies may require the recognition of additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Gain or Loss on Sale of Mortgage Loans
Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between
the net cash paid by the investor for the loan and the loan's carrying value;
(2) the calculated present value of the difference between the interest rate
paid to the Bank by the borrower on the loan sold and the interest rate
guaranteed to the investor, adjusted for normal servicing fees and considering
estimated loan prepayments (deferred premium on sale of loans); and (3) any
origination fees, net of applicable origination costs, retained by the Bank.
Premiums on sale of loans are amortized using the interest method over the
life of the related loans, adjusted for actual and estimated future
prepayments. Actual prepayment experience is reviewed periodically and the
deferred premium is adjusted, if necessary.
On April 1, 1996, the Bank adopted SFAS No. 122, Accounting for Mortgage
Servicing Rights, which amended SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. This Statement requires that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. Additionally, the
Statement requires that the capitalized mortgage servicing rights be assessed
for impairment based on the fair value of those rights, and that impairment be
recognized through a valuation allowance. The impact of adoption depends upon
the volume of loans sold and will result in increased income recognized upon
sale of loans and may result in greater earnings volatility in future periods
as mortgage servicing rights are amortized. The effect of adoption increased
pre-tax gain on the sale of loans by $261,000 (unaudited) for the quarter
ended June 30, 1996. Fair values of mortgage servicing rights are based on
quoted market prices. The fair value of mortgage servicing rights at June 30,
1996 approximates the carrying value. Capitalized mortgage servicing rights
are amortized in proportion to, and over the period of estimated net servicing
income. The Bank stratifies the capitalized mortgage servicing rights based
upon original maturity and interest rates of the underlying loans. There is no
valuation allowance on mortgage servicing rights at June 30, 1996.
Office Properties and Equipment
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives (3 to 40 years) of the related assets. Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses.
Real Estate Owned
Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded
at the lower of the carrying value of the loan or the fair value, less
F-9
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disposal costs, of the property constructively or actually received, thereby
establishing a new cost basis. Subsequent write-downs are recorded if the cost
basis exceeds current net fair value. Related operating costs, net of rental
income, are reflected in operations when incurred. Realized gains upon
disposition are recognized in income.
Management believes that the net carrying value of real estate acquired
through foreclosure reflects the lower of its cost basis or estimated net fair
value. Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory agency requirements, are considered in
the evaluation of the net fair value of real estate acquired through
foreclosure.
Pension
Pension cost is recognized over the employees' approximate service period.
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 upon management's judgments relating to the realizability of
such asset.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks.
(2) CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of tangible to average
assets (as defined), core (leverage) and total capital to risk-weighted assets
(as defined). Management believes, as of June 30, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
As of March 11, 1996, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the institution's category.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Act"). Among other provisions, the
Act empowers the Board of Directors of the FDIC to impose a special assessment
on
F-10
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"SAIF-assessable deposits" as of March 31, 1995 of depository institutions to
recapitalize the SAIF Fund. The Bank was assessed a rate of 65.7 cents per
$100 of SAIF-assessable deposits. The Bank recorded a charge to Federal
deposit insurance premiums expense of $2.9 million on September 30, 1996
related to this special assessment.
(3) INVESTMENT AND MORTGAGE-BACKED SECURITIES (IN THOUSANDS)
A summary of investment securities available for sale follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Marketable equity securities............ $55 718 -- 773
--- --- --- ---
Total investment securities available
for sale............................... $55 718 -- 773
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Marketable equity securities............ $55 670 -- 725
--- --- --- ---
Total investment securities available
for sale............................... $55 670 -- 725
=== === === ===
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
-------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Marketable equity securities............ $55 463 -- 518
--- --- --- ---
Total investment securities available
for sale............................... $55 463 -- 518
=== === === ===
</TABLE>
Investments in marketable equity securities primarily consist of an
investment in the common stock of a bank.
