<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1996
Registration No. 333-12855
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FIRSTFED AMERICA BANCORP, INC.
First Federal Savings Bank of America Thrift Plan
(exact name of registrant as specified in its certificate of incorporation)
DELAWARE 6035 04-3331237
(state or other (Primary Standard (IRS Employer
jurisdiction of Classification Code Identification No.)
incorporation or Number)
organization)
One North Main Street
Fall River, Massachusetts 02720
(508) 679-8181
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Robert F. Stoico
President and Chief Executive Officer
First Federal Savings Bank of America
One North Main Street
Fall River, Massachusetts 02720
(508) 679-8181
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas P. Faucette, Esquire
Lori M. Beresford, Esquire
Lawrence M.F. Spaccasi, Esquire
Kent M. Krudys, Esquire
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
Approximate date of commencement of proposed sale to public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / X /
----
<TABLE>
<CAPTION>
=================================================================================
| Amount to | Purchase | Aggregate |
Title of each Class of | be | Price | Offering | Registration
Securities to be Registered | Registered | Per Share | Price(1) | Fee
- ---------------------------------------------------------------------------------
<S> | <C> | <C> | <C> | <C>
Common Stock | 8,712,630 | | |
$.01 par Value | Shares | $10.00 | $87,126,300 | (2)
- ---------------------------------------------------------------------------------
| 321,260 | | |
Participation Interests | Shares | -- | -- | (3)
=================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Registration fee previously paid with Form S-1 filed on September 27, 1996.
(3) The securities of FIRSTFED AMERICA BANCORP, INC. to be purchased by the
First Federal Savings Bank of America Thrift Plan are included in the
amount shown for Common Stock. Accordingly, no separate fee is required for
the participation interests. In accordance with Rule 457(h) of the
Securities Act of 1933, as amended, the registration fee has been
calculated on the basis of the number of shares of Common Stock that may be
purchased with the current assets of such Plan.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
Cross Reference Sheet Showing Location in the Subscription and Community
Offering Prospectus ("Prospectus") of Information Required by Items of Form S-l:
<TABLE>
<CAPTION>
Registration Statement
Item and Caption Prospectus Headings
---------------------------- -------------------
<S> <C>
l. Forepart of the Registration Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Inside Front and Outside Back Cover Pages
Back Cover Page of
Prospectus
3. Summary Information, Risk Summary; Risk Factors
Factors and Ratio of
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering The Conversion-- Stock Pricing
Price
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Front Cover Page; The Conversion --
Subscription Offering and Subscription
Rights; --Community Offering;
--Syndicated Community Offering
9. Description of Securities The Conversion -- Certain Restrictions on
to be Registered Purchases or Transfer of Shares After
Conversion; Restrictions on Acquisition
of the Company and the Bank; Description
of the Capital Stock of the Company;
Description of the Capital Stock of the
Bank
10. Interests of Named Experts Not Applicable
and Counsel
11. Information with Respect Front Cover Page; Recent Developments;
to the Registrant FIRSTFED AMERICA BANCORP, INC.; First
Federal Savings Bank of America; Dividend
Policy; Consolidated Statements of
Income; Management's Discussion and
Analysis of Financial Condition and
Results of Operations of the Bank;
Business of the Bank; Regulation;
Management of the Company; Management of
the Bank; The Conversion; Description of
the Capital Stock of the Company;
Description of the Capital Stock of the
Bank; Financial Statements
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities
</TABLE>
<PAGE>
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 Profit Sharing
and Savings Plan (the "Plan" or the "401(a) 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."
The Board of Directors of the Bank has adopted the Pentegra Services, Inc.
Employees' Savings and Profit Sharing Plan and Trust which permits the
investment of Plan assets in Common Stock. The Plan will permit Participants to
direct the trustee of the Plan to purchase Common Stock with amounts in the Plan
attributable to such Participants. 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 _________________, 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.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES __ TO __ IN THE PROSPECTUS.
<PAGE>
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.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS _________, 1996.
2
<PAGE>
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.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Offering...................................... 5
Securities Offered.............................. 5
Election to Purchase Common Stock in the
Conversion................................... 5
Value of Participation Interests................ 5
Method of Directing Transfer.................... 5
Time for Directing Transfer..................... 6
Irrevocability of Transfer Direction............ 6
Direction to Purchase Common Stock
After the Conversion......................... 6
Purchase Price of Common Stock.................. 6
Nature of a Participant's Interest in the
Common Stock................................. 7
Voting and Tender Rights of Common Stock........ 7
Description of the Plan........................... 7
Introduction.................................... 7
Eligibility and Participation................... 8
Contributions under the Plan.................... 9
Limitations on Contributions.................... 9
Investment of Contributions..................... 12
Benefits Under the Plan......................... 16
Withdrawals and Distributions From the Plan..... 16
Administration of the Plan...................... 17
Reports to Plan Participants.................... 18
Plan Administrator.............................. 18
Amendment and Termination....................... 18
Merger, Consolidation or Transfer............... 18
Federal Income Tax Consequences................. 19
ERISA and Other Qualifications.................. 21
Restrictions on Resale.......................... 22
SEC Reporting and Short-Swing Profit Liability.. 23
Legal Opinions.................................... 24
Investment Form................................... 25
</TABLE>
4
<PAGE>
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 which 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 and Profit Sharing Plan and
Trust which permits each Participant to direct the trustee of the Plan
("Trustee") to transfer all or part of the funds which represent his or her
beneficial interest in the assets of the Plan to an employer stock fund
("Employer Stock Fund") and to use such funds to purchase Common Stock issued in
connection with 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. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE
EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION. FOR GENERAL
INFORMATION AS TO THE ABILITY OF PARTICIPANTS TO PURCHASE SHARES IN THE
CONVERSION, SEE "THE CONVERSION --SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS"
IN THE ATTACHED PROSPECTUS.
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.
5
<PAGE>
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wishes to transfer all or part of his or her beneficial interest in the assets
of the 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
2 of the Investment Form. If a Participant does not wish to make such an
election, he or she does not need to take any action.
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 _____________, 1996. The Investment Form should be returned to the
Bank's Human Resources Department by 12:00 noon, Eastern Time, on 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 trust assets ("Trust") 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. 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 the last business
day of the month coinciding with or next following the day the Plan
Administrator receives a written 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 are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
6
<PAGE>
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
<PAGE>
DESCRIPTION OF THE PLAN
INTRODUCTION
Effective as of ____________, 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 __________, 1996,
has adopted the First Federal Savings Bank of America Employees' Savings and
Profit Sharing Plan and Trust (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. 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 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 the 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 by filing
8
<PAGE>
a request with the Plan Administrator. 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. The Plan fiscal year is
the calendar year ("Plan Year"). Directors who are not employees of the Bank are
not eligible to participate in the Plan.
As of [JANUARY 1, 1996], there were approximately ____ employees eligible
to participate in the Plan, and approximately ____ employees had elected to
contribute to the 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 2% nor more than 15% of the Participant's
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 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,
which changes generally become effective the first business day of the month
following receipt by the Plan Administrator 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 5% 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."
9
<PAGE>
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 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
10
<PAGE>
actual contribution percentage of all other eligible employees, or (ii) the
actual contribution percentage of all other eligible employees plus two
percentage points.
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 annually 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
11
<PAGE>
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.
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 written 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 group
annuity 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.
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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.
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 5%), 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 a mutual fund. Because investment allocations only are
required to be made in increments of 5%, 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 monthly.
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 monthly 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.
A. Funds under the Prior Plan.
1995 1994
---- ----
A. ____% ____%
B. ____% ____%
C. ____% ____%
D. ____% ____%
E. ____% ____%
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B. Funds under the Plan Prior to the Conversion.
Effective contributions under the Plan were invested in the five Funds
listed below. The annual percentage of returns on these funds, calculated prior
to any fees being charged to the portfolio for 1993 and 1994 was:
1995 1994
---- ----
A. PSI 500 Stock Index Fund
B. PSI Stable Value Fund
C. PSI MidCap Fund
D. PSI Government Money
Market Fund
E. PSI Bond Index Fund
B. 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 Investment Form, Participants will be able
to change their investments at a time other than the normal monthly elective
periods. 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
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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.
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 __ AND __ 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 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 Regular Account 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 Participants
(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
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<PAGE>
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 2 to 10, 15 or 20 years, 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
is the Bank. Effective 30 days after the Conversion, the Trustee of the Plan
will be the Mellon Bank.
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.
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<PAGE>
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.
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.
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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 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
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<PAGE>
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.
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
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<PAGE>
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.
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.
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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 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 Securities Exchange Act of 1934, as amended ("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
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<PAGE>
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, 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. Participation in 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 must be reported to
the SEC annually on a Form 5 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 Participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon
the timing of elections to acquire or dispose of 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 and are prohibited from directing additional purchases of units
within the Employer Stock Fund for six months after receiving such a
distribution. Finally, Section 16(b) Persons who terminate their participation
in the Plan may not rejoin the Plan for six months following the date of their
termination. These Plan restrictions conform with the rules issued by the SEC
to exempt transactions in the Plan from becoming subject to the profit-recovery
rules of Section 16(b) of the Exchange Act.
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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.
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FIRST FEDERAL SAVINGS BANK OF AMERICA
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
INVESTMENT FORM
Name of Plan Participant: __________________ Address: _______________________
Social Security Number: ____________________
1. INSTRUCTIONS. In connection with the proposed Conversion of First Federal
Savings Bank of America from a mutual savings bank to a stock based
organization (the "Conversion"), the First Federal Savings Bank of America
Employees' Savings and Profit Sharing Plan and Trust (the "401(a) Plan") has
been adopted to permit Participants to direct their ___________, 1996,
account balances into a new fund, the Employer Stock Fund. The percentage of
a Participant's account transferred at the direction of the Participant into
the Employer Stock Fund will be used to purchase shares of common stock of
FirstFed America Bancorp, Inc. (the "Common Stock").
To direct a transfer of all or a part of the funds credited to your accounts
to the Employer Stock Fund, you must complete and file this form with the
Human Resources Department no later than ______________, 1996. A
representative for the Plan Administrator will retain a copy of this form and
return a copy to you. If you need any assistance in completing this form,
please contact _____________________________ at ___________________. If you
do not complete and return this form to the Human Resources Department by
____________, 1996, the funds credited to your accounts under the 401(a) Plan
will continue to be invested in accordance with your prior investment
direction, or in accordance with the terms of the 401(a) Plan if no
investment direction had been provided.
2. TRANSFER DIRECTIONS. I hereby direct the Plan Administrator to invest the
following percentage (in multiples of not less than 5%) of my account balance
in the:
A. PSI 500 Stock Index Fund _____%
B. PSI Stable Value Fund _____%
C. PSI MidCap 400 Stock Index _____%
D. PSI Government Money Market Fund _____%
E. PSI Bond Index Fund _____%
F. Employer Stock Fund _____%
NOTE: THE TOTAL PERCENTAGE STATED ABOVE MAY NOT EXCEED 100%. YOUR ABILITY TO
TRANSFER FUNDS TO THE EMPLOYER STOCK FUND IN THE CONVERSION IS SUBJECT TO
YOUR 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. FOR GENERAL INFORMATION AS TO YOUR ELIGIBILITY TO
PURCHASE SHARES OF COMMON STOCK AND THE MINIMUM AND MAXIMUM AMOUNTS THAT
MAY BE PURCHASED IN THE CONVERSION, SEE "THE CONVERSION--SUBSCRIPTION
OFFERING AND SUBSCRIPTION RIGHTS" AND "LIMITATION ON COMMON STOCK
PURCHASES" IN THE PROSPECTUS.
3. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this Investment Form shall
be subject to all of the terms and conditions of the 401(a) Plan. I
acknowledge that I have received a copy of the Prospectus and the Prospectus
Supplement.
_____________________________ Date ________________________
Signature of Participant
ACKNOWLEDGMENT OF RECEIPT BY PLAN ADMINISTRATOR. This Investment Form was
received by the Plan Administrator and will become effective on the date noted
below. Pentegra Services, Inc. is hereby authorized to make the above listed
change(s) to this participant's account.
________________________________ Date ________________________
Plan Administrator
24
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
FIRSTFED AMERICA BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR FIRST FEDERAL SAVINGS BANK OF AMERICA)
__________ SHARES OF COMMON STOCK
FIRSTFED AMERICA BANCORP, INC. (the "Company"), a Delaware corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") __________ shares, at a per share price of $10.00, of its common
stock, par value $.01 per share (the "Common Stock"), to be issued upon the
conversion (the "Conversion") of First Federal Savings Bank of America, Fall
River, Massachusetts (the "Bank") from a federally chartered mutual savings bank
to a federally chartered stock savings bank and the issuance of the Bank's
outstanding capital stock to the Company pursuant to a plan of conversion, as
amended, (the "Plan of Conversion"). The remaining __________ shares of the
Common Stock have been subscribed for in subscription and community offerings
(the "Subscription and Community Offerings") by the Bank's holders of deposit
accounts with the Bank with a balance of $50 or more as of June 30, 1995, by the
First Federal Savings Bank of America Employee Stock Ownership Plan, a tax-
qualified employee benefit plan, and related trust (the "ESOP"), by holders of
deposit accounts with a balance of $50 or more as of ______________, 1996, by
certain other account holders and borrowers of the Bank and then by certain
members of the general public. See "The Conversion - General." Contained
herein is the Prospectus in the form used in the Subscription and Community
Offerings. The purchase price for all shares purchased in the Syndicated
Community Offering will be the same as the price paid by subscribers in the
Subscription and Community Offerings (the "Purchase Price"). The Purchase Price
of $10.00 per share is the amount to be paid for each share at the time a
purchase order is submitted. See the cover page of the Prospectus and the table
below for information as to the method by which the range within which the
number of shares offered may vary and the method of subscribing for shares of
the Common Stock.
Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion. The Syndicated Community Offering will expire no
later than _______________, 1996, unless extended by the Bank and the Company
with the approval of the Office of Thrift Supervision (the "OTS"). Such
extensions may not go beyond _______________, 1998. If an extension of time has
been granted, all subscribers will be notified of such extension, and of their
rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest. The minimum number of shares which may be purchased
<PAGE>
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $300,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than 1.0% of the total number of
shares issued in the Conversion. See "Plan of Conversion - Subscription Rights
and Limitations on Common Stock Purchases." The Company reserves the right, in
its absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Syndicated Community Offering.
The Company and the Bank have engaged Sandler, O'Neill & Partners, L.P.
("Sandler O'Neill") as financial advisors to assist them in the sale of the
Common Stock in the Syndicated Community Offering. It is anticipated that
Sandler O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such Selected Dealers
will be ____% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Sandler O'Neill nor any Selected Dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
The Company has received conditional approval to have its Common Stock
listed on the American Stock Exchange ("AMEX") under the symbol "FAB." 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. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, 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 FEDERALLY INSURED OR GUARANTEED.
2
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
===================================================================================================================================
<S> <C> <C> <C> <C>
Minimum Per Share $ 10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Midpoint Per Share $ 10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum Per Share $ 10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Total Minimum(5) $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Total Midpoint $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Total Maximum(5) $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Total Maximum, As Adjusted(6) $ $ $ $
===================================================================================================================================
</TABLE>
_____________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Sandler O'Neill for services in connection with the Subscription and
Community Offerings) and estimated compensation of Sandler O'Neill and
Selected Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________
million and $__________ million at the minimum and the maximum of the
estimated price range and may be deemed to be underwriting fees. The
information under "Pro Forma Data" in the Prospectus was based on the
assumptions stated therein, which may differ from the estimates used for
this table. See "The Conversion - Marketing and Underwriting Arrangements"
for a more detailed discussion of fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon the
sale of the __________ shares subscribed for at a price of $10.00 per share
and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range). The Total Minimum reflects the sale
of __________ shares at a per share price of $10.00, leaving a total of
__________ shares to be sold in the Syndicated Community Offering.
(5) Gives 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% to reflect changes in
market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
_________________________________
The date of this Prospectus Supplement is _______________, 1996.
3
<PAGE>
PROSPECTUS
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 __.
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Estimated Underwriting
Subscription Price(1) Commissions Estimated Net Proceeds(3)
and Other Fees and Expenses(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<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 adjusted(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
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 __, 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 and educational 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 ____________________, 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 _______________, 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 GOES HERE]
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, changing
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 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 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.
4
<PAGE>
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 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 mortgages 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, 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 rates 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, as amended, 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
fund 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 it serves 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 it serves, the Bank believes that the Foundation will enhance the
long-term value of the Bank's community banking franchise.
5
<PAGE>
The Foundation will be dedicated to the promotion of charitable
purposes within the communities served by the Bank and surrounding communities,
including, but not limited to, grants or donations to support housing
assistance, scholarships, local education, not-for-profit medical facilities,
not-for-profit community groups and other types of organizations or civic minded
projects. The Foundation will be a private foundation under the Internal Revenue
Code of 1986, as amended, (the "Code"). As required 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 members of the boards of directors or an officer of the Company,
the Bank or any affiliate or Subsidiary of the Company or the Bank. It is
currently anticipated that the initial directors of the Foundation will be the
same individuals who are directors of the Company. See "The Conversion--
Establishment of the Charitable Foundation -- Structure of the Foundation." The
Company will provide office space to the Foundation and administrative support
service. 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 and educational 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 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
would 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
carryforward any unused portion of the deduction for five years following the
contribution. However, the Bank will not be able to utilize any such
carryforward for Massachusetts state tax purposes. Neither the
6
<PAGE>
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.
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 third quarter of fiscal 1997. Such expense would reduce
earnings and have a material impact on the Company's earnings for the year.
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's net income would have been $1.0 million rather than experiencing earnings
of $4.6 million. Management cannot predict earnings for fiscal 1997, but expects
that the establishment and funding of the Foundation will have an adverse impact
on the Company's earnings for the fiscal year. 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 being held to consider the Conversion. 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. 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 "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 _______________, 1996, and approval of the Bank's members at a
special meeting to be held on _______, 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
7
<PAGE>
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."
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 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"),
("Local Eligible Account Holders"); (2) the Employee Plans, including the ESOP;
(3) depositors whose eligible savings 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 __________,
1996, the voting record date ("Voting Record Date") for the special meeting of
members to vote on the Conversion, and borrowers with loans outstanding as of
_________________ 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 _______________, 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."
8
<PAGE>
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."
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 for 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 to be 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 Offerings,
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."
9
<PAGE>
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 issued in the Conversion will be determined by the Company and the
Bank 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 $11.3 million and $29.4
million (or $39.2 million if the Estimated Price
10
<PAGE>
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 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. See "Use of
Proceeds" and "Business of the Bank."
DIVIDENDS
No decision has yet been made by the Board of Directors of the Company as
to the amount or timing of such 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 Market;" "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
Nonperforming loans.................... 3,702 3,147 4,045 3,033 4,221 5,005 5,115
Nonperforming assets................... 4,140 3,411 4,688 3,329 5,160 5,469 5,700
<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
======= ======= ======= ======= ======= ======= =======
(continued on next page)
</TABLE>
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 3.98 2.92
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.............. 111.50 112.32 112.90 112.71 115.88 103.25 103.37
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 has historically 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>
SUMMARY OF 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
Nonperforming loans................................... 3,012 4,045
Nonperforming assets.................................. 3,638 4,688
<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 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)................................ 2.67 3.29
Net interest margin(5)......................................... 2.88 3.56
Average interest-earning assets to average
interest-earning liabilities................................ 104.49 105.86
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) The Bank has historically 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 SFAS No. 115 as of April 1, 1994. 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 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 Savings Association
Insurance Fund ("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
16
<PAGE>
$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 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. See "Risk Factors - Recapitalization of SAIF and Its Impact on
SAIF Premiums." 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 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 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
17
<PAGE>
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 $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
4.76% for the six month period ended September 30, 1995 to an average cost of
4.89% 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 terms.
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 a 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," 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
18
<PAGE>
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 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. See "Risk Factors - Recapitalization of SAIF and
Its Impact on SAIF Premiums." 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.
19
<PAGE>
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
20
<PAGE>
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
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 loan serviced for others portfolio 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
Statement of Financial Accounting Standards No. 122 ("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 - Origination, Sale,
Servicing and Purchase 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
21
<PAGE>
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 income totalled
$6.9 million and $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 non-interest
expense resulting from its expansion strategy, higher costs 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 non-
interest 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."
22
<PAGE>
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 being held to vote
upon the Conversion. If approved by members, the establishment of the Foundation
will be dilutive to the 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 equal 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 third
quarter of fiscal 1997. Such expense would reduce earnings and have a material
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's net income would have been $1.0 million rather than
experiencing earnings of $4.6 million for the year ended March 31, 1996.
Management cannot predict earnings for fiscal 1997, but expects that the
establishment and funding of the Foundation will have an adverse impact on the
Company's earnings for the fiscal year. In addition to the contribution to the
Foundation, the Bank expects in the future to
23
<PAGE>
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 the above 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 IRS to be recognized as an
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 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 stocks, 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
carryover the excess contribution over a five-year period for federal tax
purposes. The Company will not be able to utilize such carryover for 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
deduction should be deductible for federal tax purposes over the combined six-
year period. However, no assurances can be made that the Company will have
sufficient pre-tax income over the five-year period 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 was
not part of the Conversion, the pro forma market
24
<PAGE>
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 depositors 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
that 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 it serves. 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 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 18.90%, 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 was not being 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 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, however, the Foundation's board of directors would exercise sole
voting power over such shares and would no longer be subject to the restriction.
See "The Conversion - Establishment of the Charitable Foundation - Regulatory
Conditions Imposed on the Foundation." Since the entire Board of Directors of
the Foundation will be comprised of directors of the Company, 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
25
<PAGE>
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, if
approved by stockholders, 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,
assuming the Foundation voted in favor of management's position. 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 any stock benefit plans must first be approved by stockholders no sooner
than six months following completion of the Conversion, and awards under such
proposed 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 covered by the ESOP and other stock benefit plans. See, " - Certain
Anti-Takeover Provisions - Voting Control of Officers and Directors."
There will, however, 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, 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.
Potential Challenges. The establishment and funding of a charitable
--------------------
foundation as part of a conversion is innovative and has been done only on two
other occasions in connection with a conversion. As such, the Foundation may be
subject to potential challenges by depositors of the Bank 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 depositors so that depositors
have a right to vote on whether the Foundation should be established as part of
the Conversion. If certain depositors, stockholders or other third 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 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 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,
26
<PAGE>
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
_______________, 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."
27
<PAGE>
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 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.
Various proposals to eliminate the federal thrift 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 treat 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 the pending legislative proposals and would be subject to the
activities restrictions applicable to bank holding companies. Under such bills,
any lawful activity in which a savings association was engaged on September 13,
1995 would be grandfathered for up to 2 years following the effective date of
its conversion to a bank charter, plus two additional one year extensions at the
discretion of the regulator, and existing thrift intrastate and interstate
branches which were operated as branches on September 13, 1995 would also be
grandfathered. 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
28
<PAGE>
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 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
29
<PAGE>
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 the Stock Option Plans, 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
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 the employee severance compensation plan would be approximately
$5.8 million, including a $1.1 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."
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 shareholders 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
30
<PAGE>
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 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 2.6% 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 20% 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 are also 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 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
31
<PAGE>
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, that 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."
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 applied to 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
32
<PAGE>
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.
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 changing
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 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 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 serviced $1.1 billion
of loans for others which such 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,
$28.6 million, or 97.4%, 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. 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.
