<PAGE>
As filed with the Securities and Exchange Commission on November 6, 1997
Registration No. 333-34447
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MYSTIC FINANCIAL, INC.
(exact name of registrant as specified in its certificate of incorporation)
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<CAPTION>
<S> <C> <C>
DELAWARE 6035 04-1609100
(state or other (Primary Standard (IRS Employer Identification
jurisdiction of Classification Code Number) No.)
incorporation or organization)
</TABLE>
c/o MEDFORD CO-OPERATIVE BANK
60 HIGH STREET
MEDFORD, MASSACHUSETTS 02155
(617) 395-2800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
___________________________
ROBERT H. SURABIAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MEDFORD CO-OPERATIVE BANK
60 HIGH STREET
MEDFORD, MASSACHUSETTS 02155
(617) 395-2800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
___________________________
Copies to:
RICHARD A. SCHABERG, ESQ.
THACHER PROFFITT & WOOD
1500 K STREET, N.W.
WASHINGTON, D.C. 20005
(202) 347-8400
___________________________
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/
-
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<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of Registration
Securities to be Registered Registered(1) Offering Price Per Share(2) Aggregate Offering Price (2) Fee
====================================================================================================================================
<S> <C> <C> <C> <C>
Common Stock 2,711,125 $10.00 $27,111,250 $8,215.53
$.01 par Value
===================================================================================================================================
</TABLE>
(1) Includes the maximum number of shares that may be issued in connection with
this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION 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>
MYSTIC FINANCIAL, INC.
Cross Reference Sheet showing location in the Prospectus of information required
by Items of Form S-1:
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION OR HEADINGS IN PROSPECTUS
- --------------------------------------- ----------------------------------
<S> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus
3. Summary Information and Risk Factors Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Conversion -- Stock Pricing and Number of Shares to
be Issued
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page; The Conversion --
Subscription Rights -- Subscription Offering -- Direct
Community Offering -- Syndicated Offering -- Plan of
Distribution and Financial Advisory Arrangements
9. Description of Securities to be Certain Restrictions on Acquisition of the Company and
Registered the Bank; Description of Capital Stock of the Company;
Description of Capital Stock of the Bank
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Outside Front Cover Page; Selected Financial and Other
Registrant Data of the Bank; Mystic Financial, Inc.; Medford Co-
operative Bank; Dividend Policy; Market for the Common
Stock; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business
of the Company; Business of the Bank; Regulation;
Management of the Company; Management of the Bank;
The Conversion; Description of Capital Stock of the
Company; Description of Capital Stock of the Bank;
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE>
PROSPECTUS
[LOGO]
========================================
MYSTIC FINANCIAL, INC.
========================================
(PROPOSED HOLDING COMPANY FOR MEDFORD CO-OPERATIVE BANK)
UP TO 2,357,500 SHARES OF COMMON STOCK
Mystic Financial, Inc., a Delaware corporation ("Mystic" or the
"Company"), the proposed holding company for Medford Co-operative Bank (the
"Bank"), is offering up to 2,357,500 shares of its common stock, par value $.01
per share (the "Common Stock") in connection with the conversion of the Bank
from a Massachusetts chartered mutual co-operative bank to a Massachusetts
chartered stock co-operative bank and the issuance of the Bank's capital stock
to Mystic pursuant to the Bank's plan of conversion (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." The shares of
Common Stock are being offered in a subscription offering pursuant to
subscription rights in the following order of priority: (i) to the Bank's
qualifying deposit account holders as of March 31, 1996 with a $50 minimum
deposit as of that date ("Eligible Account Holders"), (ii) to the Bank's
qualifying deposit account holders as of March 31, 1997 with a $50 minimum
deposit as of that date, who are not otherwise Eligible Account Holders
("Supplemental Eligible Account Holders") and (iii) to the Bank's tax-qualified
employee stock ownership plan (as defined in the Plan of Conversion) (the
"Subscription Offering"). Concurrent with or at any time during or after the
Subscription Offering, the board of directors of the Company may elect to offer
those shares not subscribed for in the Subscription Offering to the general
public, with preference given to natural persons residing in the communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose,
Lexington and Bedford, Massachusetts, the Bank's primary market area, through a
direct community offering (the "Direct Community Offering") subject to the
Company's right to reject orders in the Direct Community Offering in whole or in
part. It is anticipated that shares not subscribed for in the Subscription
Offering and Direct Community Offering, if any, will be offered to certain
members of the general public in a Syndicated Offering (the "Syndicated
Offering"). The Subscription Offering, Direct Community Offering and Syndicated
Offering are herein referred to collectively as the "Offerings." The Offerings
will be completed no later than twenty-four (24) months from the date upon which
the Plan of Conversion was approved by the Board of Directors of the Bank (June
10, 1999). All shares sold in the Offerings will be sold at a purchase price of
$10.00 per share. A minimum of 25 Shares must be purchased by each person
purchasing stock in the conversion to the extent shares are available.
Directors, officers and their associates may not purchase, in the aggregate,
more than 30 percent of the Common Stock. Each Director and officer will be
subject to the same individual purchase limitations as other Eligible Account
Holders and Supplemental Eligible Account Holders. The Bank has never issued
stock in the past, and no assurances can be given that an established and liquid
market for the Common Stock will develop. See "Market for Common Stock."
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL INVESTED.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE DISCUSSION UNDER " RISK FACTORS" BEGINNING ON PAGE ONE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FDIC, THE CO-OPERATIVE CENTRAL BANK OR ANY OTHER GOVERNMENT
AGENCY. THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE MASSACHUSETTS
DIVISION OF BANKS, THE SECURITIES
AND EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR THE SHARE INSURANCE FUND OF THE CO-OPERATIVE
CENTRAL BANK, NOR HAS ANY OF THE FOREGOING PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
=========================================================================================================
PURCHASE ESTIMATED FEES ESTIMATED NET
PRICE (2) AND EXPENSES CONVERSION PROCEEDS
(INCLUDING
UNDERWRITING FEES
AND COMMISSIONS)(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(1)......................... $ 10.00 $ 0.38 $ 9.62
- ---------------------------------------------------------------------------------------------------------
Minimum Total........................ $17,425,000 $714,884 $16,710,116
- ---------------------------------------------------------------------------------------------------------
Midpoint Total....................... $20,500,000 $782,780 $19,717,220
- ---------------------------------------------------------------------------------------------------------
Maximum Total........................ $23,575,000 $850,676 $22,724,324
- ---------------------------------------------------------------------------------------------------------
Maximum, as Adjusted(4).............. $27,111,250 $928,756 $26,182,494
=========================================================================================================
</TABLE>
(1) The price per share will be fixed at $10.00 (the "Purchase Price").
Estimated fees and expenses per share and estimated net conversion proceeds per
share are based on the midpoint of the "Current Valuation Range, " as defined
below.
(2) Determined in accordance with an independent appraisal prepared by R.P.
Financial, L.C. ("R.P. Financial") as of August 15, 1997, which states that the
estimated pro forma market value of the Common Stock was within a range from
$17,425,000 to $23,575,000 (the "Current Valuation Range"), with a midpoint of
$20,500,000. The final aggregate purchase price will be determined at the time
of closing of the offering and is subject to change due to changing market
conditions and other factors. The aggregate purchase price of the Common Stock
sold in the Conversion will not be below $17,425,000 and will not exceed
$23,575,000 or $27,111,250 (15% above the maximum of the Current Valuation
Range, the "Super-Maximum") unless subscribers and other purchasers are offered
the opportunity to change or withdraw their orders. See "Use of Proceeds,"
"Capitalization," "Pro Forma Data" and "The Conversion--Stock Pricing and Number
of Shares to be Issued."
(3) Includes estimated printing, postage, legal, accounting, marketing and
miscellaneous expenses which will be incurred in connection with the Conversion.
Actual proceeds may vary from estimated amounts. Assumes the sale of 2,050,000
shares with respect to the per share data. See "Use of Proceeds."
(4) The "Total Maximum, as adjusted " or the "Super-Maximum " gives effect to an
increase in the number of shares which could occur without a resolicitation of
subscribers or any right of cancellation due to an increase in if the Current
Valuation Range were to increase by up to 15% above the maximum of the Current
Valuation Range to reflect regulatory considerations or changes in market and
financial conditions.
THE DATE OF THIS PROSPECTUS IS ____________________________, 1997.
____________________
TRIDENT SECURITIES, INC.
<PAGE>
[Insert Map Here]
i
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information and consolidated financial statements
contained elsewhere herein. Certain terms in this summary are defined elsewhere
herein.
MYSTIC FINANCIAL, INC.
Mystic 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, the Company's loan
to the ESOP 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 the
Conversion in exchange for 50% of the net Conversion proceeds ($8.6 million at
the midpoint of the Current Valuation Range) with the remaining net proceeds to
be retained by the Company to be used for general business activities, including
a loan by the Company directly to the ESOP to enable the ESOP to purchase up to
8% of the Common Stock issued in connection with the Conversion. Initially, the
net proceeds are expected to be invested by the Company and the Bank primarily
in short- and medium-term investments and debt securities and to reduce the
Bank's borrowings from the Federal Home Loan Bank of Boston (the "FHLB"). See
"Use of Proceeds" and "The Conversion--General." The business of the Company
will consist initially of the business of the Bank. See "Business" and
"Regulation--Holding Company Regulation."
The Company's executive offices are located at the administrative
office of the Bank at 60 High Street, Medford, Massachusetts 02155. The
Company's telephone number is (781) 395-2800.
MEDFORD CO-OPERATIVE BANK
The Bank is a Massachusetts chartered mutual co-operative bank founded
in 1886 with four offices in Medford, which is located 8 miles north of Boston,
Massachusetts. The Bank's deposits have been federally insured since 1986 and
are currently insured by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation (the "FDIC") and the Share Insurance Fund of the Co-
operative Central Bank. The Bank has been a member of the Co-operative Central
Bank since 1932 and a member of the FHLB since 1988. For a discussion of the
powers of co-operative banks under Massachusetts law, see "Regulation -
Massachusetts Banking Laws and Supervision."
The business of the Bank primarily consists of attracting savings
deposits from the general public and investing such deposits in loans secured by
one- to four- family residential real estate located in its market area,
commercial loans secured by assets and commercial real estate of businesses
located in its market area and investment securities, including U.S. Government
and Agency securities and interest-earning deposits. The Bank also makes
consumer loans, including home equity loans, automobile loans and savings
passbook loans. The Bank offers both fixed-rate and adjustable-rate loans and
emphasizes the origination of residential real estate mortgage loans and
commercial loans with adjustable interest rates. The Bank also makes other
short term (one to three year) interest rate sensitive investments which allow
the Bank to monitor the interest rate risk, maturities and repricing intervals
of its assets and liabilities.
At June 30, 1997, the Bank had total assets of $149.7 million,
deposits of $129.3 million and net worth of $11.9 million, giving the Bank a
regulatory Tier 1 leverage capital ratio of 8.1%. Also at June 30, 1997, the
Bank's capital ratios exceeded all regulatory capital requirements.
Financial highlights of the Bank include the following:
Business strategy -- The Bank's business strategy is to operate as a
well capitalized, profitable and independent community bank dedicated
to financing home ownership and small business and consumer needs in
its market area and providing quality service to its customers. The
Bank
ii
<PAGE>
has implemented this strategy by: (i) monitoring the needs of
customers and providing quality service; (ii) emphasizing consumer-
oriented banking by originating residential mortgage loans and
consumer loans, and by offering various deposit accounts and other
financial services and products; (iii) recently increasing its
emphasis on commercial banking and lending by originating loans and
taking deposits for small businesses and providing greater services in
its commercial loan department; (iv) maintaining high asset quality
through conservative underwriting; and (v) producing stable earnings.
Asset Composition and Quality -- The Bank has consistently focused on
maintaining asset quality by originating primarily one- to four-family
residential mortgage loans and investing in high quality liquid
investments. At June 30, 1997, one- to four-family residential real
estate loans comprised 78.7% of net loans outstanding, and 64.8% of
the Bank's one- to four-family residential real estate loans had
adjustable interest rates. Unlike many New England financial
institutions, the Bank did not experience significant asset quality
problems during the recession of the early 1990s. More recently, the
Bank's non-performing assets, including non-performing loans and real
estate acquired by foreclosure, have declined from 1.37% of total
assets at June 30, 1993 to 0.24% of total assets at June 30, 1997. See
"Business -- Lending Activities ," "--Non-Performing Assets, Asset
Classification and Allowances for Losses" and "-- Investment
Activities."
Capital Position --The Bank's capital ratios are in excess of current
regulatory capital requirements. At June 30, 1997, the Bank's
regulatory Tier I leverage capital ratio was 8.1% of adjusted total
average assets, its Tier I risk-based capital was 13.3% of risk-
weighted assets and its total risk-based capital equaled 14.4% of
risk-weighted assets. As a result of the Conversion, the Bank will
increase such regulatory capital to levels substantially above
regulatory requirements. For a description of the Bank's capital
position on a pro forma basis, see "Pro Forma Data" and "Regulation."
The brief description of the Bank in these financial highlights should
be considered in the context of the more detailed descriptions in this
Prospectus, including "Risk Factors."
THE CONVERSION
As a mutual institution, the Bank has no stockholders. Conversion of
the Bank to a stock co-operative bank is being accomplished by simultaneously
(i) amending its charter to authorize the issuance of shares of capital stock
and otherwise to conform to the requirements of a stock institution, (ii)
issuing the Bank's capital stock to the newly formed Delaware corporation,
Mystic, and (iii) offering and selling the Common Stock in the Subscription
Offering and, if necessary, the Direct Community Offering and/or the Syndicated
Offering, as described below.
BUSINESS PURPOSES
The board of directors and management of the Bank believe that the
stock form is the preferred structure (as opposed to mutual form) of
organization for a financial institution, as evidenced in part by the decline in
the number of mutual thrift institutions from over 12,500 in 1929 to just over
800 today.
The Bank believes that converting to the stock form of organization
will allow the Bank to compete more effectively with local community banks and
thrift institutions (most of which are stock-owned) and with statewide and
regional banks (all of which are stock-owned), by, among other things,
increasing its access to capital markets. The Bank believes that by combining
quality service and products with a local ownership base, its customers and
community members who become stockholders will be more inclined to continue to
do business with, and perhaps bring additional business to the Bank.
iii
<PAGE>
Furthermore, since the Bank finds itself competing with local and
regional banks not only for customers, but also for employees, the Bank believes
that the stock form of organization will better afford it the opportunity to
attract and retain employees and management through various stock benefit plans
like the ESOP, which are generally not available to mutual financial
institutions. See "Business Purposes."
USE OF PROCEEDS
The Company intends to contribute 50% of the net proceeds ($8.6
million at the midpoint of the Current Valuation Range) from the Offerings to
the Bank. Those Conversion proceeds will be added to the general funds of the
Bank and used for general corporate purposes, including the origination of
loans, funding the construction and/or the acquisition costs of establishing new
branch locations, enhancing the Bank's liquidity ratios and enhancing future
access to capital markets. The balance of the funds will be retained as the
Company's initial capitalization, with a portion of those funds being loaned to
the ESOP to fund its purchase of Common Stock in the Offerings or, if necessary,
to purchase shares of Common Stock through open-market purchases following
completion of the Offerings. The Company may use the funds it retains to
support future expansion of operations or diversification into other banking-
related businesses and for other business or investment purposes, although
management has no current plans regarding such activities. Subject to
applicable limitations, the Company may also use available funds for the payment
of dividends and to repurchase shares of Common Stock. The Company's ability to
repurchase shares of Common Stock is limited by its stock repurchase policy and
by the regulations of the Federal Reserve Board. See "Regulation - Holding
Company Regulation." It is expected that in the interim, all or part of the net
proceeds will be invested in U.S. Government and Agency securities and other
short-term investments and to reduce borrowings from the FHLB. See "Use of
Proceeds."
SUBSCRIPTION OFFERING
Mystic is offering up to 2,357,500 shares (or up to 2,711,125 shares
at the Super-Maximum) of the Common Stock in the Subscription Offering. Each
Eligible Account Holder is receiving nontransferable subscription rights to
subscribe for up to $600,000 of the Common Stock together with associates or
groups acting in concert with such Eligible Account Holder. In the event of an
oversubscription, shares will be allocated among subscribers in accordance with
their subscription priorities and the Plan of Conversion. Each Supplemental
Eligible Account Holder is receiving nontransferable subscription rights on a
second priority basis to subscribe for up to $600,000 of the Common Stock,
together with associates or persons acting in concert with such Supplemental
Eligible Account Holder. The Bank's ESOP is receiving nontransferable
subscription rights on a third priority basis to subscribe for shares in the
aggregate up to 8% of the Common Stock. See "The Conversion -- Subscription
Offering."
DIRECT COMMUNITY OFFERING
Concurrent with or at any time during or after the Subscription
Offering, the board of directors of the Company may elect to offer those shares
not subscribed for in the Subscription Offering, if any, to the general public,
with preference given to natural persons residing in the communities of Medford,
Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington
and Bedford, Massachusetts, the Bank's primary market area, subject to the
Bank's right to reject orders in the Direct Community Offering in whole or in
part. Purchasers in the Direct Community Offering together with their
associates, and groups acting in concert, are each eligible to purchase up to
$600,000 of the Common Stock. Purchase orders received during the Direct
Community Offering will be filled up to a maximum of 2% of the total number of
shares of Common Stock to be issued and sold, and any remaining shares will then
be allocated among unfilled purchase orders on an equal number of shares basis,
subject to the Company's right to reject orders for Common Stock in whole or in
part. The Direct Community Offering is expected to terminate on the same date as
the Subscription Offering but may be extended by the Company for up to an
additional 45 days, or such longer period as the Commissioner of Banks of the
Commonwealth of Massachusetts (the "Commissioner") may approve. If the
Conversion is not completed within 45 days of the completion of the
iv
<PAGE>
Subscription Offering, and the Commissioner consents to an extension of time to
complete the Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions.
SYNDICATED OFFERING
As a final step in the Conversion, if necessary, shares not purchased
in the Subscription Offering or Direct Community Offering, if any, will be
offered for sale in the Syndicated Offering to certain members of the general
public and/or through a syndicate of registered broker-dealers to be formed and
managed by Trident Securities, Inc. ("Trident Securities") acting as agent, to
assist the Company in the sale of the Common Stock.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
Applicable state and federal regulations provide that, prior to the
completion of the Conversion, no person shall transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of the
subscription rights under the Plan or the shares of Common Stock to be issued
upon their exercise. PERSONS VIOLATING SUCH PROHIBITION MAY LOSE THEIR RIGHT TO
SUBSCRIBE FOR STOCK IN THE CONVERSION AND MAY BE SUBJECT TO SANCTIONS BY THE
COMMISSIONER OR THE FDIC. EACH PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE
REQUIRED TO CERTIFY THAT HIS OR HER PURCHASE OF COMMON STOCK IS SOLELY FOR THE
PURCHASER'S OWN ACCOUNT AND THAT THERE IS NO AGREEMENT OR UNDERSTANDING
REGARDING THE SALE OR TRANSFER OF SUCH SHARES.
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Conversion, the Plan of Conversion
provides for the following purchase limitations: no person, including, in each
case, all persons on a joint account, either alone or together with associates
or persons acting in concert with such person, may purchase shares of Common
Stock with an aggregate purchase price of more than $600,000 in the conversion.
THIS MAXIMUM PURCHASE LIMITATION MAY BE INCREASED CONSISTENT WITH FDIC AND
MASSACHUSETTS REGULATIONS IN THE SOLE DISCRETION OF THE COMPANY AND THE BANK
SUBJECT TO ANY REQUIRED REGULATORY APPROVAL. A minimum of 25 shares must be
purchased by each person purchasing Conversion Stock to the extent that shares
are available.
The term "acting in concert" is defined in the Plan of Conversion to
mean: persons seeking to combine or pool their voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. When persons act together for such purpose, their group is deemed to
have acquired their stock. The term "associate" of a person is defined in the
Plan of Conversion to mean: (i) any corporation or organization (other than the
Bank or a majority-owned subsidiary of the Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse who has the same home as such person. The Company and
the Bank may presume that certain persons are acting in concert based upon,
among other things, joint account relationships and the fact that such persons
have filed joint Schedules 13D with the SEC with respect to other companies.
POTENTIAL BENEFITS OF CONVERSION TO MANAGEMENT
ESOP. The Company and the Bank have adopted an ESOP to become
effective on the effective date of the Conversion. The ESOP intends to purchase
an aggregate of 8% of the shares of Common Stock
v
<PAGE>
issued in the Conversion. For additional information, see "Management of the
Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan
and Trust."