A summary of investment securities held to maturity follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States Government and related
obligations due:
Within one year...................... $11,996 56 (1) 12,051
After one year but within five
years............................... 9,490 4 (44) 9,450
------- --- --- ------
21,486 60 (45) 21,501
------- --- --- ------
Other investment securities............ 1 -- -- 1
------- --- --- ------
Total investment securities held to
maturity.............................. $21,487 60 (45) 21,502
======= === === ======
</TABLE>
F-11
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
United States Government and related
obligations due:
Within one year....................... $12,996 77 (2) 13,071
After one year but within five years.. 9,990 29 (29) 9,990
------- --- --- ------
22,986 106 (31) 23,061
------- --- --- ------
Federal Home Loan Bank note due April
1996................................... 1,000 -- (1) 999
Other investment securities............. 1 -- -- 1
------- --- --- ------
Total investment securities held to
maturity........................... $23,987 106 (32) 24,061
======= === === ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
United States Government and related
obligations due:
Within one year....................... $ 7,998 -- (79) 7,919
After one year but within five years.. 11,990 33 (65) 11,958
------- --- ---- ------
19,988 33 (144) 19,877
------- --- ---- ------
Federal Home Loan Bank note due April
1996................................... 1,000 -- (26) 974
------- --- ---- ------
Total investment securities held to
maturity........................... $20,988 33 (170) 20,851
======= === ==== ======
</TABLE>
Adjustable-rate mortgage-backed securities totalled $4,928 (unaudited) and
$4,946 at June 30, 1996 and March 31, 1996, respectively. There were no
adjustable-rate mortgage-backed securities at March 31, 1995. A summary of
mortgage-backed securities held to maturity follows:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
FHLMC:
After five years but within ten years... $ 130 5 (1) 134
After ten years......................... 5,175 44 -- 5,219
------ --- --- -----
5,305 49 (1) 5,353
------ --- --- -----
GNMA:
Less than five years.................... 41 -- -- 41
After five years but within ten years... 309 6 -- 315
After ten years......................... 1,483 77 -- 1,560
------ --- --- -----
1,833 83 -- 1,916
------ --- --- -----
Total mortgage-backed securities held
to maturity.......................... $7,138 132 (1) 7,269
====== === === =====
</TABLE>
F-12
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
FHLMC:
After five years but within ten years.. $ 141 6 -- 147
After ten years........................ 5,206 35 -- 5,241
------ --- --- ------
5,347 41 -- 5,388
------ --- --- ------
GNMA:
Less than five years................... 46 1 -- 47
After five years but within ten years.. 61 1 -- 62
After ten years........................ 1,794 95 -- 1,889
------ --- --- ------
1,901 97 -- 1,998
------ --- --- ------
Total mortgage-backed securities held
to maturity......................... $7,248 138 -- 7,386
====== === === ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
FHLMC:
After five years but within ten years.. $ 149 3 (1) 151
After ten years........................ 373 12 (1) 384
------ --- --- ------
522 15 (2) 535
------ --- --- ------
GNMA:
Less than five years
After five years but within ten years.. 122 3 (2) 123
After ten years........................ 2,077 83 -- 2,160
------ --- --- ------
2,199 86 (2) 2,283
------ --- --- ------
Total mortgage-backed securities held
to maturity......................... $2,721 101 (4) 2,818
====== === === ======
</TABLE>
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.
There were no sales of investment and mortgage-backed securities in the
three months ended June 30, 1996 and 1995 (unaudited). There were no sales of
investment and mortgage-backed securities in the years ended March 31, 1996,
1995 and 1994.
GNMA mortgage-backed securities with a book value of approximately $1,586
(unaudited), $1,736 and $2,024 were pledged as collateral for certain deposits
and the "Deposit Collateralization Bailee Program" at the Federal Home Loan
Bank of Boston at June 30, 1996 and March 31, 1996 and 1995, respectively.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is
required to maintain a minimum investment in FHLB stock. The current
investment exceeds (unaudited) the required level at June 30, 1996. Any excess
may be redeemed by the Bank or called by the FHLB at par. At its discretion,
the FHLB may declare dividends on this stock.
F-13
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
The Bank's lending activities are conducted principally in Massachusetts and
Rhode Island, and to a lesser degree in Connecticut. The Bank grants single
and multifamily residential loans, commercial real estate loans, commercial
loans and a variety of consumer loans. In addition, the Bank grants loans for
the construction of residential homes, multifamily properties and for
commercial real estate properties. The ability and willingness of single and
multifamily residential and consumer borrowers to honor their repayment
commitments is generally dependent on real estate values and the level of
overall economic activity within the borrowers' geographic areas. The ability
and willingness of commercial, commercial real estate and construction loan
borrowers to honor their repayment commitments is generally dependent on the
health of the real estate economic sector in the borrowers' geographic areas
and the general economy.
The following is a comparative summary of loans receivable classified by
type:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, -----------------
1996 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans:
Residential real estate:
One-to four-family........................... $613,860 531,849 405,747
Multi-family................................. 4,798 4,703 5,157
Commercial real estate......................... 25,567 23,368 19,968
Construction and land.......................... 26,792 25,297 26,337
-------- -------- -------
Total mortgage loans....................... 671,017 585,217 457,209
-------- -------- -------
Commercial loans................................. 15,051 14,473 12,756
-------- -------- -------
Consumer loans:
Home equity lines.............................. 26,542 27,995 29,373
Second mortgages............................... 24,732 18,064 9,111
Other consumer loans........................... 6,080 5,813 3,874
-------- -------- -------
Total consumer loans....................... 57,354 51,872 42,358
-------- -------- -------
Total loans receivable........................... 743,422 651,562 512,323
-------- -------- -------
Less:
Allowance for loan losses...................... (6,445) (5,607) (4,239)
Undisbursed proceeds of construction
mortgages in process.......................... (7,986) (6,568) (5,511)
Deferred loan origination fees, net............ (1,590) (1,795) (2,596)
-------- -------- -------
(16,021) (13,970) (12,346)
-------- -------- -------
Loans receivable, net...................... $727,401 637,592 499,977
======== ======== =======
</TABLE>
At June 30, 1996, March 31, 1996 and March 31, 1995 there were $304,013
(unaudited), $267,073 and $254,690, respectively, in variable-rate loans
included in residential mortgage loans and construction and land loans.