33
<PAGE>
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
---------------------------------------------------------------------------
5,185,000 Shares 6,100,000 Shares 7,015,000 Shares
(Minimum of (Midpoint of (Maximum of
Historical at Estimated Estimated Estimated
June 30, 1996 Price Range) Price Range) Price Range)
--------------------- ---------------------- ---------------------- ----------------------
Percent Percent Percent Percent
of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
--------- ---------- --------- ---------- -------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital............... $47,521 5.92% $84,524 10.04% $84,524 10.04% $84,524 10.04%
======= ===== ======= ====== ======= ====== ======= ======
Tangible Capital:
Capital Level......... $47,104 5.87% $84,107 10.00% $84,107 10.00% $84,107 10.00%
Requirement........... 12,036 1.50 12,616 1.50 12,616 1.50 12,616 1.50
------- ----- ------- ------ ------- ------ ------- ------
Excess................ $35,068 4.37% $71,491 8.50% $71,491 8.50% $71,491 8.50%
======= ===== ======= ====== ======= ====== ======= ======
Core Capital:
Capital Level......... $47,104 5.87% $84,107 10.00% $84,107 10.00% $84,107 10.00%
Requirement(3)........ 24,072 3.00 25,232 3.00 25,232 3.00 25,232 3.00
------- ----- ------- ------ ------- ------ ------- ------
Excess................ $23,032 2.87% $58,875 7.00% $58,875 7.00% $58,875 7.00%
======= ===== ======= ====== ======= ====== ======= ======
Risk-Based Capital:
Capital Level(4)(5)... $52,689 11.58% $89,692 18.90% $89,692 18.90% $89,692 18.90%
Requirement........... 36,413 8.00 37,960 8.00 37,960 8.00 37,960 8.00
------- ----- ------- ------ ------- ------ ------- ------
Excess................ $16,276 3.58% $51,732 10.90% $51,732 10.90% $51,732 10.90%
======= ===== ======= ====== ======= ====== ======= ======
8,067,250 Shares
(15% above
Maximum
of Estimated
Price Range)(1)
--------------------
Percent
of
Amount Assets(2)
-------- ----------
(Dollars in thousands)
GAAP Capital............... $85,053 10.10%
======= ======
Tangible Capital:
Capital Level......... $84,636 10.06%
Requirement........... 12,624 1.50
------- ------
Excess................ $72,012 8.56%
======= ======
Core Capital:
Capital Level......... $84,636 10.06%
Requirement(3)........ 25,248 3.00
------- ------
Excess................ $59,388 7.06%
======= ======
Risk-Based Capital:
Capital Level(4)(5)... $90,221 19.00%
Requirement........... 37,981 8.00
------- ------
Excess................ $52,240 11.00%
======= ======
</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.
34
<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
35
<PAGE>
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 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 twelve-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. To the extent that the Company repurchases stock at market prices in
excess of the Purchase Price in the Conversion, such repurchases may have a
dilutive effect upon the interests of existing stockholders.
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."
36
<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.
37
<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 Assesment, 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)
---------- -------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
(In thousands)
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
Common Stock acquired by
the Stock Programs(7)........ -- (2,240) (2,635) (3,030) (3,485)
-------- -------- -------- -------- --------
Less: SAIF Special Assesment
net of Taxes (8)............. -- (1,670) (1,670) (1,670) (1,670)
-------- -------- -------- -------- --------
Total stockholders' equity.......... $ 47,521 $ 90,581 $ 98,667 $106,753 $106,053
======== ======== ======== ======== ========
</TABLE>
38
<PAGE>
- -----------------
(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
$1,465,000, $1,717,000, $1,970,000 and $2,261,000 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 and
was due to the enactment of federal legislation in September 1996. See
"Recent Developments."
39
<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 15.0%) 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, 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
40
<PAGE>
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.
41
<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)(6)
------------- ------------- -------------- -----------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.......................... $51,850 $61,000 $70,150 $80,673
Plus: Shares acquired by the
Charitable Trust 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 acquired by 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 acquired by 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>
42
<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 8.75%. The pro forma net
earnings assumes: (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. If the Stock Programs are approved by
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 required stockholder
approval has been received, 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. If the
Stock Option Plans are approved by 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 stockholder approval of the
Stock Option Plans and 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.
43
<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)(6)
-------------- ------------- -------------- ------------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.......................... $51,850 $61,000 $70,150 $80,673
Plus: Shares acquired by the
Charitable Trust 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 acquired by 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 acquired by 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>
44
<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 8.75%. The pro forma net earnings assumes: (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. If the Stock Programs are approved by 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 required stockholder approval
has been received, 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. If the Stock Option
Plans are approved by 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
stockholder approval of the Stock Option Plans and 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.
45
<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 virtually 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 depositors 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 Minimum At the Midpoint
----------------------------- --------------------------------
With No With No
Foundation Foundation Foundation Foundation
-------------- ------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Estimated offering amount...................... $ 51,850 $ 58,650 $ 61,000 $ 69,000
Pro forma market capitalization................ 55,998 58,650 65,880 69,000
Total assets................................... $847,547 $852,461 $855,633 $861,421
Total liabilities.............................. 756,960 756,960 756,960 756,960
Pro forma stockholders' equity................. 90,581 95,495 98,667 104,455
Pro forma consolidated net earnings............ 1,332 1,385 1,380 1,442
Pro forma stockholders' equity per share....... $16.18 $16.28 $14.98 $15.14
Pro forma consolidated net earnings per share.. 0.26 0.26 0.23 0.23
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share 61.82% 61.42% 66.77% 66.06%
Offering price to pro forma
net earnings per share............. 9.69x 9.76x 11.00x 11.03x
Offering price to assets.............. 6.61% 6.88% 7.70% 8.01%
Pro Forma Financial Ratios:
Return on assets............................ 0.63% 0.65% 0.65% 0.67%
Return on stockholders' equity.............. 5.88 5.80 5.60 5.54
Stockholders' equity to assets.............. 10.69 11.60 11.53 12.13
<CAPTION>
At the Maximum,
At the Maximum as Adjusted
----------------------------- --------------------------------
With No With No
Foundation Foundation Foundation Foundation
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Estimated offering amount...................... $ 70,150 $ 79,350 $ 80,673 $ 91,253
Pro forma market capitalization................ 75,762 79,350 87,126 91,253
Total assets................................... $863,720 $870,380 $873,020 $880,684
Total liabilities.............................. 756,960 756,960 756,960 756,960
Pro forma stockholders' equity................. 106,753 113,413 116,053 123,717
Pro forma consolidated net earnings............ 1,429 1,499 1,483 1,565
Pro forma stockholders' equity per share....... $14.09 $14.29 $13.32 $13.74
Pro forma consolidated net earnings per share.. 0.20 0.21 0.19 0.19
Pro Forma Pricing Ratios:
Offering price as a percentage of pro
forma stockholders' equity per share 70.97% 69.97% 75.08% 72.77%
Offering price to pro forma
net earnings per share............. 12.23x 12.20x 13.54x 13.44x
Offering price to assets.............. 8.77% 9.12% 9.98% 10.36%
Pro Forma Financial Ratios:
Return on assets............................ 0.66% 0.69% 0.68% 0.71%
Return on stockholders' equity.............. 5.35% 5.29% 5.11% 5.06%
Stockholders' equity to assets.............. 12.36 13.03 13.29 14.05
</TABLE>
46
<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.
47
<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. See "Regulation" for
a discussion of the regulatory changes resulting from the Financial Institutions
Reform Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") and the impact of such
changes on the Bank. 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
48
<PAGE>
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-Potential Impact of Changes in Interest
Rates."
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)
primarily investing 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.
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
49
<PAGE>
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."
50
<PAGE>
<TABLE>
<CAPTION>
3 More than More than More than More than
Months 3 Months to 6 Months to 1 Year to 3 Years to
or Less 6 Months 1 Year 3 Years 5 Years
---------- --------------- ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities ............................. $ 4,773 $ 2,000 $ 5,996 $ 9,491 $ -
Loans receivable (1) .............................. 106,004 50,468 85,374 159,136 146,535
Mortgage-backed securities......................... 96 93 183 687 4,413
Stock in FHLB-Boston............................... 6,967 - - - -
-------- -------- --------- --------- ---------
Total interest-earning assets............. 117,840 52,561 91,553 169,314 150,948
-------- -------- --------- --------- ---------
Interest-bearing liabilities:
Money market accounts.............................. 3,445 3,011 4,929 10,501 3,567
Savings accounts................................... 470 2,098 927 3,600 3,435
NOW accounts....................................... 324 320 633 2,429 2,272
Certificate accounts............................... 93,263 79,727 76,705 70,206 14,380
IRA and KEOGH accounts............................. 16,521 11,370 20,806 16,984 9,654
FHLB advances...................................... 74,516 5,000 10,000 39,083 8,000
-------- -------- --------- -------- ---------
Total interest-bearing liabilities........ 188,539 101,526 114,000 142,803 41,308
------- -------- --------- -------- ---------
Interest-earning assets less interest-bearing
liabilities................................... $(70,699) (48,965) (22,447) $ 26,511 $ 109,640
======== ======== ========= ========= =========
Cumulative interest-rate sensitivity gap........... $(70,699) $(119,664) $(142,111) $(115,600) $ (5,960)
======== ======== ========= ========= =========
Cumulative interest-rate gap as a percentage
of total assets at June 30, 1996.............. (8.81)% (14.90)% (17.70)% (14.40)% (0.74)%
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)%
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%
<CAPTION>
More
Than Total
5 Years Amount
------------ --------------
<S> <C> <C>
Interest-earning assets:
Investment securities ............................. $ - $ 22,260
Loans receivable (1) .............................. 190,747 738,264
Mortgage-backed securities......................... 1,666 7,138
Stock in FHLB-Boston............................... - 6,967
--------- ---------
Total interest-earning assets............. 192,413 774,629
-------- ---------
Interest-bearing liabilities:
Money market accounts.............................. 1,833 27,286
Savings accounts................................... 71,193 81,723
NOW accounts....................................... 32,847 38,825
Certificate accounts............................... - 334,281
IRA and KEOGH accounts............................. - 75,335
FHLB advances...................................... 49 136,648
-------- ---------
Total interest-bearing liabilities........ 105,922 694,098
------- ---------
Interest-earning assets less interest-bearing
liabilities................................... $ 86,491 $ 80,531
======== =========
Cumulative interest-rate sensitivity gap........... $80,531
=======
Cumulative interest-rate gap as a percentage
of total assets at June 30, 1996.............. 10.03%
Cumulative interest rate gap as a percentage
of total interest-earning assets at
June 30, 1996................................. 10.40%
Cumulative interest-earning assets as a percentage
of cumulative interest-bearing liabilities at
June 30, 1996................................. 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.
51
<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 between the Bank's internal
model and the OTS model, 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
Net Portfolio Value Value of Assets
Change in ---------------------------------------- ---------------------------
Interest Rates % NPV %
In Basis Points
(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% (7.2)%
300 35,394 (45,255) (56) 4.53 (5.1)
200 51,881 (28,768) (36) 6.48 (3.2)
100 67,594 (13,055) (16) 8.25 (1.4)
Static 80,649 - - 9.64 -
(100) 89,515 8,866 11 10.54 0.9
(200) 91,451 10,802 13 10.69 1.1
(300) 88,566 7,917 10 10.33 0.7
(400) 86,806 6,157 8 10.08 0.4
</TABLE>
- ----------------------
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
As is the case with the GAP Table, certain shortcoming 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.
52
<PAGE>
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.
53
<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
--------------------------- -------------------------------
Yield/ Average
Balance Cost Balance Interest
------------- ------------ --------------- ------------
(Dollars in thousands)
<S> <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
Investment securities(2)................................ 29,227 6.12 29,813 464
Mortgage-backed securities.............................. 7,138 7.05 7,199 126
-------- ---- -------- -------
Total interest-earning assets........................ 770,296 7.36 732,728 13,885
---- -------
Noninterest-earning assets.............................. 32,515 31,002
-------- --------
Total assets......................................... $802,811 $763,730
======== ========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Money market accounts................................... $27,286 2.83 $28,752 206
Savings accounts........................................ 81,723 2.50 80,301 499
NOW accounts............................................ 38,825 1.98 37,363 181
Certificate accounts.................................... 409,616 5.90 402,075 5,903
------- ---- -------- ------
Total................................................ 557,450 4.98 548,491 6,789
FHLB advances .......................................... 136,648 5.77 108,671 1,627
-------- ---- -------- ------
Total interest-bearing liabilities................... 694,098 5.13 657,162 8,416
---- ------
Non-interest-bearing liabilities(3)........................ 61,192 59,612
-------- --------
Total liabilities.................................... 755,290 716,774
-------- --------
Retained earnings.......................................... 47,521 46,956
-------- --------
Total liabilities and retained earnings................. $802,811 $763,730
======== ========
Net interest rate spread(4)................................ 2.23% $ 5,469
==== =======
Net interest margin(5).....................................
Ratio of interest-earning assets to
interest-bearing liabilities............................ 110.98% 111.50%
====== ======
<CAPTION>
For the Three Months Ended June 30,
--------------------------------------------------------
1996 1995
------------ ------------------------------------------
Average Average
Yield/ Average Yield/
Cost Balance Interest Cost
------------ -------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net and mortgage loans held for sale(1) 7.66% $507,848 $10,231 8.08%
Investment securities(2)................................ 6.24 28,616 463 6.49
Mortgage-backed securities.............................. 7.02 2,679 58 8.68
---- -------- ------- ----
Total interest-earning assets........................ 7.60 539,143 10,752 8.00
---- ------- ----
Noninterest-earning assets.............................. 24,204
--------
Total assets......................................... $563,347
=========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Money market accounts................................... 2.87 $26,876 192 2.87
Savings accounts........................................ 2.49 75,918 472 2.49
NOW accounts............................................ 1.94 26,998 133 1.98
Certificate accounts.................................... 5.89 289,692 4,148 5.74
---- ------- ------- ----
Total................................................ 4.96 419,484 4,945 4.73
FHLB advances .......................................... 6.01 60,520 1,042 6.91
---- -------- ------- ----
Total interest-bearing liabilities................... 5.14 480,004 5,987 5.00
---- ------- ----
Non-interest-bearing liabilities(3)........................ 40,969
---------
Total liabilities.................................... 520,973
--------
Retained earnings.......................................... 42,374
---------
Total liabilities and retained earnings................. $563,347
========
Net interest rate spread(4)................................ 2.46% $4,765 3.00%
==== ====== ====
Net interest margin(5)..................................... 2.99% 3.54%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities............................ 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.
54
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------
1996 1995
-------------------------------------- --------------------------
Average
Average Yield/ Average
Balance Interest Cost Balance Interest
----------- ---------- ------------ -------------- -----------
(Dollars in thousands)
<S> <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
Investment securities(2)................................ 30,808 1,966 6.38 21,922 1,355
Mortgage-backed securities.............................. 4,411 321 7.28 3,033 261
--------- ------- ---- --------- -------
Total interest-earning assets........................ 583,777 46,044 7.89 496,005 37,487
------- ---- -------
Noninterest-earning assets................................. 25,570 23,146
-------- --------
Total assets......................................... $609,347 $519,151
======== =========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Money market accounts................................... $ 27,194 783 2.88 $ 33,011 885
Savings accounts........................................ 76,511 1,915 2.50 81,525 2,037
NOW accounts............................................ 30,088 599 1.99 24,153 479
Certificate accounts.................................... 332,977 19,834 5.96 230,383 10,489
------- ------- ----- -------- --------
Total................................................ 466,770 23,131 4.96 369,072 13,890
FHLB advances .......................................... 50,321 3,251 6.46 71,005 4,447
------- ------- ----- ------- -------
Total interest-bearing liabilities................... 517,091 26,382 5.10 440,077 18,337
------- ---- -------
Non-interest-bearing liabilities(3)........................ 48,015 40,415
------- -------
Total liabilities.................................... 565,106 480,492
-------- --------
Retained earnings.......................................... 44,241 38,659
-------- --------
Total liabilities and retained earnings................. $609,347 $519,151
======== ========
Net interest rate spread(4)................................ $19,662 2.79% $19,150
======= ==== =======
Net interest margin(5)..................................... 3.37%
====
Ratio of interest-earning assets to
interest-bearing liabilities............................ 112.90% 112.71%
====== ======
<CAPTION>
---------------------------------------------------------
1994
---------------- ---------------------------------------
Average Average
Yield/ Average Yield/
Cost Balance Interest Cost
---------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net and mortgage loans held for sale(1) 7.62% $413,512 $31,767 7.68%
Investment securities(2)................................ 6.18 17,785 1,084 6.10
Mortgage-backed securities.............................. 8.61 4,124 355 8.61
---- -------- -------- ----
Total interest-earning assets........................ 7.56 435,421 33,206 7.63
---- ------- ----
Noninterest-earning assets................................. 23,498
--------
Total assets......................................... $458,919
========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Money market accounts................................... 2.68 $ 32,728 749 2.29
Savings accounts........................................ 2.50 82,480 2,898 3.51
NOW accounts............................................ 1.98 21,799 370 1.70
Certificate accounts.................................... 4.55 170,741 6,377 3.73
----- ------- ------- -----
Total................................................ 3.76 307,748 10,394 3.38
FHLB advances .......................................... 6.26 67,994 3,802 5.59
---- -------- ------- ----
Total interest-bearing liabilities................... 4.17 375,742 14,196 3.78
---- ------- ----
Non-interest-bearing liabilities(3)........................ 49,469
---------
Total liabilities.................................... 425,211
--------
Retained earnings.......................................... 33,708
---------
Total liabilities and retained earnings................. $458,919
========
Net interest rate spread(4)................................ 3.39% $19,010 3.85%
==== ======= ====
Net interest margin(5)..................................... 3.86% 4.37%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities............................ 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.
55
<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
June 30, 1996 March 31, 1996
Compared to Compared to
Three Months Ended Year Ended
June 30, 1995 March 31, 1995
--------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- --------------------
Volume Rate Net Volume Rate Net
-------- -------- --------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities.................. $ 75 $ (74) $ 1 $ 566 $ 45 $ 611
Loans receivable, net and mortgage
loans held for sale................. 6,427 (3,363) 3,064 6,127 1,759 7,886
Mortgage-backed securities............. 140 (72) 68 105 (45) 60
----- ----- ----- ----- ----- -----
Total interest-earning assets....... 6,642 (3,509) 3,133 6,798 1,759 8,557
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Money market accounts.................. 14 - 14 (164) 62 (102)
Savings accounts....................... 27 - 27 (122) - (122)
NOW accounts........................... 66 (18) 48 118 2 120
Certificate accounts................... 1,644 111 1,755 5,511 3,834 9,345
----- ----- ----- ----- ----- -----
Total............................... 1,751 93 1,844 5,343 3,898 9,241
FHLB advances.......................... 1,439 (854) 585 (1,334) 138 (1,196)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities.. 3,190 (761) 2,429 4,009 4,036 8,045
----- ----- ----- ----- ----- -----
Net change in net interest income.......... $3,452 $(2,748) $704 $2,789 $(2,277) $ 512
====== ======= ==== ====== ======= ======
<CAPTION>
Year Ended
March 31, 1995
Compared to
Year Ended
March 31, 1994
------------------------------------
Increase (Decrease)
Due to
--------------------
Volume Rate Net
--------- -------- -----------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Investment securities.................. $ 257 $ 14 $ 271
Loans receivable, net and mortgage
loans held for sale................. 4,356 (252) 4,104
Mortgage-backed securities............. (94) - (94)
----- ----- -----
Total interest-earning assets....... 4,519 (238) 4,281
----- ----- -----
Interest-bearing liabilities:
Money market accounts.................. 6 130 136
Savings accounts....................... (34) (827) (861)
NOW accounts........................... 43 66 109
Certificate accounts................... 2,524 1,588 4,112
----- ----- -----
Total............................... 2,539 957 3,496
FHLB advances.......................... 174 471 645
--- --- ---
Total interest-bearing liabilities.. 2,713 1,428 4,141
----- ----- -----
Net change in net interest income.......... $1,806 $(1,666) $ 140
====== ======= ======
</TABLE>
56
<PAGE>
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.
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
57
<PAGE>
$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 to 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 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 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
58
<PAGE>
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. This resulted in the Bank's net interest margin decreasing 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 compared 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 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 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 "- 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
59
<PAGE>
$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 and the necessary operational support
and servicing of them. 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 - Increase in
Noninterest Expense and Expansion Strategy."
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
60
<PAGE>
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 which
decreased from 3.39% for fiscal 1995 to 2.79% for fiscal 1996. The decrease in
the net interest spread was due primarily to increased 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 impact of the reduced
net interest margin was offset by average balance increase in fiscal 1996 versus
fiscal 1995 and, as a result, net interest income improved for fiscal 1996
versus fiscal 1995.
61
<PAGE>
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 chargeoff 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 which increased 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 higher balances or 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.
62
<PAGE>
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 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.
63
<PAGE>
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.
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. As a result, 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 which
totalled $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
64
<PAGE>
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, 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. 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 has attempted to maintain liquidity as
close as possible to the minimum requirement so that it may invest any excess
liquidity in higher yielding interest-earning assets or use such funds to repay
FHLB advances.
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 a strong growth in deposits 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 savings and a strong increase in FHLB advances to
continue to fund loan originations. The Bank expects to repay a portion of the
increase in FHLB advances outstanding at June 30, 1996 with net Conversion
proceeds. Depending on market conditions, the pricing of deposit products and
FHLB advances, the Bank may continue to rely on FHLB borrowing 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
65
<PAGE>
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 1997. 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 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
--------------------------------
Statement of Financial Accounting Standards 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 Statement of Financial Accounting Standards 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
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<PAGE>
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 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 twelve 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 primarily invests 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.
67
<PAGE>
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 twelve 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 some
high-tech areas conspired to dampen traditional areas of emphasis. The region is
still represented by many well-known manufacturers, such as The Acushnet
Company, Textron, American Power Conversion, Globe Manufacturing, Electric Boat
and Hasbro. 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. 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 - Competitive Market 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
68
<PAGE>
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, one new loan origination office
in Burlington, Massachusetts, and plans to open an additional branch office in
New Bedford, Massachusetts in early 1997. The Bank also plans to open 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 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.