Employment Agreements. Effective upon the Conversion, the Company and
the Bank each will enter into employment agreements with certain of their
respective officers that will provide for benefits and cash payments to be made
to such officers in the event of a change in control of the Company or the Bank.
The aggregate payments that would be made to the executive officers of the
Company named in the Company's employment agreements, assuming termination of
employment following a change in control under the circumstances described in
those agreements based on current salary levels, would be approximately
$1,267,000. The aggregate payments that would be made to the officers of the
Bank named in the Bank's employment agreements, assuming termination of
employment following a change in control of the Bank based on current salary
levels, would be approximately $503,000. These provisions may have the effect
of increasing the cost of acquiring the Company and the Bank, thereby
discouraging future attempts to take over the Company or the Bank. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Employment
Agreements Between the Company and Two Senior Executives" and "-- Employment
Agreements Between the Bank and Two Commercial Lending Officers."
Option Plan. No earlier than one year after the consummation of the
Conversion, the Company intends to submit for stockholder approval a stock
option and incentive plan for the benefit of the officers, key employees and
directors of the Company and the Bank (the "Option Plan"), pursuant to which the
Company intends to reserve a number of authorized but unissued shares of Common
Stock equal to an aggregate of 10% of the Common Stock issued in the Conversion
for issuance pursuant to stock options. The value of any options granted under
the Option Plan will be determined based on the increase, if any, in the market
value of the Common Stock compared to the exercise price of the options. The
exercise price of any options granted under the Option Plan will not be less
than the fair market value of a share of Common Stock on the date of grant.
Provided the Option Plan is implemented more than one year after completion of
the Conversion, it is expected that the Option Plan will provide for the
accelerated vesting of awards to occur upon a change in control of the Company
or the Bank. A majority of stockholders present and voting at any annual or
special meeting considering the approval of the Option Plan must approve the
Option Plan before it can be implemented by the Company. It is expected that
all awards under the Option Plan will vest over a period of time at a rate not
greater than 20% per year.
While the Company does not currently intend to implement the Option
Plan within one year following completion of the Conversion, FDIC regulations
provide that if the Option Plan is implemented within one year following
completion of the Conversion, no individual officer or employee may receive more
than 25% of the options granted, and non-employee directors may not receive more
than 5% individually or more than 30% in the aggregate of the options granted.
See "Management of the Bank --Future Stock Benefit Plans -- Option Plan."
Restricted Stock Plan. In addition, no earlier than one year after
the consummation of the Conversion, the Company intends to submit for
stockholder approval a restricted stock plan ("Restricted Stock Plan") for the
benefit of the officers, key employees and directors of the Company and the
Bank. When implemented, the Restricted Stock Plan is expected to purchase a
number of shares of Common Stock either from the Company or in the open market
equal to an aggregate of 4% of the Common Stock issued in the Conversion.
Whether such shares will be purchased in the open market or from the Company,
and the timing of all such purchases, will depend on the market and other
conditions and the alternative uses of capital available to the Company. The
actual value of any awards made under the Restricted Stock Plan will depend
upon, among other factors, the market value of the Common Stock at the time of
award and upon payment. At the minimum, midpoint, maximum and 15% above the
maximum of the Current Valuation Range, the reduction to stockholders' equity to
fund the Restricted Stock Plan would be $697,000, $820,000, $943,000 and $1.1
million, respectively, assuming purchases were made in the market at the $10.00
per share Purchase Price. All awards under the Restricted Stock Plan will be
payable over a period or time, at a rate not greater than 20% per year. A
majority of stockholders present and voting at any annual or special meeting
considering approval of the Restricted Stock Plan must approve the Restricted
Stock Plan before it can be implemented by the
vi
<PAGE>
Company. It is expected that the Plan will provide for the accelerated vesting
of awards to occur upon a change in control of the Company or the Bank.
Consistent with applicable regulations, if the Restricted Stock Plan
is implemented within one year following completion of the Conversion (which
timing is not currently contemplated), no employee will receive grants exceeding
25% of the shares available under the Restricted Stock Plan, and no non-employee
director will receive grants individually exceeding 5% of the shares available
under the Restricted Stock Plan or 30% in the aggregate of the awards granted.
See "Management of the Bank --Future Stock Benefit Plans -- Restricted Stock
Plan."
INDEPENDENT APPRAISAL AND PURCHASE PRICE
R.P. Financial, a firm experienced in valuing banking institutions,
has made an independent appraisal of the estimated aggregate pro forma market
value of the Common Stock. The Current Valuation Range in R.P. Financial's
appraisal as of August 15, 1997 is from $17,425,000 to $23,575,000, with a
midpoint of $20,500,000. Such appraisal is not intended and must not be
construed as a recommendation of any kind as to the advisability of purchasing
such shares. The appraisal considered a number of factors and was based upon
estimates derived from those factors, all of which are subject to change from
time to time. In preparing the valuation, R.P. Financial relied upon and assumed
the accuracy and completeness of financial and statistical information provided
by the Bank. R.P. Financial did not verify the consolidated financial statements
provided or independently value the assets of the Bank.
The Company has determined to issue and sell the Common Stock at a
purchase price of $10.00 per share. The aggregate actual purchase price for all
of the Common Stock will be consistent with the independent appraisal of the
estimated aggregate pro forma market value of the Company immediately after the
Conversion. Depending upon market financial conditions prior to completion of
the Conversion, the actual number of shares being issued in the Conversion may
be increased or decreased from the maximum of 2,357,500 shares being offered
hereby. Any material change in the Current Valuation Range would require the
approval of the Commissioner and the FDIC. Purchasers will be given the right to
increase, decrease or rescind their orders in the event that the aggregate
purchase price is below $17,425,000 (the low end of the Current Valuation Range)
or more than the Super-Maximum of $27,111,250 (15% above the high end of the
Current Valuation Range). See "The Conversion -- Stock Pricing and Number of
Shares to be Issued."
DIVIDENDS
The Company's board of directors anticipates declaring and paying
quarterly cash dividends on the Common Stock at an annual rate of 2%, or $0.20
per share per year based on the purchase price per share of $10.00. The first
quarterly cash dividend is expected to be declared and paid during the first
full quarter following the consummation of the Conversion. Pursuant to the
Company's and the Bank's dividend policy, there are certain limitations on the
Company's and the Bank's ability to pay dividends in excess of current earnings
for three years following the Conversion. In addition, the board of directors
may determine to pay periodic special cash dividends in addition to, or in lieu
of, regular cash dividends. Declarations and payments of any dividends (regular
and special) by the board of directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Company, capital
requirements, regulatory limitations, the Bank's and the Company's financial
condition and results of operations, tax considerations and general economic
conditions. In order to pay such cash dividends, however, the Company must have
available cash either from the net proceeds raised in the Offerings and retained
by the Company, dividends received from the Bank or earnings on Company assets.
There are certain limitations on the payment of dividends from the Bank to the
Company. See "Regulation --Massachusetts Banking Laws and Supervision." No
assurances can be given that any dividends will be declared or, if declared,
what the amount of dividends will be or whether such dividends, if commenced,
will continue. See "Dividends."
vii
<PAGE>
MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital
stock and consequently there is no established market for the Common Stock at
this time. Accordingly, there can be no assurance that an active public trading
market for the Company's Common Stock will develop or be maintained in the
foreseeable future. However, Trident Securities has agreed to act as a market
maker for the Company's Common Stock following consummation of the Conversion
and the Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "MYST." There can be no assurance, however, that the
Company will meet the Nasdaq National Market listing requirements. Accordingly,
purchasers of Common Stock should have a long-term investment intent and
recognize that the absence of an active and liquid trading market may make it
difficult to sell the Common Stock, and may have an adverse effect on the price.
See " Risk Factors -- Limited Market for Common Stock" and "Market for Common
Stock."
Trident Securities will consult with, advise and assist the Company in
the distribution of shares in the Subscription Offering. Trident Securities will
also act as marketing advisor and represent the Company as placement agent on a
best efforts basis in the sale of the Common Stock in the Direct Community
Offering. Members of its staff will conduct training sessions for directors,
officers and employees of the Bank regarding the offering process. Trident will
also provide assistance in the establishment and supervision of the Stock
Information Center. If the Subscription Offering and Direct Community Offering
are extended beyond ______________, 1997 (the "Expiration Date"), Trident
Securities may make sales to the general public and/or assemble and manage a
syndicate of selected dealers to assist the Company in the sale of the Common
Stock during the Syndicated Offering.
The engagement of Trident Securities by the Bank and the work
performed thereunder (including any due diligence investigation) should not be
construed by prospective investors as constituting an endorsement of or
recommendation to purchase the shares of Common Stock by Trident Securities or a
verification of the accuracy or completeness of the information contained in
this Prospectus. Trident Securities has not prepared or delivered a fairness or
similar opinion regarding the terms of the Offerings or the prices at which the
Common Stock may trade.
RISK FACTORS
Special attention should be given by prospective investors to the
factors discussed under " Risk Factors," including, (i) anticipated low return
on equity following the Conversion, (ii) the potential for delay in consummating
the Conversion in order to obtain regulatory approval, (iii) the growth of the
Bank's commercial and commercial real estate loan portfolio, (iv) the possible
dilutive effect of stock based compensation plans which may be implemented at a
later date, (v) regulatory environment, (vi) anti-takeover provisions and voting
control of management, (vii) the potentially adverse impact of interest rates
and economic conditions on the banking industry and the Bank and (viii) the
limited market for the Common Stock.
viii
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OVERVIEW
The following is intended to be a condensed overview of the foregoing
information and does not purport to be complete. It must be read in conjunction
with other information contained in this Prospectus. Terms used in the summary
are defined elsewhere herein.
Securities Offered and Purchase Price......... The Company is offering up to
2,357,500 shares of Common Stock
(subject to adjustment) at a
purchase price of $10.00 per
share. See "The Conversion --
Stock Pricing and Number of
Shares to be Issued."
Subscription Offering......................... The Company is offering
nontransferable subscription
rights on a first priority basis
to Eligible Account Holders,
each of whom has the right to
subscribe for the purchase of up
to $600,000 of Common Stock. On
a second priority basis, to the
extent any shares of Common
Stock are available after
satisfying the subscriptions of
the Eligible Account Holders,
each Supplemental Eligible
Account Holder has the right to
subscribe for the purchase of up
to $600,000 of Common Stock. On
a third priority basis, to the
extent any shares of Common
Stock are available after
satisfying subscriptions of
Eligible Account Holders and
Supplemental Eligible Account
Holders, the Bank's ESOP has the
right to subscribe for up to 8%
of the total number of shares of
Common Stock offered in the
Conversion. See "The
Conversion--Subscription
Offering."
Direct Community Offering..................... To the extent any shares of
Common Stock are available after
satisfying the subscriptions of
Eligible Account Holders, the
Supplemental Eligible Account
Holders and the ESOP in the
Subscription Offering, shares of
Common Stock are being offered
by the Company to the general
public, with preference given to
natural persons who are
residents of the communities of
Medford, Malden, Everett,
Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington
and Bedford, Massachusetts.
Purchasers in the Direct
Community Offering, together
with their associates and groups
acting in concert, are each
eligible to purchase up to
$600,000 of Common Stock. See
"The Conversion -- Direct
Community Offering."
Syndicated Offering........................... As a final step in the
Conversion, if necessary, shares
not purchased in the
Subscription Offering or Direct
Community Offering, if any, will
be offered for sale in the
Syndicated Offering to certain
members of the general public
and/or through a syndicate of
registered brokers-dealers to be
formed and managed by Trident
Securities acting as agent, to
assist the Company in the sale
of the Common Stock.
- --------------------------------------------------------------------------------
ix
<PAGE>
- --------------------------------------------------------------------------------
Independent Appraisal.............. The Bank has retained R.P. Financial to
prepare an appraisal of the estimated pro
forma market value of the Common Stock. The
purchase price of $10.00 per share and the
range in the number of shares being offered
in the Subscription and Direct Community
Offerings have been determined by the
Bank's board of directors based upon the
appraisal. R.P. Financial has advised the
Company, in its opinion dated as of August
15, 1997, that the Current Valuation Range
ranged from $17,425,000 to $23,575,000 with
a mid-point of $20,500,000. Pursuant to the
Plan of Conversion, the Company may issue
additional shares of Common Stock in an
aggregate dollar amount of up to 15% above
the high end of the Current Valuation Range
for an aggregate of up to $27,111,250 in
gross Conversion proceeds without a
resolicitation. R.P. Financial's estimated
valuation should not be considered a
recommendation as to the advisability of
purchasing shares of Common Stock, and
there can be no assurance that persons who
purchase shares in the Conversion will
thereafter be able to sell the shares at
comparable prices consistent with such
valuation. See "The Conversion -- Stock
Pricing and Number of Shares to be Issued."
Exercise of Subscription Rights.... Delivery of forms to order Common Stock
offered in the Subscription Offering and
the Direct Community Offering will be
preceded or accompanied by a Prospectus.
Any person receiving an order form who
desires to purchase shares must do so prior
to the Expiration Date by delivering to the
Company a properly executed order form
together with full payment. Once tendered,
subscription orders cannot be revoked or
modified without the consent of the
Company. Orders will not be accepted via
facsimile. See "The Conversion --
Subscription Offering -- Use of Order
Forms."
Payment for Shares................. Payment for subscriptions may be made (i)
in cash (if delivered in person); (ii) by
check, bank draft or money order; or (iii)
by authorization of withdrawal from deposit
accounts maintained at the Bank. Payment
for shares will not be accepted by wire
transfer. See "The Conversion--
Subscription Offering -- Payment for
Shares."
Purchase Limitations............... A maximum of $600,000 in Common Stock may
be purchased in the aggregate in all
categories in the Conversion by any person
together with any associate or group acting
in concert with such person. This maximum
purchase limitation does not apply to the
ESOP, which may purchase up to 8% of the
shares issued in the Conversion. A minimum
of 25 shares of Common Stock must be
purchased by any person purchasing any
shares
- --------------------------------------------------------------------------------
x
<PAGE>
- --------------------------------------------------------------------------------
in the Conversion to the extent sufficient
shares are available. See "Summary --
Purchase Limitations."
Nontransferability of
Subscription Rights............... The subscription rights of Eligible Account
Holders, Supplemental Eligible Account
Holders and the ESOP are nontransferable.
Persons violating the prohibition against
transferring such rights may lose the right
to subscribe for Common Stock in the
Conversion and may be subject to sanctions
by the Commissioner or the FDIC. See "The
Conversion -- Subscription Rights."
Expiration Date for the
Subscription Offering.............. The Expiration Date for the Subscription
Offering is 3:30 p.m. Eastern Standard Time
on _____________, 1997, unless extended by
the Bank. See "The Conversion --
Subscription Offering."
Expiration Date for the Direct
Community Offering................. The Expiration Date for the Direct
Community Offering is 3:30 p.m. Eastern
Standard Time on _____________, 1997,
unless extended by the Bank. See "The
Conversion -- Direct Community Offering."
Market for Stock................... As a mutual institution, the Bank has never
issued capital stock and, consequently,
there is no existing market for the Common
Stock. The Company has applied to have the
Common Stock quoted on the Nasdaq National
Market under the symbol "MYST." See "Market
for Common Stock."
Dividend Policy.................... The Company's board of directors currently
anticipates declaring and paying cash
dividends on the Common Stock at an initial
rate of approximately 2%, or $0.20 per
share of the aggregate Purchase Price,
commencing during the first full quarter
following consummation of the Conversion.
Pursuant to the Company's dividend policy,
there are certain limitations on the
Company's ability to pay dividends in
excess of current earnings for the three
years following the Conversion. In
addition, the Company's ability to pay
dividends will depend in part on the Bank's
current earnings. See "Dividends."
Risk Factors....................... A purchase of the Common Stock involves a
substantial degree of risk. Prospective
investors should carefully consider the
matters set forth under " Risk Factors."
The shares of Common Stock offered hereby
are not insured by the FDIC, the Share
Insurance Fund of the Co-operative Central
Bank or any other government agency.
No Board Recommendations........... The Bank's board of directors does not make
any recommendations to depositors or other
potential investors regarding whether such
persons should purchase the Common Stock.
An investment in the Common Stock must be
made pursuant to each investor's evaluation
of his or her best interests.
- --------------------------------------------------------------------------------
xi
<PAGE>
Stock Information Center........... If you have any questions regarding the
Conversion, call the Stock Information
Center at (781) 393-8638.
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth selected financial data concerning the
Bank at the dates and for the periods indicated. The following data is qualified
in its entirety by the detailed information and consolidated financial
statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................................. $149,653 $131,366 $124,966 $121,063 $115,799
Loans, net............................................... 114,568 94,760 80,217 77,988 80,284
Investment securities/(1)/
Available for sale..................................... 3,819 1,568 1,463 1,422 --
Held to maturity....................................... 17,504 16,926 25,051 25,152 --
Held for investment.................................... -- -- -- -- 16,160
Deposits................................................. 129,303 119,634 113,825 110,665 106,179
Borrowings............................................... 7,532 -- -- -- --
Total surplus............................................ 11,940 10,949 10,366 9,683 8,864
ASSET QUALITY DATA:
Non-performing loans..................................... $ 365 $ 622 $ 868 $ 839 $ 1,127
Allowance for loan losses................................ 977 742 757 749 746
Foreclosed real estate................................... -- -- 104 270 460
NUMBER OF:
Mortgage loans outstanding............................... 1,384 1,329 1,236 1,290 1,406
Deposit accounts......................................... 18,809 18,465 17,753 17,016 16,562
Full-service offices..................................... 3 3 2 2 2
NUMBER OF EMPLOYEES:
Full-time................................................ 44 42 40 38 34
Part-time................................................ 22 22 15 14 9
</TABLE>
_____________________________
/(1)/ Effective June 30, 1994, the Bank adopted Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115") which requires the
classification of the Bank's investment securities as "trading
securities," "held to maturity" or "available for sale." All of the
Bank's equity securities are classified as "available for sale." At June
30, 1993 all of the Bank's investment securities were held for investment
and carried at amortized cost.
xii
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest and dividend income...................................... $9,899 $8,928 $8,165 $7,784 $8,176
Interest expense.................................................. 4,911 4,569 3,885 3,474 3,960
------ ------ ------ ------ ------
Net interest income............................................ 4,988 4,359 4,280 4,310 4,216
Provision for loan losses......................................... 272 100 100 152 300
------ ------ ------ ------ ------
Net interest income after provision
for loan losses............................................... 4,716 4,259 4,180 4,158 3,916
Other income...................................................... 882 658 536 543 531
Operating expenses................................................ 4,330 3,878 3,576 3,144 2,931
------ ------ ------ ------ ------
Income before income taxes........................................ 1,268 1,039 1,140 1,557 1,516
Provision for income taxes........................................ 527 440 480 658 657
------ ------ ------ ------ ------
Income before cumulative effect of
change in accounting principle................................ 741 599 660 899 859
Cumulative effect of change in
accounting for income taxes................................... -- -- -- -- 221
------ ------ ------ ------ ------
Net income........................................................... $ 741 $ 599 $ 660 $ 899 $1,080
====== ====== ====== ====== ======
</TABLE>
xiii
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED JUNE 30,
----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Interest rate spread/(1)/...................... 3.63% 3.48% 3.57% 3.67% 3.78%
Net interest margin/(2)/....................... 3.84 3.67 3.73 3.81 3.93
Return on average assets....................... 0.54 0.48 0.55 0.75 0.97
Return on average equity....................... 6.40 5.53 6.46 9.61 12.98
Operating expenses as a percentage of average
total assets.................................. 3.15 3.08 2.97 2.62 2.63
Efficiency ratio/(3)/........................... 73.76 77.30 74.25 64.78 61.74
ASSET QUALITY RATIOS:
Non-performing loans as a percent of net
loans......................................... 0.32 0.66 1.08 1.08 1.40
Non-performing assets as a percent
of total assets.............................. 0.24 0.47 0.78 0.92 1.37
Allowance for loan losses as a percent of non-
performing loans.............................. 267.67 119.29 87.21 89.27 66.19
Net charge-offs to average
loans, net..................................... 0.04 0.13 0.12 0.19 0.24
CAPITAL RATIOS:
Average equity to average assets............. 8.42 8.60 8.47 7.81 7.46
Regulatory Tier I leverage capital ratio..... 8.08 8.51 8.30 8.00 7.65
Total surplus to total assets.................. 7.98 8.33 8.30 8.00 7.65
</TABLE>
____________________________
/(1)/ Interest rate spread represents the difference between weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
/(2)/ Net interest margin represents net interest income divided by average
interest-earning assets.