The weighted average interest rate on the mortgage loan portfolio was
approximately 7.41% (unaudited), 7.43% and 7.47% at June 30, 1996, March 31,
1996 and 1995, respectively.
Loans serviced for others approximated $1,096,000 (unaudited), $1,018,000
(unaudited), $1,086,000, $1,011,000 and $943,000 at June 30, 1996 and 1995,
and March 31, 1996, 1995 and 1994, respectively.
F-14
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information regarding nonaccrual loans:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, -----------
1996 1996 1995
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Nonaccrual loans................................. $3,702 4,045 3,033
====== ===== =====
</TABLE>
The following table summarizes information regarding the reduction of
interest income on nonaccrual loans:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS YEARS ENDED
ENDED JUNE 30, MARCH 31,
---------------- --------------
1996 1995 1996 1995 1994
------- ------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income in accordance with original terms... $ 89 71 358 272 368
Income recognized.......................... 25 6 234 95 121
------- ------- --- --- ---
Foregone interest income during year....... $ 64 65 124 177 247
======= ======= === === ===
</TABLE>
At June 30, 1996, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or nonaccrual.
At June 30, 1996 and March 31, 1996, total impaired loans were $985
(unaudited) and $991, respectively. At June 30, 1996, impaired loans of $985
(unaudited) required an impairment allowance of $493. In opinion of
management, none of these impaired loans required a impairment allowance at
March 31, 1996. There were no (unaudited) impaired loans at June30, 1995. All
impaired loans have been measured using the fair value of the collateral
method. During the three months ended June 30, 1996, the average recorded
value of impaired loans was $986 (unaudited). For these loans, $30 (unaudited)
of interest income was recognized while $63 (unaudited) of interest income
would have been recognized under their original terms. During the year ended
March 31, 1996, the average recorded value of impaired loans was $580. For
these loans, $128 of interest income was recognized while $195 of interest
income would have been recognized under their original terms. The Bank follows
the same policy for recognition of income on impaired loans as it does for all
other loans. None of the impaired loans are on nonaccrual as of June 30, 1996
(unaudited) and March 31, 1996.
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS YEARS ENDED
ENDED JUNE 30, MARCH 31,
---------------- --------------------
1996 1995 1996 1995 1994
------- ------- ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........ $ 5,607 4,239 4,239 3,964 3,524
Provision for loan losses........... 1,000 475 2,626 653 1,035
Charge-offs......................... (164) (55) (1,288) (400) (628)
Recoveries.......................... 2 -- 30 22 33
------- ------ ------ ----- -----
Balance at end of period.............. $ 6,445 4,659 5,607 4,239 3,964
======= ====== ====== ===== =====
</TABLE>
In the ordinary course of business, the Bank makes loans to its directors,
executive officers, and their related interests, generally at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity:
F-15
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS YEARS ENDED
ENDED JUNE 30, MARCH 31,
---------------- ----------------
1996 1995 1996 1995 1994
------- ------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period................ $ 778 796 796 693 831
Originations.............................. -- -- 182 163 371
Payments.................................. (161) (5) (200) (60) (509)
------- ------ ---- --- ----
Balance, end of period...................... $ 617 791 778 796 693
======= ====== ==== === ====
</TABLE>
Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $181 (unaudited), $196, $183 and $162 at June 30,
1996 and March 31, 1996, 1995 and 1994, respectively.
Loans with a book value of $6,617 (unaudited) and $5,959 were pledged as
collateral for the "Deposit Collateralization Bailee Program" with the Federal
Home Loan Bank of Boston at June 30, 1996 and March 31, 1996.