69
<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, At March 31,
----------------------- --------------------------------------------------------------------------
1996 1996 1995 1994
----------------------- -------------------- -------------------------- ------------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
---------- ----------- --------- -------- ------------- ----------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family...... $613,860 82.57% $531,849 81.63% $405,747 79.20% $335,374 78.84%
Multi-family............. 4,798 0.65 4,703 0.72 5,157 1.00 5,257 1.24
Commercial real estate..... 25,567 3.44 23,368 3.59 19,968 3.90 14,849 3.49
Construction and land...... 26,792 3.60 25,297 3.88 26,337 5.14 20,142 4.73
------ ---- ------ ---- ------ ---- ------ ----
Total mortgage loans... 671,017 90.26 585,217 89.82 457,209 89.24 375,622 88.30
------- ----- ------- ----- ------- ----- ------- -----
Commercial .................. 15,051 2.03 14,473 2.22 12,756 2.49 10,269 2.41
-------- ----- ------ ----- ------ ----- ------ -----
Consumer Loans:
Home equity lines........ 26,542 3.57 27,995 4.30 29,373 5.73 30,409 7.15
Second mortgages......... 24,732 3.32 18,064 2.77 9,111 1.78 5,438 1.28
Other consumer loans..... 6,080 .82 5,813 .89 3,874 .76 3,672 .86
-------- ---- ------ ---- ------ ---- ----- ----
Total consumer loans... 57,354 7.71 51,872 7.96 42,358 8.27 39,519 9.29
-------- ---- ------ ---- ------ ---- ------ ----
Total loans receivable..... 743,422 100.00% 651,562 100.00% 512,323 100.00% 425,410 100.00%
====== ====== ====== ======
Less:
Allowance for loan
losses................. (6,445) (5,607) (4,239) (3,964)
Undisbursed proceeds of
construction mortgages
in process............. (7,986) (6,568) (5,511) (6,758)
Deferred loan origination
fees, net.............. (1,590) (1,795) (2,596) (2,915)
------- ------- ------- -------
Loans receivable, net...... 727,401 637,592 499,977 411,773
Mortgage loans held for
sale................... 6,530 17,747 6,816 15,779
----- ------ ----- ------
Loans receivable, net and
mortgage loans held for
sale..................... $733,931 $655,339 $506,793 $427,552
======== ======== ======== ========
At March 31,
----------------------------------------------------
1993 1992
--------------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
--------------- --------- ---------- ---------
Mortgage Loans:
Residential:
One- to four-family...... $263,911 76.42% $305,495 78.84%
Multi-family............. 3,948 1.14 4,206 1.09
Commercial real estate..... 11,932 3.46 9,348 2.41
Construction and land...... 13,091 3.79 12,371 3.19
------ ---- ------ ----
Total mortgage loans... 292,882 84.81 331,420 85.53
------- ----- ------- -----
Commercial .................. 7,396 2.14 7,550 1.95
----- ----- ----- ----
Consumer Loans:
Home equity lines........ 33,492 9.70 35,096 9.06
Second mortgages......... 7,371 2.13 8,308 2.14
Other consumer loans..... 4,215 1.22 5,110 1.32
------ ---- ------ -----
Total consumer loans... 45,078 13.05 48,514 12.52
------ ----- ------ -----
Total loans receivable..... 345,356 100.00% 387,484 100.00%
====== ======
Less:
Allowance for loan
losses................. (3,524) (1,795)
Undisbursed proceeds of
construction mortgages
in process............. (810) (632)
Deferred loan origination
fees, net.............. (2,854) (2,876)
------- -------
Loans receivable, net...... 338,168 382,181
Mortgage loans held for
sale................... 20,253 18,592
------- -------
Loans receivable, net and
mortgage loans held for
sale..................... $358,421 $400,773
======== ========
</TABLE>
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<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
Family Family Real Estate and Land Commercial
------------ ----------- --------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
One year or less............................ $ 402 $ - $ 1,646 $ 10,776 $ 7,346
--------- --------- -------- -------- ---------
After one year:
More than one year to three years........ 2,756 125 6,129 15 2,891
More than three years to five years...... 7,099 104 12,549 - 3,658
More than five years to 10 years......... 81,661 566 2,890 608 1,011
More than 10 years to 20 years........... 224,022 2,551 1,767 8,143 145
More than 20 years....................... 297,920 1,452 586 7,250 -
-------- -------- --------- --------- -----------
Total due after one year................. 613,458 4,798 23,921 16,016 7,705
-------- ------ ------- ------- ------
Total amount due......................... $613,860 $ 4,798 $ 25,567 $ 26,792 $ 15,051
======== ======= ======== ======== ========
Total
Consumer Loans
------------- -----------
Amounts due:
One year or less............................ $ 29,955 $ 50,125
-------- ---------
After one year:
More than one year to three years........ 2,704 14,620
More than three years to five years...... 5,422 28,832
More than five years to 10 years......... 12,132 98,868
More than 10 years to 20 years........... 7,110 243,738
More than 20 years....................... 31 307,239
------- -------
Total due after one year................. 27,399 693,297
------- -------
Total amount due......................... $ 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>
71
<PAGE>
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-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
72
<PAGE>
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.
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 whereby 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,
73
<PAGE>
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.
74
<PAGE>
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.
75
<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 thirty 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.
76
<PAGE>
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 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."
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 ten 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. 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.
77
<PAGE>
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 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.
78
<PAGE>
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 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 loans-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 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.
79
<PAGE>
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 $665,000.
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 $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.
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
80
<PAGE>
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 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
81
<PAGE>
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.
Mixed Used - Retail and Office, Fall River, Massachusetts. A $2.1
---------------------------------------------------------
million first mortgage loan was made by the Bank in 1989 and is 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 twenty 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.
82
<PAGE>
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
---------------------------- ---------------------------- -----------------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
------------- ---------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans: (Dollars in thousands)
One- to four-family....... 8 $269 33 $2,493 24 $1,589
Multi-family.............. 1 206 3 289 - -
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
--- ---- --- ------ --- ------
Commercial Loans............. - - 2 26 - -
--- --- --- ---- --- ---
Consumer Loans:
Home equity lines......... 6 174 15 495 16 231
Second mortgages.......... 1 1 5 157 - -
Other consumer loans...... 1 1 8 14 4 12
--- --- --- ----- --- ----
Total consumer loans: 8 176 28 666 20 243
--- ---- --- ----- --- -----
Total loans.................. 19 $1,131 67 $3,702 46 $2,100
=== ====== === ====== === ======
Delinquent loans to loans
receivable, net........... 0.16% 0.51% 0.33%
<CAPTION>
At March 31, 1996
---------------------------
90 Days or More
---------------------------
Principal
Number Balance
of Loans of Loans
------------- ---------
<S> <C> <C>
Mortgage Loans:
One- to four-family....... 31 $2,469
Multi-family.............. 3 334
Commercial real estate.... - -
Construction and land..... - -
--- ---
Total mortgage loans.... 34 2,803
--- ------
Commercial Loans............. 1 87
--- ----
Consumer Loans:
Home equity lines......... 12 956
Second mortgages.......... 12 196
Other consumer loans...... 4 3
--- -----
Total consumer loans: 28 1,155
--- ------
Total loans.................. 63 $4,045
=== ======
Delinquent loans to loans
receivable, net........... 0.63%
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1995 At March 31, 1994
------------------------------------------------------------ --------------------------------
60-89 Days 90 Days or More 60-89 Days
---------------------------- ----------------------------
Principal Principal Principal
Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans: (Dollars in thousands)
One- to four-family....... 20 $1,044 29 $2,501 18 $768
Multi-family.............. 1 76 1 51 - -
Commercial real estate.... - - 1 85 - -
Construction and land..... - - - - - -
- - - - - -
Total mortgage loans.... 21 1,120 31 2,637 18 768
-- ----- -- ----- -- -----
Commercial Loans............. 1 3 - - 2 20
--- ----- --- --- --- -----
Consumer Loans:
Home equity lines......... 11 354 12 386 15 637
Second mortgages.......... 2 46 - - - -
Other consumer loans...... 4 12 5 10 2 14
-- -- -- ----- -- ------
Total consumer loans.... 17 412 17 396 17 651
-- --- -- ----- -- ------
Total loans.................. 39 $1,535 48 $3,033 37 $1,439
== ====== == ====== == ======
Delinquent loans to loans,
receivable, net........... 0.31% 0.61% 0.35%
<CAPTION>
At March 31, 1994
---------------------------
90 Days or More
---------------------------
Principal
Number Balance
of Loans of Loans
------------- ---------
<S> <C> <C>
Mortgage Loans:
One- to four-family....... 43 $3,649
Multi-family.............. - -
Commercial real estate.... - -
Construction and land..... 1 26
- --
Total mortgage loans.... 44 3,675
-- -----
Commercial Loans............. 2 15
--- ------
Consumer Loans:
Home equity lines......... 14 483
Second mortgages.......... 3 34
Other consumer loans...... 6 14
-- ------
Total consumer loans.... 23 531
-- -----
Total loans.................. 69 $4,221
== ======
Delinquent loans to loans,
receivable, net........... 1.03%
</TABLE>
84
<PAGE>
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 1 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 includes loans receivable, net, excluding allowance for loan losses.
(4) Non-performing loans consist of all 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.
85
<PAGE>
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
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.
86
<PAGE>
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.
87
<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 1995 1994
------------------------------- ---------------------------- --------------------------------
Percent Percent Percent
of Loans of of
Percent of in Each Percent of Loans Percent of Loans
Allowance Category Allowance in Each Allowance in Each
to Total to Total to Total Category to Total Category
Amount Allowance Loans Amount Allowance to Total Amount Allowance to Total
Loans Loans
-------- --------- --------- ------- -------- ------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential...... $2,175 38.79% 86.23% $1,223 28.85% 85.34% $1,144 28.86% 84.81%
Commercial....... 1,195 21.31 3.59 1,265 29.84 3.90 1,063 26.82 3.49
----- ----- ---- ----- ----- ---- ----- ----- ----
Total......... 3,370 60.10 89.82 2,488 58.69 89.24 2,207 55.68 88.30
Commercial .......... 621 11.08 2.22 600 14.16 2.49 426 10.75 2.41
Consumer............. 829 14.79 7.96 473 11.16 8.27 454 11.45 9.29
Unallocated.......... 787 14.03 - 678 15.99 - 877 22.12 -
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses......... $5,607 100.00% 100.00% $4,239 100.00% 100.00% $3,964 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
At March 31,
----------------------------------------------------------------
1993 1992
------------------------------ --------------------------------
Percent Percent
of of Loans
Percent of Loans Percent of in Each
Allowance in Each Allowance Category
to Total Category to Total to Total
Amount Allowance to Total Amount Allowance Loans
Loans
------- ---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential...... 1,149 32.60% 81.35% $ 689 38.38% 83.12%
Commercial....... 941 26.70 3.46 205 11.42 2.41
--- ----- ---- --- ----- ----
Total......... 2,090 59.30 84.81 894 49.80 85.53
Commercial .......... 383 10.87 2.14 218 12.14 1.95
Consumer............. 559 15.86 13.05 402 22.40 12.52
Unallocated.......... 492 13.97 - 281 15.66 -
----- ------ ------ ------ ------- ------
Total allowance
for loan
losses......... $3,524 100.00% 100.00% $1,795 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
88
<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
conducts 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 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 will be greater than 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.
89
<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 June 30, At March 31,
----------------------- -----------------------------------------------------------------------
1996 1996 1995 1994
----------------------- --------------------- --------------------- -----------------------
Amortized Fair Amortized Fair Amortized Fair mortized 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.
90
<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 June 30, At March 31,
------------------------------ -------------------------------
1996 1996
------------------------------ -------------------------------
Percent Percent
of of
Amortized Amortized Fair Amortized Amortized Fair
Cost Cost Value Cost Cost Value
--------- --------- ------ --------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Fixed-rate:
GNMA................................ $1,833 25.68% $1,917 $1,901 26.23% $1,998
FHLMC(1)............................ 377 5.28 394 401 5.53 423
----- ----- ----- ----- ------ -----
Total fixed-rate................. 2,210 30.96 2,311 2,302 31.76 2,421
------ ------ ------ ------ ------ ------
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
======== ======= ====== ======= ====== ======
<CAPTION>
At March 31,
-----------------------------------------------------------------
1995 1994
----------------------------- ----------------------------------
Percent Percent
of of
Amortized Amortized Fair Amortized Amortized Fair
Cost Cost Value Cost Cost Value
-------- --------- ------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Fixed-rate:
GNMA............................... $2,199 80.82% $2,283 $2,768 80.54% $2,885
FHLMC(1)........................... 522 19.18 535 669 19.46 710
----- ------ ----- ----- ------ -----
Total fixed-rate................ 2,721 100.00 2,818 3,437 100.00 3,595
------ ------ ------ ------ ------ ------
Adjustable-rate:
FHLMC(1)........................... - - - - - -
------ ------ ------ ------- ------ -------
Total mortgage-backed
securities held to maturity.. $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.
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>
91
<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 Ten Years
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- --------- -------- --------- -------- ---------
(Dollars in thousand)
<S> <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% $ - -%
------- ---- ------- ----- -------- ------
Total investment securities
held to maturity................... $11,997 6.52% $9,490 5.64% $ - -%
======= ==== ======= ===== ======== ======
Mortgage-backed securities:
Held to maturity:
Adjustable-rate:
FHLMC................................. $ - -% $ - -% $ - -%
Fixed-rate:
GNMA.................................. - - 41 8.00 309 8.21
FHLMC................................. - - - - 252 5.64
------- ------- ------- ------- -------- -------
Total mortgage-backed securities
held to maturity.......................... $ - -% $41 8.00% $561 7.06%
======= ==== ======= ===== ======== ======
<CAPTION>
At June 30, 1996
---------------------------------------------
More than Ten Years Total
-------------------- --------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities(1):
Held to maturity:
U.S. Government and agency obligations... $ - -% $21,487 6.13%
------- ------- ------- -------
Total investment securities
held to maturity................... $ - -% $21,487 6.13%
======= ======= ======= =======
Mortgage-backed securities:
Held to maturity:
Adjustable-rate:
FHLMC................................. $4,928 6.30% $4,928 6.30%
Fixed-rate:
GNMA.................................. 1,483 8.79 1,833 8.67
FHLMC................................. 125 5.64 377 5.64
------- ------- ------- -------
Total mortgage-backed securities
held to maturity.......................... $ 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.
92
<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 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>
93
<PAGE>
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>
94
<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
Ended June 30,
-----------------------------
1996
-----------------------------
Percent
Average of Total Weighted
Balance Average Average
Deposits Rate
-------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Business checking accounts........ $ 42,887 7.25% -%
Money market accounts............. 28,752 4.86 2.82
Savings accounts.................. 80,301 13.58 2.50
NOW accounts...................... 37,363 6.32 1.98
-------- ------
Total....................... 189,303 32.01 1.88
-------- ------
Certificate accounts(1):
Less than six months........... 169,854 28.72 5.61
Over six through 12 months..... 78,202 13.22 5.83
Over 12 through 36 months...... 64,454 10.90 6.19
Over 36 months................. 15,406 2.61 6.72
IRA and KEOGH.................. 74,159 12.54 6.21
-------- ------
Total certificate accounts.. 402,075 67.99 5.90
-------- ------
Total average deposits...... $591,378 100.00% 4.62%
======== ====== ====
<CAPTION>
For the Year Ended March 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ----------------------------- ---------------------------------
Percent Percent Percent
Average of Total Weighted Average of Total Weighted Average of Total Weighted
Balance Average Average Balance Average Average Balance Average Average
Deposits Rate Deposits Rate Deposits Rate
-------- ------- --------- -------- -------- --------- -------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business checking accounts........ $ 35,587 7.08% -% $ 28,783 7.23% -% $ 37,427 10.84% -%
Money market accounts............. 27,194 5.41 2.83 33,011 8.30 2.83 32,728 9.48 2.59
Savings accounts.................. 76,511 15.23 2.50 81,525 20.49 2.50 82,480 23.89 2.50
NOW accounts...................... 30,088 5.99 1.98 24,154 6.07 1.98 21,799 6.32 1.98
-------- ------ -------- ------ -------- ------
Total....................... 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........... 125,491 24.98 5.66 96,932 24.37 5.16 73,030 21.16 3.60
Over six through 12 months..... 64,743 12.89 5.91 40,981 10.30 5.75 26,512 7.68 4.01
Over 12 through 36 months...... 61,698 12.28 6.37 27,622 6.94 6.39 10,739 3.11 4.42
Over 36 months................. 14,558 2.90 6.74 7,850 1.97 6.78 2,166 0.63 5.22
IRA and KEOGH.................. 66,487 13.24 6.17 56,998 14.33 5.12 58,294 16.89 4.14
-------- ------ -------- ------ -------- ------
Total certificate accounts.. 332,977 66.29 5.95 230,383 57.91 5.56 170,741 49.47 3.95
-------- ------ -------- ------ -------- ------
Total average deposits...... $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.
95
<PAGE>
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
--------------------------------------------------------------------- --------------
Less than One to Two to Three to Four to At June 30,
One Year Two years Three years Four years Five years 1996
--------- --------- ----------- ---------- ---------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............... $ - $ 255 $ - $ - $ - $ 255
4.01 to 5.00%............ 17,371 631 50 - - 18,052
5.01 to 6.00%............ 186,097 38,257 4,746 427 2,157 231,684
6.01 to 7.00%............ 76,742 14,569 17,785 4,531 5,701 119,328
7.01 to 8.00%............ 16,718 10,389 1,972 11,194 21 40,294
8.01 to 9.00%............ - - - 3 - 3
Over 9.01%............... - - - - - -
-------- ------- ------- ------- ------ --------
Total................. $296,928 $64,101 $24,553 $16,155 $7,879 $409,616
======== ======= ======= ======= ====== ========
<CAPTION>
At March 31,
-------------------------------------
1996 1995 1994
----------- ---------- --------
<S> <C> <C> <C>
Certificate accounts:
0 to 4.00%............... $ 253 $ 19,822 $136,815
4.01 to 5.00%............ 31,913 74,008 44,589
5.01 to 6.00%............ 178,891 91,477 2,187
6.01 to 7.00%............ 140,863 66,856 969
7.01 to 8.00%............ 40,027 28,198 907
8.01 to 9.00%............ 4 4 511
Over 9.01%............... - 169 223
-------- -------- --------
Total.................
$391,951 $280,534 $186,201
======== ======== ========
</TABLE>
96
<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, and furniture, fixtures and
equipment of the facility and the branch office. See "Business of the Bank -
Properties."
PROPERTIES
The Bank currently conducts its business through an administrative and
full service branch office and an operations office located in Fall River and
eleven 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
97
<PAGE>
construction costs for the Swansea Property are estimated to be approximately
$10 million. Once this project is completed, in late 1997, 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 "Business of the
Bank - Subsidiary Activity."
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Year Leasehold
Leased Leased Date of Improvements
or or Lease at
Location Owned Acquired Expiration 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 Drive)(2) Owned 1994 - 567
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>
98
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Year Leasehold
Leased Leased Date of Improvements
or or Lease at
Location Owned Acquired Expiration June 30,1996
- --------------------------------------- ---------- ------------ ----------------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Loan Origination Centers:
12 White's Path, Unit 7 Leased 1992 October 1996 (1) -
Yarmouth, MA 02664
62 Auburn Street Leased 1990 June 1997 -
Auburn, MA 01501
1325 Springfield Street Leased 1992 June 1997 (1) -
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.
99
<PAGE>
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.
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 Internal Revenue Service
("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
100
<PAGE>
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 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 Internal Revenue Code of 1986,
as amended (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.
101
<PAGE>
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 Internal Revenue 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 Internal Revenue Code. For taxable years beginning on or after January 1,
1999, the definition of state taxable income is modified to allow a deduction
for ninety-five percent of dividends received from stock where the Bank owns
fifteen percent 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.
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,
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<PAGE>
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 currently has under consideration various proposals to eliminate the
federal thrift charter and abolish the OTS. The outcome of such legislation is
uncertain. Therefore, the Bank is unable to determine the extent to which
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 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."
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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 - Asset/Liability
Management" and "- 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 proposed 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,
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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.
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
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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 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.
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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. 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. See "Risk Factors - Recapitalization of
SAIF and Its Impact on SAIF Premiums."
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.
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FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking 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.
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 BHC Act, subject to the prior approval of the OTS,
and to other activities authorized by OTS regulation. Recently proposed
legislation would treat 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
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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.
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."
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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>
Position(s) Held With the Director Term
Name Age(1) Bank(2) Since Expires
- ------------------------------ -------- -------------------------------------------- ---------- -------------------
<S> <C> <C> <C> <C>
Robert F. Stoico 56 Director, President and Chief Executive 1980 1998
Officer
Gilbert C. Oliveira 71 Director and Chairman of the Board 1960 1999
Thomas A. Rodgers, Jr. 82 Director and Vice Chairman of the Board 1963 1997
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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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.
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<PAGE>
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.
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.
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<PAGE>
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.
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 - $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 -
$600 (depending on the Committee) for each Committee meeting they attend.
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<PAGE>
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
$100,000.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Annual Compensation(1)
---------------------------------------------------
Other
Annual
Name and Principal Fiscal Compensation
Positions (2) Year Salary($) Bonus($) ($)(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert F. Stoico 1996 $282,045 $75,000 -
President and Chief Executive Officer
Kevin J. McGillicuddy 1996 96,846 8,000 -
Senior Vice President
Frederick R. Sullivan 1996 99,923 8,000 -
Senior Vice President
Terrence M. Tyrrell 1996 91,846 8,000 -
Senior Vice President and Treasurer
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
------------------------------------------------------------
Awards Payouts
------------------------------------------------------------
(i)
Securities
Restricted Underlying LTIP All Other
Name and Principal Stock Awards Options/SARs Payouts Compensation
Positions (2) ($)(3) (#)(4) ($)(5) ($)(6)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert F. Stoico - - - $149,364
President and Chief Executive Officer
Kevin J. McGillicuddy - - - 771
Senior Vice President
Frederick R. Sullivan - - - 16,167
Senior Vice President
Terrence M. Tyrrell - - - 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 Conversion, the Bank and the Company intend to enter into
employment agreements with Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell,
(individually, the "Executive"). These 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. These 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 proposed 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 such 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 benefits 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 agreement 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 agreement.
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
agreement. 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.
115
<PAGE>
Payments to the Executive under the Bank employment agreement 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 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 change in control of the Bank or
Company, the total amount of payments due under the 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 Contract. 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 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
following Conversion. 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
116
<PAGE>
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 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
117
<PAGE>
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 Internal Revenue
Code is $150,000.
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.
118
<PAGE>
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 (also known as a "rabbi trust") to hold Bank assets to
satisfy the obligations of the plan to participants and allows the rabbi 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 January 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 contribution's 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. There can be no assurance that the OTS will
permit the Company to make the loan to the ESOP, or guarantee and provide
additional collateral in the event the ESOP loan is obtained from a third party.
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 or completely if their service was terminated due to death,
early retirement, permanent disability or a change in 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
119
<PAGE>
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 has reserved 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 propriety
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.
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
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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.
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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.
Subject to stockholder approval, 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, if stockholder approval is obtained, 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.
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<PAGE>
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 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
The FIRREA requires 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.
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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, 9 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.
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 Price of the Estimated Price
Range(1) 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
Executive Officers as a
group (15 persons)....... $1,538,000 153,800 2.75% 153,800 2.06%
========== ======= ==== ======= ====
</TABLE>
- --------------------
(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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<PAGE>
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.
GENERAL
On August 2, 1996 the Bank's Board of Directors unanimously adopted,
and subsequently amended, subject to approval by the OTS, the Plan 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
_______________, 1996.
The Company filed an application with 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 Company's 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.
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<PAGE>
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 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. The Plan is
also filed as an Exhibit to the Registration Statement of which this Prospectus
is a part, copies of which may be obtained from the SEC. See "Additional
Information."
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 be
funded 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 its
community and thereby enables the Bank's community 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 its local community, 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 Bank's local community, including, but not limited to, grants or
donations to support housing assistance, scholarships, local education, not-for-
profit medical facilities, not for profit to community groups and other types of
organizations or civic minded 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 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
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<PAGE>
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 causes within the Bank's local community. 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 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 Bank's
community 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 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. It is
currently anticipated that the initial board of directors of the Foundation will
consist of the same individuals who are directors of the Company. A Nominating
Committee of the Board, 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. The members of the Foundation, who are compromised of its
board members will elect the directors at the annual meeting of the Foundation
from those nominated by the Nominating Committee. 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 and educational 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.
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<PAGE>
The members of the Foundation will be the board of directors of the
Foundation. 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, there 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 to
the Foundation and administrative support service. 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 tranaction restrictions set forth
in Sections 23A and 23B of the Federal Reserve Act.
The Company proposes to capitalize the Foundation with Company Common
Stock in an amount equal to 8.0% of the total amount of Common Stock to be 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, assuming 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
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<PAGE>
the stock donation, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
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, 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 and
educational 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 "Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
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independent accountants that an organization created for the above purposes
will qualify as a 501(c)(3) exempt organization under the Code, 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 outstanding 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
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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 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 18.90%,
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 carryforward any unused portion of the deduction for five years following the
year in which the contribution is made. 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 midpoint of the
Estimated Price Range, the Company estimates that substantially all of the
deduction should be deductible over the combined six-year period. However, no
assurances can be made that the Company will have sufficient pre-tax income over
the five year period 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
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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) 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 outstanding shares of Common Stock on all proposals
considered by stockholders of the Company; provided, however, that the OTS will
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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 (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 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
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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. 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 subscription funds will be promptly
refunded with interest at the Bank's passbook rate of interest, or be permitted
to decrease, increase 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 _______________, 1998.