/(3)/ Operating expenses divided by the sum of net interest income and other
income.
xiv
<PAGE>
RECENT DEVELOPMENTS
The following financial data as of and for the three months ended September
30, 1997 and 1996 are derived in part from the unaudited consolidated financial
statements of the Bank. In the opinion of management, such unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments,
consisting solely of normal recurring adjustments, necessary to present fairly
such selected financial data as of for those periods and as of those dates. The
following financial data as of and for the years then ended, June 30, 1997 and
1996, have been derived in part from audited consolidated financial statements
of the Bank. The information presented below is qualified in its entirety by the
detailed information and consolidated financial statements included elsewhere in
this Prospectus and should be read in conjunction with "Management's Discussion
of Financial Condition and Results of Operations," and the consolidated
financial statements of the Bank and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
----------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets $149,653 $131,366 $158,075 $133,471
Loans, net 114,568 94,760 121,045 99,859
Investment securities
Available for sale 3,819 1,568 2,395 3,178
Held to maturity 17,504 16,926 17,502 17,921
Deposits 129,303 119,634 133,126 120,352
Borrowings 7,532 -- 11,524 998
Total surplus 11,940 10,949 12,304 11,243
ASSET QUALITY DATA:
Non-performing loans $ 365 $ 622 $ 342 $ 545
Allowance for loan losses 977 742 1,049 762
Foreclosed real estate -- -- -- --
NUMBER OF:
Mortgage loans outstanding 1,384 1,329 1,498 1,450
Deposit accounts 18,809 18,465 18,650 18,590
Full-service offices 3 3 3 3
NUMBER OF EMPLOYEES:
Full-time 44 42 45 45
Part-time 22 22 18 20
</TABLE>
_____________________________
xv
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
----------- ------------------
JUNE 30 SEPTEMBER 30
------- ------------
1997 1996 1997 1996
------ ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest and dividend income $9,899 $8,928 $2,785 $2,332
------ ------ ------ ------
Interest expense 4,911 4,569 1,391 1,162
------ ------ ------ ------
Net interest income 4,988 4,359 1,394 1,170
Provision for loan losses 272 100 70 25
------ ------ ------ ------
Net interest income after provision
for loan losses 4,716 4,259 1,324 1,145
Other income 882 658 345 229
Operating expenses 4,330 3,878 1,070 1,036
------ ------ ------ ------
Income before income taxes 1,268 1,039 599 338
------ ------ ------ ------
Provision for income taxes 527 440 244 139
------ ------ ------ ------
Net income $ 741 $ 599 $ 355 $ 199
====== ====== ====== ======
</TABLE>
xvi
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR
AT OR FOR THE YEARS THE THREE MONTHS
------------------- --------------------
ENDED JUNE 30, ENDED SEPTEMBER 30,
------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
SELECTED OPERATING RATIOS:
Interest rate spread/(1)/ 3.63% 3.48% 3.60% 3.52%
Net interest margin/(2)/ 3.84 3.67 3.86 3.75
Return on average assets 0.54 0.48 0.92 0.61
Return on average equity 6.40 5.53 11.94 6.39
Operating expenses as a percentage 3.15 3.08 2.79 7.15
of average total assets
Efficiency ratio/(3)/ 73.76 77.30 61.53 74.10
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of net loans 0.32 0.66 0.28 0.55
Non-performing assets as a percent
of total assets 0.24 0.47 0.22 0.41
Allowance for loan losses as a
percent of non-performing loans 267.67 119.29 306.73 139.82
Net charge-offs (recoveries)to average
loans, net 0.04 0.13 (0.01) 0.02
CAPITAL RATIOS:
Average equity to average assets 8.42 8.60 7.75 8.47
Regulatory Tier I leverage capital
ratio 8.08 8.51 8.08 8.51
Total surplus to total assets 7.98 8.33 7.78 8.42
</TABLE>
____________________________
(1) Interest rate spread represents the difference between weighted average
yield on interest-earning assets and the weighted average cost of interest-
bearing liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Operating expenses divided by the sum of net interest income and other
income.
xvii
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND JUNE 30, 1997.
The Bank's total assets increased by $8.4 million or 5.6% to $158.1 million at
September 30, 1997 from $149.7 million at June 30, 1997. The increase in total
assets is primarily attributable to a $6.5 million increase in net loans and a
$1.6 million increase in other earning assets. Total net loans increased by $6.5
million or 5.7% to $121.0 million or 76.6% of total assets at September 30, 1997
as compared to $114.6 million or 76.6% of total assets at June 30, 1997.
Investment securities held by the Bank decreased by $1.4 million or 6.7% to
$19.9 million at September 30, 1997 from $21.3 million at June 30, 1997. Other
earning assets increased by $2.5 million or 66.0% to $6.3 million at September
30, 1997 from $3.8 million at June 30, 1997.
Total deposits increased by $3.8 million or 3.0% to $133.1 million at
September 30, 1997 from $129.3 million at June 30, 1997. Total borrowings
increased by $4.0 million to $11.5 million at September 30, 1997 from $7.5
million at June 30, 1997. The Bank's continued use of borrowed funds reflects
additional funding needed to support its continued growth in net loans. Surplus
increased by $364,000 or 3.0% to $12.3 million at September 30, 1997 from $11.9
million at June 30, 1997 as a result of net income $355,000 and an increase in
the net unrealized gain on securities available for sale of $9,000.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996.
Net Income. The Bank's net income for the three months ended September 30,
1997 was $355,000 as compared to $199,000 for the three months ended September
30, 1996. This $156,000 or 78.4% increase in net income during the period was
the result of an increase of $224,000 in net interest income and an increase of
$116,000 in other income, offset by an increase of $45,000 in provision for loan
losses, an increase of $34,000 in operating expenses, and an increase in
provision for income taxes of $105,000. The Bank's continued expansion of its
lending activities accounted for the increase in net interest income, while its
other income increased due to gains on sales of investment securities. The
return on average assets for the three months ended September 30, 1997 was .92%
compared to .61% for the three months ended September 30, 1996.
Interest Income. Total interest and dividend income increased by $453,000 or
19.4% to $2.8 million for the three months ended September 30, 1997 from $2.3
million for the three months ended September 30, 1996. The increase in interest
income was a result of a higher level of loans and a greater mix of higher
yielding commercial and commercial real estate loans funded by maturing lower
yield investment securities and other earning assets. The average balance of net
loans for the three months ended September 30, 1997 was $117.3 million compared
to $97.8 million for the three months ended September 30, 1996. The average
yield on net loans was 8.17% for the three months ended September 30, 1997
compared to 7.98% for the three months ended September 30, 1996.
Interest Expense. Interest expense increased by $229,000 or 19.7% to $1.4
million for the three months ended September 30, 1997 from $1.2 million for the
three months ended September 30, 1996. The reason for the increase in interest
expense was the increase in the overall deposit balances as well as an increase
in Federal Home Loan Bank of Boston borrowings. Average interest-bearing
deposits increased by $10.6 million or 9.2% to $125.8 million for the three
months ended September 30, 1997 from $115.3 million for the three months ended
September 30, 1996. Average borrowings increased by $9.4 million to $9.9 million
for the three months ended September 30, 1997 from $522,000 for the three months
ended September 30, 1996.
Net Interest Income. The net interest income for the three months ended
September 30, 1997 was $1.4 million as compared to $1.2 million for the three
months ended September 30, 1996. The $224,000 or 19.1% increase can be
attributed to a combination of the $453,000 increase in interest and dividend
income and the $229,000 increase in interest expense on deposits and borrowed
funds. The average yield on interest earning assets increased 17 basis points to
7.70% for the three months ended September 30, 1997 from 7.53% for the three
months ended September 30, 1996, while the average cost on interest-bearing
liabilities increased by 9 basis points to 4.10% for the three months ended
September 30, 1997 from 4.01% for the three months ended
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September 30, 1997 from 4.01% for the three months ended September 30, 1996. As
a result, the interest rate spread increased to 3.60% for the three months ended
September 30, 1997 from 3.52% for the three months ended September 30,
1996.
Provision for Possible Loan Losses. The provision for loan losses was $70,000
for the three months ended September 30, 1997 as compared to $25,000 for the
three months ended September 30, 1996. At September 30, 1997, the balance of
the allowance for loan losses was $1,049,000 or .86% of total loans. During the
three months ended September 30, 1997, no amount was charged against allowance
for loan losses while $2,000 in recoveries was credited to the allowance for
loan losses. At September 30, 1996, the balance of the allowance for loan
losses was $762,000 or .76% of total loans. During the three months ended
September 30, 1996, $10,000 was charged against allowance for loan losses while
$5,000 in recoveries was credited to the allowance for loan losses.
Other Income. Non-interest income or other income was $345,000 for the three
months ended September 30, 1997 compared to $229,000 for the three months ended
September 30, 1996. The $116,000 or 50.7% increase was primarily the result of
a $139,000 increase in gain on sales of investment securities and a decrease in
the gains on the sale of mortgage loans held for sale of $29,000.
Operating Expenses. Non-interest expense or operating expense increased to
$1.1 million for the three months ended September 30, 1997 from $1.0 million for
the three months ended September 30, 1996. The increase of $34,000 or 3.3%
mainly resulted from a general increase in operating expenses. Annual operating
expenses are also expected to increase in future periods due to the increased
cost of operating as a stock institution.
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS,
AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING
TO MAKE AN INVESTMENT IN THE SHARES OF COMMON STOCK. WHEN USED IN THIS
PROSPECTUS, THE WORDS OR PHRASES "WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL
CONTINUE," "IS ANTICIPATED," "ESTIMATE," "PROJECT," "BELIEVE" OR SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS ." THE COMPANY
WISHES TO CAUTION READERS THAT ALL FORWARD-LOOKING STATEMENTS ARE NECESSARILY
SPECULATIVE AND NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE, AND TO ADVISE READERS THAT
VARIOUS RISKS AND UNCERTAINTIES, INCLUDING REGIONAL AND NATIONAL ECONOMIC
CONDITIONS, CHANGES IN LEVELS OF MARKET INTEREST RATES, CREDIT RISKS OF LENDING
ACTIVITIES, AND COMPETITIVE AND REGULATORY FACTORS, COULD AFFECT THE COMPANY'S
FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR FUTURE
PERIODS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED. THE RISKS
HIGHLIGHTED HEREIN SHOULD NOT BE ASSUMED TO BE THE ONLY THINGS THAT COULD AFFECT
FUTURE PERFORMANCE OF THE COMPANY.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
For the year ended June 30, 1997, the Bank's return on average equity
was 6.40%. On a pro forma basis, for the year ended June 30, 1997, assuming the
sale of the midpoint of 2,050,000 shares of Common Stock in the Conversion at
the beginning of the year, the Bank's return on equity would have been 3.69%.
With a relatively high capital position as a result of the Conversion, and with
the possible difficulty in finding good quality loans in which to invest, it is
unlikely that the Company will be able to immediately generate earnings to
support its higher level of capital. In addition, the expenses associated with
the ESOP, the Restricted Stock Plan and possible branching costs, along with
other post-Conversion expenses and the expenses associated with having publicly
traded stock, are expected to contribute to increased operating expenses (in
comparison to past results of operations). As a result, it is expected that the
Company's return on equity initially will be lower than the Bank's historical
levels and will be below industry norms for stock banks. Consequently, investors
expecting a return on equity which will meet or exceed industry standards for
the foreseeable future should carefully evaluate and consider the risk of a
subpar return on equity.
POSSIBLE DELAYS IN CONSUMMATION OF THE CONVERSION
Consummation of the Conversion is contingent upon the receipt of
approvals of the Commissioner and the FDIC. The Bank's Plan of Conversion was
approved by the Commissioner on ____________ ___, 1997, and was approved by the
Bank's depositors on October 28, 1997. The FDIC, pursuant to its rule requiring
state-chartered banks to provide notice to the FDIC of their intention to
convert to stock form and prohibiting consummation of such a conversion unless
the FDIC provides a notice of non-objection with respect to the transaction, has
provided to the Bank a letter dated ___________ __, 1997 indicating that,
subject to the satisfaction of certain conditions, the FDIC plans to issue such
notice of non-objection in connection with the Conversion. The conditions are
that: (i) the Bank must receive final approval of the conversion from the
Commissioner and (ii) the Bank must advise the FDIC of the results of the
Offerings and deliver an updated appraisal taking those results into account,
discussing any material developments during the subscription period, and
explaining any rejected stock orders. If the FDIC concludes that the updated
appraisal presents a fair value of the Bank and that the Bank has adequately
justified any rejected stock orders, it will issue a letter of non-objection to
the Conversion.
Accordingly, consummation of the Conversion may be significantly
delayed or terminated in the event such approvals have not been received by the
Bank. If such approvals are not obtained, all subscription funds held will be
returned promptly with interest at the Bank's passbook rate, currently 2.6% and
all withdrawal authorizations will be terminated.
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GROWTH OF THE BANK'S COMMERCIAL LOAN AND COMMERCIAL REAL ESTATE LOAN PORTFOLIO
Since 1995, the Bank's lending activities have increasingly emphasized
commercial and commercial real estate loans to small businesses in its market
area. At June 30, 1997, the Bank's total loan portfolio included commercial
loans of $3.7 million, or 3.2% of net loans and commercial real estate loans of
$17.8 million or 15.6% of net loans. Commercial loans accounted for 10.7% and
8.6% of the Bank's total loan originations during the fiscal years 1997 and
1996, respectively, and commercial real estate loans accounted for 23.6% and
15.8% of the Bank's total loan originations during the fiscal years 1997 and
1996, respectively. Additionally, because the Bank has originated most of its
current commercial and commercial real estate loans within the past three to
five years, the commercial and commercial real estate loan portfolio is
unseasoned, and there can be no guarantee as to the long-term performance of
such loans.
The Bank attempts to collateralize all of its commercial loans with
real estate or tangible commercial assets. Loans secured by commercial real
estate properties generally involve a higher degree of risk than the single-
family mortgages traditionally emphasized by banking institutions engaged in
residential real estate lending. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Commercial and commercial real estate loans may also involve
relatively large loan balances to single borrowers or groups of related
borrowers. The repayment of commercial loans is typically dependent on the
successful operation and income stream of the borrower. Such loans can be
significantly affected by economic conditions. In addition, commercial and
commercial real estate lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
POSSIBLE DILUTIVE EFFECT OF FUTURE STOCK BENEFIT PLANS
In the future, the Company intends to implement the Restricted Stock
Plan and the Option Plan for the benefit of certain officers, directors and
employees of the Bank and the Company. It is not currently anticipated that
such plans would be implemented during the first year following the date of the
consummation of the Conversion. When a decision is made to implement the
Restricted Stock Plan and/or the Option Plan, such plans must be approved by a
majority of the Company's shareholders and the Commissioner. The maximum number
of shares which would be issued under the proposed Restricted Stock Plan and
Stock Option Plan would not exceed 4% and 10%, respectively, of the stock to be
issued in the Conversion. Shares issued pursuant to the Restricted Stock Plan
or the Stock Option Plan will be acquired either through open market purchases
or the issuance of authorized but unissued shares of Common Stock from the
Company. If the Restricted Stock Plan is funded by the issuance of authorized
but unissued shares, the voting interests of existing shareholders will be
diluted by 3.8%. If all of the Stock Options intended to be granted were to be
exercised using authorized but unissued Common Stock and if the Restrict Stock
Plan is funded with authorized but unissued shares, the voting interests of
existing stockholders would be diluted by 12.3%.
REGULATORY ENVIRONMENT
The Bank is subject to extensive regulation, supervision and
examination by the Commissioner and the FDIC. Such regulation and supervision
establishes a comprehensive framework of activities in which a bank may engage
and is intended primarily for the protection of depositors and the deposit
insurance fund which is administered by the FDIC. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities. Any change in such regulation, whether
by the Commissioner, the Massachusetts legislature, the FDIC or the U.S.
Congress, could have a significant impact on the Bank and its operations. In
response to an increase in the number of financial institution failures in the
early 1990s, Congress passed legislation which has significantly increased the
regulation of financial institutions through, among other things, the imposition
of higher capital requirements and restrictions on activities and an increase in
the penalties that may be imposed on financial institutions for regulatory
violations. See "Regulation."
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ANTI-TAKEOVER PROVISIONS AND VOTING CONTROL OF MANAGEMENT
It is the present intention of the board of directors of Mystic to
remain an independent, locally-owned financial institution. The Certificate of
Incorporation and bylaws of the Company provide, among other things, for
restrictions on the acquisition of more than 10% of the Company's outstanding
Common Stock following consummation of the Conversion. In addition, the
Certificate of Incorporation prohibits an owner of Common Stock in excess of 10%
of the then-outstanding shares to vote those shares held in excess of the 10%
limit.
Also, the Certificate of Incorporation requires an affirmative vote of
at least 80% of outstanding shares for certain business combinations. The
Certificate of Incorporation also authorizes the issuance of serial preferred
stock, the rights and preferences of which may be designated by the board of
directors without stockholder approval. Additionally, the board of directors is
divided into three classes, each class serving a staggered term and containing
approximately one-third of the members of the board of directors. The
classified board of directors is intended to provide for continuity of the board
of directors and make it more difficult and time consuming for a stockholder
group to use its voting power to gain control of the board of directors without
consent of the incumbent board of directors. The Certificate of Incorporation
does not provide for cumulative voting for any purpose. Also, the bylaws of the
Company provide that special meetings of stockholders of the Company may be
called only by the Chairperson of the board, the President or by resolution of
at least three-fourths of the directors then in office. Moreover, stockholder
action by written consent in lieu of a meeting is not permitted. These and
other provisions are designed to encourage or may have the effect of encouraging
any prospective acquiror to negotiate directly with the board of directors.
These provisions may discourage non- negotiated takeover attempts which certain
stockholders may deem to be in their interest and may tend to perpetuate
existing management.
In addition, directors and executive officers of the Bank expect to
purchase approximately 7.06% at the minimum of the Current Valuation Range, or
5.22% at the maximum of the Current Valuation Range, of the shares of Common
Stock issued in the Conversion assuming such shares are available to satisfy
their subscriptions. Such purchases will be made for investment and not with a
view to re-sale and will be subject to a restriction that the shares not be sold
for a period of one year following the date of purchase except in certain
circumstances. See "The Conversion -- Restrictions on Transferability by
Directors and Officers." In addition, the Bank's executive officers will control
approximately ____% of the stock issued in the Conversion through the ESOP
(assuming that one annual allocation has been made under the ESOP) assuming the
rates of compensation paid in fiscal 1997 to executive officers were used to
determine ESOP awards. Under the terms of the ESOP, the unallocated shares will
be voted by the independent ESOP trustee in the same proportions as the
allocated shares. Voting control by management and directors over shares
purchased in the Conversion or acquired under the ESOP could, based upon the
assumptions set forth above, total approximately 9.38% at the minimum of the
Current Valuation Range, or approximately 7.54%, at the maximum of the Current
Valuation Range, of the shares issued in the Conversion. If all shares issuable
under the ESOP, the Restricted Stock Plan and the Stock Option Plan were issued
to the management and directors of the Company, management and directors would
control 21.54% of the total voting stock of the Company at the maximum of the
current valuation range. Such voting control could defeat stockholder proposals
requiring an 80% super-majority vote. As a result, these provisions may
discourage proxy contests and other takeover attempts that certain stockholders
may deem to be in their best interests and may tend to perpetuate existing
management of the Company. See "Certain Restrictions on Acquisition of the
Company and the Bank" for more information concerning anti-takeover provisions
and management's voting control.
POTENTIALLY ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC AND INDUSTRY
CONDITIONS
The Banking Industry. The results of operations of banking
institutions are materially affected by general economic conditions, the
monetary and fiscal policies of the federal government and the regulatory
policies of governmental authorities and other factors that affect market rates
of interest. The results of operations of banking institutions depend to a large
extent on their level of "net interest income," which is the difference between
interest income on interest-earning assets, such as loans and investments, and
interest
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expense on interest-bearing liabilities, such as deposits and borrowings. A
significant portion of the assets of most banking institutions consists of long-
term residential mortgages and loans with shorter terms to maturity. The
repricing periods of these assets are generally not as short as those of the
banking institution's interest-bearing liabilities. As a result, the yield on
interest-earning assets of most banking institutions has adjusted to changes in
interest rates at a slower rate than the cost of their interest-bearing
liabilities. Banking institutions in recent years have experienced significant
fluctuations in net interest income due to rapidly changing interest rates and
to differences in the repricing characteristics of their interest-earning assets
and interest-bearing liabilities. Because most banking institutions continue to
hold assets which reprice more slowly than their liabilities, any significant
increase in interest rates would be expected to have an adverse impact on net
interest income.
The Bank. The results of operations of the Bank are affected by the
same factors as those described above with respect to banking institutions
generally. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset/Liability Management" and "Business -- Lending
Activities."