(5) SALE OF MORTGAGE LOANS (IN THOUSANDS)
The following summarizes mortgage loan sales, the components of gain (loss)
on sale of mortgage loans and changes in the premium on sale of mortgage
loans:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS YEARS ENDED
ENDED JUNE 30, MARCH 31,
---------------- ----------------------------
1996 1995 1996 1995 1994
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gain on sale of mortgage loans:
Cash proceeds from sales of
loans....................... $44,715 24,322 183,323 139,583 547,035
Buy-up (buy-down) fees paid
(received), net............. (24) (22) 43 (419) (889)
------- ------- -------- -------- --------
Net cash proceeds from
sales
of loans.................. 44,691 24,300 183,366 139,164 546,146
Principal balance of loans
sold........................ (45,207) (24,438) (183,571) (141,169) (546,651)
Capitalized mortgage
servicing rights............ 261 -- -- -- --
Net Deferred origination
(costs) fees recognized at
time of sale................ 85 (58) (422) 124 1,775
Recovery (provision) for
realized loss on mortgage
loans held for sale......... 214 -- (214) -- --
Premium resulting from
interest rate differential.. -- -- -- 2 366
------- ------- -------- -------- --------
Gain (loss) on sales of
mortgage loans, net....... $ 44 (196) (841) (1,879) 1,636
======= ======= ======== ======== ========
</TABLE>
F-16
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) OFFICE PROPERTIES AND EQUIPMENT (IN THOUSANDS)
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------
1996 1996 1995
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 1,234 1,234 1,159
Office building and improvements.................... 5,688 5,688 5,051
Furniture, fixtures and equipment................... 4,879 4,768 4,135
Construction in progress............................ 2,062 1,189 --
------- ------ ------
13,863 12,879 10,345
Less accumulated depreciation....................... (4,697) (4,550) (3,905)
------- ------ ------
$ 9,166 8,329 6,440
======= ====== ======
</TABLE>
Construction in progress at June 30, 1996 and March 31, 1996 primarily
represents costs incurred for the purchase and renovation of the Pawtucket and
Warwick banking offices, as well as renovations to the Bank's existing Union
Street and South End banking facilities.
The Bank leases certain office space under various noncancellable operating
leases. A summary of future minimum rental payments under such leases follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, JUNE 30, 1996 MARCH 31, 1996
--------------------- ------------- --------------
(UNAUDITED)
<S> <C> <C>
1997......................................... $135 161
1998......................................... 90 76
1999......................................... 6 6
</TABLE>
Rent expense was $46,000 and $45,000 for the three months ended June 30,
1996 and 1995 (unaudited), respectively. Rent expense was $182,000, $172,000
and $143,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
F-17
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEPOSITS (DOLLARS IN THOUSANDS)
A summary of deposits are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 MARCH 31,
-------------------------- ----------------------------------------------
WEIGHTED WEIGHTED 1996 1995
AVERAGE AVERAGE --------------- ---------------
RATES AMOUNT % RATES AMOUNT % AMOUNT %
-------- --------- ----- ----------- -------- ----- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money market............ (2.82)% $ 27,286 4.5% (2.83; 2.83)% $ 28,614 4.9% $ 27,969 6.4%
Business checking....... -- 43,134 7.2 -- ; -- 48,517 8.3 28,950 6.6
Savings................. (2.50) 81,723 13.6 (2.50; 2.50) 78,420 13.4 76,103 17.3
NOW..................... (1.98) 38,825 6.5 (1.98; 1.98) 36,248 6.2 26,551 6.0
--------- ----- -------- ----- -------- -----
190,968 31.8 191,799 32.8 159,573 36.3
--------- ----- -------- ----- -------- -----
Certificates:
Six months to one
year................. (5.52) 171,141 28.5 (5.63; 5.28) 153,082 26.2 100,893 22.9
Over one year......... (6.32) 137,052 22.8 (6.39; 6.12) 133,480 22.9 68,331 15.5
Jumbo................. (5.63) 11,521 1.9 (5.68; 5.89) 11,196 2.0 38,959 8.9
IRA & Keogh........... (6.22) 75,335 12.5 (6.24; 5.30) 72,530 12.4 60,266 13.7
Business statement.... (4.79) 1,701 0.3 (4.62; 5.54) 11,335 1.9 4,389 1.0
7-91 day.............. (4.92) 12,866 2.2 (4.75; 4.68) 10,328 1.8 7,696 1.7
--------- ----- -------- ----- -------- -----
Total certificate
accounts........... 409,616 68.2 391,951 67.2 280,534 63.7
--------- ----- -------- ----- -------- -----
$ 600,584 100.0 $583,750 100.0% $440,107 100.0%
========= ===== ======== ===== ======== =====
Weighted average stated
interest rate of
deposits............... 4.62% 4.59% 4.28%
========= ======== ========
</TABLE>
The remaining contractual maturities of certificate accounts are summarized
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
FOR THE THREE MONTHS ------------------------------
ENDED JUNE 30, 1996 1996 1995
-------------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------------------- -------- ----- -------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Within twelve months.... $ 296,928 72.5% $287,579 73.4% $192,115 68.5%
Thirteen months to
thirty-six months...... 88,654 21.6 80,301 20.5 71,587 25.5
Beyond thirty-six
months................. 24,034 5.9 24,071 6.1 16,832 6.0
----------- -------- -------- ----- -------- -----
$ 409,616 100.0% $391,951 100.0% $280,534 100.0%
=========== ======== ======== ===== ======== =====
</TABLE>
Certificates of deposit in denominations of $100 or more totaled
approximately $48,211 (unaudited) at June 30, 1996. Certificates of deposit in
denominations of $100 or more totaled approximately $53,600 and $31,144 at
March 31, 1996 and 1995, respectively.