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 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. Accordingly, the
Bank has not pursued lending or investment activities and has controlled its
asset growth, in part, as a result of its being unable to engage in such
activities or growth and retain its status as a "well capitalized" institution
pursuant to OTS regulatory capital requirements. 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
corresponds to 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-
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capitalized" pursuant to OTS regulations. 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 $84.5 million or a ratio of GAAP capital to
adjusted assets, on a pro forma basis, of 10.04% 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
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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.
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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 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.
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Stock Pricing
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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 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 valuation, however, is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
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 valuation 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 valuation 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 such
shares in the Conversion will thereafter be able to sell such shares 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
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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 _______________, 1998.
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
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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 _______________, 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
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."
The number of shares to be issued and outstanding following the
Conversion may be increased by a number of shares equal to 8.0% of the Common
Stock issued in the Conversion to fund the Foundation. 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
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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 __________, 1996, the Voting Record Date, and
borrowers with loans outstanding as of ________________, 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 and voting record date (whichever may be applicable). Only to the
extent a depositor's mailing address or primary place of employment as of the
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 or primary place of
employment 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.
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
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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 year
preceding December 31, 1993.
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 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
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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
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received by Eligible Account Holders will be applied in partial satisfaction to
the subscription rights to be received as a Supplemental Eligible Account
Holder.
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 _______________, 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
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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
_______________, 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 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 the Common Stock
offered 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.
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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 agreement) to such selected dealers, any sponsoring dealers fees, and a
management fee to Sandler O'Neill of 1.5% for shares sold by a National
Association of Securities Dealers, Inc. ("NASD") 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, when combined with its reimbursable
expenses as financial and marketing advisor, shall not exceed an aggregate of
$10,000.
Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Bank may participate in the Offering in ministerial capacities
or providing clerical work in effecting a sales transaction. Other questions of
prospective purchasers will be directed to executive officers or registered
representatives. 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
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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.
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 (_______, 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.
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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 Individual Retirement Accounts ("IRAs") may use
the assets of such IRAs 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 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 to purchase shares of
Common Stock in the Subscription and Community Offerings, make such purchases
for the exclusive benefit of the IRAs.
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.
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.
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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 $300,0000 of 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 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.
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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 Subscription Expiration Date, unless extended by the Company with
the approval of the OTS. Such extensions may not be beyond _______________,
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
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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%;
(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.
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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 1%, subject to paragraphs (3) and (4) 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 Adjusted Maximum number of shares; (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 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 and with preference to
institutional investors 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.
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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 _____________, 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, 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
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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. The Company and Bank have received an opinion issued by Keller stating
that, pursuant to Keller's valuation, Keller is of the opinion 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 unsubscribed
shares of Common Stock. 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 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.
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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. During the second and third years following the
Conversion, the Regional Director may permit stock repurchases in amounts
greater than 5% during a twelve-month period.
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.
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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 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.
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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 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
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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 24% 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.
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.
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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 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
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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 - Preferred
Stock," for the issuance or use of the shares of undesignated preferred stock
(the "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
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except on terms which the Board deems to be in the best interest of the Bank and
its then existing stockholders.
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.
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<PAGE>
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 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.
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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.
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.
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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 additional 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 The First
National Bank of Boston.
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.
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.
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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. 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,
however, 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 are available
without charge from the Bank.
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FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY (1)
Fall River, Massachusetts
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS (2)
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.........................................................48
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
___________
(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.
/s/ KPMG Peat Marwick LLP
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>
June 30, March 31,
----------------
Assets 1996 1996 1995
------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
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
------- ------- -------
47,521 46,418 41,697
Total retained earnings ------- ------- -------
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>
(Continued)
F-5
<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 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
activities (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.
(Continued)
F-7
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
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
(Continued)
F - 8
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 differenc
e 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 restructuring 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.
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
(Continued)
F - 9
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 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.
(Continued)
F - 10
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 "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.
(Continued)
F - 11
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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
== === === ===
<CAPTION>
March 31, 1996
-----------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
(unaudited)
<S> <C> <C> <C> <C>
Marketable equity securities $ 55 670 - 725
-- --- --- ---
Total investment securities available
for sale $ 55 670 - 725
== === === ===
<CAPTION>
March 31, 1995
-----------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
(unaudited)
<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.
(Continued)
F - 12
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
======= ==== === ======
<CAPTION>
March 31, 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 $ 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
======= === === ======
<CAPTION>
March 31, 1995
-----------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
(unaudited)
<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>
(Continued)
F - 13
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
====== === === =====
<CAPTION>
March 31, 1996
-----------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
(unaudited)
<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
====== === === =====
<CAPTION>
March 31, 1995
-----------------------------------------
Amortized Unrealized Unrealized Fair
cost gains losses value
---- ----- ------ -----
(unaudited)
<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>
(Continued)
F - 14
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
(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.
(Continued)
F - 15
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The following is a comparative summary of loans receivable classified by type:
<TABLE>
<CAPTION>
June 30, March 31,
-------------------
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.
The following table summarizes information regarding nonaccrual loans:
<TABLE>
<CAPTION>
June 30, March 31,
------------------
1996 1996 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Nonaccrual loans 3,702 4,045 3,033
======= ======= =======
</TABLE>
(Continued)
F - 16
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 June 30, 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>
(Continued)
F - 17
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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:
<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>
(Continued)
F - 18
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Office Properties and Equipment (In Thousands)
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
-----------------------
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>
June 30, 1996 March 31, 1996
Year ending March 31, --------------------- ---------------
--------------------- (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.
(Continued)
F - 19
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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 certifi-
cate 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%
======= ======= =======
(Continued)
</TABLE>
F - 20
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The remaining contractual maturities of certificate accounts are summarized
as follows:
<TABLE>
<CAPTION>
For the
three months For the
ended years ended March 31,
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.
Interest expense on deposits consisted of the following:
<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>
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>
(Continued)
F - 21
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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>
Year ending June 30, March 31,
--------------
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 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.
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.
(Continued)
F - 22
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
June 30, March 31,
-------------------
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)
<TABLE>
<CAPTION>
Income tax expense is summarized as follows:
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>
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>
(Continued)
F - 23
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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%
===== ===== ===== ===== =====
The following is an analysis of accrued income taxes:
<CAPTION>
June 30, March 31,
-------------------
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>
June 30, March 31,
-------------------
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>
(Continued)
F - 24
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
(Continued)
F - 25
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
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
an 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, respectively.
(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
(Continued)
F - 26
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
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.
(Continued)
F - 27
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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
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>
March 31,
June 30, --------------------------------------
1996 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 securi-
ties 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>
(Continued)
F - 28
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(14) Subsequent Event -- Plan of Conversion (Unaudited)
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 Fall River, Massachusetts and
its neighboring communities 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.
(Continued)
F - 29
<PAGE>
FIRST FEDERAL SAVINGS BANK OF AMERICA
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 - 30
<PAGE>
================================================================================
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.
------------------------------
TABLE OF CONTENTS
Page
----
Summary...............................................................
Selected Consolidated Financial and
Other Data of the Bank............................................
Recent Developments...................................................
Risk Factors..........................................................
FIRSTFED AMERICA BANCORP, INC.........................................
First Federal Savings Bank of America.................................
Regulatory Capital Compliance.........................................
Use of Proceeds.......................................................
Dividend Policy.......................................................
Market for the Common Stock...........................................
Capitalization........................................................
Pro Forma Data........................................................
First Federal Savings Bank of America and its Subsidiary Consolidated
Statements of Income..............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................
Business of the Bank..................................................
Federal and State Taxation............................................
Regulation............................................................
Management of the Company.............................................
Management of the Bank................................................
The Conversion........................................................
Restrictions on Acquisition of the Company
and the Bank......................................................
Description of Capital Stock of the Company...........................
Description of Capital Stock of the Bank..............................
Transfer Agent and Registrar..........................................
Experts...............................................................
Legal and Tax Opinions................................................
Additional Information................................................
Index of Consolidated Financial Statements............................
------------------------------
Until __________, 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 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.
7,015,000 Shares
FIRSTFED AMERICA BANCORP, INC.
(Proposed Holding Company for
First Federal Savings Bank of America)
COMMON STOCK
----------
PROSPECTUS
----------
November , 1996
Sandler O'Neill & Partners, L.P.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.(1)
<TABLE>
<CAPTION>
<S> <C>
OTS filing fee.................................. $ 14,400
SEC filing fee(1)............................... 30,044
NASD filing fee(1).............................. 9,213
Exchange listing fee(1)......................... 37,500
Printing, postage and mailing................... 235,000
Legal fees and expenses......................... 320,000
Accounting fees and expenses.................... 250,000
Appraiser's fees and expenses (including
business plan)................................ 31,000
Marketing fees and selling commissions(1)....... 1,125,800
Underwriter's expenses (including underwriters
counsel fees)(1)............................. 75,000
Proxy solicitation and record management
fees and expenses............................. 45,000
Transfer agent fees and expenses................ 15,000
Certificate printing............................ 5,000
Telephone, temporary help and other
equipment..................................... 20,000
Blue Sky fees and expenses...................... 15,000
Miscellaneous................................... 41,843
----------
TOTAL........................................... $2,269,800
==========
</TABLE>
- --------------------
(1) Actual expenses based upon the registration of 8,712,630 shares at $10.00
per share, including shares issued to The FIRSTFED Charitable Foundation.
All other expenses are estimated.
Item 14. Indemnification of Directors and Officers.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof)
<PAGE>
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses under this
Article TENTH, or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
<PAGE>
ELEVENTH:
- --------
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
Item 15. Recent Sales of Unregistered Securities
Not applicable.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits (Filed herewith unless otherwise noted)
1.1 Engagement Letter between First Federal Savings Bank of America and
Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Federal Stock Charter and
Bylaws of First Federal Savings Bank of America)*
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.*
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.*
3.3 Federal Stock Charter and Bylaws of First
Federal Savings Bank of America (See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of FIRSTFED AMERICA BANCORP, INC.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick, LLP re: State Tax Matters
10.1 Form of First Federal Savings Bank of America Employee Stock Ownership
Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 First Federal Savings Bank of America 1996 Supplemental Executive
Retirement Plan*
10.4 Form of Employment Agreement between First Federal Savings Bank of
America and certain executive officers*
10.5 Form of Employment Agreement between FIRSTFED AMERICA BANCORP, INC.
and certain executive officers*
10.6 Form of Change in Control Agreement between First Federal Savings Bank of
America and certain executive officers*
10.7 Form of Change in Control Agreement between FIRSTFED AMERICA BANCORP,
INC. and certain executive officers*
10.8 Form of First Federal Savings Bank of America Employee Severance
Compensation Plan*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Draft Form of The FIRSTFED Charitable Foundation Gift Instrument
99.2 Agreement Regarding Listing on a Securities Exchange
- --------------------------------
*Previously filed
<PAGE>
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes to furnish stock certificates
to or in accordance with the instructions of the respective purchasers of the
Common Stock, so as to make delivery to each purchaser promptly following the
closing under the Plan of Conversion.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act will be governed by the final adjudication of
such issue.
<PAGE>
CONFORMED
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Bristol, Commonwealth
of Massachusetts, on November 5, 1996.
FIRSTFED AMERICA BANCORP, INC.
By: /s/ Robert F. Stoico
----------------------------------------
Robert F. Stoico
Director, Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Date
---- ----
/s/ Robert F. Stoico November 5, 1996
- ------------------------------------------
Robert F. Stoico
Director, Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
/s/ Terrence M. Tyrrell November 5, 1996
- ------------------------------------------
Terrence M. Tyrrell
Senior Vice President, Chief Financial Officer
and Treasurer
(principal accounting and financial officer)
*
- --------------------------------------------
Gilbert C. Oliveira
Director
*
- -----------------------------------------
Thomas A. Rodgers, Jr.
Director
*
- ----------------------------------------
Richard W. Cederberg
Director
*
- -------------------------------------------
John S. Holden, Jr.
Director
<PAGE>
*
- -------------------------------------------
Dr. Paul A. Raymond
Director
*
- -------------------------------------------
Anthony L. Sylvia
Director
* Pursuant to the Power of Attorney filed on September 27, 1996, as Exhibit 24.1
to the S-1 Registration Statement of FIRSTFED AMERICA BANCORP, INC.
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
<TABLE>
<C> <S>
1.1 Engagement Letter between First Federal Savings Bank of America and
Sandler O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Federal Stock Charter and
Bylaws of First Federal Savings Bank of America)*
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.*
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.*
3.3 Federal Stock Charter and Bylaws of First Federal Savings Bank of America
(See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of FIRSTFED AMERICA BANCORP, INC.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of KPMG Peat Marwick, LLP re: State Tax Matters
10.1 Form of First Federal Savings Bank of America Employee Stock Ownership
Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 First Federal Savings Bank of America 1996 Supplemental Executive
Retirement Plan*
10.4 Form of Employment Agreement between First Federal Savings Bank of
America and certain executive officers*
10.5 Form of Employment Agreement between FIRSTFED AMERICA BANCORP, INC. and
certain executive officers*
10.6 Form of Change in Control Agreement between First Federal Savings Bank
of America and certain executive officers*
10.7 Form of Change in Control Agreement between FIRSTFED AMERICA BANCORP,
INC. and certain executive officers*
10.8 Form of First Federal Savings Bank of America Employee Severance
Compensation Plan*
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Draft Form of The FIRSTFED Charitable Foundation Gift
Instrument
99.2 Agreement Regarding Listing on a Securities Exchange
</TABLE>
__________________________________
* Previously filed
<PAGE>
EXHIBIT 1.2
7,015,000 Shares
(subject to increase up to 8,067,250 Shares
in the event of an oversubscription)
FIRSTFED AMERICA BANCORP, INC.
(a Delaware corporation)
Common Stock
(par value $0.01 per share)
AGENCY AGREEMENT
__________, 1996
Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
FIRSTFED AMERICA BANCORP, INC., a Delaware corporation (the "Company"), and
First Federal Savings Bank of America, a federally chartered mutual savings bank
(the "Savings Bank"), hereby confirm their agreement with Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill" or the "Agent") with respect to the offer and
sale by the Company of 7,015,000 shares (subject to increase up to 8,067,250
shares in the event of an oversubscription) of the Company's common stock, par
value $0.01 per share (the "Common Stock"). The shares of Common Stock to be
sold by the Company are hereinafter called the "Securities." In addition, as
described herein, the Company expects to contribute shares of Common Stock in an
amount equal to 8% of the shares of Common Stock sold in the Offerings (as
hereinafter defined) to the First Federal Savings Bank of America Foundation
(the "Foundation"), such shares hereinafter being referred to as the "Foundation
Shares."
The Securities are being offered in accordance with the plan of conversion
(the "Plan") adopted by the Board of Directors of the Savings Bank pursuant to
which the Savings Bank intends to convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank and issue all of its
stock to the Company. Pursuant to the Plan, the Company is offering to certain
of the Savings Bank's depositors and borrowers and to the Savings Bank's
employee stock ownership plan (the "ESOP") rights to subscribe for the
Securities in a subscription offering (the "Subscription Offering"). To
<PAGE>
-2-
the extent Securities are not subscribed for in the Subscription Offering, such
Securities may be offered to certain members of the general public, with
preference given to natural persons residing in the Savings Bank's Local
Community (as defined in the Plan) in a direct community offering (the
"Community Offering" and together with the Subscription Offering, as each may be
extended or reopened from time to time, the "Subscription and Community
Offering") to be commenced concurrently with the Subscription Offering. It is
currently anticipated by the Savings Bank and the Company that any Securities
not subscribed for in the Subscription and Community Offering will be offered,
subject to Section 2 hereof, in a syndicated community offering (the "Syndicated
Community Offering"). The Subscription and Community Offering and the
Syndicated Community Offering are hereinafter referred to collectively as the
"Offerings," and the conversion of the Savings Bank from mutual to stock form,
the acquisition of the capital stock of the Savings Bank by the Company and the
Offerings are hereinafter referred to collectively as the "Conversion." It is
acknowledged that the number of Securities to be sold in the Conversion may be
increased or decreased as described in the Prospectus (as hereinafter defined).
If the number of Securities is increased or decreased in accordance with the
Plan, the term "Securities" shall mean such greater or lesser number, where
applicable.
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, the Company has established the Foundation.
Immediately following the consummation of the Conversion, subject to the
approval of the establishment of the Foundation by the depositors of the Savings
Bank and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute newly issued shares of Common Stock in
an amount equal to 8% of the Securities sold in the Offering, or between 414,800
and 561,200 shares of Common Stock (subject to increase in certain circumstances
to 646,100 shares).
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-______) including a
prospectus for the registration of the Securities and the Foundation Shares
under the Securities Act of 1933, as amended (the "1933 Act"), has filed such
amendments thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective, and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectus constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein, if any, and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the 1933 Act, as from time to time amended
or supplemented pursuant to the 1933 Act or otherwise (the "1933 Act
Regulations")) are hereinafter referred to as the "Registration Statement" and
the "Prospectus," respectively, except that if any revised prospectus that shall
be used by the Company in connection with the Subscription and Community
Offering or the Syndicated Community Offering which differs from the Prospectus
on file with the Commission at the time the Registration Statement becomes
effective (whether or not such revised prospectus is required to be filed by the
Company pursuant to Rule 424(b) of the 1933 Act
<PAGE>
-3-
Regulations), the term "Prospectus" shall refer to such revised prospectus from
and after the time it is first provided to the Agent for such use.
Concurrently with the execution of this Agreement, the Company is
delivering to the Agent copies of the Prospectus of the Company to be used in
the Subscription and Community Offering. Such Prospectus contains information
with respect to the Savings Bank, the Company and the Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Savings Bank jointly and severally represent and
warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company and the Savings Bank, threatened by the Commission. At the time
the Registration Statement became effective and at the Closing Time
referred to in Section 2 hereof, the Registration Statement complied and
will comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading. The Prospectus, at the date hereof does not and at the Closing
Time referred to in Section 2 hereof will not, include an untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
-------- -------
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the Agent furnished
to the Company in writing by the Agent expressly for use in the
Registration Statement or Prospectus (the "Agent Information," which the
Company and the Savings Bank acknowledge appears only in the sections
captioned "Market for Common Stock," and "The Conversion -Marketing and
Underwriting Arrangements," and " - Syndicated Community Offering" of the
Prospectus).
(ii) The Company has filed with the Office of Thrift Supervision,
Department of the Treasury (the "OTS") the Company's application for
approval of its acquisition of the Savings Bank (the "Holding Company
Application") on Form H-(e)1-S promulgated under the savings and loan
holding company provisions of the Home Owners' Loan Act (the "HOLA") and
the regulations promulgated thereunder. The Company has received written
notice from the OTS of its approval of the acquisition of the Savings Bank,
such approval remains in full force and effect and no order has been issued
by the OTS suspending or revoking such approval and no proceedings therefor
have been initiated or, to the knowledge of the Company or the Savings
Bank, threatened by the OTS. At the date of such approval, the Holding
<PAGE>
-4-
Company Application complied in all material respects with the applicable
provisions of HOLA and the regulations promulgated thereunder.
(iii) Pursuant to the rules and regulations of the OTS governing the
conversion of federally chartered mutual savings banks to stock form (the
"Conversion Regulations"), the Savings Bank has filed with the OTS an
application for conversion on Form AC, and has filed such amendments
thereto and supplementary materials as may have been required to the date
hereof (such application, as amended to date, if applicable, and as from
time to time amended or supplemented hereafter, is hereinafter referred to
as the "Conversion Application"), including copies of the Savings Bank's
Proxy Statement, to be dated on or about ____________ , 1996, relating to
the Conversion (the "Proxy Statement"), and the Prospectus. The OTS has,
by letter dated _____________, 1996, approved the Conversion Application,
such approval remains in full force and effect and no order has been issued
by the OTS suspending or revoking such approval and no proceedings therefor
have been initiated or, to the knowledge of the Company or the Savings
Bank, threatened by the OTS. At the date of such approval and at the
Closing Time referred to in Section 2, the Conversion Application complied
and will comply in all material respects with the applicable provisions of
the Conversion Regulations.
(iv) At the time of their use, the Proxy Statement and any other
proxy solicitation materials will comply in all material respects with the
applicable provisions of the Conversion Regulations and will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Savings Bank
will promptly file the Prospectus and any supplemental sales literature
with the OTS. The Prospectus and all supplemental sales literature, as of
the date the Registration Statement became effective and at the Closing
Time referred to in Section 2, complied and will comply in all material
respects with the applicable requirements of the Conversion Regulations
and, at or prior to the time of their first use, will have received all
required authorizations of the OTS for use in final form.
(v) The OTS has not, by order or otherwise, prevented or suspended
the use of the Prospectus or any supplemental sales literature authorized
by the Company or the Savings Bank for use in connection with the
Offerings.
(vi) Keller & Company, Inc., which prepared the valuation of the
Savings Bank as part of the Conversion, has advised the Company and the
Savings Bank that it satisfies all requirements for an appraiser set forth
in the Conversion Regulations and any interpretations or guidelines issued
by the OTS with respect thereto.
(vii) KPMG Peat Marwick LLP, the accountants who certified the
financial statements and supporting schedules of the Savings Bank included
in the Registration Statement, have advised the Company and the Savings
Bank that they are
<PAGE>
-5-
independent public accountants within the meaning of the Code of Ethics of
the American Institute of Certified Public Accountants; and such
accountants are, with respect to the Company, the Savings Bank and each
subsidiary of the Savings Bank, independent certified public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(viii) The only subsidiaries of the Savings Bank are _________________
(each a "Subsidiary" and collectively the "Subsidiaries").
(ix) The consolidated financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the consolidated financial position of the Company, the Savings Bank
and the Subsidiaries as at the dates specified and the results of
operations, retained earnings and cash flows for the periods specified and
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act Regulations and the Conversion Regulations;
except as otherwise stated in the Registration Statement, said financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis; and the supporting
schedules and tables included in the Registration Statement present fairly
the information required to be stated therein.
(x) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein (A) there has been no material adverse change in the financial
condition, results of operations, or business of the Company, the Savings
Bank and the Subsidiaries, taken as a whole, whether or not arising in the
ordinary course of business, and (B) except for transactions specifically
referred to or contemplated in the Prospectus, there have been no
transactions entered into by the Company, the Savings Bank or the
Subsidiaries, other than those in the ordinary course of business and
consistent with past practice, which are material with respect to the
Company, the Savings Bank and the Subsidiaries, taken as a whole.
(xi) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement; the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in the State of Massachusetts and in all other jurisdictions in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to
so qualify would not have a material adverse effect on the financial
condition, results of operations or business of the Company and its
subsidiaries, taken as a whole.
(xii) Upon consummation of the Conversion and the contribution of the
Foundation Shares as described in the Prospectus, the authorized, issued
and
<PAGE>
-6-
outstanding capital stock of the Company will be as set forth in the
Prospectus under "Capitalization" (except for subsequent issuances, if any,
pursuant to reservations, agreements or employee benefit plans specified in
the Prospectus); no shares of Common Stock have been or will be issued and
outstanding prior to the Closing Time referred to in Section 2; at the time
of Conversion, the Securities will have been duly authorized for issuance
and, when issued and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan and stated
on the cover page of the Prospectus, will be duly and validly issued and
fully paid and nonassessable; the terms and provisions of the Common Stock
and the capital stock of the Company conform to all statements relating
thereto contained in the Prospectus; the certificates representing the
shares of Common Stock will conform with the requirements of federal and
Delaware law; and the issuance of the Securities is not subject to
preemptive or other similar rights.