LIMITED MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital
stock and consequently there is no established market for the Common Stock at
this time. Accordingly, there can be no assurance that an active public trading
market for the Company's Common Stock will develop or be maintained in the
foreseeable future. However, Trident Securities has agreed to act as a market
maker for the Company's Common Stock following consummation of the Conversion
and the Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "MYST." In order for its securities to be listed on
the Nasdaq National Market, the Company must meet net tangible assets, pretax
income, public float, minimum price, shareholder and market maker requirements.
Although the Company believes that it currently meets those requirements, there
can be no assurance that the Company will meet the Nasdaq National Market
listing requirements at the time of the Conversion, in the future or at all.
Accordingly, purchasers of Common Stock should have a long-term investment
intent and recognize that the absence of an active and liquid trading market may
make it difficult to sell the Common Stock, and may have an adverse effect on
the price. See "Market for Common Stock."
MYSTIC FINANCIAL, INC.
Mystic was recently organized at the direction of the board of
directors of the Bank for the purpose of acquiring all of the capital stock of
the Bank to be issued in the Conversion. The Company has received approval from
the Federal Reserve Board ("FRB") to become a bank holding company and, upon
completion of the Conversion, will be subject to regulation by the FRB. See
"The Conversion--General" and "Regulation--Holding Company Regulation." Upon
consummation of the Conversion, the Company will have no significant assets
other than the shares of the Bank's capital stock acquired in the Conversion and
an amount equal to approximately 50% of the net proceeds of the Conversion,
including the loan to the ESOP, and will have no significant liabilities. The
Company intends to use a portion of the net proceeds it retains to loan to the
ESOP funds to enable the ESOP to purchase up to 8% of the stock issued in
connection with the Conversion. See "Use of Proceeds." The management of
Mystic 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 certain officers who are currently
officers of the Bank but will utilize the support staff of the Bank from time to
time.
Management believes that the holding company structure will provide
the Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with other financial institutions and financial services related companies.
Presently, there are no current arrangements, understandings or agreements
regarding any such opportunities. However, subsequent to the Conversion, the
Company will be in a position, subject to regulatory limitations and the
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Company's financial position, to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to be funded by the proceeds to be retained by the Company,
income thereon and through dividends from the Bank.
The Company's executive office is located at the administrative
offices of the Bank, 60 High Street, Medford, Massachusetts 02155. Its
telephone number is (781) 395-2800.
MEDFORD CO-OPERATIVE BANK
The Bank is a Massachusetts chartered mutual co-operative bank founded
in 1886 with three full-service offices and one educational branch office in
Medford, Massachusetts. The Bank's deposits have been federally insured since
1986 and are currently insured by the BIF of the FDIC and the Share Insurance
Fund of the Co-operative Central Bank. The Bank has been a member of the Co-
operative Central Bank since 1932 and a member of the FHLB since 1988. The Bank
is subject to comprehensive examination, supervision and regulation by the
Commissioner and the FDIC. This regulation is intended primarily for the
protection of depositors and borrowers.
The Bank's offices are located at 60 High Street, 430 High Street, 201
Salem Street and 489 Winthrop Street, Medford, Massachusetts, and its main
office telephone number is (781) 395-2800. The Bank considers its primary market
area to be the Massachusetts communities of Medford, Malden, Everett, Stoneham,
Arlington, Winchester, Somerville, Melrose, Lexington and Bedford, which are
located in eastern Middlesex County, Massachusetts.
The Bank has an active subsidiary, Mystic Securities Corporation,
which was established for the sole purpose of acquiring and holding investment
securities. All securities held by Mystic Securities Corporation are
investments which are permissible for banks to hold under Massachusetts law.
The business of the Bank primarily consists of attracting savings
deposits from the general public and investing such deposits in mortgage loans
secured by one- to four- family residential real estate located in its market
area, commercial loans secured by assets and commercial real estate of
businesses located in its market area and investment securities, including U. S.
Government and Federal Agency securities, equity securities and interest-earning
deposits. The Bank also makes consumer loans, including home equity loans,
automobile, passbook and other consumer loans. The Bank offers both fixed-rate
and adjustable-rate loans and emphasizes the origination of residential real
estate mortgage loans and commercial loans with adjustable interest rates. The
Bank also makes other short-term (one to three year) interest sensitive
investments which allow the Bank to monitor the interest rate, maturities and
repricing intervals of its assets and liabilities.
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank dedicated to financing home ownership
and small business and consumer needs in its market area and providing quality
service to its customers. The Bank has implemented this strategy by: (i)
monitoring the needs of customers and providing quality service; (ii)
emphasizing consumer-oriented banking by originating residential mortgage loans
and consumer loans, and by offering various deposit accounts and other financial
services and products; (iii) recently increasing its emphasis on commercial
banking and lending by originating loans for small businesses and providing
greater services in its commercial and commercial real estate loan department,
(iv) maintaining high asset quality through conservative underwriting standards;
and (v) producing stable earnings.
DIVIDENDS
Payment of dividends on the Common Stock will be subject to
determination and declaration by the board of directors of the Company and the
availability of funds therefor. The Company's board of directors currently
anticipates declaring and paying cash dividends on the Common Stock at an
initial annual rate of approximately $0.20 per share per year (or 2% based on
the $10.00 Purchase Price per share),
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commencing the first full quarter following consummation of the Conversion.
Pursuant to the Bank's dividend policy, the Board of Directors has determined
that the Bank will not pay dividends in excess of current earnings for the three
years following the Conversion, and will not pay dividends from borrowed funds
or nonrecurring gains. As a condition to the approval of the Conversion, any
change in this policy would require the prior approval of the Commissioner. Any
dividend policy of the Company, however, will also depend upon the Company's
debt and equity structure, earnings and financial condition, need for capital in
connection with possible future acquisitions and other factors, including
economic conditions, regulatory restrictions and tax considerations. No
assurance can be given that dividends will be declared or as to the amount and
frequency of dividends, if declared.
The only funds available to the Company for the payment of dividends
will be cash and cash equivalents held at the holding company level, dividends
paid by the Bank to the Company, and borrowings. The Bank will be prohibited
from paying cash dividends to the Company to the extent that any such payment
would reduce the Bank's capital below required capital levels or would impair
the liquidation account to be established for the benefit of the Bank's Eligible
Account Holders and Supplemental Eligible Account Holders at the time of the
Conversion. See "The Conversion--Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank--Liquidation Account."
BUSINESS PURPOSES
General. The Bank, as a mutual co-operative bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
stock form of organization, the Bank will be structured in the form used by
commercial banks, most business entities and a growing number of savings
institutions. The Conversion will be important to the future growth and
performance of the Bank by providing a larger capital base on which the Bank may
operate, enhancing future access to capital markets, providing the ability to
attract and retain qualified management through stock-based compensation
programs, enhancing the Bank's and the Company's ability to diversify into other
financial services related activities and enhancing the Bank's and the Company's
ability to render services to the public.
The board of directors and management of the Bank believe that the
stock form of organization is a preferred form (as opposed to the mutual form)
of organization for a financial institution. The Board and management recognize
the decline in the number of mutual thrift institutions from over 12,500 in 1929
to just over 800 today.
The Bank believes that converting to the stock form of organization
will allow the Bank to more efficiently compete with local community banks and
thrift institutions, most of which are stock owned, and with statewide, regional
and super-regional banks, all of which are stock owned. The Bank believes that
by combining quality service and products with a local ownership, base its
customers and community members who become stockholders will be more inclined to
do business with the Bank.
Additionally, the Bank has, from time to time, experienced the need
for additional liquidity, due in part to the expansion of the commercial and
commercial real estate loan department and the need for funds to originate such
loans. Recently, the Bank has utilized borrowings from the FHLB and has engaged
in selected loan sales as a source of liquidity. The Bank believes that the
capital-raising power of a stock form company would help to meet the need for
additional liquidity.
Furthermore, the Board considers having access to the capital markets
an important option for the Bank. While immediately following the Conversion the
Bank will be well capitalized, the Bank's capital could decrease as a result of
unforeseen circumstances affecting the economic viability of the Bank's market
area. The protection of this additional capital against such an economic
downturn is seen by management as a key benefit of the Conversion.
Finally, because the Bank competes with local, regional and super-
regional banks not only for customers, but also for employees, it believes that
the stock form of organization will better afford the Bank
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the opportunity to attract and retain employees and management through various
stock benefit plans like the ESOP.
After the Conversion, the Company will have a substantially increased
capital position. Based on the Company's pro forma capital at June 30, 1997 of
$29.2 million and annualized pro forma net income of $1,063,000 (based on the
mid-point of the Current Valuation Range), the Company would have a pro forma
reported return on stockholders' equity of 3.69%, which in the opinion of
management is not an acceptable long-term return. See "Pro Forma Data." With
the possible difficulty of finding good quality loans to originate and because
the Company intends to control its growth, unacceptable returns likely will
exist for the foreseeable future. For this reason, the Company expects to
manage capital through the payment of regular cash dividends, the possible
payments of special dividends, and the implementation of stock repurchases,
depending upon capital levels and regulatory and market limitations and subject
to the discretion of the board of directors. Management and the board of
directors recognize their responsibility to stockholders; however, they are also
concerned with continuing to operate a safe, sound and viable community
financial institution.
Convenience and Needs Considerations. Management and the board of
directors believe that the mutual to stock conversion through the Subscription
and Direct Community Offering process is in the best interests of the various
communities that the Bank serves because following the Conversion it is
anticipated that a significant portion of the Common Stock will be owned by
local residents desiring to share in the ownership of a local community
financial institution. Because the Bank will have a higher level of capital
after the Conversion, it is also believed that local stockholders, along with
all stockholders, may share in the Bank's future profitability through possible
regular cash dividends or, if deemed prudent by management and the board of
directors, the possibility of payment of periodic special dividends. See
"Dividends." Furthermore, should the price of the Common Stock increase
following the Conversion, recognizing the chance that the price could decline or
remain the same, stockholders will share in the success of the local institution
through capital appreciation.
The Bank has endeavored to be a good corporate and community citizen
through the years. Community investment and involvement have been a large part
of the Bank's history and tradition and a key reason for its success. Programs
such as the first-time homebuyer seminars and loans to provide housing for low
and moderate income borrowers have been a recent emphasis and have helped the
Bank earn the highest possible Community Reinvestment Act ("CRA") performance
rating of "Outstanding."
The Bank looks forward to continuing its community investment by
offering services such as Savings Bonds, the "Save for America" program -- a
banking program for elementary school students, the student-operated branch at
Medford High School -- one of the first such programs in the state, and the
"School-Link" program -- after-school program designed to promote interaction
between the students, schools, and students' families, all of which will
continue to benefit the children of the Bank's community.
In an effort to further assure that it meets the lending needs of its
communities, the Bank participates in a CRA bank consortium in cooperation with
six other local banks. The consortium meets on CRA issues to offer more
effective CRA support and improve CRA performance in their communities through
home buying seminars, offering credit counseling programs and programs to help
low-income homeowners with the repair and rehabilitation of their homes and
neighborhoods.
Remaining a good corporate citizen is an essential responsibility of
any community financial institution, and the Bank will continue to pursue new
avenues to assist the communities it serves. However, playing such a role can
also be a very costly proposition for a small institution, which is subject to
increasing competitive pressures and economic uncertainty. The Bank's board of
directors and management feel that in times of rising interest rates or economic
difficulties, the Bank will be in a better position to continue and build its
community support efforts due to the capital cushion provided through funds
received in the Conversion.
Because management will focus its Conversion stock marketing efforts
on the community it serves, the Bank anticipates that a significant portion of
the shares offered will be purchased by local residents and businesses. As a
result, it is hoped that these local stockholders will take an active role in
suggesting additional ways in which the Bank could better support community
needs.
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USE OF PROCEEDS
An amount equal to 50% of the net proceeds from the sale of the Common
Stock ($8.6 million at the midpoint of the Current Valuation Range) will be
added to the general funds of the Bank and used for general corporate purposes,
including the origination of loans, funding the construction and/or acquisition
costs of establishing new branch locations, enhancing the Bank's liquidity
ratios and enhancing future access to capital markets. The balance of the funds
will be retained as the Company's initial capitalization, with a portion of
those funds ($1,640,000 at the midpoint of the Current Valuation Range) being
loaned to the ESOP to fund its purchase of Common Stock in the Offerings or, if
necessary, to purchase shares of Common Stock through open-market purchases
following completion of the Offerings. Pursuant to the Bank's Past-Conversion
Supervision Policy, the Company may use the funds it retains to support future
expansion of operations or diversification into other banking-related businesses
and for other business or investment purposes, although management has no
current plans regarding such activities. Subject to applicable limitations, the
Company may also use available funds to repurchase shares of Common Stock and
for the payment of dividends. It is expected that in the interim, all or part
of the net proceeds will be invested in U.S. Government and Agency securities
and other short-term investments and used to reduce FHLB borrowings.
The Bank has structured an array of commercial services administered
and run by the Bank's commercial loan department which are designed to give
business owners borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle purchases and
the refinancing of existing corporate debt. In the past two years, the Bank has
made a major commitment to small business commercial lending. The Bank has
worked to develop a niche of making commercial loans to companies which have
from $500,000 to $15 million in sales and has recently become an approved lender
of the Small Business Administration. The Bank has expanded its commercial
lending department with the addition of two senior officers with considerable
commercial lending expertise and has developed a support staff to run the
commercial loan department. Conversion proceeds are expected to be deployed to
fund the Bank's traditional one- to four-family residential lending, as well as
the expanded commercial lending activities. There is no specific amount the
Bank plans to allocate to the Company's lending operation. The Bank has
experienced strong loan demand and anticipates that a portion of the proceeds
will be used to fund additional loans, thereby reducing the Bank's reliance on
deposits and borrowings for funding needs.
Although the Bank opened a new office at 201 Salem Street in December
1995, which has been successful, especially on the commercial lending front,
the Bank's lending and deposit gathering activities are limited by the fact that
it currently operates from only three full service locations and one student-run
educational branch located at Medford High School. Accordingly, pursuant to its
Post-Conversion Supervision Policy, the Bank is pursuing establishing one or
more other branch locations either de novo, or by purchasing an existing deposit
base and/or location. The Bank has performed feasibility studies of certain
locations, and is considering a plan to establish a new branch at one of these
locations. Although there can be no assurance that the Bank's branching efforts
will be successful, the Bank expects to apply a portion of the Conversion
proceeds to fund the construction and/or acquisition of one or more additional
branch locations. The Bank is reviewing the feasibility of expanding its branch
network and continues to review various locations on an ongoing basis. However,
there are no specific plans or sites which have been identified by the Bank as
probable locations and there are no current negotiations for the acquisition of
branch locations other than inquiries as to availability and cost. Expansion
beyond four offices will facilitate expanded services and increased loan
originations within the Bank's existing underwriting standards.
The total number of shares of the Common Stock to be issued in the
Conversion cannot be stated with certainty at this time, because it will depend
upon the estimated pro forma market value of the Common Stock at the time of
sale. See "The Conversion -- Stock Pricing and Number of Shares to be Issued."
However, the net proceeds to the Company would be approximately $17,257,000
based upon the assumptions that (i) 2,050,000 shares of Common Stock are sold at
a purchase price per share of $10.00 for an aggregate of $20,500,000 (the
midpoint of the Current Valuation Range), (ii) the Conversion expenses are
$782,780 in the aggregate and (iii) ESOP and Restricted Stock Plan purchases
are $1,640,000 and $820,000, respectively.
-8-
<PAGE>
THE ACTUAL NET PROCEEDS MAY BE MORE OR LESS THAN THE ESTIMATED AMOUNT
BECAUSE THE TOTAL PROCEEDS FROM THE SALE OF THE COMMON STOCK MAY BE
SIGNIFICANTLY MORE OR LESS THAN THE MIDPOINT OF THE CURRENT VALUATION RANGE AND
BECAUSE ACTUAL CONVERSION EXPENSES MAY BE MORE OR LESS THAN THOSE CURRENTLY
EXPECTED. The following table indicates the total gross proceeds, estimated
Conversion expenses and estimated net proceeds, assuming the Common Stock is
sold at the minimum, midpoint and maximum of the Current Valuation Range, and at
the Super-Maximum (which is 15% above the maximum of the Current Valuation Range
and is the highest amount of Common Stock that may be sold without further
solicitation of subscribers).
<TABLE>
<CAPTION>
SUPER
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM OF
1,742,500 SHARES 2,050,000 SHARES 2,357,500 SHARES 2,711,125 SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
----------------- ----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Gross proceeds......................... $17,425 $20,500 $23,575 $27,111
Estimated conversion expenses (715) (783) (851) (929)
Less: ESOP Stock Purchases............. (1,394) (1,640) (1,886) (2,169)
Less: Restricted Stock Plan (697) (820) (943) (1,084)
Purchases.......................... ------- ------- ------- -------
Estimated net proceeds................. $14,619 $17,257 $19,895 $22,929
======= ======= ======= =======
</TABLE>
MARKET FOR COMMON STOCK
The Bank, as a mutual co-operative bank, has never issued capital
stock and consequently there is no established market for the Common Stock at
this time. Accordingly, there can be no assurance that an active public trading
market for the Company's Common Stock will develop or be maintained in the
foreseeable future. However, Trident Securities has agreed to act as a market
maker for the Company's Common Stock following consummation of the Conversion
and the Company has applied to list the Common Stock on the Nasdaq National
Market under the symbol "MYST." In order for its securities to be listed on the
Nasdaq National Market, the Company must meet net tangible assets, pretax
income, public float, minimum price, shareholder and market maker requirements.
Although the Company believes that it currently meets those requirements, there
can be no assurance that the Company will meet the Nasdaq National Market
listing requirements. Accordingly, purchasers of Common Stock should have a
long-term investment intent and recognize that the absence of an active and
liquid trading market may make it difficult to sell the Common Stock, and may
have an adverse effect on the price.
-9-
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth, for each director of the Bank, for the
executive officers of the Bank as a group and for all directors and officers as
a group (including their associates) certain information as to the number of
shares of Common Stock which they have advised the Bank that they intend to
purchase. For purposes of the following table, it has been assumed that
2,050,000 shares of Common Stock will be offered at $10.00 per share, the
midpoint of the Current Valuation Range (see "The Conversion--Stock Pricing and
Number of Shares to be Issued") and that sufficient shares will be available to
satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Total
Shares of Aggregate Purchase
Name Common Total Price of
Stock Percentage Proposed Purchases
---------- ---------- ------------------
<S> <C> <C> <C>
Julie Bernardin 1,000 0.05% $ 10,000
John A. Hackett 5,000 0.24% 50,000
Richard M. Kazanjian 20,000 0.98% 200,000
John J. McGlynn 9,000 0.44% 90,000
Dennis Raimo 2,000 0.10% 20,000
Robert B. Risman(1) 10,000 0.49% 100,000
Lorraine P. Silva 10,000 0.49% 100,000
Robert H. Surabian 60,000 2.92% 600,000
All other executive officers
(4 persons) as a group......................... 6,000 0.29% 60,000
------- ---- ---------
Total shares to be purchased by directors and 123,000 6.00% $1,230,000
executive officers............................ ======= ==== ==========
</TABLE>
(1) Director Emeritus
-10-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization, including deposits,
of the Bank as of June 30, 1997 and the pro forma capitalization of the Company
as of that date after giving effect to the sale of the Common Stock in the
Conversion, based upon the assumptions that the shares of the Common Stock are
sold at the minimum, midpoint, maximum and super-maximum of the Current
Valuation Range, and that the expenses of the Conversion are as set forth under
"Use of Proceeds." Any change in the Current Valuation Range would require the
approval of the Commissioner. Purchasers will be given the right to change or
cancel their orders in the event that the aggregate purchase price is below
$17,425,000 or more than $27,111,250 (i.e., more than 15% above the maximum of
the Current Valuation Range of $23,575,000.) A MATERIAL CHANGE IN THE NUMBER OF
SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY AFFECT SUCH PRO FORMA
CAPITALIZATION. SEE "USE OF PROCEEDS" AND "THE CONVERSION-- STOCK PRICING AND
NUMBER OF SHARES TO BE ISSUED."