In the ordinary course of business, the Bank accepts deposits from brokerage
companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $2,752 (unaudited),
$2,350 and $21,514 at June 30, 1996 and at March 31, 1996 and 1995,
respectively.
F-18
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30, FOR THE YEARS ENDED MARCH 31,
---------------------- -----------------------------
1996 1995 1996 1995 1994
----------- ---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Money market............... $ 206 192 783 885 749
Savings.................... 499 472 1,915 2,037 2,898
NOW........................ 181 133 599 479 370
Certificates............... 5,903 4,148 19,834 10,489 6,377
----------- ---------- --------- --------- ---------
$ 6,789 4,945 23,131 13,890 10,394
=========== ========== ========= ========= =========
</TABLE>
(8) FEDERAL HOME LOAN BANK ADVANCES (DOLLARS IN THOUSANDS)
At June 30, 1996 and at March 31, 1996 and 1995, advances from the Federal
Home Loan Bank of Boston with a weighted average interest rate of 5.77%
(unaudited), 5.94% and 6.96%, respectively, mature as follows:
<TABLE>
<CAPTION>
MARCH 31,
YEAR ENDING JUNE 30, -------------
MARCH 31, 1996 1996 1995
----------- ----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
1996........................................... $ -- -- 51,592
1997........................................... 79,516 48,092 8,000
1998........................................... 19,000 9,000 7,000
1999........................................... 21,700 10,000 --
2000........................................... 15,383 7,000 --
2001 and thereafter............................ 1,049 1,049 --
-------- ------ ------
$136,648 75,141 66,592
======== ====== ======
</TABLE>
In accordance with the Federal Home Loan Bank of Boston's collateral
requirements, a portion of first mortgage loans on residential property and
all deposits and securities issued, insured or guaranteed by the United States
government or an agency thereof, are pledged as collateral to secure such
advances.
The Bank has a $7,420 (unaudited) secured line of credit available through
the Federal Home Loan Bank of Boston at June 30, 1996. The line of credit
balance available at March 31, 1996 was $11,710.
(9) LITIGATION
Various legal proceedings are pending against the Bank which have arisen out
of the normal course of business. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial position, the annual results of operations, or
liquidity of the Bank.
(10) 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 primarily include commitments to originate and
sell loans and unadvanced lines of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheet. The contract amounts of those
instruments reflect the extent of the Bank's involvement in these particular
classes of financial instruments.
F-19
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit 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.
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ---------------
1996 1996 1995
----------- ------- -------
AMOUNT AMOUNT AMOUNT
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Financial instruments whose contract amount
represents credit risk:
Commitments to originate loans to be sold.... $12,197 $15,977 $10,128
Commitments to originate loans to be held in
portfolio................................... 58,972 70,215 24,895
Unadvanced home equity lines of credit....... 24,512 23,986 22,552
Unadvanced commercial lines of credit........ 7,758 8,107 7,089
Undisbursed proceeds of construction
mortgages................................... 7,986 6,568 5,511
Financial instruments whose contractual amount
exceeds the amount of credit risk:
Commitments to sell residential mortgage
loans....................................... 13,433 23,635 16,000
</TABLE>
At June 30, 1996, commitments to originate loans to be sold with maturities
ranging from 15 years to 30 years had interest rates ranging from 7.25% to
9.74%. Commitments to originate loans, unadvanced commercial lines of credit,
unadvanced home equity lines of credit and unadvanced residential 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 are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by the
Bank upon extension of credit, is based on management's credit evaluation of
the borrower.
In addition, the Bank enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Bank to
originate loans to fulfill these contracts, in which case the Bank would
normally purchase loans or securities in the open market to deliver against
the contract. All loans are sold without recourse.