(xiii) The Savings Bank, as of the date hereof, is a federally
chartered savings bank in mutual form and upon consummation of the
Conversion will be a federally chartered savings bank in stock form, in
both instances with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Company, the Savings Bank and each Subsidiary has obtained
all licenses, permits and other governmental authorizations required for
the conduct of their respective businesses or required for the conduct of
their respective businesses as contemplated by the Holding Company
Application, except where the failure to obtain such licenses, permits or
other governmental authorizations would not have a material adverse effect
on the financial condition, results of operations or business of the
Company, the Savings Bank or the Subsidiaries; all such licenses, permits
and other governmental authorizations are in full force and effect and the
Company, the Savings Bank and each Subsidiary is in all material respects
in compliance therewith; neither the Company, the Savings Bank nor any
Subsidiary has received notice of any proceeding or action relating to the
revocation or modification of any such license, permit or other
governmental authorization which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a
material adverse effect on the financial condition, results of operations
or business of the Company, the Savings Bank or the Subsidiaries; and the
Savings Bank is in good standing under the laws of the United States and is
qualified to do business in any jurisdiction in which the failure to so
qualify would have a material adverse effect on the financial condition,
results of operations or business of the Company, the Savings Bank and the
Subsidiaries, taken as a whole.
(xiv) The deposit accounts of the Savings Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to the applicable limits
and, upon consummation of the Conversion, the liquidation account for the
benefit of eligible account holders and supplemental eligible account
holders will be duly established in accordance with the requirements of the
Conversion Regulations.
<PAGE>
-7-
(xv) Upon consummation of the Conversion, the authorized, issued and
outstanding capital stock of the Savings Bank is 1,000 shares of common
stock, par value $1.00 per share (the "Savings Bank Common Stock"); no
shares of Savings Bank Common Stock or of any Savings Bank preferred stock
have been or will be issued and outstanding prior to the Closing Time
referred to in Section 2; at the time of Conversion, the Savings Bank
Common Stock will have been duly authorized for issuance and, when issued
and delivered by the Savings Bank pursuant to the Plan against payment of
the consideration calculated as set forth in the Plan and as described in
the Prospectus, will be duly and validly issued and fully paid and
nonassessable, and all such Savings Bank Common Stock will be owned
beneficially and of record by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; the terms
and provisions of the Savings Bank Common Stock conform to all statements
relating thereto contained in the Prospectus; and the issuance of the
Savings Bank Common Stock is not subject to preemptive or similar rights.
(xvi) The Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the laws of the
State of Delaware with corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Foundation will not be a savings and loan holding company
within the meaning of 12 C.F.R. Section 574.2(q) as a result of the
issuance of shares of Common Stock to it in accordance with the terms of
the Plan and in the amounts as described in the Prospectus; no approvals
are required to establish the Foundation and to contribute the shares of
Common Stock thereto as described in the Prospectus other than those set
forth in the OTS approval of the Conversion Application; except as
specifically disclosed in the Prospectus and the Proxy Statement, there are
no agreements and/or understandings, written or oral, between the Company
and/or the Savings Bank and the Foundation with respect to the control,
directly or indirectly, over the voting or the acquisition or disposition
of the Foundation Shares; at the time of the Conversion, the Foundation
Shares will have been duly authorized for issuance and, when issued and
contributed by the Company pursuant to the Plan, will be duly and validly
issued and fully paid and non-assessable; and the issuance of the
Foundation Shares is not subject to preemptive or similar rights.
(xvii) Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and Prospectus, and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the failure to so qualify would have a material adverse effect on
the financial condition, results of operations or business of the Company,
the Savings Bank and the Subsidiaries, taken as a whole; the activities of
the Subsidiaries are permitted to subsidiaries of a federally chartered
savings bank by the rules, regulations, resolutions and practices of the
OTS; all of the issued and outstanding capital stock of the Subsidiaries
has been duly authorized and validly issued, is fully
<PAGE>
-8-
paid and nonassessable and is owned by the Savings Bank, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or
equitable claim.
(xviii) The Company and the Savings Bank have taken all corporate
action necessary for them to execute, deliver and perform this Agreement,
and this Agreement has been duly executed and delivered by, and is the
valid and binding agreement of, the Company and the Savings Bank,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting the enforceability of the
rights of creditors generally and judicial limitations on the right of
specific performance and except as the enforceability of indemnification
and contribution provisions may be limited by applicable securities laws.
(xix) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Time, except as otherwise may be indicated or contemplated therein,
none of the Company, the Savings Bank or any Subsidiary will have (A)
issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, except borrowings in the ordinary course of
business from the same or similar sources indicated in the Prospectus, or
(B) entered into any transaction or series of transactions that is or are
material in light of the business of the Company, the Savings Bank and the
Subsidiaries, taken as a whole, excluding the origination, purchase and
sale of loans or the purchase and sale of investment securities or
mortgage-backed securities in the ordinary course of business.
(xx) No approval of any regulatory or supervisory or other public
authority is required in connection with the execution and delivery of this
Agreement or the issuance of the Securities and the Foundation Shares that
has not been obtained and a copy of which has been delivered to the Agent,
except for the issuance of the federal stock charter by the OTS, and as may
be required under the securities laws of various jurisdictions.
(xxi) Neither the Company, the Savings Bank nor any Subsidiary is in
violation of its charter or bylaws (and the Savings Bank will not be in
violation of its charter or bylaws in stock form upon consummation of the
Conversion); and neither the Company, the Savings Bank nor the Subsidiaries
is in default (nor has any event occurred which, with notice or lapse of
time or both, would constitute a default) in the performance or observance
of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Savings Bank or the Subsidiaries is a
party or by which it or any of them may be bound, or to which any of the
property or assets of the Company, the Savings Bank or the Subsidiaries is
subject, except for such defaults that would not, individually or in the
aggregate, have a material adverse effect on the financial condition,
results of operations or business of the Company, the Savings Bank and the
Subsidiaries, taken as a whole.
<PAGE>
-9-
(xxii) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein do not and will
not conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company, the Savings Bank or the Subsidiaries
pursuant to, any contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which the Company, the Savings Bank or any
Subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company, the Savings Bank or any
Subsidiary is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the Company, the
Savings Bank and the Subsidiaries, taken as whole, nor will such action
result in any violation of the provisions of the charter or bylaws of the
Company, the Savings Bank or the Subsidiaries, or any applicable law,
regulation or administrative or court decree.
(xxiii) No labor dispute with the employees of the Company, the
Savings Bank or any Subsidiary exists or, to the knowledge of the Company
or the Savings Bank, is imminent; and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
principal suppliers or contractors that might be expected to result in any
material adverse change in the financial condition, results of operations
or business of the Company, the Savings Bank and the Subsidiaries, taken
as a whole.
(xxiv) Each of the Company, the Savings Bank and each Subsidiary has
good and marketable title to all properties and assets for which ownership
is material to the business of the Company, the Savings Bank or the
Subsidiaries and to those properties and assets described in the Prospectus
as owned by them, free and clear of all liens, charges, encumbrances or
restrictions, except such liens, charges, encumbrances or restrictions as
are described in the Prospectus or are not material in relation to the
business of the Company, the Savings Bank and the Subsidiaries, taken as a
whole; and all of the leases and subleases material to the business of the
Company, the Savings Bank and the Subsidiaries taken as a whole under which
the Company, the Savings Bank and the Subsidiaries hold properties,
including those described in the Prospectus, are valid and binding
agreements of the Company, the Savings Bank or the Subsidiaries,
enforceable in accordance with their terms, subject, as to enforceability,
to bankruptcy, insolvency, reorganization, moratorium and other laws of
general applicability relating to or affecting creditors' rights, and to
general principles of equity.
(xxv) Neither the Company, the Savings Bank nor any Subsidiary is in
violation of any directive from the OTS or the FDIC to make any material
change in the method of conducting their respective businesses; the Savings
Bank and the Subsidiaries have conducted and are conducting their
businesses so as to comply with all applicable statutes, regulations and
administrative and court decrees (including, without limitation, all
regulations, decisions, directives and orders of the OTS or the
<PAGE>
-10-
FDIC) except in such respects as would not have a material adverse effect
upon the Company, the Savings Bank and the Subsidiaries taken as a whole.
(xxvi) There is no action, suit or proceeding before or by any court
or government agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, the Savings Bank, or any Subsidiary, threatened,
against or affecting the Company, the Savings Bank or any Subsidiary (other
than as disclosed in the Registration Statement) which might result in any
material adverse change in the financial condition, results of operations
or business of the Company, the Savings Bank and the Subsidiaries, taken as
a whole, or which might materially and adversely affect the properties or
assets thereof or which might materially and adversely affect the
consummation of the Conversion; all pending legal or governmental
proceedings to which the Company, the Savings Bank or any Subsidiary is a
party or of which any of their respective properties or assets is the
subject that are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are, in the
aggregate, not material; and there are no contracts or documents of the
Company, the Savings Bank, or any Subsidiary which are required to be filed
as exhibits to the Registration Statement or the Conversion Application
which have not been so filed.
(xxvii) The Savings Bank has obtained opinions of its counsel,
Muldoon, Murphy & Faucette, with respect to the legality of the Securities
and the Foundation Shares to be issued and the federal income tax
consequences of the Conversion and the reorganization of the Company as
contemplated by the Holding Company Application, copies of which are filed
as exhibits to the Registration Statement; all material aspects of the
aforesaid opinions that are required to be disclosed are accurately
summarized in the Prospectus; the facts and representations upon which such
opinions are based are truthful, accurate and complete in all material
respects, and neither the Savings Bank nor the Company has taken or will
take any action inconsistent therewith.
(xxviii) The Savings Bank has obtained an opinion of KPMG Peat
Marwick, LLP with respect to the Massachusetts income tax consequences of
the Conversion and the federal income tax consequences of the Foundation,
copies of which are filed as exhibits to the Registration Statement; all
material aspects of the aforesaid opinions that are required to be
disclosed are accurately summarized in the Prospectus; the facts and
representations upon which such opinions are based are truthful, accurate
and complete in all material respects, and neither the Savings Bank nor the
Company has taken or will take any action inconsistent therewith.
(xxix) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xxx) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Savings Bank
included in the Prospectus meet or are exempt from all requirements of
federal, state or local law
<PAGE>
-11-
pertaining to lending, including, without limitation, truth in lending
(including the requirements of Regulations Z and 12 C.F.R. Part 226 and
Section 563.99), real estate settlement procedures, consumer credit
protection, equal credit opportunity and all disclosure laws applicable to
such loans, except for violations which, if asserted, would not result in a
material adverse effect on the financial condition, results of operations
or business of the Company, the Savings Bank and the Subsidiaries, taken as
a whole.
(xxxi) To the best knowledge of the Company and the Savings Bank,
none of the Company, the Savings Bank or any Subsidiary, or any of their
respective employees has made any payment of funds of the Company, the
Savings Bank or any Subsidiary as a loan for the purchase of the Common
Stock or made any other payment of funds prohibited by law, and no funds
have been set aside to be used for any payment prohibited by law.
(xxxii) The Company, the Savings Bank and each Subsidiary is in
compliance in all material respects with the applicable financial
recordkeeping and reporting requirements of the Currency and Foreign
Transaction Reporting Act of 1970, as amended, and the rules and
regulations thereunder.
(xxxiii) Neither the Company, the Savings Bank nor any Subsidiary, or
any properties owned or operated by the Company, the Savings Bank or any
Subsidiary, is in violation of or is liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse effect
on the business, financial condition or results of operations of the
Company, the Savings Bank and the Subsidiaries, taken as a whole. There
are no actions, suits or proceedings, or demands, claims, or notices
(including, without limitation, notices, demand letters or requests for
information from any environmental agency) instituted or pending, or to the
knowledge of the Company or the Savings Bank threatened, relating to the
liability of any property owned or operated by the Company, the Savings
Bank or any Subsidiary thereof, under any Environmental Law. For purposes
of this subsection, the term "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order, judgment, decree,
injunction or agreement with any regulatory authority relating to (i) the
protection, preservation or restoration of the environment (including,
without limitation, air, water, vapor, surface water, groundwater, drinking
water supply, surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxxiv) The Company, the Savings Bank and each Subsidiary has filed
all federal, state and local tax returns required to be filed and has made
timely
<PAGE>
-12-
payments of all taxes shown as due and payable in respect of such returns,
and no deficiency has been asserted with respect thereto by any taxing
authority.
(xxxv) The Company has received approval, subject to official notice
of issuance, to have the Securities quoted on the National Market of the
Nasdaq Stock Market, Inc. ("Nasdaq") effective at the Closing Time referred
to in Section 2 hereof.
(b) Any certificate signed by the President and Chief Executive Officer
and/or the Chief Financial Officer of the Company or the Savings Bank and
delivered to either of the Agent or counsel for the Agent shall be deemed a
representation and warranty by the Company or the Savings Bank of each as to the
matters covered thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY OF THE
SECURITIES; CLOSING.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company hereby
appoints Sandler O'Neill as its Agent to consult with and advise the Company,
and to assist the Company in its solicitation of subscriptions and purchase
orders for Securities, in connection with the Company's sale of the Securities
in the Subscription and Community Offering and the Syndicated Community
Offering. On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, Sandler O'Neill
accepts such appointment and agrees to use its best efforts to assist the
Company with its solicitation of subscriptions and purchase orders for
Securities in accordance with this Agreement; provided, however, that the Agent
-------- -------
shall not be obligated to take any action that is inconsistent with any
applicable laws, regulations, decisions or orders. The services to be rendered
by Sandler O'Neill pursuant to this appointment include the following: (i)
consulting as to the securities marketing implications of any aspect of the Plan
or related corporate documents, (ii) reviewing all offering documents, the
Prospectus, stock order forms and related offering materials (it being
understood that preparation and filing of such documents is the sole
responsibility of the Company and the Savings Bank and their counsel); (iii)
assisting in the design and implementation of a marketing strategy for the
Offerings; (iv) assisting Savings Bank management in scheduling and preparing
for meetings with potential investors and broker-dealers; and (v) providing such
other general advice and assistance as may be requested to promote the
successful completion of the Offerings.
The appointment of the Agent hereunder shall terminate upon the earliest
to occur of (a) forty-five (45) days after the last day of the Subscription and
Community Offering, unless the Company and the Agent agree in writing to extend
such period and the OTS agrees to extend the period of time in which the
Securities may be sold, (b) the receipt and acceptance of subscriptions and
purchase orders for all of the Securities, or (c) the completion of the
Syndicated Community Offering.
If any of the Securities remain available after the expiration of the
Subscription and Community Offering, at the request of the Company and the
Savings Bank, Sandler O'Neill will seek to form a syndicate of registered
brokers or dealers ("Selected Dealers")
<PAGE>
-13-
to assist in the solicitation of purchase orders of such Securities on a best
efforts basis, subject to the terms and conditions set forth in a selected
dealers' agreement (the "Selected Dealers' Agreement"), substantially in the
form set forth in Exhibit A to this Agreement. Sandler O'Neill will endeavor to
limit the aggregate fees to be paid by the Company and the Savings Bank to
Selected Dealers under any such Selected Dealers' Agreement to an amount
competitive with gross underwriting discounts charged at such time for
underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment; provided, however, that the aggregate
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fees payable to Sandler O'Neill and Selected Dealers shall not exceed 7% of the
aggregate Purchase Price (as defined in the Prospectus) of the Securities sold
by such Selected Dealers. Sandler O'Neill will endeavor to distribute the
Securities among the Selected Dealers in a fashion that best meets the
distribution objectives of the Company and the Savings Bank and the requirements
of the Plan and applicable law, which may result in limiting the allocation of
stock to certain Selected Dealers. It is understood that in no event shall
Sandler O'Neill be obligated to act as a selected dealer or to take or purchase
any Securities.
In the event the Company is unable to sell at least the Total Minimum of
Securities, as disclosed on the cover of the Prospectus, within the periods
herein provided, this Agreement shall terminate and the Company shall refund to
any persons who have subscribed for any of the Securities the full amount that
it may have received from them, together with interest as provided in the
Prospectus, and no party to this Agreement shall have any obligation to the
others hereunder, except for the obligations of the Company and the Savings Bank
as set forth in Sections 4, 6(a) and 7 hereof and the obligations of the Agent
as provided in Sections 6(b) and 7 hereof. Appropriate arrangements for placing
the funds received from subscriptions for Securities or other offers to purchase
Securities in special interest-bearing accounts with the Savings Bank until all
Securities are sold and paid for were made prior to the commencement of the
Subscription Offering, with provision for refund to the purchasers as set forth
above, or for delivery to the Company if all Securities are sold.
If at least the Total Minimum of Securities, as disclosed on the cover
of the Prospectus, are sold, the Company agrees to issue or have issued the
Securities sold and to release for delivery certificates for such Securities at
the Closing Time against payment therefor by release of funds from the special
interest-bearing accounts referred to above. The closing shall be held at the
offices of Muldoon, Murphy and Faucette, Washington, D.C., at 10:00 a.m., local
time, or at such other place and time as shall be agreed upon by the parties
hereto, on a business day to be agreed upon by the parties hereto. The Company
shall notify the Agent by telephone, confirmed in writing, when funds shall have
been received for all the Securities. Certificates for Securities shall be
delivered directly to the purchasers thereof in accordance with their
directions. Notwithstanding the foregoing, certificates for Securities purchased
through Selected Dealers shall be made available to the Agent for inspection at
least 48 hours prior to the Closing Time at such office as the Agent shall
designate. The hour and date upon which the Company shall release for delivery
all of the Securities, in accordance with the terms hereof, are herein called
the "Closing Time."
<PAGE>
-14-
The Company will pay any stock issue and transfer taxes that may be
payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in Section 4
hereof, the Agent will receive the following compensation for its services
hereunder: 1.56% of the aggregate Purchase Price (as defined in the Prospectus)
of the Securities sold in the Subscription Offering and in the Community
Offering.
With respect to any Securities sold by an NASD member firm (other than
Sandler O'Neill) under the Selected Dealers' Agreement in the Syndicated
Community Offering, the Company shall pay (i) the compensation payable to
Selected Dealers under any Selected Dealers' Agreement, (ii) any sponsoring
dealer's fees, and (iii) a management fee to Sandler O'Neill of one and one-half
percent (1.50%). Any fees payable to Sandler O'Neill for Securities sold by
Sandler O'Neill under any such agreement shall be limited to an aggregate of
1.56% of the aggregate Purchase Price of such Securities.
Notwithstanding the foregoing, no fee shall be payable with respect to
any Securities sold in the Subscription and Community Offering to (i) any
employee benefit plan of the Company or the Savings Bank established for the
benefit of their respective directors, officers or employees or (ii) any
director, officer or employee of the Company or the Savings Bank or any member
of such person's immediate family (which term shall mean parents, spouse,
siblings, children and grandchildren).
If this Agreement is terminated by the Agent in accordance with the
provisions of Section 9(a) hereof or the Conversion is terminated by the Company
or the Savings Bank, no fee shall be payable by the Company or the Savings Bank;
however, Sandler O'Neill shall be entitled to reimbursement of expenses in
accordance with Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in immediately
available funds at Closing Time, or upon the termination of this Agreement, as
the case may be. In recognition of the long lead times involved in the
conversion process, the Savings Bank agrees to make advance payments to the
Agent in the aggregate amount of $50,000, $25,000 of which has been previously
paid, and the remaining $25,000 of which shall be payable upon execution hereof,
which shall be credited against any fees or expenses payable hereunder.
SECTION 3. COVENANTS OF THE COMPANY AND THE SAVINGS BANK. The Company
and the Savings Bank covenant with the Agent as follows:
(a) The Company and the Savings Bank will prepare and file such amendments
or supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Proxy Statement as may hereafter be required by the 1933 Act
Regulations or the Conversion Regulations or as may hereafter be reasonably
requested by the Agent. Following completion of the Subscription and Community
Offering, in the event of a Syndicated Community Offering, the Company and the
Savings Bank will (i) promptly
<PAGE>
-15-
prepare and file with the Commission a post-effective amendment to the
Registration Statement relating to the results of the Subscription and Community
Offering, any additional information with respect to the proposed plan of
distribution and any revised pricing information or (ii) if no such post-
effective amendment is required, file with, or mail for filing to, the
Commission a prospectus or prospectus supplement containing information relating
to the results of the Subscription and Community Offering and pricing
information pursuant to Rule 424(c) of the 1933 Act Regulations, in either case
in a form acceptable to the Agent. The Company and the Savings Bank will notify
the Agent immediately, and confirm the notice in writing, (i) of the
effectiveness of any post-effective amendment to the Registration Statement, the
filing of any supplement to the Prospectus and the filing of any amendment to
the Conversion Application, (ii) of the receipt of any comments from the OTS or
the Commission with respect to the transactions contemplated by this Agreement
or the Plan, (iii) of any request by the Commission or the OTS for any amendment
to the Registration Statement or the Conversion Application or any amendment or
supplement to the Prospectus or for additional information, (iv) of the issuance
by the OTS of any order suspending the Offerings or the use of the Prospectus or
the initiation of any proceedings for that purpose, (v) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, and (vi) of the
receipt of any notice with respect to the suspension of any qualification of the
Securities for offering or sale in any jurisdiction. The Company and the
Savings Bank will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof at
the earliest possible moment.
(b) The Company and the Savings Bank will give the Agent notice of its
intention to prepare or file any amendment to the Conversion Application or
Registration Statement (including any post-effective amendment) or any amendment
or supplement to the Prospectus (including any revised prospectus that the
Company proposes for use in connection with the Syndicated Community Offering of
the Securities that differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations), will furnish the Agent with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement or use any
such prospectus to which the Agent or counsel for the Agent may reasonably
object.
(c) The Company and the Savings Bank will deliver to the Agent as many
signed copies and as many conformed copies of the Conversion Application and the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) as the
Agent may reasonably request, and from time to time such number of copies of
the Prospectus as the Agent may reasonably request.
(d) During the period when the Prospectus is required to be delivered, the
Company and the Savings Bank will comply, at their own expense, with all
requirements imposed upon them by the OTS, by the applicable Conversion
Regulations, as from time to time in force, and by the 1933 Act, the 1933 Act
Regulations, the Securities Exchange
<PAGE>
-16-
Act of 1934 (the "1934 Act") and the rules and regulations of the Commission
promulgated thereunder, including, without limitation, Rule 10b-6 under the 1934
Act, so far as necessary to permit the continuance of sales or dealing in shares
of Common Stock during such period in accordance with the provisions hereof and
the Prospectus.
(e) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Agent, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company
and the Savings Bank will forthwith amend or supplement the Prospectus (in form
and substance satisfactory to counsel for the Agent) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, and the Company and the Savings Bank will
furnish to the Agent a reasonable number of copies of such amendment or
supplement. For the purpose of this subsection, the Company and the Savings
Bank each will furnish such information with respect to itself as the Agent may
from time to time reasonably request.
(f) The Company and the Savings Bank will take all necessary action, in
cooperation with the Agent, to qualify the Securities for offering and sale
under the applicable securities laws of such states of the United States and
other jurisdictions as the Conversion Regulations may require and as the Agent
and the Company have agreed; provided, however, that the Company and the Savings
-------- -------
Bank shall not be obligated to file any general consent to service of process or
to qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. In each jurisdiction in which the Securities have been so qualified,
the Company and the Savings Bank will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement.