<TABLE>
<CAPTION>
PRO FORMA CAPITALIZATION
THE COMPANY BASED ON THE SALE OF
---------------------------------------------------------------------
2,711,125
CAPITALIZATION OF THE 1,742,500 2,050,000 2,357,500 SHARES AT
BANK AT SHARES SHARES SHARES SUPER-
JUNE 30, 1997 AT MINIMUM AT MIDPOINT AT MAXIMUM MAXIMUM
----------------------- ----------------- --------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits/(1)/..................... $ 129,303 $ 129,303 $ 129,303 $ 129,303 $ 129,303
FHLB advances..................... 7,532 7,532 7,532 7,532 7,532
-------- ---------- ---------- ---------- ----------
Total deposits and borrowed funds. $ 136,835 $ 136,835 $ 136,835 $ 136,835 $ 136,835
======== ========== ========== ========== ==========
Stockholders' equity:
Preferred stock, $0.01 par
value; authorized - 1,000,000
shares; assumed outstanding -
none............................ $ -- $ -- $ -- $ -- $ --
Common Stock, $0.01 par
value; authorized - 5,000,000
shares; shares to be
outstanding - as
shown in column heading/(2)/... -- 17 21 24 27
Additional paid-in capital/(3)/... -- 16,693 19,696 22,700 26,155
Retained earnings/(5)/............ 11,940 11,940 11,940 11,940 11,940
Less:
Common Stock to be acquired
by ESOP/(4)/................... --- (1,394) (1,640) (1,886) (2,169)
Common Stock acquired
by Restricted Stock Plan/(6)/.. --- (697) (820) (943) (1,084)
------------ ---------- ---------- ----------- ----------
Total stockholders' equity..... $ 11,940 $ 26,559 $ 29,197 $ 31,835 $ 34,869
============ ========== ========== =========== ==========
Total capitalization $ 148,775 $ 163,394 $ 166,032 $ 168,670 $ 171,704
============ ========== ========== =========== ==========
</TABLE>
_______________________________________________________
/(1)/ Withdrawals from deposit accounts for the purchase of the Common Stock
have not been reflected in these adjustments. Any withdrawals will reduce
pro forma capitalization by the amount of such withdrawals.
/(2)/ The number of shares of Common Stock to be issued in the Conversion will
be determined on the basis of the final appraisal and may be increased or
decreased. See "The Conversion--Stock Pricing and Number of Shares to be
Issued."
/(3)/ Based upon the estimated net proceeds from the sale of Common Stock less
the par value of shares sold. Estimated expenses are $714,884, $782,780,
$850,676 and $928,756, respectively. See "Use of Proceeds."
/(4)/ Assumes that 8% of the Common Stock will be acquired by the ESOP with
funds borrowed by the ESOP from the Company. The Bank intends to make
annual contributions to the ESOP over a ten-year period in an amount at
least equal to the principal and interest requirement (which interest rate
shall be at the prime rate) of the debt. See "Management of the Company --
Certain Benefit Plans and Agreements -- Employee Stock Ownership Plan and
Trust" for additional information.
/(5)/ Includes net unrealized gain on securities available for sale, net of tax
effects. The surplus of the Bank will be substantially restricted after
the Conversion. See "The Conversion-- Effect of Conversion to Stock Form
on Depositors and Borrowers of the Bank - Liquidation Account."
/(6)/ The Company intends to adopt the Restricted Stock Plan and submit such
plan to stockholders at special or annual meeting of stockholders to be
held not earlier than one year after the completion of the Conversion. If
the Restricted Stock Plan is approved by stockholders, the Company intends
to contribute sufficient funds to the trust created under the Restricted
Stock Plan to enable the trust to purchase a number of shares of Common
Stock equal to 4% of the Common Stock sold in the Offerings. The shares
are reflected as a reduction of stockholders' equity. The issuance of
authorized but unissued shares of Common Stock pursuant to the Restricted
Stock Plan in the amount of 4% of the Conversion stock would dilute the
voting interests of existing stockholders by approximately 3.7%. See "Pro
Forma Data" and "Management of the Bank -- Future Stock Benefit Plans --
Restricted Stock Plan."
-11-
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to
the Conversion for the period and at the date indicated, pro forma income from
operations, stockholders' equity and other data of the Bank prior to the
Conversion and of the Company following the Conversion. Pro forma income and
related data have been calculated for the year ended June 30, 1997 as if the
Common Stock to be issued in the Conversion had been sold at the beginning of
the respective periods, and the estimated net proceeds had been invested at
5.82% at the beginning of the respective periods. The foregoing yield
approximates the yield on the one-year U.S. Treasury bill at June 30, 1997. The
pro forma after-tax yield is assumed to be 3.43% for the periods, based on the
current effective tax rate of 41%. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Common Stock. No effect has been given in the pro
forma stockholders' equity calculations for the assumed earnings on the net
proceeds. The pro forma income and related data set forth below reflect accruals
to be made by the Bank with regard to the ESOP. See "Management of the Bank--
Certain Benefit Plans and Agreements." Both fixed Conversion expenses estimated
at $313,500 and the estimated Conversion expenses of Trident Securities have
been subtracted when figuring net proceeds. Trident Securities' expenses are
assumed to equal to 2.4% of the Common Stock sold in the Offerings less shares
purchased by the ESOP (assumed to be 8% of the Common Stock) and by directors
and officers of the Bank (see "Shares to Be Purchased by Management Pursuant to
Subscription Rights") plus an estimated $44,000 in fixed expenses.
THE PRO FORMA NET INCOME AMOUNTS DERIVED FROM THE ASSUMPTIONS SET FORTH
HEREIN SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF OPERATIONS
OF THE BANK THAT WOULD HAVE BEEN ATTAINED FOR THE YEAR ENDED JUNE 30, 1997, IF
THE CONVERSION HAD BEEN ACTUALLY CONSUMMATED AT THE BEGINNING OF SUCH PERIOD,
AND THE ASSUMPTIONS REGARDING INVESTMENT YIELDS SHOULD NOT BE CONSIDERED
INDICATIVE OF THE ACTUAL YIELDS EXPECTED TO BE ACHIEVED DURING ANY FUTURE
PERIOD.
THE STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE NOT
INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, OR THE CURRENT
VALUE OF ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE
FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL
INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION-- EFFECTS OF
CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK--LIQUIDATION
ACCOUNT." SUCH PRO FORMA DATA MAY BE MATERIALLY AFFECTED BY A CHANGE IN THE
NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND BY OTHER FACTORS. SEE "THE
CONVERSION--STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED."
-12-
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30, 1997(1)
--------------------------------------------------------
MINIMUM MID-POINT MAXIMUM SUPER-MAXIMUM
1,742,500 2,050,000 2,357,500 2,711,125
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(2)
----------- ---------- ---------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds (1)............................................... $ 17,425 $ 20,500 $ 23,575 $ 27,111
Less: Total expenses............................................. (715) (783) (851) (929)
---------- ---------- ---------- ----------
Estimated net proceeds(3)...................................... 16,710 19,717 22,724 26,182
Less: ESOP Stock Purchases(4).................................... (1,394) (1,640) (1,886) (2,169)
Less: Restricted Stock Plan purchases(5)......................... (697) (820) (943) (1,084)
---------- ---------- ---------- ----------
Estimated net cash proceeds..................................... $ 14,619 $ 17,257 $ 19,895 $ 22,929
========== ========== ========== ==========
Consolidated net income:
Historical...................................................... $ 741 $ 741 $ 741 $ 741
Pro forma income on net proceeds................................ 502 593 683 787
Pro forma ESOP adjustment(4)(6)................................. (148) (174) (200) (230)
Pro forma Restricted Stock Plan adjustment(5)................... (82) (97) (111) (128)
---------- ---------- ---------- ----------
Pro forma net income........................................... $ 1,013 $ 1,063 $ 1,113 $ 1,170
========== ========== ========== ==========
Per share net income:
Historical...................................................... $ 0.46 $ 0.39 $ 0.34 $ 0.29
Pro forma income on net proceeds................................ 0.31 0.31 0.31 0.31
Pro forma ESOP adjustment(4)(6)................................. (0.09) (0.09) (0.09) (0.09)
Pro forma Restricted Stock Plan adjustment(5)................... 0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net income per share.................................. $ 0.63 $ 0.56 $ 0.51 $ 0.46
========== ========== ========== ==========
Stockholders' equity:
Historical...................................................... $ 11,940 $ 11,940 $ 11,940 11,940
Estimated net proceeds.......................................... 16,710 19,717 22,724 26,182
Less: Common Stock acquired by ESOP(4).......................... (1,394) (1,640) (1,886) (2,169)
Less: Common Stock acquired by Restricted Stock
Plan(5)........................................................ (697) (820) (943) (1,084)
---------- ---------- ---------- ----------
Pro forma stockholders' equity................................. $ 26,559 $ 29,197 $ 31,835 $ 34,869
========== ========== ========== ==========
Stockholder's equity per share:
Historical...................................................... $ 6.85 $ 5.82 $ 5.06 $ 4.40
Estimated net proceeds.......................................... 9.59 9.62 9.64 9.66
Less: Common Stock acquired by ESOP(4).......................... (0.8) (0.8) (0.8) (0.8)
Less: Common Stock acquired by Restricted Stock Plan(5)......... (0.4) (0.4) (0.4) (0.4)
---------- ---------- ---------- ----------
Pro forma Stockholders' equity per share....................... $ 15.24 $ 14.24 $ 13.5 $ 12.86
========== ========== ========== ==========
Pro forma pricing ratios:
Offering price as a percentage of pro forma
stockholders' equity per share.................................. 65.62% 70.22% 74.07% 77.76%
Offering price as a multiple of pro forma net earnings
per share....................................................... 15.87x 17.86x 19.61x 21.74x
</TABLE>
_______________
(1) The effect of the liquidation account is not included in these
computations. For additional information concerning the liquidation
account, see "The Conversion--Effect of Conversion to Stock Form on
Depositors and Borrowers of the Bank--Liquidation Account." The amounts
shown do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation.
(2) The Company reserves the right to issue up to a total of 2,711,125 shares
at $10.00 per share, or 15% above the maximum of the Current Valuation
Range. Any increase in the number of shares to be issued which causes the
gross proceeds of the Offerings to exceed $23,575,000 (maximum of the
Current Valuation Range) would be subject to approval of the Commissioner.
Unless otherwise required by the Commissioner, subscribers will not be
given the right to modify their subscriptions unless the aggregate purchase
price of the Common Stock is increased to exceed $27,111,250 (i.e., 15%
above the maximum of the Current Valuation Range.)
(3) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. Management estimates that approximately 20%
of all subscription orders may utilize funds currently on deposit at the
Bank. See "Use of Proceeds."
(4) Assumes 8% of the shares to be sold in the Conversion are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Company. The approximate amount expected to
be borrowed by the ESOP is reflected in this table as a reduction of
capital. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Bank expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a ten-year term. Since the Company will be providing the ESOP loan,
only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. The provisions of SOP 93-6 have been
applied for shares to be acquired by the ESOP and for purposes of computing
earnings per share. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Employee Stock Ownership Plan and Trust."
(5) Assumes a number of issued and outstanding shares of Common Stock equal to
4% of the Common Stock to be sold in the Conversion will be purchased by
the Restricted Stock Plan. The dollar amount of the Common Stock possibly
to be purchased by the Restricted Stock Plan is based on the price per
share in the Conversion and represents unearned compensation and is
reflected as a reduction of capital. Such amount does not reflect possible
increases or decreases in the value of such stock relative to the price per
share in the Conversion. As the Bank
-13-
<PAGE>
acrues compensation expenses to reflect the vesting of such shares pursuant
to the Restricted Stock Plan, the charge against capital will be reduced
accordingly. In the event the shares issued under the Restricted Stock Plan
consist of shares of Common Stock newly issued at the price per share in
the Conversion, the per share financial condition and results of operations
of the Company would be proportionately reduced and to that extent the
interests of existing stockholders would be diluted by approximately 4%.
See "Management of the Bank -- Certain Benefit Plans and Agreements" and,
regarding possible dilution of proportionate voting rights and book value
and income per share, "Risk Factors -- Possible Dilutive Effect of Future
Stock Benefit Plans. "
(6) The Bank intends to record compensation expense related to the ESOP in
accordance with SOP 93-6. As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share and
stockholder's equity per share computations for leveraged ESOPs to include
as outstanding only shares that have been committed to be released to
participants. For purposes of the preceding table, it was assumed that the
number of ESOP shares committed to be released at June 30, 1997 was equal
to the percentage of principal repaid in the ESOP loan during the first
year.
-14-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Medford Co-
operative Bank for each of the fiscal years ended June 30, 1997, 1996 and 1995
have been audited by Wolf & Company, P.C., independent certified public
accountants, whose report thereon appears elsewhere herein. The 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 herein.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1997 1996 1995
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans.................................................... $8,397 $7,115 $6,323
Interest and dividends on investment securities............................... 1,208 1,364 1,358
Other interest................................................................ 294 449 484
------ ------ ------
Total interest and dividend income.......................................... 9,899 8,928 8,165
------ ------ ------
INTEREST EXPENSE:
Deposits...................................................................... 4,700 4,569 3,885
FHLB borrowings............................................................... 211 -- --
------ ------ ------
Total interest expense...................................................... 4,911 4,569 3,885
------ ------ ------
Net interest income............................................................. 4,988 4,359 4,280
Provision for loan losses....................................................... 272 100 100
------ ------ ------
Net interest income, after provision for loan losses............................ 4,716 4,259 4,180
------ ------ ------
OTHER INCOME (CHARGES):
Customer service fees......................................................... 536 512 410
Loan servicing and other loan fees............................................ 56 52 59
Gain on sale of mortgage loans................................................ 8 8 6
Write-down of mortgage loans held for sale.................................... -- (41) --
Gain on sale of securities available for sale, net............................ 168 4 --
Rental income, net of expenses................................................ 29 44 45
Co-operative Central Bank Share Insurance Fund special dividend............... 44 44 --
Miscellaneous................................................................. 41 35 16
------ ------ ------
Total other income.......................................................... 882 658 536
------ ------ ------
OPERATING EXPENSES:
Salaries and employee benefits................................................ 2,734 2,486 2,113
Occupancy and equipment expenses.............................................. 412 321 247
Data processing expenses...................................................... 207 179 175
FDIC insurance expense........................................................ 8 7 251
Foreclosed real estate, net................................................... -- (5) 77
Other general and administrative expenses..................................... 969 890 713
------ ------ ------
Total operating expenses.................................................... 4,330 3,878 3,576
------ ------ ------
Income before income taxes...................................................... 1,268 1,039 1,140
Provision for income taxes...................................................... 527 440 480
------ ------ ------
Net income...................................................................... $ 741 $ 599 $ 660
====== ====== ======
</TABLE>
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The business of the Bank consists of attracting deposits from the
general public and using these funds to originate various types of loans
primarily in eastern Middlesex County, Massachusetts, including mortgage loans
secured by one- to four-family residences, commercial loans secured by general
business assets, commercial real estate loans secured by commercial property,
and to invest in U.S. Government and Federal Agency and other securities. To a
lesser extent, the Bank engages in various forms of consumer and home equity
lending. The Bank's profitability depends primarily on its net interest income,
which is the difference between the interest income it earns on its loans and
investment portfolio and its cost of funds, which consists mainly of interest
paid on deposits and on borrowings from the FHLB. Net interest income is
affected by the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rates earned or paid on these balances. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
The Bank's profitability is also affected by the level of other
(noninterest) income and operating expenses. Other income consists primarily of
service fees, loan servicing and other loan fees and gains on sales of
investment securities. Operating expenses consist of salaries and benefits,
occupancy related expenses, and other general operating expenses.
The operations of the Bank, and banking institutions in general, are
significantly influenced by general economic conditions and related monetary and
fiscal policies of financial institution's regulatory agencies. Deposit flows
and the cost of funds are influenced by interest rates on competing investments
and general market rates of interest. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be offered and other
factors affecting loan demand and the availability of funds.
BUSINESS STRATEGY
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank dedicated to financing home ownership,
small business and consumer needs in its market area and providing quality
service to its customers. The Bank has implemented this strategy by: (i)
monitoring the needs of customers and providing quality service; (ii)
emphasizing consumer-oriented banking by originating residential mortgage loans
and consumer loans, and by offering various deposit accounts and other financial
services and products; (iii) recently increasing its emphasis on commercial
banking and lending by originating loans for small businesses and providing
greater services in its commercial and commercial real estate loan department;
(iv) maintaining high asset quality through conservative underwriting; and (v)
producing stable earnings.
ASSET/LIABILITY MANAGEMENT
A principal operating objective of the Bank is to produce stable
earnings by achieving a favorable interest rate spread that can be sustained
during fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets have longer terms to maturity than its primary source of
funds, i.e., deposit liabilities, increases in general interest rates will
generally result in an increase in the Bank's cost of funds before the yield on
its asset portfolio adjusts upward. The Bank has sought to reduce its exposure
to adverse changes in interest rates by attempting to achieve a closer match
between the periods in which its
-16-
<PAGE>
interest-bearing liabilities and interest-earning assets can be expected to
reprice through the origination of adjustable-rate mortgages and loans with
shorter terms and the purchase of other shorter term interest-earning assets.
The term "interest rate sensitivity" refers to those assets and
liabilities which mature and reprice periodically in response to fluctuations in
market rates and yields. As noted above, one of the principal goals of the
Bank's asset/liability program is to maintain and match the interest rate
sensitivity characteristics of the asset and liability portfolios.
In order to properly manage interest rate risk, the Bank's board of
directors has established an Asset/Liability Management Committee ("ALCO") made
up of members of management to monitor the difference between the Bank's
maturing and repricing assets and liabilities and to develop and implement
strategies to decrease the "negative gap" between the two. The primary
responsibilities of the committee are to assess the Bank's asset/liability mix,
recommend strategies to the Board that will enhance income while managing the
Bank's vulnerability to changes in interest rates and report to the Board the
results of the strategies used.
Since the early 1980s, the Bank has stressed the origination of
adjustable-rate residential mortgage loans and adjustable-rate home equity
loans. The Bank regularly sells fixed rate loans with terms in excess of 15
years. Since 1995, the Bank has also emphasized commercial loans with short-
term maturities or repricing intervals as well as commercial real estate
mortgages with short-term repricing intervals. In addition, the Bank has used
borrowings from the FHLB to match-fund the maturity or repricing interval of
several larger commercial real estate mortgages. At June 30, 1997, the Bank's
loan portfolio included $58.4 million of adjustable-rate one-to four-family
mortgage loans, $16.9 million of adjustable-rate commercial real estate loans,
$3.7 million of adjustable-rate or short-term commercial loans, and $1.6 million
of adjustable-rate home equity loans. Together, these loans represent 70.4% of
the Bank's net loans at June 30, 1997. See "Business-Lending Activities."
In the future, in managing its interest rate sensitivity, the Bank
intends to continue to stress the origination of adjustable-rate mortgages and
loans with shorter maturities and the maintenance of a consistent level of
short-term securities. See "Use of Proceeds."
INTEREST RATE SENSITIVITY 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 an institution'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 period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that same time period. A gap
is considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities, and is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, while
conversely, during a period of falling interest rates, a negative gap would
result in an increase in net interest income and a positive gap would negatively
affect net interest income.
-17-
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1997 which are expected
to mature or reprice in each of the time periods shown. In the table, investment
securities held to maturity are presented at amortized cost; other interest-
earning assets include marketable equity securities, FHLB stock, due from Co-
operative Central Bank, federal funds sold and other short-term investments;
fixed rate one-to four-family loans are assumed to have an average life of 12
years; adjustable rate one-to four-family loans, commercial real estate loans,
and commercial loans do not include any amortization or prepayment amounts.
Money market accounts, NOW accounts, regular and other deposits are allocated in
accordance with FDIC guidelines for interest rate risk management.
At June 30, 1997
<TABLE>
<CAPTION>
OVER OVER SIX OVER ONE OVER
THREE THREE MONTHS THROUGH THREE OVER
MONTHS THROUGH THROUGH THREE THROUGH SEVEN
OR LESS SIX MONTHS ONE YEAR YEARS SEVEN YEARS YEARS TOTAL
--------- ---------- -------- ----- ----------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS:
Investment $5,000 $2,000 $2,493 $ 8,011 $ -- $ -- $17,504
securities
held to
maturity........
Other 7,618 -- -- -- -- -- 7,618
interest-
earning
assets..........
Adjustable- 4,633 4,759 4,449 12,940 31,668 -- 58,449
rate one-to
four-
family
loans...........
Fixed rate 698 698 1,396 5,583 10,585 12,794 31,754
one- to
four-
family
loans...........
Commercial 986 227 2,107 10,264 3,097 1,166 17,847
real estate
loans...........
Commercial 2,288 2 -- 486 901 -- 3,677
loans
Home equity....... 1,564 -- -- -- -- -- 1,564
loans
Consumer 12 14 38 482 312 797 1,655
loans...........
Construction 976 -- -- -- -- -- 976
--------- --------- -------- -------- ----------- ------- ------
loans...............
Total 23,775 7,700 10,483 37,766 46,563 14,757 141,044
--------- --------- -------- -------- ----------- ------- ------
interest-
earning
assets........
INTEREST-
BEARING
LIABILITIES:
Certificates 24,138 8,528 15,650 10,475 344 -- 59,135
of deposit......
Money 6,489 -- -- -- -- -- 6,489
market
accounts........