(11) INCOME TAXES (DOLLARS IN THOUSANDS)
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE
ENDED YEARS ENDED
JUNE 30, MARCH 31,
-------------- ------------------
1996 1995 1996 1995 1994
------ ------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax expense:
Federal............................... $ 684 784 2,861 1,963 3,419
State................................. 281 312 1,202 755 1,425
------ ------ ----- ----- -----
965 1,096 4,063 2,718 4,844
------ ------ ----- ----- -----
Deferred income tax (benefit) expense:
Federal............................... (135) (109) (586) 810 (406)
State................................. (49) (44) (124) 324 (203)
------ ------ ----- ----- -----
(184) (153) (710) 1,134 (609)
------ ------ ----- ----- -----
$ 781 943 3,353 3,852 4,235
====== ====== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED YEARS ENDED
JUNE 30, MARCH 31,
------------------ ----------------
1996 1995 1996 1995 1994
--------- --------- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax rate.. 34.0% 34.0% 34.0% 34.0% 34.0%
Items affecting federal income tax
rate:
State tax, net of federal
benefit......................... 8.3 7.9 8.9 8.1 8.4
Other, net....................... (.1) .2 (.8) 1.6 1.5
--------- --------- ---- ---- ----
Effective income tax rate.......... 42.2% 42.1% 42.1% 43.7% 43.9%
========= ========= ==== ==== ====
</TABLE>
The following is an analysis of accrued income taxes:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ------------
1996 1996 1995
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Federal income taxes payable....................... $ 374 897 1,013
State income taxes receivable...................... (215) (206) (61)
------ ----- -----
Total current income tax payable, net............ $ 159 691 952
====== ===== =====
Deferred income tax asset, net..................... $2,128 1,960 1,339
====== ===== =====
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, are presented
below:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, -----------
1996 1996 1995
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accrued interest income.......................... $ 121 118 143
Write-down of equity investments................. 63 63 45
Deferred loan fees, net.......................... 497 536 512
Deferred compensation and pension cost........... 255 245 92
Allowance for loan losses........................ 2,269 1,919 1,187
------ ----- -----
Gross deferred income tax asset................ 3,205 2,881 1,979
------ ----- -----
Deferred tax liabilities:
Mortgage servicing rights........................ 106 -- --
Depreciation..................................... 658 621 246
Premium on sale of loans......................... -- -- 179
Other............................................ 12 15 19
Unrealized gain on investments available for
sale............................................ 301 285 196
------ ----- -----
Gross deferred tax liability................... 1,077 921 640
------ ----- -----
Deferred income tax asset, net................. $2,128 1,960 1,339
====== ===== =====
</TABLE>
F-21
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 June 30, 1996 and March 31, 1996. The primary
sources of recovery of the net federal deferred tax asset of $1,575
(unaudited) and $1,464 at June 30, 1996 and March 31, 1996 are federal income
taxes paid in the previous three years that are available for carryback and
the expectation that the existing net deductible temporary differences will
reverse during periods in which the Bank generates net taxable income.
Deferred state tax assets, net of related federal tax, totaled $553
(unaudited) and $496 at June 30, 1996 and March 31, 1996, respectively. Since
there is no carryback provision for state income tax purposes, the Bank needs
to generate approximately $4,718 (unaudited) and $4,232 at June 30, 1996 and
March 31, 1996 of future net taxable income to realize the state deferred tax
asset.
It should be noted, however, that factors beyond management's control, such
as the general economy and real estate values, can affect future levels of
taxable income, and no assurance can be given that sufficient taxable income
will be generated to fully absorb gross deductible temporary differences.
Under the Internal Revenue Code (the "Code"), the Bank is allowed a special
bad debt deduction related to additions to tax bad debt reserves established
for the purpose of absorbing losses. The provisions of the Code permit the
Bank to deduct from taxable income an addition to the tax bad debt reserves
based on a percentage (currently 8%) of taxable income before such deduction
or on certain experience formulas. At March 31, 1996, retained earnings
included approximately $7,398 representing the accumulated amount of such
statutory bad debt deductions for which no federal income taxes have been
provided. If this amount is used for purposes other than for loan losses, it
may be subject to federal income tax of approximately $2,515. The Bank does
not anticipate that retained earnings will be used in any way which would
result in the payment of taxes, accordingly a deferred tax liability has not
been recorded for the statutory bad debt deduction amount.
(12) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS)
Pension Plan
All eligible officers and employees of the Bank, who have reached the age of
twenty-one and completed one year of service, are included in a
noncontributory, defined benefit pension plan ("the Plan") provided by the
Bank. The Plan is administered by Pentegra ("the Fund"). The Fund does not
segregate the assets or liabilities of each participating employer and,
accordingly, disclosure of the Bank's accumulated vested and nonvested
benefits is not possible. Contributions are based on each individual
employers' experience. According to the Fund's administrators, as of June 30,
1995, the date of the latest actuarial valuation, the market value of the
Fund's net assets exceeded the actuarial present value of vested and nonvested
benefits in the aggregate.
The Bank's contribution to the pension plan was $82 (unaudited) and $121
(unaudited) for the three months ended June 30, 1996 and 1995, respectively.
The Bank's contribution to the pension plan was $360 and $289 for the years
ended March 31, 1996 and 1995.