(g) The Company authorizes Sandler O'Neill and any Selected Dealers to act
as agent of the Company in distributing the Prospectus to persons entitled to
subscription rights and other persons having record addresses in the states or
jurisdictions set forth in a survey of the securities or "blue sky" laws of the
various jurisdictions in which the Offerings will be made (the "Blue Sky
Survey").
(h) The Company will make generally available to its security holders as
soon as practicable but no later than sixty (60) days from the close of the
period covered thereby an earnings statement (in compliance with the provisions
of Rule 158 of the 1933 Act Regulations) covering a twelve month period
beginning not later than the first day of the Company's fiscal quarter next
following the "effective date" (as defined in said Rule 158) of the Registration
Statement.
(i) During the period ending on the third anniversary of the expiration of
the fiscal year during which the closing of the transactions contemplated hereby
occurs, the Company will furnish to its stockholders as soon as practicable
after the end of each such fiscal year an annual report (including consolidated
statements of financial condition and
<PAGE>
-17-
consolidated statements of income, stockholders' equity and cash flows of the
Company, the Savings Bank and the Subsidiaries, certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), consolidated summary
financial information of the Company, the Savings Bank and the Subsidiaries for
such quarter in reasonable detail. In addition, such annual report and
quarterly consolidated summary financial information shall be made public
through the issuance of appropriate press releases at the same time or prior to
the time of the furnishing thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of the expiration of
the fiscal year during which the closing of the transactions contemplated hereby
occurs, the Company will furnish to the Agent (i) as soon as available, a copy
of each report or other document of the Company furnished generally to
stockholders of the Company or furnished to or filed with the Commission under
the 1934 Act or any national securities exchange or system on which any class of
securities of the Company is listed, and (ii) from time to time, such other
information concerning the Company as the Agent may reasonably request.
(k) The Company and the Savings Bank will conduct the Conversion (including
the formation and operation of the Foundation) in all material respects in
accordance with the Plan, the Conversion Regulations and all other applicable
regulations, decisions and orders thereunder, including all applicable terms,
requirements and conditions precedent to the Conversion imposed upon the Company
or the Savings Bank by the OTS.
(l) Each of the Company and the Savings Bank will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(m) The Company will file with the Commission such reports on Form SR as
may be required pursuant to Rule 463 of the 1933 Act Regulations.
(n) The Company will file a registration statement for the Common Stock
under Section 12(g) of the 1934 Act prior to completion of the Offerings and
will request that such registration statement be effective upon completion of
the Conversion. The Company will maintain the effectiveness of such
registration for not less than three years. The Company will file with the
Nasdaq all documents and notices required by Nasdaq National Market of companies
that have issued securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market.
(o) During the period beginning on the date hereof and ending on the later
of the third anniversary of the Closing Time or the date on which the Agent
receives full payment in satisfaction of any claim for indemnification or
contribution to which it may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company nor the Savings Bank shall, without the prior
written consent of the Agent, which consent shall not be unreasonably withheld,
take or permit to be taken any action that could result in the Savings Bank
common stock becoming subject to any security interest, mortgage, pledge, lien
or
<PAGE>
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encumbrance; provided, however, that this covenant shall be null and void if the
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Board of Governors of the Federal Reserve System or other Federal agency with
jurisdiction over the Savings Bank, by regulation, policy statement or general
or specific interpretive release or letter permits indemnification of the Agent
by the Savings Bank as contemplated by Section 6(a) hereof.
(p) The Company and the Savings Bank will take such actions and furnish
such information as are reasonably requested by the Agent in order for the Agent
to ensure compliance with the National Association of Securities Dealers, Inc.'s
("NASD") "Interpretation Relating to Free-Riding and Withholding."
(q) The Company and the Savings Bank will comply with the conditions
imposed by or agreed to with the OTS in connection with its approval of the
Holding Company Application and the Conversion Application including those
conditions relating to the establishment and the operation of the Foundation;
the Company and the Savings Bank shall use their best efforts to ensure that the
Foundation submits within the time frames required by applicable law a request
to the Internal Revenue Service to be recognized as a tax-exempt organization
under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"); the Company and the Savings Bank will take no action which will result
in the possible loss of the Foundation's tax-exempt status; and neither the
Company nor the Savings Bank will contribute any additional assets to the
Foundation until such time that such additional contributions will be deductible
for federal and state income tax purposes.
(r) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 180 days after the Closing Time, without the Agent's
prior written consent, any shares of Common Stock other than the Securities or
the Foundation Shares or other than in connection with any employee benefit plan
or arrangement described in the Prospectus.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Savings Bank jointly
and severally agree to pay all expenses incident to the performance of their
obligations under this Agreement, including but not limited to (i) the cost of
obtaining all securities and bank regulatory approvals, (ii) the printing and
filing of the Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the certificates for
the Securities to the purchasers in the Offerings, (iv) the fees and
disbursements of the Company's and the Savings Bank's counsel, accountants,
conversion agent and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the fees and disbursements of counsel in connection
therewith and in connection with the preparation of the Blue Sky Survey, (vi)
the printing and delivery to the Agent of copies of the Registration Statement
as originally filed and of each amendment thereto and the printing and delivery
of the Prospectus and any amendments or supplements thereto to the purchasers in
the Offerings and the Agent, (vii) the printing and delivery to the Agent of
copies of a Blue Sky Survey and (viii) the fees and expenses incurred in
connection with the listing of the Securities on the Nasdaq National Market. In
the event the Agent incurs any
<PAGE>
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such fees and expenses on behalf of the Savings Bank or the Company, the Savings
Bank will reimburse the Agent for such fees and expenses whether or not the
Conversion is consummated; provided, however, that the Agent shall not incur any
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substantial expenses on behalf of the Savings Bank or the Company pursuant to
this Section without the prior approval of the Savings Bank.
The Company and the Savings Bank jointly and severally agree to pay
certain expenses incident to the performance of the Agent's obligations under
this Agreement, including (i) the filing fees paid or incurred by the Agent in
connection with all NASD filings and (ii) all reasonable out-of-pocket expenses
incurred by the Agent relating to the Offerings, including, without limitation,
advertising, promotional, syndication and travel expenses and fees and expenses
of the Agent's counsel, up to an aggregate of $75,000. All fees and expenses to
which the Agent is entitled to reimbursement under this paragraph of this
Section 4 shall be due and payable upon receipt by the Company or the Savings
Bank of a written accounting therefor setting forth in reasonable detail the
expenses incurred by the Agent.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company, the Savings
Bank and the Agent agree that the issuance and sale of the Securities and all
obligations of the Agent hereunder are subject to the accuracy of the
representations and warranties of the Company and the Savings Bank herein
contained as of the date hereof and the Closing Time, to the accuracy of the
statements of officers and directors of the Company and the Savings Bank made
pursuant to the provisions hereof, to the performance by the Company and the
Savings Bank of their obligations hereunder, and to the following further
conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, no order suspending the Offerings or
authorization for final use of the Prospectus shall have been issued or
proceedings therefor initiated or threatened by the OTS and no order suspending
the sale of the Securities in any jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time, of Muldoon,
Murphy & Faucette, counsel for the Company and the Savings Bank, in form
and substance satisfactory to counsel for the Agent, providing that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has full corporate power and authority to own
its properties and to conduct its business as described in the
Registration Statement and Prospectus and to enter into and perform
its obligations under this Agreement.
<PAGE>
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(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the State of
Massachusetts and in each other jurisdiction in which the failure to
so qualify would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Savings Bank and the Subsidiaries, taken as a whole.
(iv) Upon consummation of the Conversion and the issuance of
Foundation Shares to the Foundation immediately upon completion
thereof, subject to compliance with all conditions imposed upon the
formation and contribution thereof by the OTS under the terms of any
written notice or order of approval of the Conversion Application or
the Holding Company Application, in an amount as described in the
Prospectus, the authorized, issued and outstanding capital stock of
the Company will be within the range as set forth in the Prospectus
under "Capitalization," and no shares of Common Stock have been issued
and outstanding prior to the Closing Time.
(v) The Securities and the Foundation Shares have been duly
and validly authorized for issuance and sale and, when issued and
delivered by the Company pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan, or contributed by
the Company pursuant to the Plan in the case of the Foundation Shares,
will be duly and validly issued and fully paid and non-assessable.
(vi) The issuance of the Securities and the Foundation Shares
is not subject to preemptive or other similar rights arising by
operation of law or, to the best of such counsel's knowledge and
information, otherwise.
(vii) The Savings Bank has been at all times since the date
hereof and prior to the Closing Time duly organized, and is validly
existing, under the laws of the United States of America as a
federally chartered savings bank of mutual form, and, at the Closing
Time, has become duly organized, validly existing and in good standing
under the laws of the United States of America as a federally
chartered savings bank of stock form, in both instances with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement
and the Prospectus; and the Savings Bank is duly qualified as a
foreign corporation in each jurisdiction in which the failure to so
qualify would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Savings Bank and the Subsidiaries, taken as a whole.
(viii) The Savings Bank is a member of the Federal Home Loan
Bank of New York and the deposit accounts of the Savings Bank are
insured by the FDIC up to the applicable limits.
<PAGE>
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(ix) Each of the Subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws
of the state of Massachusetts, has full corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material
adverse effect upon the financial condition, results of operations or
business of the Company, the Savings Bank and the Subsidiaries, taken
as a whole; the activities of each Subsidiary as described in the
Prospectus are permitted to subsidiaries of a savings and loan holding
company and of a federally chartered savings bank by the rules,
regulations, resolutions and practices of the OTS; all of the issued
and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is
owned directly by the Savings Bank free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim.
(x) The Foundation has been duly incorporated and is validly
existing as a non-stock corporation in good standing under the laws of
the State of Delaware with corporate power and authority to own, lease
and operate its properties and to conduct its business as described in
the Prospectus; the Foundation is not a savings and loan holding
company within the meaning of 12 C.F.R. Section 574.2(q) as a result
of the issuance of shares of Common Stock to it in accordance with the
terms of the Plan and in the amounts as described in the Prospectus;
no approvals are required to establish the Foundation and to
contribute the shares of Common Stock thereto as described in the
Prospectus other than those set forth in any written notice or order
of approval of the Conversion Application or the Holding Company
Application copies of which were provided to the Agent prior to the
Closing Time.
(xi) Upon consummation of the Conversion, all of the issued
and outstanding capital stock of the Savings Bank will be duly
authorized and validly issued and fully paid and nonassessable, and
all such capital stock will be owned of record by the Company free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
legal or equitable claim.
(xii) The OTS has duly approved the Holding Company
Application and the Conversion Application and no action is pending
or, to the best of such counsel's knowledge, threatened respecting the
Holding Company Application or the Conversion Application (including
therewith, the establishment of the Foundation and the contribution of
shares of Common Stock thereto) or the acquisition by the Company of
all of the Savings Bank's issued and outstanding capital stock; the
Holding Company Application and the Conversion Application comply as
to form in all material respects with the Conversion Regulations and
all other applicable requirements of the OTS, and, to best of such
counsel's knowledge, include all documents required to
<PAGE>
-22-
be filed as exhibits thereto, and is complete in all material
respects, excluding the Prospectus and any related marketing materials
filed as a part of the Holding Company Application or the Conversion
Application as to which no opinion need be given; the Company is duly
authorized to become a savings and loan holding company and is duly
authorized to own all of the issued and outstanding capital stock of
the Savings Bank to be issued pursuant to the Plan.
(xiii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, including the
establishment of the Foundation and the contribution thereto of the
Foundation Shares, (A) have been duly and validly authorized by all
necessary action on the part of each of the Company and the Savings
Bank, and this Agreement constitutes the legal, valid and binding
agreement of each of the Company and the Savings Bank, enforceable in
accordance with its terms, except as rights to indemnity and
contribution hereunder may be limited under applicable law (it being
understood that such counsel may avail itself of customary exceptions
concerning the effect of bankruptcy, insolvency or similar laws and
the availability of equitable remedies), (B) to the best of such
counsel's knowledge, will not conflict with or constitute a breach of,
or default under, and no event has occurred which, with notice or
lapse of time or both, would constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance, that,
individually or in the aggregate, would have a material adverse effect
on the financial condition, results of operations or business of the
Company, the Savings Bank and the Subsidiaries, taken as a whole, upon
any property or assets of the Company, the Savings Bank or any
Subsidiary pursuant to any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company, the
Savings Bank or any Subsidiary is a party or by which any of them may
be bound, or to which any of the property or assets of the Company,
the Savings Bank or any Subsidiary is subject, and (C) will not result
in any violation of the provisions of the charter or bylaws of the
Company, the Savings Bank or any Subsidiary.
(xiv) The Prospectus has been duly authorized by the OTS for
final use pursuant to the Conversion Regulations and no action has
been taken, or is pending or, to the best of such counsel's knowledge,
threatened, by the OTS to revoke such authorization.
(xv) The Registration Statement is effective under the 1933
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued under the 1933 Act or proceedings therefor
initiated or, to the best of such counsel's knowledge, threatened by
the Commission.
(xvi) No further approval, authorization, consent or other
order of any public board or body is required in connection with the
execution and delivery of this Agreement, the issuance of the
Securities and the Foundation
<PAGE>
-23-
Shares and the consummation of the Conversion, except as may be
required under the securities or Blue Sky laws of various
jurisdictions as to which no opinion need be rendered.
(xvii) At the time the Registration Statement became effective,
the Registration Statement (other than the financial statements,
appraisal and statistical data included therein, as to which no
opinion need be rendered) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(xviii) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies with
all applicable statutory requirements.
(xix) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against or
affecting the Company, the Savings Bank, any Subsidiary or the
Foundation that are required, individually or in the aggregate, to be
disclosed in the Registration Statement and Prospectus, other than
those disclosed therein, and all pending legal or governmental
proceedings to which the Company, the Savings Bank or the Subsidiaries
is a party or to which any of their property is subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, are, considered in the
aggregate, not material.
(xx) The information in the Prospectus describing the
liquidation account under the captions "The Conversion - Liquidation
Rights" and "-Effects of Conversion - Effect on Liquidation Rights,"
and the information under "Risk Factors - Establishment of the
Charitable Foundation," " -Recapitalization of SAIF and its Impact on
SAIF Premiums," "Financial Institution Regulation and Possible
Legislation," "- Certain Anti-takeover Provisions Which May Discourage
Takeover Attempts," " - Possible Adverse Income Tax Consequences of
the Distribution of Subscription Rights," "Dividend Policy," "Federal
and State Taxation," "Regulation," "The Conversion," "Restrictions on
Acquisition of the Company and the Bank," "Description of Capital
Stock of the Company" and "Description of Capital Stock of the Bank"
to the extent that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions, is complete
in all material respects.
(xxi) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto.
<PAGE>
-24-
(xxii) The Plan has been duly authorized by the Boards of
Directors of the Company and the Savings Bank and the OTS's approval
of the Plan remains in full force and effect; the Savings Bank's
charter has been amended, effective upon consummation of the
Conversion and the filing of such amended charter with the OTS, to
authorize the issuance of permanent capital stock; to the best of such
counsel's knowledge, the Company and the Savings Bank have conducted
the Conversion and the establishment and the funding of the Foundation
in all material respects in accordance with applicable requirements of
the Plan, the Conversion Regulations and all other applicable
regulations, decisions and orders thereunder, including all material
applicable terms, conditions, requirements and conditions precedent to
the Conversion imposed upon the Company or the Savings Bank by the OTS
and no order, to the best of such counsel's knowledge, has been issued
by the OTS to suspend the Offerings and, no action for such purpose
has been instituted or, to the best of such counsel's knowledge
threatened by the OTS; and, to the best of such counsel's knowledge,
no person has sought to obtain review of the final action of the OTS
in approving the Plan.
(xxiii) To the best of such counsel's knowledge and information,
the Company, the Savings Bank and each Subsidiary has obtained all
licenses, permits and other governmental approvals and authorizations
currently required for the conduct of their respective businesses as
described in the Registration Statement and Prospectus, except for
such licenses, permits, approvals or authorizations the failure of
which to have would not result in a material adverse change in the
financial condition, results of operations or the business of the
Company, the Savings Bank and the Subsidiaries, taken as a whole, and
all such licenses, permits and other governmental authorizations are
in full force and effect, and each of the Company, the Savings Bank
and each Subsidiary is in all material respects complying therewith.
(xxiv) Neither the Company, the Savings Bank nor any Subsidiary
is in violation of its charter upon consummation of the Conversion
nor, to the best of such counsel's knowledge, in default (nor has any
event occurred which, with notice or lapse of time or both, would
constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Savings Bank or any Subsidiary is
a party or by which the Company, the Savings Bank or any Subsidiary or
any of their respective property may be bound in any respect that
would have a material adverse effect upon the financial condition,
results of operations or business of the Company, the Savings Bank and
the Subsidiaries, taken as a whole.
(2) The favorable opinion, dated as of Closing Time, of Breyer &
Aguggia, counsel for the Agent, with respect to the matters set forth in
Section 5(b)(1)(i), (iv),
<PAGE>
-25-
(v), (vi) (solely as to preemptive rights arising by operation of law),
(xiii)(A), (xvii) and (xviii) and such other matters as the Agent may
reasonably require.
(3) In giving their opinions required by subsections (b)(l) and
(b)(2), respectively, of this Section, Muldoon, Murphy & Faucette and
Breyer & Aguggia shall each additionally state that nothing has come to
their attention that would lead them to believe that the Registration
Statement (except for the appraisal, financial statements and schedules and
other financial or statistical data included therein, as to which counsel
need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus (except for the appraisal, financial
statements and schedules and other financial or statistical data included
therein, as to which counsel need make no statement), at the time the
Registration Statement became effective or at Closing Time, included an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. In giving their opinions, Muldoon, Murphy & Faucette and
Breyer & Aguggia may rely as to certain matters of fact on certificates of
officers and directors of the Company and the Savings Bank and certificates
of public officials, and as to matters of Massachusetts law and Delaware
law upon the opinions of ___________ and Morris, Nichols, Arsht & Tunnell,
respectively, which opinions shall be in form and substance satisfactory to
the Agent, and Breyer & Aguggia may also rely as to certain matters on the
opinion of Muldoon, Murphy & Faucette.
(c) At the Closing Time referred to in Section 2, the Company and the
Savings Bank will have completed in all material respects the conditions
precedent to the Conversion in accordance with the Plan, the applicable
Conversion Regulations and all other applicable laws, regulations, decisions and
orders, including all terms, conditions, requirements and provisions precedent
to the Conversion imposed upon the Company or the Savings Bank by the OTS, the
FDIC, or any other regulatory authority other than those that the OTS or the
FDIC permit to be completed after the Conversion.
(d) At Closing Time, there shall not have been, since the date hereof or
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change in the financial
condition, results of operations or business of the Company, the Savings Bank
and the Subsidiaries, taken as a whole, whether or not arising in the ordinary
course of business, and the Agent shall have received a certificate of the
President and Chief Executive Officer of the Company and of the Savings Bank
and the chief financial or chief accounting officer of the Company and of the
Savings Bank, dated as of Closing Time, to the effect that (i) there has been no
such material adverse change, (ii) there shall have been no material transaction
entered into by the Company or the Savings Bank from the latest date as of which
the financial condition of the Company or the Savings Bank is set forth in the
Registration Statement and the Prospectus other than transactions referred to or
contemplated therein and transactions in the ordinary course of business, (iii)
neither the Company nor the Savings Bank shall have received from
<PAGE>
-26-
the OTS any direction (oral or written) to make any material change in the
method of conducting its business with which it has not complied (which
direction, if any, shall have been disclosed to the Agent) or which materially
and adversely might affect the financial condition, results of operations or
business of the Company and the Savings Bank taken as a whole, (iv) the
representations and warranties in Section 1 hereof are true and correct with the
same force and effect as though expressly made at and as of the Closing Time,
(v) the Company and the Savings Bank have complied with all agreements and
satisfied all conditions on their part to be performed or satisfied at or prior
to Closing Time, (vi) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been initiated or threatened by the Commission and (vii) no order suspending the
Offerings or the authorization for final use of the Prospectus has been issued
and no proceedings for that purpose have been initiated or threatened by the OTS
or the FDIC and no person has sought to obtain regulatory or judicial review of
the action of the OTS in approving the Plan in accordance with the Conversion
Regulations.
(e) At the time of the execution of this Agreement, the Agent shall have
received from KPMG Peat Marwick LLP a letter dated such date, in form and
substance satisfactory to the Agent, to the effect that (i) they are independent
certified public accountants with respect to the Company, the Savings Bank and
the Subsidiaries within the meaning of the 1933 Act, the 1933 Act Regulations
and the Conversion Regulations; (ii) it is their opinion that the consolidated
financial statements and supporting schedules included in the Registration
Statement and covered by their opinions therein comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the 1933 Act Regulations and the OTS Regulations; (iii) based upon limited
procedures as agreed upon by the Agent and KPMG Peat Marwick LLP and set forth
in detail in such letter, nothing has come to their attention which causes them
to believe that (A) the unaudited financial statements and supporting schedules
of the Savings Bank and the Subsidiaries included in the Registration Statement
do not comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act, the 1933 Act Regulations and the OTS Regulations
or are not presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and the Prospectus, (B) the
unaudited amounts included under the caption "Recent Developments" in the
Registration Statement do not agree with the amounts set forth in the unaudited
consolidated financial statements as of and for the dates and periods presented
under such caption or such unaudited amounts were not determined on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus, (C) at a specified date not
more than five (5) days prior to the date of this Agreement, there has been any
increase in the consolidated long term or short term debt of the Savings Bank
and the Subsidiaries or any decrease in consolidated total assets, allowance for
loan losses, total savings deposits or equity of the Savings Bank and the
Subsidiaries, in each case as compared with the amounts shown in the December
31, 1995 balance sheet included in the Registration Statement or, (D) during the
period from December 31, 1995 to a specified date not more than five days prior
to the date of this Agreement, there were any decreases, as compared with the
corresponding period in the preceding year, in net interest income, net interest
income after provision for loan losses, or net income of the Savings Bank and
<PAGE>
-27-
the Subsidiaries, except in all instances for increases or decreases that the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the examination referred to in their opinions and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information that are included in the
Registration Statement and Prospectus and that are specified by the Agent, and
have found such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other records of the
Company, the Savings Bank and the Subsidiaries identified in such letter.
(f) At Closing Time, the Agent shall have received from KPMG Peat Marwick
LLP a letter, dated as of Closing Time, to the effect that they reaffirm their
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been approved for listing on
the Nasdaq National Market upon notice of issuance.
(h) At Closing Time, the Agent shall have received a letter from Keller &
Company, Inc., dated as of the Closing Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been furnished with
such documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Securities and the Foundation Shares
as herein contemplated and related proceedings, or in order to evidence the
accuracy of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities and the Foundation
Shares as herein contemplated shall be satisfactory in form and substance to the
Agent and counsel for the Agent.
(j) At any time prior to Closing Time, (i) there shall not have occurred
any material adverse change in the financial markets in the United States or
elsewhere or any outbreak of hostilities or escalation thereof or other calamity
or crisis the effects of which, in the judgment of the Agent, are so material
and adverse as to make it impracticable to market the Securities or to enforce
contracts, including subscriptions or orders, for the sale of the Securities,
and (ii) trading generally on either the Nasdaq National Market or the New York
Stock Exchange shall not have been suspended, or minimum or maximum prices for
trading shall not have been fixed, or maximum ranges for prices for securities
shall not have been required, by either of such Exchange or Market or by order
of the Commission or any other governmental authority, and a banking moratorium
shall not have been declared by either Federal, New York or Massachusetts
authorities.
<PAGE>
-28-
SECTION 6. INDEMNIFICATION.