NOW accounts 1,498 -- -- 2,996 5,992 7,489 17,975
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
OVER OVER SIX OVER ONE OVER
THREE THREE MONTHS THROUGH THREE OVER
MONTHS THROUGH THROUGH THREE THROUGH SEVEN
OR LESS SIX MONTHS ONE YEAR YEARS SEVEN YEARS YEARS TOTAL
------- ---------- -------- ----- ----------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Regular and 850 850 1,700 6,800 13,600 16,994 40,794
other deposits.....
FHLB 1,006 6 1,113 2,355 2,287 765 7,532
--------- ---------- -------- -------- ---------- ------- ---------
borrowing
s................
Total 33,981 9,384 18,463 22,626 22,223 25,248 131,925
--------- ---------- -------- -------- ---------- ------- ---------
interest-
bearing
liabilitie
s................
Interest rate ($10,206) ($1,684) ($7,980) $15,140 $24,340 ($10,491) $9,119
========= ========== ======== ======== =========== ======= =========
sensitivity gap....
Cumulative ($10,206) ($11,890) ($19,870) ($4,730) $19,610 $9,119 $9,119
========= ========== ======== ======== =========== ======= =========
interest rate
sensitivity gap....
Cumulative ratio
of interest- 70.0% 72.6% 67.9% 94.4% 118.4% 106.9% 106.9%
earning assets to
interest-bearing
liabilities........
Ratio of
cumulative (7.2)% (8.4)% (14.1)% (3.4)% 13.9% 6.5% 6.5%
interest rate
sensitivity gap to
total interest-
earning assets.....
Ratio of (7.9)% (13.3)% (3.2)% 13.1% 6.1% 6.1%
cumulative
interest rate
sensitivity gap to (6.8)
total assets....... %
</TABLE>
-19-
<PAGE>
Management believes the current one-year gap of negative 13.3%
presents a risk to the net interest income should a sustained increase occur in
the current level of interest rates. If interest rates increase, the Bank's
negative one-year gap should cause the net interest margin to decrease. A
conservative interest rate risk-gap policy provides a stable net interest income
margin. Accordingly, management emphasizes a structured schedule of investment
securities with greater emphasis on maturities and repricings within one year.
It is possible that the actual interest rate sensitivity of the Bank's assets
and liabilities could vary significantly from the information set forth in the
table due to market and other factors.
Certain shortcomings are inherent in the method of analysis presented
above. Although certain assets and liabilities may have similar maturity or
periods of repricing, they may react in different degrees to changes in the
market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
rates on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, generally
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. In the event of a change in interest rates,
prepayments and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Additionally, an interest rate increase
may make it more difficult for borrowers to service their debt, thereby
increasing the credit risk in the Bank's loan portfolio.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following tables set forth certain information relating to the
Bank's average balance sheet and reflect the average yield on assets and average
cost of liabilities for the periods indicated and the average yields earned and
rates paid for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balances of assets and
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances. Loans on nonaccrual status are included in the
average balances of loans shown in the table. Interest earned on loan portfolios
is net of reserves for uncollected interest. The investment securities in the
following table are presented at amortized cost.
-20-
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED YIELD/ AVERAGE EARNED YIELD/ AVERAGE EARNED YIELD/
BALANCE OR PAID RATE BALANCE OR PAID RATE BALANCE OR PAID RATE
----------- ---------- -------- -------- --------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net.................. $103,223 $8,397 8.13% $ 86,651 $7,115 8.21% $ 78,398 $6,323 8.07%
Investments........................... 20,686 1,208 5.84% 23,306 1,364 5.85% 26,452 1,358 5.13%
Other earning assets/(1)/.......... 5,896 294 4.99% 8,836 449 5.08% 9,762 484 4.96%
-------- ------ -------- ------ -------- ------
Total interest-earning assets......... 129,805 9,899 7.63% 118,793 8,928 7.52% 114,612 8,165 7.12%
------ ------
Cash and due from banks............... 2,188 1,627 1,089
Other assets.......................... 5,638 5,445 4,904
-------- -------- --------
Total assets.......................... $137,631 $125,865 $ 120,605
======== ======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits............ $ 40,419 $1,114 2.76% $ 39,818 $1,121 2.82% $ 44,451 $1,304 2.93%
Now accounts.......................... 15,710 281 1.79% 14,681 286 1.95% 14,175 313 2.21%
Money market deposits................. 6,070 157 2.59% 6,154 157 2.55% 6,557 161 2.46%
Certificates of deposit............... 57,223 3,148 5.50% 52,340 3,005 5.74% 44,216 2,107 4.77%
-------- ------ -------- ------ -------- ------
Total interest-bearing deposits ... 119,422 4,700 3.94% 112,993 4,569 4.04% 109,399 3,885 3.55%
FHLB borrowings...................... 3,289 211 6.42% -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total interest-bearing liabilities. 122,711 4,911 4.00% 112,993 4,569 4.04% 109,399 3,885 3.55%
------ ------ ------
Demand deposit accounts............ 3,056 1,756 721
Other liabilities..................... 277 288 268
-------- -------- --------
Total liabilities..................... 126,044 115,037 110,388
Surplus............................... 11,587 10,828 10,217
-------- -------- --------
Total liabilities and surplus......... $137,631 $125,865 $120,605
======== ======== ========
Net interest income................... $4,988 $4,359 $4,280
====== ====== ======
Interest rate spread.................. 3.63% 3.48% 3.57%
Net interest margin................... 3.84% 3.67% 3.73%
Interest-earning assets/interest
-bearing liabilities................. 1.06x 1.05x 1.05x
</TABLE>
_________________
(1) At June 30, 1997, other earning assets included Bank Investment Fund
Liquidity Fund, FHLB overnight deposits, federal funds sold, the Co-
operative Central Reserve Fund and Money Market Accounts.
-21-
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes
in interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated between changes in rate and
changes in volume.
<TABLE>
<CAPTION>
-------------------------------------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
1997 VS 1996 1996 VS 1995
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------ -----------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
----------- -------- --------- --------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans, net................................ $ (69) $1,351 $1,282 $ 114 $ 678 $792
Investments............................... (2) (154) (156) 178 (172) 6
Other earning assets...................... (8) (155) 12 (47) (35)
----- ----- ------ ------ ----- ----
Total................................... (79) 1,050 971 304 459 763
----- ------ ------ ------ ----- ----
INTEREST EXPENSE:
Deposits.................................. (119) 250 131 551 133 684
Borrowed funds............................ -- 211 211 -- -- --
----- ------ ------ ------ ----- ----
Total................................... (119) 461 342 551 133 684
----- ------ ------ ------ ----- ----
Change in net interest income................ $ 40 $ 589 $ 629 ($247) $ 326 $ 79
===== ====== ------ ====== ===== ====
</TABLE>
RESULTS OF OPERATIONS
The Bank's operating results depend primarily upon its net interest income,
which is the difference between the interest income earned on its interest-
bearing assets (loans and investment securities), and the interest expense paid
on its interest-bearing liabilities (deposits and FHLB borrowings). Operating
results are also significantly affected by provisions for loan losses, other
income and operating expenses. Each of these factors is significantly affected
not only by the Bank's policies, but, to varying degrees, by general economic
and competitive conditions and by policies of state and federal regulatory
authorities.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND 1996.
The Bank's total assets increased by $18.3 million or 13.9% to $149.7
million at June 30, 1997 from $131.4 million at June 30, 1996. The Bank's
asset growth reflected the increased emphasis on the origination and retention
of residential mortgage loans, commercial real estate loans and commercial
loans during 1997. Net loans were $114.6 million or 76.6% of total assets at
June 30, 1997 as compared to $94.8 million or 72.1% of total assets at June 30,
1996, representing an increase of $19.8 million or 20.9%. The increase in loans
was
-22-
<PAGE>
funded through FHLB borrowings and increased deposits. Investment securities
held by the Bank increased by $2.8 million or 15.3% to $21.3 million in 1997
from $18.5 million in 1996. Total deposits increased by $9.7 million or 8.1% to
$129.3 million at June 30, 1997 from $119.6 million at June 30, 1996. Deposits
increased due to new accounts established at the Bank's new branch opened in
November 1995 as well as increases in commercial deposits resulting from the
Bank's emphasis on expanding its commercial banking services. Total borrowings
were $7.5 million at June 30, 1997 compared to no borrowings at June 30, 1996.
Total surplus increased by $1.0 million or 9.1% to $11.9 million at June 30,
1997 from $10.9 million at June 30, 1996 as a result of net income of $741,000
and an increase in the net unrealized gain on securities available for sale of
$250,000.
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996.
Net Income. The Bank's net income for the year ended June 30, 1997 was
$741,000 as compared to $599,000 for the year ended June 30, 1996. This
$142,000 or 23.7% increase in net income during the period was the result of an
increase of $457,000 in net interest income after provision for loan losses and
an increase of $224,000 in other income, partially offset by an increase of
$452,000 in operating expenses. Although operating expenses increased from
1996 to 1997, the increase did not adversely affect net income. The opening of
a new branch in November 1995 resulted in the Bank gathering additional
deposits which were used primarily to increase the Bank's loan portfolio. These
changes resulted in an increase in net interest income of $629,000 which
exceeded the increase in operating expenses of $452,000. The return on average
assets for the year ended June 30, 1997 was 0.54% compared to 0.48% for the year
ended June 30, 1996.
Interest Income. Total interest and dividend income increased by $971,000
or 10.9% to $9.9 million for the year ended June 30, 1997 from $8.9 million for
the year ended June 30, 1996. The increase in interest income was a result of a
higher level of loan originations and a greater mix of higher yielding
commercial and commercial real estate loans funded by FHLB borrowings and
increased deposits.
Interest Expense. Interest expense increased by $342,000 or 7.5% to $4.9
million for the year ended June 30, 1997 from $4.6 million for the year ended
June 30, 1996. The reason for the increase in interest expense was the increase
in the overall deposit balances as well as the increase in FHLB borrowings.
Net Interest Income. Net interest income for the year ended June 30, 1997
was $5.0 million as compared to $4.4 million for the year ended June 30, 1996.
The $629,000 or 14.4% increase can be attributed to a combination of the
$971,000 increase in interest and dividend income and the $342,000 increase in
interest expense on deposits and FHLB borrowings. The average yield on
interest-earning assets increased 11 basis points to 7.63% for the year ended
June 30, 1997 from 7.52% for the year ended June 30, 1996, while the average
cost of interest-bearing liabilities decreased by 4 basis points to 4.00% for
the year ended June 30, 1997 from 4.04% for the year ended June 30, 1996. As a
result, the net interest spread increased to 3.63% for the year ended June 30,
1997 from 3.48% for the year ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses was $272,000 for
the year ended June 30, 1997 as compared to $100,000 for the year ended June 30,
1996. The provision was increased in part because of the larger number of high-
balance commercial loans. At June 30, 1997, the balance of the allowance for
loan losses was $977,000 or 0.9% of total loans. During the year ended June 30,
1997, $57,000 was charged against the allowance for loan losses while $20,000 in
recoveries was credited to the allowance for loan losses. At June 30, 1996, the
balance of the allowance for loan losses was $742,000 or 0.8% of total loans.
During the year ended June 30, 1996, $138,000 was charged against the allowance
for loan losses while $23,000 in recoveries was credited to the allowance for
loan losses.
-23-
<PAGE>
Other Income. Non-interest income or other income was $882,000 for the year
ended June 30, 1997 compared to $658,000 for the year ended June 30, 1996. The
$224,000 or 34% increase was primarily the result of a $164,000 increase in gain
on sales of investment securities and a decrease in the writedown of mortgage
loans held for sale of $41,000.
Operating Expenses. Non-interest expense or operating expense increased to
$4.3 million for the year ended June 30, 1997 from $3.9 million for the year
ended June 30, 1996. The increase of $452,000 or 11.7% mainly resulted from an
increase of $248,000 in salaries and employee benefits and an increase of
$91,000 in occupancy and equipment expenses. The Bank's operating expenses
increased in 1997 due to the full effect of the new branch that was opened in
November 1995. In 1997, the Bank incurred a full year's worth of operating
expenses associated with the new branch, whereas in 1996 the branch was open for
only seven months. In 1997, the Bank also continued to expand its commercial
loan and commercial real estate departments by hiring a second loan officer.
Other general and administrative expenses increased by $79,000 over the prior
year. Annual operating expenses are also expected to increase in future periods
due to the increased cost of operating as a stock institution. See "Risk
Factors --Anticipated Low Return on Equity Following Conversion." The Bank may
experience slightly higher deposit insurance premiums due to recent
Congressional action to require all FDIC insured financial institutions to fund
the Financing Corporation ("FICO") bond obligations that financed the resolution
of failed savings institutions. See " Risk Factors - Regulatory Environment"
and "Regulation."
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND 1995.
The Bank's total assets increased by $6.4 million or 5.1% to $131.4 million
at June 30, 1996, from $125.0 million at June 30, 1995. Net loans were $80.2
million or 64.2% of total assets at June 30, 1995 as compared to $94.8 million
or 72.1% of total assets at June 30, 1996, representing an increase of $14.6
million or 18.1%. The Bank's net loan growth reflects its increased emphasis on
the origination of residential mortgage loans, commercial real estate loans and
commercial loans. Investment securities held by the Bank decreased from $26.5
million in 1995 to $18.5 million in 1996. The proceeds from maturing securities
were in part allocated to fund the increased volume of loan production. Total
deposits increased by $5.8 million or 5.1% from $113.8 million at June 30, 1995
to $119.6 million at June 30, 1996. Total surplus increased by 5.6% to $10.9
million at June 30, 1996 as a result of net income of $599,000 offset by an
increase in the net unrealized loss on securities available for sale of $16,000.
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995.
Net Income. The Bank's net income for the year ended June 30, 1996 was
$599,000 as compared to $660,000 for the year ended June 30, 1995. This $61,000
decrease in net income during the period was the result of an increase of
$302,000 of operating expenses, partially offset by an increase of $79,000 in
net interest income after provision for loan losses and an increase of $122,000
in other income. The Bank opened a new branch in November 1995 and expanded its
commercial loan and commercial real estate departments during 1996 resulting in
the increased operating expense. The return on average assets for the year
ended June 30, 1996 was .48% compared to .55% for the year ended June 30, 1995.
Interest Income. Total interest and dividend income increased by $763,000
or 9.3% to $8.9 million for the year ended June 30, 1996 from $8.2 million for
the year ended June 30, 1995. The increase in interest income was in part the
result of loan originations funded by maturing lower yield investment
securities.
Interest Expense. Interest expense increased by $684,000 or 17.6% to $4.6
million for the year ended June 30, 1996 from $3.9 million for the year ended
June 30, 1995. The primary reason for the increase in
-24-
<PAGE>
interest expense was the increase in the general level of interest rates,
driving an increase in the rollover rates for certificates of deposit, coupled
with the increase in the overall deposit balances.
Net Interest Income. Net interest income for the year ended June 30, 1995
was $4.3 million as compared to $4.4 million for the year ended June 30, 1996,
an increase of 1.8%. The $79,000 increase can be attributed to a combination of
the $763,000 increase in interest and dividend income and the $684,000 increase
in interest expense on deposits. The average yield on interest-earning assets
increased by 40 basis points to 7.52% for the year ended June 30, 1996 from
7.12% for the year ended June 30, 1995, while the average cost on interest-
bearing liabilities increased by 49 basis points to 4.04% for the year ended
June 30, 1996 from 3.55% for the year ended June 30, 1995. As a result, the net
interest spread declined from 3.57% for the year ended June 30, 1995 to 3.48%
for the year ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses was $100,000 for
each of the years ended June 30, 1996 and 1995. At June 30, 1996, the balance
of the allowance for loan losses was $742,000 or 0.8% of total loans. During
the year ended June 30, 1996, $138,000 was charged against the allowance for
loan losses while $23,000 in recoveries was credited to the allowance for loan
losses. At June 30, 1995, the balance of the allowance for loan losses was
$757,000 or 0.9% of total loans. During the year ended June 30, 1995, $119,000
was charged against allowance for loan losses while $27,000 in recoveries was
credited to the allowance for loan losses.
Other Income. Other income was $658,000 for the year ended June 30, 1996
as compared to $536,000 for the year ended June 30, 1995. The $122,000 increase
was primarily the result of a $102,000 increase in customer services fees, as
the Bank increased fees charged for certain services while also increasing the
number of deposit accounts on which fees could be charged. The Bank also
received a special dividend of $44,000 from the Co-operative Central Bank during
the year ended June 30, 1996. Offsetting the increases in other income for the
year ended June 30, 1996 was a writedown of $41,000 on mortgage loans held for
sale.
Operating Expenses. Operating expenses increased to $3.9 million for the
year ended June 30, 1996 from $3.6 million for the year ended June 30, 1995.
The increase of $302,000 or 8.4% mainly resulted from an increase of $373,000 in
salaries and employee benefits and an increase of $74,000 in occupancy and
equipment expenses, resulting from the opening of a new branch office in
November 1995 and the expansion of the commercial and commercial real estate
loan department. Other general and administrative expenses increased by
$177,000 over the prior year. These increases were offset by a $244,000
decrease in FDIC insurance expense and an $82,000 decrease in losses from
foreclosed real estate.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales and participations of loans, maturities
of investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions, and competition. The Bank uses its liquidity resources primarily to
fund existing and future loan commitments, to fund net deposit outflows, to
invest in other interest-earning assets, to maintain liquidity and to meet
operating expenses.
The Bank is required to maintain adequate levels of liquid assets. This
guideline, which may be varied depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
Bank has historically maintained a level of liquid assets in excess of
regulatory requirements. The Bank's liquidity ratio at June 30, 1997 was 18.0%.
The Bank began using FHLB borrowings in 1997 to
-25-
<PAGE>
augment its liquidity as its loan originations increased from 1996. The Bank
also sold $5.4 million of adjustable-rate residential mortgage loans to improve
its level of liquid assets in 1997.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term U.S. Government and Federal Agency obligations, and
corporate bonds. The level of these assets is dependent upon the Bank's
operating, investing, lending and financing activities during any given period.
The primary investing activities of the Bank include origination of loans
and purchase of investment securities. During the year ended June 30, 1997,
loan originations totaled $44.7 million while purchases of investment securities
and FHLB stock totaled $16.4 million. These investments were funded primarily
from loan repayments of $15.1 million, investment security maturities of $13.9
million, net deposit increases of $9.7 million, and borrowings of $7.6 million.
Liquidity management is both a daily and long-term function of management.
If the Bank requires funds beyond its ability to generate them internally, the
Bank believes it could borrow additional funds from the FHLB. At June 30, 1997,
the Bank had borrowings of $7.5 million from the FHLB.
At June 30, 1997, the Bank had $4.4 million in outstanding commitments to
originate loans. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit which are scheduled to mature in one year or less totaled $48.3 million
at June 30, 1997. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At June 30, 1997, the Bank exceeded all of its regulatory capital
requirements. For further information regarding the Bank's regulatory capital
at June 30, 1997 and on a pro forma basis see "Regulation--Federal Banking
Regulations--Capital Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation. Unlike most industrial
companies, virtually all of the assets and liabilities of the Bank are monetary
in nature. As a result, interest rates have a more significant impact on the
Bank's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June of 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Accounting principles generally require all recognized
revenue, expenses, gains and losses to be included in net income. Various FASB
statements, however, require companies to report certain changes in assets and
liabilities as a separate component of the equity section of the balance sheet
such as unrealized gains and losses on available for sale securities. This such
item, along with net income, is a component of comprehensive income.
It is required under SFAS 130 that all items of comprehensive income are to
be reported in a "financial statement" that is displayed with the same
prominence as other financial statements. Additionally, SFAS 130
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<PAGE>
requires the classification of items comprising other comprehensive income by
their nature, and the accumulated balance of other comprehensive income must be
displayed separately from retained earnings and additional paid-in capital in
the equity section of the balance sheet. Management will adopt this new
disclosure requirement beginning in fiscal year 1999.
Also, in June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"). SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 establishes standards for
the way that public companies report information about operating segments in
annual financial statements and selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS 131 also requires companies to report information about the way that
the operating segments were determined, the product and services provided by the
operating segments, differences between the measurements used in reporting
segment information and those used by the company in its general purpose
financial statements, and changes in the measurement of segment amounts from
period to period. Management has not yet determined the impact that adoption of
SFAS 131 will have on its financial statement presentation.
YEAR 2000
The Company and the Bank are aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company and the Bank are utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
by December 31, 1998, allowing adequate time for testing. To date, confirmations
have been received from the Company's primary processing vendors that plans are
being developed to address processing of transactions in the year 2000.
Management has not yet assessed the year 2000 compliance expense and related
potential affect on the Company's or the Bank's earnings. To date, the year 2000
compliance expense has not been material.