Postretirement Benefits
On April 1, 1995, the Bank adopted SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions. Under SFAS No. 106, the Bank
changed its method of accounting for postretirement benefits other than
pensions from the pay-as-you-go method to the method of accruing these costs
over employees' service periods. The effect of adopting SFAS No. 106 can be
charged to expense immediately or spread over no more than the lesser of
twenty years or the average life expectancy of the participants. The Bank
currently provides postretirement benefits for a limited number of retirees.
The Bank is amortizing the cumulative effect of this change of $177 over the
average life expectancy of the participants, which is 7 years.
F-22
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Supplemental Executive Retirement Plan
In 1986, the Internal Revenue Service issued regulations which limit the
benefits of certain individuals under qualified retirement plans. During 1993,
the Bank adopted a supplemental executive retirement plan which provides for
certain Bank executives to receive benefits upon retirement subject to certain
limitations as set forth in the plan. The Bank's expense under this Plan was
approximately $35 (unaudited) and $31 (unaudited) for the three months ended
June 30, 1996 and 1995 and $130, $121 and $115 for the years ended March 31,
1996, 1995 and 1994. At June 30 1996 and March 31, 1996, the Bank holds
restricted assets in a irrevocable grantor's trust with a cost basis of $635
(unaudited) and $598, respectively and a market value of $771 (unaudited) and
$699, respectively, which are included in other assets and offset by an
accrued liability of $635 (unaudited) and 598.
Employee Tax Deferred Thrift Plan
The Bank has an employee tax deferred thrift plan ("Plan") under which
employee contributions to the Plan are matched within certain limitations by
the Bank. All employees who meet specified age and length of service
requirements are eligible to participate in the plan. The amounts matched by
the Bank are included in compensation and benefits expense. The amount matched
for the three months ended June 30, 1996 and 1995 was $28 (unaudited) and $27
(unaudited). The amounts matched for the years ended March 31, 1996, 1995 and
1994 were $104, $95 and $92.
(13) FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
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 owned, the deferred income tax asset, office properties and
equipment, and core deposit and other intangibles. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates 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.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for some of the Bank's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions and changes in the
loan, debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
The following methods and assumptions were used by the Bank in estimating
the fair values of its financial instruments:
Cash on Hand and Due from Banks
The fair values for cash on hand and due from banks approximate those
assets' carrying amounts reported in the balance sheet.
F-23
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment and Mortgage-backed Securities
Fair values 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.
Mortgage Loans Held for Sale
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the value of mortgage loans held for sale.
Loans
The fair values of loans are estimated using discounted cash flow analyses
and 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 fair value of accrued interest receivable approximates its carrying
amount because of the short-term nature of these financial instruments.
Stock in FHLB of Boston
The fair value of FHLB stock approximates the amount reported in the balance
sheet. If redeemed, the Bank will receive an amount equal to the par value of
the stock.
Deposits and Advance Payments by Borrowers for Taxes and Insurance
The fair values of demand deposits (e.g., N.O.W., business checking, regular
and club accounts, certain types of money market accounts and advance payments
by borrowers for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities of such
certificates.
FHLB Advances
The fair value of Federal Home Loan Bank overnight advances approximates
their carrying value due to their short term nature. All other advances are
estimated using a discounted cash flow technique that applies interest rates
currently being offered on advances to a schedule of aggregated expected
monthly maturities of FHLB advances.
Accrued Interest Payable
The fair value of accrued interest payable approximates its carrying amount
because of the short-term nature of these financial instruments.
Off-balance Sheet Instruments
Fair values for the Bank's off-balance-sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
F-24
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
standing. The difference between the fair value of commitments to originate
loans and their contract value is considered to be immaterial based on a
comparison to current offering rates for similar loan products. The contract
value of commitments to sell loans was considered in determining the fair
value of loans held for sale. The Bank's commitments for unused lines and
outstanding standby letters of credit and unadvanced portions of loans are at
floating rates, and therefore, there is no fair value adjustment.
The carrying amount and fair values of the Bank's financial instruments are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 MARCH 31,
----------------- -----------------------------------
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash on hand and due
from banks............ $ 13,885 $ 13,885 $ 13,277 $ 13,277 $ 9,891 $ 9,891
Mortgage loans held for
sale.................. 6,530 6,530 17,747 17,747 6,816 6,816
Investment securities
available for sale.... 773 773 725 725 518 518
Investment securities
held to maturity...... 21,487 21,502 23,987 24,061 20,988 20,851
Mortgage-backed
securities held to
maturity.............. 7,138 7,269 7,248 7,386 2,721 2,818
Stock in FHLB of
Boston................ 6,967 6,967 6,630 6,630 6,630 6,630
Loans receivable, net.. 727,401 697,122 637,592 631,952 499,977 502,074
Accrued interest
receivable............ 4,182 4,182 3,711 3,711 2,864 2,864
Financial liabilities:
Deposits............... 600,584 602,093 583,750 586,239 440,107 439,440
FHLB advances.......... 136,648 136,560 75,141 74,997 66,592 66,440
Advance payments by
borrowers for taxes
and insurance......... 4,544 4,544 4,167 4,167 3,415 3,415
Accrued interest
payable............... 649 649 304 304 401 401
</TABLE>
On August 2, 1996, the Board of Directors of the Bank adopted the Plan of
Conversion (the "Plan") pursuant to which the Bank will convert from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, all of the outstanding common stock of which will be acquired by
FIRSTFED AMERICA BANCORP, INC. (the "Company"), a holding company formed
expressly for such purpose, in exchange for a portion of the net conversion
proceeds (the "Conversion"). All of the stock to be issued in the Conversion
is being offered to eligible account holders as of June 30, 1995.