(a) The Company and the Savings Bank, jointly and severally, agree to
indemnify and hold harmless the Agent, each person, if any, who controls the
Agent, within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act, and its respective partners, directors, officers, employees and agents
as follows:
(i) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, related to or arising out of the
Conversion (including the establishment of the Foundation and the
contribution of the Foundation Shares thereto by the Company) or any action
taken by the Agent where acting as agent of the Company and the Savings
Bank or otherwise as described in Section 2 hereof; provided, however, that
-------- -------
this indemnity agreement shall not apply to any loss, liability, claim,
damage or expense found in a final judgment by a court of competent
jurisdiction to have resulted primarily from the bad faith, willful
misconduct or gross negligence of the Agent;
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, based upon or arising out of any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto), or the omission
or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (or any amendment or supplement
thereto) or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(iii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any claim
whatsoever described in clauses (i) or (ii) above, if such settlement is
effected with the written consent of the Company or the Savings Bank, which
consent shall not be unreasonably withheld; and
(iv) from and against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the fees and disbursements of
counsel chosen by the Agent), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation,
proceeding or inquiry by any governmental agency or body, commenced or
threatened, or any pending or threatened claim whatsoever described in
clauses (i) or (ii) above, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this paragraph (a)
- -------- -------
shall not apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission of
<PAGE>
-29-
a material fact required to be stated therein or necessary to make not
misleading any statements contained in the Registration Statement (or any
amendment thereto) or the Prospectus (or any amendment or supplement thereto)
made in reliance upon and in conformity with written information relating to the
Agent furnished to the Company or the Savings Bank by the Agent expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto), which information is included in the
sections captioned "Market for the Common Stock," "The Conversion - Marketing
and Underwriting Arrangements" and "- Syndicated Community Offering" of the
Prospectus. Notwithstanding the foregoing, the indemnification provided for in
this paragraph (a) shall not apply to the Savings Bank to the extent that such
indemnification by the Savings Bank would constitute an impermissible covered
transaction under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the Company, the
Savings Bank, their directors and trustees, each of their officers who signed
the Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or alleged untrue statements of a material
fact or omissions or alleged omissions of a material fact, made in the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with the
Agent Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
that it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to no more than one local counsel
in each separate jurisdiction in which any action or proceedings is commenced)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
(d) The Company and the Savings Bank also agree that the Agent shall not
have any liability (whether direct or indirect, in contract or tort or
otherwise) to the Savings Bank, the Company, its security holders or the Savings
Bank's or the Company's creditors relating to or arising out of the engagement
of the Agent pursuant to, or the performance by the Agent of the services
contemplated by, this Agreement, except to the extent that any loss, claim,
damage or liability is found in a final judgment by a court to have resulted
primarily from the Agent's bad faith, willful misconduct or gross negligence.
(e) In addition to, and without limiting, the provisions of Section
(6)(a)(iv) hereof, in the event that any Agent, any person, if any, who controls
the Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act or any of its partners, directors,
<PAGE>
-30-
officers, employees or agents is requested or required to appear as a witness or
otherwise gives testimony in any action, proceeding, investigation or inquiry
brought by or on behalf of or against the Company or the Savings Bank or any of
its respective affiliates or any participant in the transactions contemplated
hereby in which the Agent or such person or agent is not named as a defendant or
subject to an investigation or inquiry, the Company and the Savings Bank jointly
and severally agree to reimburse the Agent for all reasonable and necessary out-
of-pocket expenses incurred by it in connection with preparing or appearing as a
witness or otherwise giving testimony and to compensate the Agent in an amount
to be mutually agreed upon.
SECTION 7. CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company, the
Savings Bank and the Agent shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by said
indemnity agreement incurred by the Company or the Savings Bank and the Agent,
as incurred, in such proportions (i) that the Agent is responsible for that
portion represented by the percentage that the maximum aggregate marketing fees
appearing on the cover page of the Prospectus bears to the maximum aggregate
gross proceeds appearing thereon and the Company and the Savings Bank are
jointly and severally responsible for the balance or (ii) if, but only if, the
allocation provided for in clause (i) is for any reason held unenforceable, in
such proportion as is appropriate to reflect not only the relative benefits to
the Company and the Savings Bank on the one hand and the Agent on the other, as
reflected in clause (i), but also the relative fault of the Company and the
Savings Bank on the one hand and the Agent on the other (relative fault shall be
determined by reference to, among other things, whether the untrue statement of
a material fact or omission to state a material fact relates to information
supplied by the Company and Savings Bank or the Agent and the parties relative
intent, knowledge, and access to information), as well as any other relevant
equitable considerations; provided, however, that no person guilty of fraudulent
-------- -------
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Agent within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Agent, and
each director of the Company, each director of the Savings Bank, each officer of
the Company who signed the Registration Statement, and each person, if any, who
controls the Company or the Savings Bank within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company and the Savings Bank. Notwithstanding anything to
the contrary set forth herein, to the extent permitted by applicable law, in no
event shall the Agent be required to contribute an aggregate amount in excess of
the aggregate marketing fees to which the Agent is entitled and actually paid
pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement, or
contained in certificates of officers of the Company or the Savings Bank
submitted pursuant
<PAGE>
-31-
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of the Agent or any controlling person, or by
or on behalf of the Company, and shall survive delivery of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to the Company, at
any time at or prior to Closing Time (i) if there has been, since the date of
this Agreement or since the respective dates as of which information is given in
the Registration Statement, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company or the Savings Bank, or the Company, the Savings Bank
and the Subsidiaries, taken as a whole, whether or not arising in the ordinary
course of business; or (ii) if there has occurred any material adverse change in
the financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effects of
which, in the judgment of the Agent, are so material and adverse as to make it
impracticable to market the Securities or to enforce contracts, including
subscriptions or orders, for the sale of the Securities; or (iii) or if trading
generally on either the Nasdaq National Market or the New York Stock Exchange
has been suspended, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required, by either of such
Exchange or Market or by order of the Commission or any other governmental
authority, or if a banking moratorium has been declared by either Federal, New
York or Massachusetts authorities; or (iv) if any condition specified in Section
5 shall not have been fulfilled when and as required to be fulfilled; or (v) if
there shall have been such material adverse change in the condition or prospects
of the Company or the Savings Bank or the prospective market for the Company's
securities as in the Agent's good faith opinion would make it inadvisable to
proceed with the offering, sale or delivery of the Securities; or (vi) if in the
Agent's good faith opinion, the aggregate price for the Securities established
by Keller & Company, Inc. is not reasonable or equitable under then prevailing
market conditions; or (vii) if the Conversion is not consummated prior to
__________, 1997.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except
that the provisions of Section 4 relating to reimbursement of expenses and the
provisions of Sections 6 and 7 hereof shall survive any termination of this
Agreement.
SECTION 10. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Agent shall be directed to the Agent at Two World Trade Center, 104th Floor, New
York, New York 10048, attention of Mark B. Cohen, with a copy to Paul M.
Aguggia, Esq., Breyer & Aguggia, 1300 I Street, N.W., Suite 470 East,
Washington, D.C. 20005; notices to the Company and the Savings Bank shall be
directed to either of them at 1 North Main Street, Fall River, Massachusetts
02722, attention Mr. Robert F. Stoico, President, with a copy to Joseph G.
Passaic, Jr., Esq., Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue, N.W.,
Washington, D.C. 20016.
<PAGE>
-32-
SECTION 11. PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Agent, the Company and the Savings Bank and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Agent, the Company and the Savings Bank and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein or
therein contained. This Agreement and all conditions and provisions hereof and
thereof are intended to be for the sole and exclusive benefit of the Agent, the
Company and the Savings Bank and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. With the exception of
that certain agreement between the Savings Bank and Sandler O'Neill dated April
12, 1996 relating to records management services in connection with the Savings
Bank's Conversion, this Agreement represents the entire understanding of the
parties hereto with reference to the transactions contemplated hereby and
supersedes any and all other oral or written agreements heretofore made. No
waiver, amendment or other modification of this Agreement shall be effective
unless in writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said State without regard
to the conflicts of laws provisions thereof. Specified times of day refer to
Eastern time.
SECTION 14. SEVERABILITY. Any term or provision of this Agreement
that is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be considered
part of this Agreement, are for convenience and reference only, and are not to
be deemed to be full or accurate descriptions of the contents of any paragraph
or subparagraph.
<PAGE>
-33-
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Agent, the Company and the Savings Bank in accordance with its terms.
Very truly yours,
FIRSTFED AMERICA BANCORP, INC.
By:
----------------------------------
Robert F. Stoico
President and Chief Executive Officer
FIRST FEDERAL SAVINGS BANK OF
AMERICA
By:
----------------------------------
Robert F. Stoico
President and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
----------------------------------
<PAGE>
[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE APPEARS HERE]
Exhibit 5.0
November 4, 1996
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, Massachusetts 02720
Re: The offering of up to 7,015,000 shares of
FIRSTFED AMERICA BANCORP, INC. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the conversion of First Federal Savings Bank of America (the
"Bank"), a federally-chartered savings bank, from the mutual form of ownership
to the stock form of ownership (the "Conversion"), and the related subscription
offering, community offering and syndicated community offering (the "Offerings")
by FIRSTFED AMERICA BANCORP, INC., a Delaware corporation (the "Company"), of up
to 7,015,000 shares of its common stock, par value $.01 per share ("Common
Stock"), (8,067,250 shares if the Estimated Valuation Range is increased up to
15% to reflect changes in market and financial conditions following commencement
of the Offerings).
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on September 6, 1996 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange Commission initially on
September 27, 1996 and as amended on November 5, 1996 (the "Registration
Statement"); a consent of the sole incorporator of the Company; resolutions of
the Board of Directors of the Company (the "Board") concerning the organization
of the Company, the Offerings and designation of a Pricing Committee of the
Board, and the form of stock certificate approved by the Board to represent
shares of Common Stock. We have also been furnished a certificate of the
Delaware Secretary of State certifying the Company's good standing as a Delaware
corporation. Capitalized terms used but not defined herein shall have the
meaning given them in the Certificate of Incorporation.
<PAGE>
Board of Directors
November 4, 1996
Page 2
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying.
We understand that the Company will contribute funds to a wholly-owned
subsidiary of the Company (the "Subsidiary") which Subsidiary will loan to the
trust for the Bank's Employee Stock Ownership Plan (the "ESOP") the funds the
ESOP Trust will use to purchase shares of Common Stock for which the ESOP Trust
subscribes pursuant to the Offerings and for purposes of rendering the opinion
set forth in paragraph 2 below, we assume that: (a) the Board of Directors of
the Company has duly authorized the capital contribution to the Subsidiary for
purposes of making a loan to the ESOP Trust (the "Loan"); (b) the Board of
Directors of the Subsidiary has duly authorized the Loan to the ESOP Trust; (c)
the ESOP serves a valid corporate purpose for the Company; (d) the Loan will be
made at an interest rate and on other terms that are fair to the Subsidiary; (e)
the terms of the Loan will be set forth in customary and appropriate documents
including, without limitation, a promissory note representing the indebtedness
of the ESOP Trust to the Subsidiary as a result of the Loan; and (f) the closing
for the Loan and for the sale of Common Stock to the ESOP Trust will be held
after the closing for the sale of the other shares of Common Stock sold in the
Offerings, the receipt by the Company of the proceeds thereof and the
contribution by the Company to the Subsidiary of the funds sufficient to make
the Loan.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP Trust) will be duly authorized and, when such shares are sold and paid for
in accordance with the terms set forth in the Prospectus and such resolution of
the Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable.
<PAGE>
Board of Directors
November 4, 1996
Page 3
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We consent to the filing of this opinion as an exhibit to the Registration
Statement on Form S-1 and the Form AC and to the use of the name of our firm
where it appears in the Registration Statement, Form AC and Prospectus.
Very truly yours,
/s/ Muldoon, Murphy & Faucette
MULDOON, MURPHY & FAUCETTE
<PAGE>
Exhibit 5.1
[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL APPEARS HERE]
November 4, 1996
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with (i) the conversion of First Federal Savings Bank of America
(the "Bank"), from the mutual form of ownership to stock form of ownership (the
"Conversion"), and (ii) the subscription and community offering (the
"Offering"), in connection with the Conversion, by FIRSTFED AMERICA BANCORP,
INC., a Delaware corporation (the "Company"), of up to 8,067,250 shares of its
common stock, par value $.01 per share (the "Common Stock").
In connection with your request for our opinion, you have provided to us,
and we have reviewed, the Company's certificate of incorporation (the "Company
Certificate of Incorporation"), its by-laws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering (the
"Registration Statement"), including the prospectus constituting a part
<PAGE>
Muldoon, Murphy & Faucette
November 4, 1996
Page 2
thereof (the "Prospectus"), a consent of the sole incorporator of the Company,
resolutions of the Board of Directors of the Company (the "Board") concerning,
inter alia, the organization of the Company, the Offering, the designation of
- ----- ----
a Pricing Committee of the Board (the "Pricing Committee"), and the form of
stock certificate approved by the Board to represent shares of Common Stock.
We have also obtained certificates of the Delaware Secretary of State as to
the Company's good standing as Delaware corporations. Capitalized terms used
but not defined herein shall have the meanings given them in the Company
Certificate of Incorporation.
We understand that a wholly-owned subsidiary of the Company (the
"Subsidiary") will loan to the Bank's Employee Stock Ownership Plan (the "ESOP")
the funds the ESOP will use to purchase the shares of Common Stock for which the
ESOP has subscribed as part of the Offering. The Subsidiary will receive the
funds necessary to make such loan by way of a capital contribution by the
Company to the Subsidiary (the "Capital Contribution"). In this regard, we have
assumed, for purposes of rendering the opinion set forth in paragraph 2 below,
that: (a) the board of directors of the Subsidiary has duly authorized the loan
to the ESOP (the "Loan") and the Board has duly authorized the Capital
Contribution; (b) the Loan serves a valid corporate purpose of the Subsidiary
and the Capital Contribution serves a valid corporate purpose of the
<PAGE>
Muldoon, Murphy & Faucette
November 4, 1996
Page 3
Company; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Subsidiary; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Subsidiary as a result of
the Loan; and (e) the Capital Contribution, the closing for the Loan and for the
sale of Common Stock to the ESOP will be held after the closing for the sale of
the other shares of Common Stock sold in the Offering and the receipt by the
Company of the proceeds thereof.
We call your attention to the fact that the opinions expressed herein are
limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Company, the Offering, or the
Conversion, including, without limitation, those applicable to federally insured
savings banks or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
<PAGE>
Muldoon, Murphy & Faucette
November 4, 1996
Page 4
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offering, the Common
Stock to be issued in the Offering (including the shares to be issued to the
ESOP) will be duly authorized and, when such shares are sold and paid for in
accordance with the terms set forth in the Prospectus and such resolution of the
Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and nonassessable, with no personal liability for the payment of the Company's
debts arising solely by virtue of the ownership thereof; such issuance and sale
will not be in violation of or subject to any preemptive rights provided for by
Delaware law or by the Company Certificate of Incorporation.
The following provisions of the Company Certificate of Incorporation may
not be given effect by a court applying Delaware law, but in our opinion the
failure to give effect to such provisions will not affect the duly authorized,
validly issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection
<PAGE>
Muldoon, Murphy & Faucette
November 4, 1996
Page 5
authorizes the Board to demand, and the provision of Section C.7 of Article
EIGHTH empowering the Board to determine the Fair Market Value of property
offered or paid for the Company's stock by an Interested Stockholder, to the
extent, if any, that a court applying Delaware law were to impose equitable
limitations upon the authority of the directors of the Company under such
provisions.
(b) Article NINTH of the Company Certificate of Incorporation, which
purports to permit the Board to consider the effect of any offer to acquire the
Company on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
------------------------------------
<PAGE>
Exhibit 8.0
November 4, 1996
Board of Directors
First Federal Savings Bank of America
One North Main Street
Fall River, Massachusetts 02720
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, Massachusetts 02720
Re: Certain Federal Tax Consequences of the Conversion of First Federal
Savings Bank of America from a Federally Chartered Mutual Savings Bank
to a Federally Chartered Stock Savings Bank and the Offer and Sale of
Common Stock of FIRSTFED AMERICA BANCORP, INC. (the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax consequences of
the proposed conversion of First Federal Savings Bank of America (the "Bank")
from a federally chartered mutual savings bank to a federally chartered capital
stock savings bank and the acquisition of the Bank's capital stock by FIRSTFED
AMERICA BANCORP, INC., a Delaware corporation (the "Holding Company"), pursuant
to the plan of conversion adopted on August 2, 1996, and amended on September
17, 1996, (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
November 4, 1996
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received certain standard representations of the Holding
Company and the Bank concerning the Holding Company and the Bank as well as the
transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the closing
of the Conversion. We will rely upon the accuracy of the Representations of the
Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided
by the Holding Company and the Bank are incorporated in this letter as part of
the statement of the facts.
First Federal Savings Bank of America, with an administrative office in
Fall River, Massachusetts, is a federally chartered mutual savings bank. As a
mutual savings bank, the Bank has never been authorized to issue stock.
Instead, the proprietary interest in the reserves and undivided profits of the
Bank belong to the deposit account holders of the Bank, hereinafter sometimes
referred to as "depositors." A depositor of the Bank has a right to share, pro
rata, with respect to the withdrawal value of his respective deposit account in
any liquidation proceeds distributed in the event the Bank is ever liquidated.
In addition, a depositor of the Bank is entitled to interest on his account
balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank, the
Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a federally-chartered capital stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized,
the Holding Company will acquire the stock of the Bank by purchase, in exchange
for the Conversion proceeds that are not permitted to be retained by the Holding
Company. The Holding Company will apply to the Office of Thrift Supervision
("OTS") to retain up to 50% of the proceeds received from the Conversion. The
aggregate sales price of the Common Stock issued in the Conversion will be based
on an independent appraiser's valuation of the estimated pro forma market value
of the Common Stock of the Converted Bank. The Conversion and sale of the
Common Stock will be subject to approval by the OTS and the approval of the
Voting Members.
<PAGE>
Board of Directors
November 4, 1996
Page 3
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Bank shall establish at the time
of Conversion a liquidation account in an amount equal to its net worth as of
the latest practicable date prior to Conversion. The liquidation account will
be maintained by the Bank for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their Savings
Accounts at the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the liquidation account balance, in relation
to his Savings Account balance on the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their Savings Accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the liquidation account, in the amount of the then
adjusted subaccount balance for his Savings Account then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of Savings
Accounts and other liabilities, or similar transaction with an FDIC institution,
in which the Bank is not the surviving institution, shall be deemed to be a
complete liquidation for this purpose. In such transactions, the liquidation
account shall be assumed by the surviving institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Bank intend to establish a charitable foundation that will qualify as an
exempt organization under Section 501(c)(3) of the Internal Revenue Code (the
"Foundation") and to donate to the Foundation 8.0% of the number of shares of
Common Stock sold in the Conversion. The establishment and funding of the
Foundation as part of the Conversion is subject to the approval of the voting
members of the Bank at the Special Meeting of Members. In the event that the
Foundation does not receive the prerequisite approval, the Bank may determine to
complete the Conversion without the Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Bank's
existing community reinvestment activities so as to allow the local community to
share in the growth and profitability of the Holding Company and the Converted
Bank over the long term.
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Bank's Local Community, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The Foundation
will annually distribute total grants and donations to assist charitable
organizations or to fund
<PAGE>
Board od Directors
November 4, 1996
Page 4
projects within its local community of not less than 5% of the average fair
value of the Foundation assets each year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity of
the Bank) deemed to be surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed $50 as
of the Eligibility Record Date or the Supplemental Eligibility Record
Date, then no amount of that individual's total deposits will be
excluded from participating in the liquidation account. The fair
market value of the deposit accounts of the Bank which have a balance
of less than $50 on the Eligibility Record Date or the Supplemental
Eligibility Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Bank will own all of
the outstanding interests in the liquidation account and will own such
interest solely by reason of their ownership of deposits in the Bank
immediately before the Conversion.
(d) After the Conversion, the Converted Bank will continue the business of
the Bank in the same manner as prior to the Conversion. The Converted
Bank has no plan or intention and the Holding Company has no plan or
intention to cause the Converted Bank to sell its assets other than in
the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in the
ordinary course of business.
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
<PAGE>
Board of Directors
November 4, 1996
Page 5
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of the
Bank immediately prior to the Conversion, plus the net proceeds from
the sale of the Converted Bank's common stock to the Holding Company
and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
Plans.
(h) The Bank, Converted Bank and the Holding Company are corporations
within the meaning of section 7701(a)(3) of the Internal Revenue Code
of 1986, as amended (the "Code").
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be issued or
acquired at a discount. However, shares may be given to certain
Directors and employees as compensation by means of the Employee
Plans. Compensation to be paid to such Directors and depositor-
employees will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Bank which will be assumed by
the Converted Bank and any liabilities to which the transferred assets
are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of section
368(a)(3)(A) of the Code.
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the
Conversion, the Converted Bank does not have any plan or intention to
issue additional shares of its stock following the transaction.
Further, no shares of preferred stock of the Converted Bank will be
issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital stock of the Converted Bank, nor will there be
any securities outstanding which are convertible into the capital
stock of the Converted Bank.
<PAGE>
Board of Directors
November 4, 1996
Page 6
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Bank utilizes a reserve for bad debts in accordance with section
593 and, following the Conversion, to the extent allowed under the
Code, the Converted Bank shall likewise utilize a reserve for bad
debts in accordance with section 593.
(p) The Bank currently satisfies the 60% "qualified assets" test of
section 7701(a)(19) of the Code. Management expects the Converted
Bank to be able to continue to satisfy the test in the future. The
Converted Bank will also satisfy the "qualified thrift lender" tests
set out in sections 301 and 303 of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Bank will each pay
expenses of the transaction attributable to them and will not pay any
expenses solely attributable to the depositors or to the Holding
Company shareholders.
(r) The exercise price of the subscription rights received by the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders, and
other holders of subscription rights to purchase Holding Company
Common Stock will be equal to the fair market value of the stock of
the Holding Company at the time of the completion of the Conversion as
determined by an independent appraisal.
(s) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Bank arise solely by
virtue of the fact that they are account holders in the Bank.
(t) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Bank in the ordinary course of its business and are
associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years. The Bank has neither generated nor carried forward a net
operating loss for federal tax purposes in the past ten tax years.
<PAGE>
Board of Directors
November 4, 1996
Page 7
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions of
the Internal Revenue Code of 1986, as amended, including applicable regulations
thereunder and current judicial and administrative authority. Any future
amendments to the Code or applicable regulations, or new judicial decisions or
administrative interpretations, any of which could be retroactive in effect,
could cause us to modify our opinion. No opinion is expressed herein with
regard to the federal, state, or city tax consequences of the Conversion under
any section of the Code except if and to the extent specifically addressed.
FEDERAL TAX OPINION
-------------------
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a depositor in
a mutual savings bank is more nominal than real, unlike that of a
shareholder of a corporation, the Conversion of the Bank from a mutual
savings bank to a stock savings bank is a tax-free reorganization
since it is a mere change in identity, form or place of organization
within the meaning of section 368(a)(1)(F) of the Code (see Rev. Rul.
80-105, 1980-1 C.B. 78). Neither the Bank nor the Converted Bank
shall recognize gain or loss as a result of the Conversion. The Bank
and the Converted Bank shall each be "a party to a reorganization"
within the meaning of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from the
Holding Company in exchange for shares of the Converted Bank's capital
stock or by the Holding Company upon the receipt of money from the
sale of its Common Stock (Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the Converted Bank
shall be the same as the basis of such assets in the hands of the Bank
immediately prior to the Conversion (Section 362(b) of the Code).