BUSINESS
THE COMPANY
Prior to the Conversion, the Company will not transact any material
business. Following the Conversion, in addition to directing, planning and
coordinating the business activities of the Bank, the Company will invest the
proceeds of the Conversion which are retained by it. See " Use of Proceeds."
Upon consummation of the Conversion, the Company will have no significant assets
other than the shares of the Bank's capital stock acquired in the Conversion,
the loan receivable held with respect to its loan to the ESOP and that portion
of the net proceeds of the Conversion retained by it, and will have no
significant liabilities. Cash flow to the Company will be dependent upon
investment earnings from the net proceeds retained by it,
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<PAGE>
payments on the ESOP loan and any dividends received from the Bank. 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 its officers (who are not
anticipated to be separately compensated by the Company), 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. In
the future, the Company will consider using some of the proceeds of the
Conversion retained by it to expand its operations in its existing primary
market and other nearby areas by acquiring other financial institutions which
could be merged with the Bank or operated as separate subsidiaries. Presently,
there are no agreements or understandings for expansion of the Company's
operations.
THE BANK
The business of the Bank primarily consists of attracting savings deposits
from the general public and investing such deposits in mortgage loans secured by
single-family residential real estate, commercial real estate, commercial assets
and investment securities, including U.S. Government and Federal Agency
securities, equity securities and interest-earning deposits. The Bank also
makes consumer loans, including home equity loans, automobile, passbook and
other consumer loans. The Bank offers both fixed-rate and adjustable-rate loans
and emphasizes the origination of residential real estate mortgage loans and
commercial loans with adjustable interest rates. The Bank also makes other
short term (one to three years) interest sensitive investments which allow the
Bank to monitor the interest rate risk, maturities and repricing intervals of
its assets and liabilities.
The Bank's principal sources of income are interest and fees on loans
and other investments, and the Bank's principal expenses are interest paid on
deposit accounts and general operating expenses.
MARKET AREA
The Bank's main office and three branch offices are located in
Medford, Middlesex County, Massachusetts. The city of Medford, containing
approximately 60,000 residents, is located approximately seven miles from
downtown Boston in the northern suburbs of Boston, bounded by the towns of
Malden, Everett, Somerville, Stoneham, Winchester and Arlington. The City of
Medford is easily accessible from downtown Boston via Interstate 93 and is
accessible via other state roads connecting the communities within the Route 128
corridor surrounding Boston. As an established metropolitan suburb, Medford
consists mostly of developed single- and multi-family properties within a
network of well-maintained neighborhoods. The city of Medford represents the
primary market area for deposit and loan generation as most of the Bank's
depositors and loan customers live in the areas surrounding the Bank's office
locations. The Bank considers its primary market area to be the communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose,
Lexington and Bedford, Massachusetts. The economic base of the Bank's market
area is diversified and includes a number of financial service institutions,
industrial and manufacturing companies, hospitals and other health care
facilities and educational institutions. The major employers in the Medford area
are Tufts University, Lawrence Memorial Hospital, the City of Medford and Meadow
Glen Mall, with approximately 1,600, 1,300, 1,200 and 1,000 employees each,
respectively. Management believes that the housing vacancy rate in Medford is
very low. The majority of the Bank's lending and deposit activity has
historically been in Medford, although the commercial loan department has been
largely responsible for expanded business throughout eastern Middlesex County.
Middlesex County, located in eastern Massachusetts to the north and west of the
city of Boston, is part of the Boston metropolitan area. Based on 1997 Bureau
of Labor Statistics, the median household income for Middlesex County was
$49,414.
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<PAGE>
LENDING ACTIVITIES
The Bank originates loans through its four offices located in Medford,
Massachusetts. The principal lending activities of the Bank are the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties in its designated
community reinvestment area, consisting of the Massachusetts communities of
Medford, Malden, Everett, Stoneham, Arlington, Winchester, Somerville, Melrose,
Lexington and Bedford, and the origination of commercial loans secured by
commercial real estate and commercial assets within eastern Middlesex County. To
a lesser extent, the Bank also originates consumer loans including home equity
and passbook loans.
In the past two years, the Bank has made a major commitment to small
business commercial lending. The Bank has expanded its commercial lending
department with the addition of two senior officers with considerable commercial
lending expertise and has developed a support staff to run the commercial loan
department.
The Bank's ten largest loans, outstanding as of June 30, 1997, ranged
from $500,000 to $1.2 million.
Loan Portfolio. The following table presents selected data relating to
the composition of the Bank's loan portfolio by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------ ----------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------------ ----------- ----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans....................... $ 90,203 78.7% $ 82,459 87.0% $ 73,458 91.6%
Commercial real estate loans..................... 17,847 15.6 8,280 8.7 3,909 4.9
Commercial loans................................. 3,677 3.2 1,715 1.8 415 0.5
Consumer loans................................... 1,655 1.4 1,781 1.9 1,832 2.3
Home equity loans................................ 1,564 1.4 1,176 1.2 1,248 1.6
Construction loans............................... 976 0.9 285 0.4 358 0.4
-------- ------ -------- ------ -------- ------
Total loans...................................... 115,922 101.2 95,696 101.0 81,220 101.3
Less:
Deferred loan origination........................ --
fees............................................ 37 60 0.1 111 0.1
Unadvanced principal............................. 340 0.3 134 0.1 135 0.2
Allowance for loan
losses........................................... 977 0.9 742 0.8 757 1.0
-------- ------ -------- ------ -------- ------
Loans, net....................................... $114,568 100.0% $94,760 100.0% $80,217 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans on one- to four-family residential dwellings located in the
Bank's primary market area. As of June 30, 1997, loans on one- to four-family
residential properties accounted for 78.7% of the Bank's loan portfolio.
The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms as borrowers may refinance or prepay loans
at their option, without penalty. Conventional residential mortgage loans
granted by the Bank customarily contain
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<PAGE>
"due-on-sale" clauses which permit the Bank to accelerate the indebtedness of
the loan upon transfer of ownership of the mortgaged property.
The Bank makes conventional mortgage loans and uses standard Federal
National Mortgage Association ("FNMA") documents, to allow for the sale of
qualifying loans in the secondary mortgage market. The Bank's lending policies
generally limit the maximum loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 95% of the lesser of the appraised value or
purchase price of the property, with the condition that private mortgage
insurance is required on loans with a loan-to-value ratio in excess of 80%.
Since the early 1980s the Bank has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the Bank
include loans which reprice every one or three years and provide for an interest
rate which is based on the interest rate paid on U.S. Treasury securities of a
corresponding term, plus a margin of up to 250 basis points, or 2.5%.
Additionally, the Bank offers an adjustable-rate loan product with an interest
rate fixed for seven years which then reprices annually for its remaining term
thereafter. The Bank currently offers adjustable-rate loans with initial rates
below those which would prevail under the foregoing computations, based upon the
Bank's determination of market factors and competitive rates for adjustable-rate
loans in its market area. For adjustable-rate loans, borrowers are qualified at
the initial rate.
Historically, the Bank has retained all adjustable-rate mortgages it
originates. However, in recent years, in order to generate liquidity, the Bank
has sold some of these loans. The Bank's adjustable-rate mortgages include
limits on increases or decreases of the interest rate of the loan. The interest
rate may increase or decrease by 2% per year and 5% over the life of the loan
for the Bank's one-year adjustable rate mortgages and by 3% per adjustment
period and 6% over the life of the loan for the Bank's three-year adjustable
rate mortgages. The Bank also offers an adjustable rate mortgage on which the
rate is fixed for the first seven years; thereafter, the loan converts to a one-
year adjustable-rate mortgage. The retention of adjustable-rate mortgage loans
in the Bank's loan portfolio helps reduce the Bank's exposure to increases in
interest rates. However, there are unquantifiable credit risks resulting from
potential increased costs to the borrower as a result of the repricing of
adjustable-rate mortgage loans. During periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower.
During the year ended June 30, 1997, the Bank originated $24.1 million
in adjustable-rate mortgage loans and $4.3 million in fixed-rate mortgage loans.
Of the fixed-rate loans originated, the Bank sold $2.1 million of fixed-rate
loans with terms of greater than 15 years and retained $2.2 million of fixed-
rate loans, substantially all of which had terms of 15 years or less.
Approximately 6% of all loan originations during fiscal 1997 were refinancings
of loans already in the Bank's loan portfolio. At June 30, 1997, the Bank's loan
portfolio included $58.4 million in adjustable-rate one- to four-family
residential mortgage loans or 51.0% of the Bank's net loan portfolio, and $31.8
million in fixed-rate one- to four-family residential mortgage loans, or 27.7%
of the Bank's net loan portfolio.
The Bank engages in a limited amount of construction lending usually
for the construction of single family residences. Most are construction/
permanent loans to the future occupants, structured to become loans upon the
completion of construction. All construction loans are secured by first liens on
the property. Loan proceeds are disbursed as construction progresses and
inspections warrant. Loans involving construction financing present a greater
risk than loans for the purchase of existing homes, since collateral values and
construction costs can only be estimated at the time the loan is approved. Due
to the small amount of construction loans in the Bank's portfolio, the risk in
this area is limited.
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<PAGE>
Commercial Real Estate Loans. At June 30, 1997, the Bank's commercial
real estate loan portfolio consisted of 25 loans, totaling $17.8 million, or
15.6% of net loans. The Bank's largest loan is a commercial real estate loan
with an outstanding balance of $1.2 million at June 30, 1997 secured by a
commercial office building in Bedford, Massachusetts. Commercial real estate
loans are administered by the commercial loan department as described below
under "Commercial Loans."
In May 1995, the Bank hired a commercial loan officer with over 20
years of experience in commercial lending in the Boston market area for the
purpose of expanding the commercial lending program of the Bank. In 1996, the
Bank added a second commercial loan officer with over 15 years of experience
with commercial lending in the Bedford/Lexington area. With the help of these
two officers, the Bank is originating commercial real estate loans and
commercial loans to satisfy the working capital and short-term financing needs
of established local businesses.
Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers and the payment
experience on such loans is typically dependent on the successful operation of a
real estate project and/or the collateral value of the commercial real estate
securing the loan. See " Risk Factors--Growth of the Bank's Commercial Loan and
Commercial Real Estate Loan Portfolio."
Commercial Loans. In the past two years, the Bank has made a major
commitment to small business commercial lending. The Bank has worked to develop
a niche of making commercial loans to companies which have from $500,000 to $15
million in sales and has recently become an approved lender of the Small
Business Administration. At June 30, 1997, the Bank's commercial loan
portfolio consisted of 78 loans, totaling $3.7 million, or 3.2% of net loans.
Commercial loans are expected to comprise a growing portion of the
Bank's loan portfolio in the future. Unless otherwise structured as a mortgage
on commercial real estate, such loans generally are limited to terms of five
years or less. Substantially all such commercial loans have variable interest
rates tied to the prime rate as reported in the Wall Street Journal. Whenever
possible, the Bank collateralizes these loans with a lien on commercial real
estate, or alternatively, with a lien on business assets and equipment and the
personal guarantees from principals of the borrower.
Commercial business loans are generally considered to involve a higher
degree of risk than residential mortgage loans because the collateral may be in
the form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans may also involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial business lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
Home Equity Loans. The Bank also originates home equity loans which
are loans secured by available equity based on the appraised value of owner-
occupied one- to four-family residential property. Home equity loans will be
made for up to 75% of the appraised value of the property (less the amount of
the first mortgage). Home equity loans are offered at adjustable rates. The
adjustable interest rate is prime minus 1% for the first year and prime plus 1%
thereafter above the prime rate as reported in the Wall Street Journal and
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<PAGE>
have terms of ten years or less. At June 30, 1997, the Bank had $1.6 million in
home equity loans with unused credit available to existing borrowers of $1.6
million.
Consumer Loans. The Bank's consumer loans consist of share secured
loans, and other consumer loans, including automobile loans and credit card
loans. At June 30,1997, the consumer loan portfolio totaled $1.7 million or
1.4% of total loans. Consumer loans are generally offered for terms of up to
five years at fixed interest rates. Consumer loans generally do not exceed
$20,000 individually.
The Bank makes share secured loans up to 90% of the amount of the
depositor's savings account balance. The interest rate on the loan is 4% higher
than the rate being paid on the account. The Bank also makes other consumer
loans, which may or may not be secured. The terms of such loans usually depend
on the collateral.
The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 90% of the purchase price or
the retail value listed by the National Automobile Dealers Book. The terms of
the loans are determined by the age and condition of the collateral. Collision
insurance policies are required on all these loans.
The Bank makes unsecured credit card loans up to $5,000 at fixed rates
of interest. At June 30, 1997, the Bank had 686 unsecured credit card loans
totaling $407,000.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however, that
the Bank's delinquency rate on consumer loans will continue to remain low in the
future, or that the Bank will not incur future losses on these activities.
Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding 60 days. At June 30, 1997, the Bank had $4.4 million in
loan commitments outstanding, all for the origination of one- to four-family
residential real estate loans, home equity loans, commercial loans and
commercial real estate loans.
Loan Solicitation and Loan Fees. Loan originations are derived from a
number of sources, including the Bank's existing customers, referrals, realtors,
advertising and "walk-in" customers at the Bank's office. Additionally, the
Bank has two residential loan originators, both of whom actively cover the local
community, working with local real estate brokers and agents to identify and
contact potential new customers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. For all
mortgage loans, an appraisal of real estate intended to secure the proposed loan
is obtained from an independent appraiser who has been approved by the Bank's
board of directors. Fire and casualty insurance are required on all loans
secured by improved real estate. Insurance on other collateral is required
unless waived by the loan committee. The board of directors of the Bank has the
responsibility and authority for the general supervision over the loan policies
of the Bank. The Board has established written lending policies for the Bank.
All residential and commercial real estate mortgages and commercial business
loans must be ratified by the Bank's board of directors. In addition, certain
designated officers of the Bank have authority to approve loans not exceeding
specified levels, while the board of directors must approve loans in excess of
(a) $300,000 for commercial real estate loans; (b) $100,000 for commercial
loans; (c) loans over the current FNMA limit for residential mortgage loans; and
(d) $20,000 for consumer loans.
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<PAGE>
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and interest
rate costs of the source of funding for the loan. The Bank generally charges an
origination fee on new mortgage loans. The origination fees, net of direct
origination costs, are deferred and amortized into income over the life of the
loan. At June 30, 1997, the amount of net deferred loan origination fees was
$37,000.
Loan Maturities. The following table sets forth certain information
at June 30, 1997 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------------------------------
RESIDENTIAL COMMERCIAL
MORTGAGE REAL ESTATE COMMERCIAL CONSUMER TOTAL
LOANS LOANS LOANS LOANS LOANS
------------- --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total loans scheduled to mature:
In one year or less.......................... $ 1,625 $ -- $ 1,103 $ 57 $ 2,785
After 1 year through 5 years................. 2,405 121 1,888 871 5,285
Beyond five years............................ 88,713 17,726 686 727 107,852
-------- --------- --------- ------- ---------
Total.......................................... $ 92,743 $ 17,847 $ 3,677 $ 1,655 $ 115,922
======== ========= ========= ======= =========
Loan balance by type scheduled
to mature after one year:
Fixed-rate................................... $ 31,621 $ 1,221 $ 732 $ 1,396 $ 34,970
Adjustable-rate.............................. 59,497 16,626 1,842 202 78,167
</TABLE>
For purposes of this schedule, home equity loans and construction loans have
been included in residential mortgage loans.
Originations and Sales of Loans. The Bank is a qualified
seller/servicer for FNMA. Beginning in 1987, the Bank began to sell a portion of
its fixed-rate loans with terms in excess of 15 years to FNMA. All of the Bank's
sales to FNMA have been made with servicing retained on the loans. At June 30,
1997, the Bank was servicing $10.6 million in loans for FNMA. Depending upon
market conditions, the Bank retains a portion of its fixed rate loans from time
to time. In addition, the Bank has also sold loans to other private investors.
At June 30, 1997, the Bank was servicing $5.2 million of such loans.
Originations for the year ended June 30, 1997 have increased due to
the addition of a mortgage loan originator and a second commercial lending
officer. Loan sales were reduced during the same period as the Bank borrowed
from the FHLB to fund loan originations. Historically, the Bank has not
purchased loans. However, the Bank may in the future consider making limited
loan purchases, including purchases of commercial loans and commercial real
estate loans. The Bank has also entered into two participation agreements with
local banks for two of its larger commercial real estate loans. The following
table sets forth information with respect to originations and sales of loans
during the periods indicated.
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<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1997 1996 1995
--------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Beginning balance............................. $ 94,760 $ 80,217 $ 77,988
-------- -------- --------
Mortgage originations......................... 28,423 24,712 8,807
Consumer loan originations.................... 959 1,033 1,545
Commercial real estate loan originations...... 10,573 5,357 --
Commercial loan originations.................. 4,771 2,908 445
-------- -------- --------
Total loans originated........................ 44,726 34,010 10,797
-------- -------- --------
Less:
Amortization and payoffs...................... 15,055 16,561 7,812
Provision for loan losses.................... 272 100 100
Transfers to foreclosed real estate........... -- 83 298
Total loans sold.............................. 8,750 1,598 358
Loan participations sold.................... 841 1,125 --
-------- -------- --------
Ending balance................................ $114,568 $ 94,760 $ 80,217
======== ======== ========
</TABLE>
Non-Performing Assets, Asset Classification and Allowances for Losses.
Management and the Security Committee of the board of directors perform a
monthly review of all delinquent loans and loans are placed on a non-accrual
status when loans are 90 days past due or, in the opinion of management, the
collection of principal and interest are doubtful. One of the primary tools
used to manage and control problem loans is the Bank's "Watch-List," a listing
of all loans or commitments larger than $25,000, that are considered to have
characteristics that could result in loss to the Bank if not properly
supervised. The list is managed by the Senior Lending Officer for Commercial
Loans, Senior Loan Officer for Mortgage Lending, Chief Financial Officer, Chief
Executive Officer, and Mortgage Servicing Officer (the "Watch-List Committee"),
who meet periodically to discuss the status of the loans on the Watch List and
to add or delete loans from the list. The Directors can request that a loan
relationship be placed on Watch-List status.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair value. Any required write-down of the loan to its fair value
is charged to the allowance for loan losses.
The following table sets forth the Bank's problem assets and loans at
the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------
1997 1996 1995
----------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Loans 30-89 days past due
(not included in non-performing loans)............... $1,708 $1,265 $1,769
====== ====== ======
Loans 30-89 days past due as a percent of net loans............ 1.49% 1.33% 2.21%
Non-performing loans (90 days past due)....................... $ 365 $ 622 $ 868
Foreclosed real estate........................................ -- -- 104
------ ------ ------
Total non-performing assets.................................... $ 365 $ 622 $ 972
====== ====== ======
Non-performing loans as a percent of net loans................. 0.32% 0.66% 1.08%
Non-performing assets as a percent of total assets............. 0.24% 0.47% 0.78%
</TABLE>
During the year ended June 30, 1997, gross interest income of $46,000,
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. Interest on such loans included in
income during the year ended June 30, 1997 amounted to $31,000. At June 30,
1997, management was not aware of any loans not currently classified as non-
accrual, 90 days past due or restructured but which
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<PAGE>
may be so classified in the near future because of concerns over the borrower's
ability to comply with repayment terms.
Federal and state regulations require each banking institution to
classify its asset quality on a regular basis. In addition, in connection with
examinations of such banking institutions, federal and state examiners have
authority to identify problem assets and, if appropriate, classify them. An
asset is classified substandard if it is determined to be inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. As a general rule, the Bank will classify a loan as substandard
if the Bank can no longer rely on the borrower's income as the primary source
for repayment of the indebtedness and must look to secondary sources such as
guarantors or collateral. An asset is classified as doubtful if full collection
is highly questionable or improbable. An asset is classified as loss if it is
considered uncollectible, even if a partial recovery could be expected in the
future. The regulations also provide for a special mention designation,
described as assets which do not currently expose a banking institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require a banking institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified as a loss, a banking institution must either establish specific
allowances for loan losses in the amount of the portion of the asset classified
as a loss, or charge off such amount. Examiners may disagree with a banking
institution's classifications and amounts reserved. If a banking institution
does not agree with an examiner's classification of an asset, it may appeal this
determination to the Regional Director of the FDIC or to the Commissioner of
Banks, whichever is applicable. At June 30, 1997, the Bank had no assets
classified as special mention, doubtful or loss, and $1.4 million in assets
designated as substandard.
In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the type of
loan being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain an adequate
general allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Further, after properties are acquired following loan defaults, additional
losses may occur with respect to such properties while the Bank is holding them
for sale. The Bank increases its allowances for loan losses and losses on real
estate owned by charging provisions for losses against the Bank's income.