The Bank plans to establish an ESOP for the benefit of eligible employees,
to become effective upon the Conversion. The ESOP intends to purchase up to 8%
of the Common Stock issued in the Conversion utilizing proceeds of a loan from
a wholly-owned subsidiary of the Company or a third party lender. The loan
will be repaid over a period of nine years and the collateral for the loan
will be the common stock purchased by the ESOP.
Pursuant to the Plan, the Company intends to establish a Charitable
Foundation ("Foundation") in connection with the Conversion. The Plan provides
that the Bank and the Company will create the Foundation and donate an amount
of the Company's common stock equal to 8.0% of the common stock to be issued
in the Conversion. The Foundation will be dedicated to charitable purposes
within the communities in which the Bank
F-25
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operates and to complement the Bank's existing community activities.
Establishment of the Foundation is subject to the approval of the Bank's
members at the special meeting being held to vote upon the Conversion.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10 percent
of the Company's annual taxable income. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an
expense in the full amount of the contribution, offset in part by the
corresponding tax deduction, during the quarter in which the contribution is
made.
The Bank may provide support services to the Foundation including, but not
limited to, employee time, office space and accounting support. The Bank
expects to provide these services without compensation, however, expenses
incurred on behalf of the Foundation are not expected to be significant to the
operations of the Bank.
At the time of the Conversion, the Bank will establish a liquidation account
in an amount equal to its equity as reflected in the latest balance sheet used
in the final conversion prospectus. The liquidation account will be maintained
for the benefit of eligible account holders and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders and supplemental eligible account holders have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or supplemental
eligible account holder's interest in the liquidation account. In the event of
a complete liquidation of the Bank, each eligible account holder and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held.
The costs associated with Conversion will be deferred and will be deducted
from the proceeds upon the sale and issuance of stock. In the event the
Conversion is not consummated, costs incurred will be charged to expense. At
June 30, 1996, there were no (unaudited) deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock
if such declaration and payment would violate statutory or regulatory
requirements.
F-26
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRSTFED AMERICA BANCORP, INC., THE BANK OR SANDLER O'NEILL
& PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRSTFED AMERICA BANCORP, INC.
OR THE BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN
OR SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Selected Consolidated Financial and Other Data of the Bank............... 12
Recent Developments...................................................... 14
Risk Factors............................................................. 20
FIRSTFED AMERICA BANCORP, INC. .......................................... 31
First Federal Savings Bank of America.................................... 32
Regulatory Capital Compliance............................................ 33
Use of Proceeds.......................................................... 34
Dividend Policy.......................................................... 36
Market for the Common Stock.............................................. 36
Capitalization........................................................... 37
Pro Forma Data........................................................... 38
Comparison of Valuation and Pro Forma Information With No Foundation..... 43
First Federal Savings Bank of America and its Subsidiary Consolidated
Statements of Income.................................................... 44
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 45
Business of the Bank..................................................... 61
Federal and State Taxation............................................... 87
Regulation............................................................... 89
Management of the Company................................................ 95
Management of the Bank................................................... 95
The Conversion........................................................... 108
Restrictions on Acquisition of the Company and the Bank.................. 132
Description of Capital Stock of the Company.............................. 137
Description of Capital Stock of the Bank................................. 139
Transfer Agent and Registrar............................................. 139
Experts.................................................................. 139
Legal and Tax Opinions................................................... 140
Additional Information................................................... 140
Index of Consolidated Financial Statements............................... F-1
</TABLE>
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UNTIL DECEMBER 24, 1996 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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7,015,000 SHARES
FIRSTFED AMERICA BANCORP, INC.
[FIRSTFED AMERICA BANCORP, INC. LOGO APPEARS HERE]
(PROPOSED HOLDING COMPANY FOR
FIRST FEDERAL SAVINGS BANK OF AMERICA)
COMMON STOCK
-------------------
PROSPECTUS
-------------------
NOVEMBER 12, 1996
Sandler O'Neill & Partners, l.p.
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