<PAGE>
Board of Directors
November 4, 1996
Page 8
(4) The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank held the
assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Bank on the
issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted Bank
in exchange for their deposit accounts in the Bank or to the other
depositors on the issuance to them of withdrawable deposit accounts
(Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a)). Gain realized, if any, by the
Eligible Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other depositors of the Bank will be the same as the basis of
their deposit accounts in the Bank surrendered in exchange therefor
(Section 358(a)(1) of the Code). The basis of the interests in the
liquidation account of the Converted Bank to be received by the
Eligible Account Holders of the Bank shall be zero (Rev. Rul. 71-233,
1971-1 C.B. 113). The basis of the Holding Company Common Stock to
its stockholders will be the purchase price thereof plus the basis, if
any, of nontransferable subscription rights (Section 1012 of the
Code). Accordingly, assuming the nontransferable subscription rights
have no value, the basis of the Common Stock to the Eligible Account
Holders and Supplemental Eligible Account Holders will be the amount
paid therefor. The holding period of the Common Stock purchased
pursuant to the exercise of subscription rights shall commence on the
date on which the right to acquire such stock was exercised (Section
1223(6) of the Code).
<PAGE>
Board of Directors
November 4, 1996
Page 9
Our opinion under paragraph (6) above is predicated on the representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs (6) and
(7) above assumes that the subscription rights to purchase shares of Common
Stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members have a fair market value of zero. We understand that
you have received a letter from Keller & Company, Inc. that the subscription
rights do not have any value. We express no view regarding the valuation of the
subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and the Holding
Company and/or the Converted Bank may be taxable on the distribution of the
subscription rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause
us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form AC
and Form S-1 Registration Statement of FIRSTFED AMERICA BANCORP, INC. and the
references to and summary of this opinion in such Form AC and Form S-1
Registration Statement.
Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE
MULDOON, MURPHY & FAUCETTE
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
November 1, 1996
Board of Directors
First Federal Savings Bank of America
One North Main Street
Fall River, MA 02720
Board of Directors
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, MA 02720
Ladies and Gentlemen:
This letter constitutes our opinion as to certain state income tax consequences
of the proposed conversion of First Federal Savings Bank of America (the "Bank")
from a federally chartered mutual savings bank to a federally chartered stock
savings bank followed by the acquisition of the Bank's capital stock by FIRSTFED
AMERICA BANCORP, INC. (the "Holding Company"), a Delaware corporation, pursuant
to the plan of conversion (the "Conversion").
The opinions contained herein are based solely on the FACTS and REPRESENTATIONS
stated in your letter dated September 24, 1996. All Section references are to
the Internal Revenue Code of 1986, as amended (the "Code") and Massachusetts
General Laws ("MGL") as in effect as of the date of this opinion. If any of the
FACTS and REPRESENTATIONS is not correct or complete, it is imperative that we
be informed in writing as this could have a material adverse effect on our
opinion.
STATEMENT OF FACTS
------------------
First Federal Savings Bank of America, with an administrative office in Fall
River, Massachusetts, is a federally chartered mutual savings bank. As a mutual
savings bank, the Bank has never been authorized to issue stock. Instead, the
proprietary interest in the reserves and undivided profits of the Bank belong to
the deposit account holders of the Bank, hereinafter sometimes referred to as
"depositors". A depositor of the Bank has a right to share, pro rata, with
respect to the withdrawal value of his respective deposit account in any
liquidation proceeds distributed in the event the Bank
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 2
is ever liquidated. In addition, a depositor of the Bank is entitled to interest
on his account balance as fixed and paid by the Bank.
Holding Company 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. Holding Company will have authorized capital stock consisting of 25
million shares of common stock ("Common Stock") and 1 million shares of
preferred stock. Only Common Stock will be issued in connection with the
Conversion. Holding Company will acquire the stock of the Bank 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.
DESCRIPTION OF THE CONVERSION
-----------------------------
In order to provide organizational and economic strength to the Bank, the Board
of Directors has adopted a plan of conversion (the "Plan of Conversion") whereby
the Bank will convert itself into a federally chartered stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. In connection with the Conversion, the Holding Company will issue
shares of its $0.01 par value Common Stock in Subscription and Community
Offerings. It is anticipated that all such shares of Common Stock not
subscribed for in the Subscription and Community Offerings will be offered to
the general public in a Syndicated Community Offering.
The aggregate sales price of the Common Stock issued in the Conversion will be
based on an independent appraiser's valuation of the estimated pro forma value
of the Common Stock of the Converted Bank. The Conversion and sale of the
Common Stock will be accomplished pursuant to the rules and regulations and will
be subject to the approval of the Office of the Thrift Supervision, Department
of the Treasury (the "OTS").
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 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 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")
("Local Eligible Account Holders"); (2) the Employee Plans, including the ESOP;
(3) depositors whose eligible savings 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 a date to be
determined, the voting record date ("Voting Record Date") for the special
meeting of members to vote on the
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 3
Conversion, and borrowers with loans outstanding as of a date to be determined
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"). 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.
REPRESENTATIONS
---------------
In connection with the proposed reorganization, the following representations
have been made to us by you and we have relied on them as an integral assumption
in reaching our conclusions:
1) The value of the withdrawable deposit accounts plus interests in the
liquidation account of the Converted Bank to be received under the
Plan of Conversion will, in each instance, be equal to the value of
the withdrawable deposit accounts (plus the related interest in the
residual equity of the Bank) deemed to be surrendered in exchange
therefor.
2) If an individual's total deposits in the Bank equal or exceed $50 as
of the Eligibility Record Date and/or the Supplemental Eligibility
Record Date, then no amount of that individual's total deposits will
be excluded from participation in the liquidation account. The value
of the deposit accounts of the Bank which have a balance of less than
$50 on the Eligibility Record Date or the Supplemental Eligibility
Record Date is less than 1% of the total value of all deposit accounts
of the Bank.
3) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Bank will own all
of the outstanding interests in the liquidation account and will own
such interest solely by reason of their ownership of deposits in the
Bank immediately before the Conversion.
4) After the Conversion, the Converted Bank will continue the business of
the Bank in the same manner as prior to the Conversion. The Converted
Bank has no plan or intention and the Holding Company has no plan or
intention to cause the Converted Bank to sell its assets other than in
the ordinary course of business.
5) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in
the ordinary course of business.
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 4
6) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
7) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of
the Bank immediately prior to the Conversion, plus the net proceeds
from the sale of the Converted Bank's common stock to the Holding
Company and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
and/or Stock Plans.
8) The Bank, Converted Bank and the Holding Company are corporations
within the meaning of section 7701(a)(3) of the Code.
9) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be issued or
acquired at a discount. However, shares may be given to certain
Directors and employees as compensation by means of the Employee
and/or Stock Plans that may be approved at the conversion or
subsequently thereto. Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
10) The value of the assets of the Bank, which will be transferred to
Converted Bank in the Conversion, will equal or exceed the sum of the
liabilities of the Bank which will be assumed by the converted Bank
and any liabilities to which the transferred assets are subject.
11) The Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of section
368(a)(3)(A) of the Code.
12) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the
Conversion, the converted Bank does not have any plan or intention to
issue additional shares of its stock following the transaction.
Further, no shares of preferred stock of the Converted Bank will be
issued and/or outstanding.
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 5
13) Upon the completion of the conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital stock of the Converted Bank, nor will there be
any securities outstanding which are convertible into the capital
stock of the Converted Bank.
14) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
15) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Bank will each pay
expenses of the transaction attributable to them and will not pay
any expenses solely attributable to the depositors or to the Holding
Company shareholders.
16) The exercise price of the subscription rights received by the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders, and
other holders of subscription rights to purchase Holding Company
Common Stock will be equal to the value of the stock of the Holding
Company at the time of the completion of the Conversion as determined
by an independent appraisal.
17) The proprietary interests of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Bank arise solely by
virtue of the fact that they are account holders in the Bank.
18) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
19) The liabilities of the Bank assumed by the Converted Bank plus the
liabilities, if any, to which the transferred assets are subject
were incurred by the Bank in the ordinary course of its business and
are associated with the assets transferred.
20) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years. The Bank has neither generated nor carried forward a net
operating loss for federal tax purposes in the past 5 tax years.
21) The money necessary for the ESOP to purchase the Stock will be lent
from a newly created subsidiary of Holding Company ("ESOP Loan
Subsidiary").
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 6
DISCUSSION
----------
FINANCIAL INSTITUTION EXCISE TAX
Bank is a federally chartered mutual savings bank subject to the Massachusetts
Financial Institution excise tax under MGL chapter 63, sections 1, 2, 2A, and 7.
Holding Company will be a Delaware chartered corporation subject to
Massachusetts excise tax under MGL chapter 63, section 39 or the excise imposed
under MGL chapter 63, section 38B(b) if Holding Company is classified as a
security corporation pursuant to that section. ESOP Loan Subsidiary will be a
Massachusetts domestic corporation subject to the Massachusetts Financial
Institution excise tax under MGL chapter 63, sections 1, 2, 2A and 7 whose
purpose is to loan money to the ESOP to enable the ESOP to purchase stock.
The Massachusetts Financial Institution excise tax provides that banks and
certain corporations are taxed on net income as defined in MGL chapter 63,
section 1, which provides that net income is equal to "gross income other than
ninety-five percent of dividends received in any taxable year beginning on or
after January first, nineteen hundred and ninety-nine from or on account of the
ownership of any class of stock if the financial institution owns fifteen
percent or more of the voting stock of the institution paying the dividend, less
the deductions, but not the credits allowable under the provisions of the
Internal Revenue Code, as amended and in effect for the taxable year. For
taxable years beginning on or after January first, nineteen hundred and ninety-
nine, the provisions of section 291 of said Code shall not apply; and the
provisions of section 171(a)(2) and 265 of said Code shall only apply to the
extent that the income to which the deductions relate is excludable from gross
income. Deductions with respect to the following items, however, shall not be
allowed except as otherwise provided:
(a) dividends received, except as otherwise provided;
(b) losses sustained in other taxable years; or
(c) taxes on or measured by income, franchise taxes measured by net
income, franchise taxes for the privilege of doing business and capital
stock taxes imposed by any state."
Pursuant MGL chapter 63, section 1 for taxable years beginning on or after
January 1, 1995 gross income "is defined under the provisions of the federal
Internal Revenue Code, as amended and in effect for the taxable year, plus the
interest from bonds, notes and evidences of indebtedness of any state, including
the Commonwealth". Accordingly, a transaction that is non-taxable for federal
income tax purposes because it qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(F) of the federal Internal Revenue Code would also
be non taxable for
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 7
Massachusetts Financial Institution excise tax purposes by reason of the fact
that the federal treatment is controlling for Massachusetts purposes.
Although there is no case law nor regulations, announcements, or letter rulings
issued by the Department of Revenue ("DOR") since the adoption of the revised
definition of gross income, the DOR has issued numerous letter rulings regarding
reorganizations under pre-1995 law. In several letter rulings, the DOR has
ruled that no gain or loss should be recognized on transactions which qualify as
reorganizations under Code section 368(a)./1/ Other letter rulings have been
issued which exclude from Massachusetts gross income or loss resulting from the
conversion of a mutual savings or cooperative bank to a stock savings or
cooperative bank./2/
The letter rulings relating to the conversion from mutual to stock form of doing
business specifically address the issue of whether the issuance of stock, under
Section 1032 of the Code, creates income to the issuer. In all of the rulings,
the DOR stated that no gain or loss should be recognized on the receipt of money
in exchange for shares of common stock./3/
Accordingly, no gain should be recognized by either Holding Company upon
issuance of its shares to the public or by Bank upon issuance of its shares to
Holding Company.
While the above rulings apply to pre-1995 tax law, the statutory definition of
gross income under pre-1995 tax law was very broad to include gross income from
all sources. Accordingly, the conclusions reached by these rulings would
provide weight to our conclusion that a non-taxable transaction for federal
income tax purposes would also be non taxable for Massachusetts Financial
Institution excise tax purposes.
CORPORATE EXCISE TAX
It is the intent of management of Holding Company to obtain classification as a
Massachusetts Security Corporation under Massachusetts Chapter 63, Section
38B(b) for Massachusetts excise tax purposes. One of the requirements for
obtaining classification as a Massachusetts Security Corporation is that the
company be engaged "exclusively in buying, selling, dealing in, or holding
securities its own behalf and not as a broker."/4/
Holding Company has been authorized to loan money to the ESOP plan to be used
for the purchase of Holding Company stock. The lending of money is an
impermissible activity for Massachusetts
- ------------------
/1/ Massachusetts Letter Rulings 82-5, 83-53, 85-3, and 85-63.
/2/ Massachusetts Letter Rulings 84-11, 83-61 and 83-53.
/3/ Ibid.
/4/ MGL Chapter 63, Section 38(B).
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 8
Security Corporations/5/ and would result in disqualification as a Massachusetts
Security Corporation. Such disqualification could result in additional taxes
(net worth and/or income based) being incurred by Holding Company.
Management has represented to us that if it becomes necessary for the Holding
Company to loan money to the ESOP plan, the Holding Company will create a newly
formed subsidiary, ESOP Loan Subsidiary. ESOP Loan Subsidiary will then loan
the money to the ESOP plan.
Massachusetts Letter Rulings 88-13 and 91-3 addressed the issues of whether bank
holding companies and other corporations, respectively, were allowed to own
wholly-owned subsidiaries and what there permissible activities would be. In
both rulings, and particularly in the case of bank holding companies,
corporations were given fairly broad powers to manage the investment in their
wholly-owned subsidiaries provided they did not actually conduct a trade or
business themselves.
Provided ESOP Loan Subsidiary is created in such a manner that the business of
ESOP Loan Subsidiary can be managed by ESOP Loan Subsidiary and is not managed
by Holding Company, the formation of ESOP Loan Subsidiary followed by the
lending of money from ESOP Loan Subsidiary to the ESOP plan should not violate
the requirements necessary to obtain and retain Massachusetts Security
Classification status for Holding Company.
OPINION
-------
Accordingly, based upon the facts and representations stated herein, it is the
opinion of KPMG Peat Marwick LLP regarding the Massachusetts income tax effect
of the planned reorganization that:
1). Provided that the Conversion qualifies as a tax-free reorganization
within the meaning of section 368(a)(1)(F) of the Code, the Conversion
will also qualify as a tax-free reorganization for Massachusetts
excise tax purposes (Massachusetts Letter Rulings 84-11, 83-53 and 83-
61).
2). No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from
the Holding Company in exchange for shares of the Converted Bank's
capital stock or by the Holding Company upon the receipt of money
from the sale of its Common Stock (Massachusetts Letter Ruling 87-11,
Section 1032(a) of the Code).
- ------------------
/5/ Massachusetts Directive 86-35.
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 9
3). The basis of the assets of the Bank in the hands of the Converted Bank
shall be the same as the basis of such assets in the hands of the Bank
immediately prior to the Conversion (Massachusetts Letter Ruling 84-
11, Section 362(b) of the Code).
4). The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank held the
assets (Section 1223(2) of the Code and Massachusetts Letter Ruling
84-11).
5). No gain or loss will be recognized by the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Bank on the
constructive issuance to them of withdrawable deposit accounts in the
Converted Bank plus interests in the liquidation account of the
Converted Bank in exchange for their deposit accounts in the Bank or
to the other depositors on the issuance to them of withdrawable
deposit accounts (Massachusetts Letter Ruling 84-11 and Section 354(a)
of the Code).
6). Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a) and Massachusetts Letter Ruling
84-11). Gain realized, if any, by the Eligible Account Holders and
Supplemental Eligible Account Holders on the distribution to them of
nontransferable subscription rights to purchase shares of Common Stock
will be recognized but only in an amount not in excess of the fair
market value of such subscription rights (Section 356(a) and
Massachusetts Letter Ruling 84-11). Eligible Account Holders and
Supplemental Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Massachusetts Letter Ruling 84-11).
7). The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other depositors of the Bank will be the same as the basis of
their deposit accounts in the Bank surrendered in exchange therefor
(Section 358(a)(1) of the Code and Massachusetts Letter Rulings 84-11
and 83-61). The basis of the interests in the liquidation account of
the Converted Bank to be received by the Eligible Account Holders of
the Bank shall be zero (Massachusetts Letter Rulings 84-11 and 83-61).
The basis of the Holding Company Common Stock to its stockholders will
be the purchase price thereof plus the fair market values, if any, of
nontransferable subscription rights (Section 1012 of the Code and
Massachusetts Letter Rulings 84-11 and 83-61). Accordingly,
assuming the nontransferable subscription rights have no value, the
basis of the Common Stock to the Eligible Account Holders and
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 10
Supplemental Eligible Account Holders will be the amount paid
therefor. The holding period of the Common Stock purchased pursuant to
the exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section 1223(6)
of the Code and Massachusetts Letter Ruling 84-11 and 83-61).
8). Under MGL Chapter 63, Sections 1, 2 and 7, the Bank and the Converted
Bank will be treated as the same savings bank and as if the Conversion
had not occurred (Mssachusetts Letter Ruling 84-11). Accordingly:
a) the part of the current taxable year of the Bank before the
Conversion and the part of the current taxable year of the
Converted Bank after the Conversion will constitute a single
taxable year of the Converted Bank;
b) the Converted Bank will succeed to and take into account the net
operating income of the Bank as of the date of the Conversion; and
c) for the current taxable year, the Converted Bank may claim as a
credit any estimated tax under MGL Chapter 63, Section 2 paid by
the Bank prior to the Conversion.
9). The lending of money from ESOP Loan Subsidiary to the ESOP plan will
not prevent Holding Company from qualifying as a Massachusetts
Security Corporation provided that Holding Company does not conduct
any other activities deemed impermissible under MGL Chapter 63,
Section 38B, and the various regulations, announcements and letter
rulings issued by the Department of Revenue.
Our opinion under paragraph (6) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have a fair market value of zero. We understand that you have
received an opinion of Keller & Company that the subscription rights do not have
any value. We express no view regarding the valuation of the subscription
rights.
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
<PAGE>
Board of Directors
First Federal Savings Bank of America
November 1, 1996
Page 11
Our opinion assumes that the Conversion qualifies under Code Section 368(a) as a
tax free reorganization. We understand that the federal tax opinion is being
rendered by Muldoon, Murphy & Faucette, Attorneys at Law. We express no view
regarding whether the Conversion qualifies as a tax free reorganization under
the Code.
CONCLUSION
----------
THE OPINIONS CONTAINED HEREIN ARE RENDERED ONLY WITH RESPECT TO THE SPECIFIC
MATTERS DISCUSSED HEREIN AND WE EXPRESS NO OPINION WITH RESPECT TO ANY OTHER
LEGAL, FEDERAL, STATE, OR LOCAL TAX ASPECT OF THESE TRANSACTIONS. THIS OPINION
IS NOT BINDING UPON ANY TAX AUTHORITY INCLUDING THE MASSACHUSETTS DEPARTMENT OF
REVENUE OR ANY COURT AND NO ASSURANCE CAN BE GIVEN THAT A POSITION CONTRARY TO
THAT EXPRESSED HEREIN WILL NOT BE ASSERTED BY A TAX AUTHORITY.
IN RENDERING OUR OPINIONS WE ARE RELYING UPON THE RELEVANT PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, MASSACHUSETTS GENERAL LAWS AND THE
REGULATIONS, JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS THEREOF, ALL AS OF THE
DATE OF THIS LETTER.
HOWEVER, ALL OF THE FOREGOING AUTHORITIES ARE SUBJECT TO CHANGE OR MODIFICATION
WHICH CAN BE RETROACTIVE IN EFFECT AND, THEREFORE, COULD ALSO AFFECT OUR
OPINIONS. WE UNDERTAKE NO RESPONSIBILITY TO UPDATE OUR OPINION FOR ANY
SUBSEQUENT CHANGE OR MODIFICATION.
Very truly yours,
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
First Federal Savings Bank of America:
We consent to the use of our report included herein and to the reference to our
firm under the headings "EXPERTS", "LEGAL AND TAX OPINIONS", "STATE AND LOCAL
TAXATION", "TAX ASPECTS", "CONSOLIDATED STATEMENTS OF INCOME", and "EFFECTS OF
CONVERSION" in the Prospectus, which is a part of the Registration Statement on
Form S-1 for FIRSTFED AMERICA BANCORP, INC. and Form AC for First Federal
Savings Bank of America.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
November 1, 1996
<PAGE>
DRAFT
- ----- EXHIBIT 99.1
GIFT INSTRUMENT
CHARITABLE GIFT TO FIRSTFED CHARITABLE FOUNDATION
FirstFed America Bancorp, Inc., One North Main Street, Fall River,
Massachusetts (the "Company"), desires and intends to make a gift of its common
stock, par value $.01 per share to FirstFed Charitable Foundation, a nonprofit
corporation organized under the laws of the State of Delaware. The purpose of
the donation is to establish a bond between FirstFed America Bancorp, Inc., and
the communities in which it and its affiliates operate to enable the communities
to share in the potential growth and success of the Company and its affiliates
over the long term. To that end, FirstFed America Bancorp, Inc. now gives,
transfers, and delivers to FirstFed Charitable Foundation__________ shares of
its common stock, par value $.01 per share ("Common Stock") for consideration of
$.01 per share, or total consideration of $________, subject to the following
conditions:
1. The Foundation shall use the donation solely for charitable purposes
in the communities in which the Bank operates in accordance with the provisions
of the Foundation's Certificate of Incorporation;
2. Consistent with the Company's intent to form a long-term bond between
the Company and the community, the amount of Common Stock that may be sold by
the Foundation in any one year shall not exceed 5% of the market value (measured
as of the first business day of each year), of the assets held by the Foundation
or such amount as may be necessary to maintain the Foundation's designation as a
tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code of
1986 as amended, except that this restriction shall not prohibit the board of
directors of the Foundation from selling a greater amount of Common Stock in any
one year if the board of directors of the Foundation by three-fourths vote,
determines that the failure to sell a greater amount of the common stock held by
the Foundation would result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; and
3. The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be considered by the
Company to be voted in the same ratio as all other shares of Common Stock of the
Company which are voted on each and every proposal considered by stockholders of
Company, provided, however, that if this Condition No. 3 is waived by the
Office of Thrift Supervision pursuant to Office of Thrift Supervision pursuant
to Office of Thrift Supervision Order No. ______, dated ___________, 1996 (a
copy of which is attached hereto), then this Condition No. 3 shall become void
and of no effect.
Dated: ____________, 1996 FIRSTFED AMERICA BANCORP, INC.
By:
---------------------------
Robert F. Stoico
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
American
Stock Exchange
Listing Form 1
86 Trinity Place Listing Agreement
New York, New York 10006-1881
================================================================================
EXHIBIT 99.2
FIRSTFED AMERICA BANCORP, INC. (the "Company"), in consideration of the listing
- ------------------------------
of its securities, hereby agrees with the American Stock Exchange, Inc. (the
"Exchange"), that it will:
(1) Comply with all Exchange rules, policies and procedures which apply to
listed companies as they are now in effect and as they may be amended from
time to time, regardless of whether the company's organization documents
would allow for a different result.
(2) Notify the Exchange, at least 20 days in advance, of any change in the
form or nature of any listed security or in the rights, benefits and
privileges of the holders of such security.
(3) File with the Exchange (i) proposed amendments to and certified copies of
the Certificate of Incorporation; By-Laws or other similar organization
documents; (ii) all SEC filings; and (iii) all material sent to
shareholders or released to the press.
I am an officer of the Company, authorized to sign this agreement on the
Company's behalf.
By: /s/ Robert F. Stoico
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Dated: October 17, 1996 Robert F. Stoico,
---------------- President and Chief Executive Officer
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(Please print name and title
below signature)
AMEX