Specific reserves are also recognized against specific assets when management
believes it is warranted.
In the past few years, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of the institution by federal or state
regulators. Results of recent examinations indicate that these regulators may be
applying more conservative criteria in evaluating real estate market values,
requiring significantly increased provisions for potential loan losses. While
the Bank believes it has established its existing allowances for loan losses in
accordance with GAAP there can be no assurance that regulators, in reviewing the
Bank's loan portfolio, will not request the Bank to increase its allowance for
loan losses, thereby negatively affecting the Bank's financial condition and
earnings. Alternately, there can be no assurance that increases in the Bank's
allowance for loan losses will occur.
The FDIC has adopted a policy statement regarding maintenance of an
adequate allowance for loan and lease losses and an effective loan review
system. This policy includes an arithmetic formula for checking the
reasonableness of an institution's allowance for loan loss estimate compared to
the average loss experience of the industry as a whole. Examiners will review an
institution's allowance for loan losses and compare it against the sum of (i)
50% of the portfolio that is classified doubtful; (ii) 15% of the portfolio that
is classified as substandard; and (iii) estimated credit losses for the portions
of the portfolio that have not been classified (including those loans designated
as special mention). This amount is considered neither a "floor" nor a "safe
harbor" of the level of allowance for loan losses an institution should
maintain, but examiners will view a shortfall relative to the amount as an
indication that they should review management's policy on allocating these
allowances to determine whether it is reasonable based on all relevant factors.
-35-
<PAGE>
The following table analyzes activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1997 1996 1995
--------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Average loans, net..................................... $103,223 $86,651 $78,398
======== ======= =======
Period-end total loans................................. $114,568 $94,760 $80,217
======== ======= =======
Allowance for loan losses at beginning of period.... $ 742 $ 757 $ 749
Provision charged to operations..................... 272 100 100
Recoveries:
Real estate-mortgage:
Residential - 15 10
Commercial - - -
Commercial loans - - -
Consumer and loan equity 20 8 17
Construction - - -
-------- ------- -------
Total recoveries 20 23 27
-------- ------- -------
Loans charged-off:
Real estate-mortgage:
Residential - (100) (107)
Commercial (24) - -
Commercial loans - -- --
Consumer and loan equity (33) (38) (12)
Construction - - -
-------- ------- -------
Loans charged-off (57) (138) (119)
-------- ------- -------
Allowance for loan losses at end of period.......... $ 977 $ 742 $ 757
======== ======= =======
Ratios:
Allowance for loan losses to period end net loans... 0.85% 0.78% 0.94%
Allowance for loan losses to non-performing loans... 267.67% 119.29% 87.21%
Net charge-offs to average loans, net............... 0.04% 0.13% 0.12%
Net charge-offs to allowance for loan losses........ 3.79% 15.50% 12.15%
</TABLE>
-36-
<PAGE>
The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any other loan category.
<TABLE>
<CAPTION>
AT JUNE 30,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------- ------------- --------- ------------ --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential...................... $542 77.8% $542 86.2% $614 90.5%
Commercial....................... 338 15.4 120 8.7 100 4.8
Commercial loans................... 75 3.2 50 1.8 -- 0.5
Consumer and home equity........... 22 2.8 30 3.1 43 3.8
Construction....................... -- 0.8 -- 0.2 -- 0.4
---- ----- ---- ----- ---- -----
Total allowance for loan losses.... $977 100.0% $742 100.0% $757 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
INVESTMENT ACTIVITIES
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net savings withdrawals and current borrowings. It
has generally been the Bank's policy to maintain a liquidity portfolio in excess
of regulatory requirements. At June 30, 1997, the Bank's liquidity ratio was
18%. Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of the
yields then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.
Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. As the New England
economy experienced a severe downturn in the late 1980's, the Bank chose to
invest excess liquidity in its investment portfolio. The Bank invests in U.S.
Treasury and Federal Agency securities, bank certificates of deposits, equity
securities, corporate debt securities and overnight federal funds. The balance
of investment securities maintained by the Bank in excess of regulatory
requirements reflects management's historical objective of maintaining liquidity
at a level that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting withdrawal
requests and loan commitments and making other investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
The Bank purchases securities through a primary dealer of U.S.
Government obligations or such other securities dealers authorized by the board
of directors and requires that the securities be delivered to a safekeeping
agent before the funds are transferred to the broker or dealer. The Bank
purchases investment securities pursuant to an investment policy established by
the board of directors.
Investment securities are recorded on the books of the Bank in
accordance with GAAP. The Bank does not purchase investment securities for
trading. Effective June 30, 1994, the Bank implemented SFAS No. 115. Available
for sale securities are reported at fair value with unrealized gains or losses
reported as a separate component of net worth, net of tax effects. Held-to-
maturity securities are carried at amortized cost. Substantially all purchases
of investment securities conform to the Bank's interest rate risk policy. The
following table sets forth the Bank's investment securities at the dates
indicated.
-37-
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------
1997 1996
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- ----- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities... $ 3,543 $ 3,819 $ 1,639 $ 1,568
------- ------- ------- -------
Securities held to maturity:
U.S. Government and Federal
Agency obligations................. 14,976 14,908 16,899 16,767
Other bonds and obligations.... 2,528 2,523 27 27
------- ------- ------- -------
Total..................... 17,504 17,431 16,926 16,794
------- ------- ------- -------
Total........... $21,047 $21,250 $18,565 $18,362
======= ======= ======= =======
</TABLE>
The following table sets forth the scheduled maturities, carrying
values and average yields for the Bank's debt securities held to maturity at
June 30, 1997.
<TABLE>
<CAPTION>
JUNE 30, 1997
ONE YEAR OR LESS ONE TO FIVE YEARS TOTAL
------------------------ ---------------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
CARRYING VALUE YIELD CARRYING VALUE YIELD CARRYING VALUE YIELD
-------------- --------- -------------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal
Agency obligations................. $4,990 5.20% $ 9,986 6.10% $14,976 5.80%
Other bonds and obligations -- -- 2,528 6.23% 2,528 6.23%
------ ------- -------
Total............................... 4,990 5.20% $12,514 6.12% $17,504 5.85%
====== ======= =======
</TABLE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from principal repayments and interest payments on loans and investments
as well as other sources arising from operations in the production of net
earnings. Loan repayments and interest payments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources, or on a longer term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including checking accounts, passbook savings, NOW accounts, demand
deposits, money market accounts and certificates of deposit. Deposit account
terms vary, with the principal differences being the minimum balance required,
the time periods the funds must remain on deposit and the interest rate.
-38-
<PAGE>
The Bank's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers due
to the volatility and rate sensitivity of such deposits. Interest rates paid,
maturity terms, service fees and withdrawal penalties are established by the
Bank on a periodic basis. Determination of rates and terms are predicated upon
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.
During the past two years, there has been a significant increase in
demand deposit accounts, resulting from the increase in commercial customers
during this time period.
The following table sets forth the various types of deposit accounts
at the Bank and the balances in these accounts at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits.......... $ 40,794 31.6% $ 40,019 33.5% $ 40,399 35.4%
NOW accounts.............. 17,975 13.9 15,480 12.9 14,275 12.5
Money market deposits..... 6,489 5.0 6,366 5.3 5,755 5.1
Demand deposits........... 4,910 3.8 4,103 3.4 1,883 1.7
Certificates of deposit... 59,135 45.7 53,666 44.9 51,513 45.3
-------- ----- -------- ----- -------- -----
Total deposits....... $129,303 100.0% $119,634 100.0% $113,825 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
For more information on the Bank's deposit accounts, see Note 7 of Notes to
Consolidated Financial Statements.
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity at June 30, 1997.
<TABLE>
<CAPTION>
MATURITY PERIOD CERTIFICATES OF DEPOSIT RATE
--------------- ----------------------- -----
(Dollars in thousands)
<S> <C> <C>
0- 3 months $3,762 5.43%
3-6 months 1,539 5.42
6-12 months 2,394 5.37
1-2 years 1,072 5.87
2-3 years 346 6.00
over 3 years 106 6.25
------
Total............... $9,219 5.50%
======
</TABLE>
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB to supplement its supply of lendable funds and to meet liquidity
requirements. Due to recent lending activity and demand for liquidity, the Bank
has utilized this borrowing power, and has received advances from the FHLB.
Advances from the FHLB are secured by the Bank's stock in the FHLB, the Bank's
deposits at the FHLB and a portion of the Bank's mortgage loans and investment
securities. The Bank had FHLB advances of $7.5 million outstanding at June 30,
1997.
The FHLB functions as a central reserve bank providing credit for
savings institutions and certain other financial institutions. As a member, the
Bank is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed by
the United States) provided certain standards related to creditworthiness have
been met.
-39-
<PAGE>
COMPETITION
The Bank experiences competition both in attracting and retaining
savings deposits and in the making of mortgage, commercial and other loans.
Direct competition for savings deposits primarily comes from larger commercial
banks and other savings institutions located in or near the Bank's primary
market area which often have significantly greater financial and technological
resources than the Bank. Additional significant competition for savings deposits
comes from credit unions, money market funds and brokerage firms.
With regard to lending competition in the local market area, the Bank
experiences the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real estate
lending as a line of business. In addition, the Bank competes with local and
regional mortgage companies, independent mortgage brokers and credit unions in
originating mortgage and non-mortgage loans. The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by the various financial institutions.
Competition from other financial institutions operating in the Bank's
local community includes a number of both large and small commercial banks and
savings institutions. As of June 30, 1997, the Bank's market share was
approximately 14.5% of overall financial institution deposits in the City of
Medford. The Bank has experienced growth in deposits in recent years primarily
due to an increased emphasis on marketing products and services. However,
competition remains high in the marketplace.
PROPERTIES
The following table sets forth certain information at June 30, 1997
regarding the Bank's office facilities, which are owned by the Bank, with the
exception of the High School Educational Branch, which is leased at no cost, and
certain other information relating to its property at that date.
<TABLE>
<CAPTION>
YEAR COMPLETED SQUARE FOOTAGE NET BOOK VALUE
--------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Main Office: 60 High Street
Medford, MA 02155 1931 7,000 $ 1,180
West Medford Office: 430 High Street
Medford, MA 02155 1970 2,500 $ 45
Salem Street Office: 201 Salem Street
Medford, MA 02155 1995 3,500 $ 947
High School
Educational Branch: 489 Winthrop Street 1986 500 $ - 0 -
Medford, MA 02155
</TABLE>
The Bank also owns an office building adjacent to its main office,
located at 66 High Street, Medford, MA 02155, which had a net book value of $1.8
million at June 30, 1997. The Bank uses a portion of the top floor of this
building to house a portion of its administrative and clerical services and
leases the remaining space to third-party tenants.
At June 30, 1997, the net book value of the Bank's computer equipment
and other furniture, fixtures and equipment at its existing offices totaled
$524,000. For more information, see Note 5 of the Notes to Consolidated
Financial Statements.
-40-
<PAGE>
EMPLOYEES
At June 30, 1997, the Bank had 44 full-time and 22 part-time
employees. None of the Bank's employees is represented by a collective
bargaining agreement. Management of the Bank believes that it enjoys good
relations with its personnel.
LEGAL PROCEEDINGS
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank, its directors or its officers is a party or to
which any of its property is subject.
-41-
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The board of directors of the Company will initially be comprised of
the existing members of the Bank's board of directors, with Mr. McGlynn serving
as Chairman of the Board. The board of directors of the Company is divided into
three classes, each of which contains approximately one-third of the board of
directors. The directors are 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. McGlynn and Surabian, has a term
of office expiring at the first annual meeting of stockholders following the
Conversion; the second class, consisting of Ms. Silva, Mr. Hackett and Ms.
Bernardin, has a term of office expiring at the second annual meeting of
stockholders; and the third class, consisting of Messrs. Kazanjian and Raimo,
has a term of office expiring at the third annual meeting of stockholders. The
biographical information of each Director is set forth under "Management of the
Bank - Directors." It is currently intended that directors of the Company will
receive no additional fees for their services as Directors of the Company.
However, subsequent to the Conversion, the Boards of the Company and the Bank
intend to study the level and structure of compensation paid to financial
institutions and, upon a review of such study, may revise the amounts of fees
paid to Board members and frequency of Board and Committee meetings. See
"Management of the Bank - Directors' Compensation" for a discussion of fees paid
to the directors of the Bank.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names. The biographical
information for each executive officer is set forth under "Management of the
Bank - Directors" and "- Executive Officers who are not Directors."
Name Position(s) Held With the Company
- ---- ---------------------------------
Robert H. Surabian President and Chief Executive Officer
Ralph W. Dunham Executive Vice President, Chief Financial Officer and
Treasurer
Lorraine P. Silva Secretary
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, retirement or removal by the board of directors.
Since the formation of the Company, none of the executive officers, directors or
other personnel has received remuneration from the Company. It is currently
expected that, unless and until the Company becomes actively involved in
business activities separate from those conducted by the Bank, no separate
compensation will be paid to the directors and employees of the Company.
However, directors of the Company or the Bank who are not employees of the
Company or the Bank or any of their subsidiaries may be entitled to participate
in the Stock Option Plan and Restricted Stock Plan expected to be established
by the Company at least one year following completion of the Conversion. See
"Management of the Bank." The Company will also guarantee certain obligations of
the Bank to the Bank's executive officers, employees and directors, as described
below. Information concerning the principal occupations, employment and
compensation of the directors and the officers of the Company during the last
five years is set forth under "Management of the Bank -- Biographical
Information."
-42-
<PAGE>
MANAGEMENT OF THE BANK
DIRECTORS
The following table sets forth certain information with respect to the
persons who are directors of the Bank. There are no arrangements or
understandings between the Bank and any person pursuant to which such person has
been elected as a director. The term of each director is three years and terms
are staggered so that only one-third of the directors is elected each year. Upon
completion of the Conversion, each director will continue to serve as a director
of the Bank. Following the Conversion, directors will be elected by the
stockholder rather than by mutual shareholders.
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
DIRECTORS AGE(1) POSITION SINCE EXPIRES
- --------- ------ -------- -------- -------
<S> <C> <C> <C> <C>
Julie Bernardin 54 Director 1994 1998
John A. Hackett 57 Director 1983 1998
Richard M. Kazanjian 61 Director 1984 1999
John J. McGlynn 75 Chairman of Board 1966 1997
of Directors
Robert B Risman 66 Director Emeritus 1959 2001
Dennis M. Raimo 35 Director 1994 1999
Lorraine P. Silva 66 Director 1983 1998
Robert H. Surabian 61 President, Chief Executive 1967 1997
Officer and Director
</TABLE>
__________________
(1) At June 30, 1997.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the directors and
executive officers of the Bank. Unless otherwise indicated, each director and
executive officer has held his current occupation for the last five years.
John J. McGlynn is the Chairman of the board of directors of the Bank.
Mr. McGlynn was elected Chairman of the Board in 1992. Mr. McGlynn is the
retired Commissioner of the Public Employee Retirement Administration for the
Commonwealth of Massachusetts and a former member of the Pension Reserves
Investment Management Board.
Robert H. Surabian is the President and Chief Executive Officer and a
Director of the Bank. He has been the President of the Bank since 1979 and was
named Chief Executive Officer in 1991.
Julie Bernardin is a Principal at J.B. Consulting, Medford,
Massachusetts, which provides management and organizational consulting services,
including career counseling and small business consulting.
John A. Hackett is the President and owner of J.J. Ruddy Insurance
Agency, Inc., Medford, Massachusetts, which he has owned for 35 years.
Richard M. Kazanjian is a Principal of Consolidated Realty Trust,
Medford, MA, a General Partner in Wellington Realty, Medford, MA, and a part-
owner and consultant for Graphic Solutions, Medford, MA.
-43-
<PAGE>
Dennis M. Raimo is a certified public accountant and is a Partner, the
Treasurer and a Director of the firm of Della Pelle, Quigley, Raimo & Co., P.C.,
Medford, Massachusetts. His firm provides consulting, tax advice, audit and
general accounting services to small and medium-sized businesses.
Robert B. Risman, Director Emeritus of the Company, has been owner of
Risman Real Estate, Medford, Massachusetts, since 1959, which provides
residential sales and property management services. As Director Emeritus, Mr.
Risman is a non-voting member of the board of directors.
Lorraine P. Silva is the current Clerk of the Bank. Ms. Silva was
employed by the Bank for 28 years and has been retired since 1988.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Thomas G. Burke, age 50, has been a Senior Vice President and
Commercial Loan Officer of the Bank since 1995. He is responsible for all
commercial lending and supervision of the commercial loan department. Mr. Burke
was employed at Medford Savings Bank from 1990 to 1995, where he was a Vice
President and a Commercial Loan Officer.
Ralph W. Dunham, age 41, has been an Executive Vice President since
1997 and the Chief Financial Officer of the Bank since 1988. As Chief Financial
Officer, he is responsible for the overall financial management of the Bank.
Mr. Dunham is an attorney and a certified public accountant.
Deborah A. McNeill, age 42, is a Senior Vice President since 1996 and
the Treasurer of the Bank since 1993. She has been an employee of the Bank for
23 years. Her present duties include directing and coordinating the operation
of the accounting and operations departments.
Henry T. Sampson, Jr., age 49, has been a Senior Vice President since
1992 and the Chief Residential Loan Officer of the Bank since 1993. Mr. Sampson
is responsible for all non-commercial lending and supervision of the lending
department.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors conducts its business through meetings of the
Board and its committees. Regular meetings of the board of directors are held on
a monthly basis. The board of directors held 12 regular and 7 special meetings
during the fiscal year ended June 30, 1997. No director attended fewer than 75%
of the meetings of the board of directors and committees on which such director
served during this period.
The Board's Security Committee consists of Directors Surabian, Hackett
and McGlynn. This Committee meets weekly and reviews loan applications, loan
collateral, loan commitments, appraisal reports on real estate and interest
rates on loan and deposit accounts. Mr. Surabian serves as Chairperson.
The Board's Finance Committee consists of Directors Silva, Raimo,
Bernardin and Kazanjian. This Committee is responsible for the review of the
annual audit with the Bank's outside auditors and to report on any substantive
issues thereon to the Board. The Committee also reviews internal audits of Bank
operations conducted by an accounting firm which conducts internal audits. The
Committee meets monthly to review internal financial reports and also meets to
provide recommendations to the Board on the Bank's annual budget. Ms. Silva
serves as Chairperson.
-44-
<PAGE>
The Board's Compensation Committee consists of Directors Hackett,
McGlynn, Raimo and Silva. This Committee provides advice and recommendations to
the Board in areas of employee salaries and directors' compensation. Mr.
Hackett serves as Chairperson.
As part of its recently adopted Post-Conversion Supervision Policy,
the Board has established procedures to monitor management's implementation of
the Bank's Plan of Conversion, including the sound deployment of the Conversion
proceeds. Following the Conversion, the Board will appoint a post-conversion
supervision committee to evaluate the Bank's deployment of conversion proceeds
and monitor activities as a stock company. See "Regulation -- Massachusetts
Banking Laws and Supervision -- Post-Conversion Oversight."
It is expected that after the Conversion, the Bank's full Board will
act as a nominating committee for selecting the management nominees for election
as directors in accordance with the Bank's Bylaws as a stock co-operative bank.
It is also expected that the board of directors of the Company will establish
similar committees that will serve the same functions for the Company and its
board of directors.
DIRECTORS' COMPENSATION
Fee Arrangements. Members of the Bank's board of directors receive
fees of $600 per Board Meeting, and fees ranging from $650 to $885 per month for
each committee attended. The Chairman of the Board also receives a $6,000
annual retainer. Total directors' fees for fiscal 1997 were $90,300 and total
committee fees were $67,140. It is initially anticipated that directors of the
Company will not receive compensation for their services as such but will
participate in the Option Plan and Restricted Stock Plan expected to be
implemented by the Company.
EXECUTIVE COMPENSATION
Compensation Decisions. Decisions regarding the Company's executive
compensation will be made by the Company's Compensation Committee, exclusive of
those directors employed by the Company. Under this structure, no interlocks
will exist between members of the compensation committee and employees of the
Company.
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 June 30, 1997 to the President and Chief Executive Officer of
the Bank and each other executive officer of the Bank whose annual salary and
bonus for such fiscal year was in excess of $100,000 (each, a "Named Executive
Officer").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
- -------------------------------------------------------------------------------------------------------------
LONG-TERM
NAME AND PRINCIPAL FISCAL OTHER ANNUAL INCENTIVE PLAN ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION (2) PAYOUTS (3) COMPENSATION (4)
- ------------------ ------ ---------- --------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Surabian, 1997 $148,896 $37,500 __ __ $4,700
President and Chief
Executive Officer
Ralph W. Dunham, 1997 93,600 9,400 __ __ 4,700
Chief Financial Officer,
Executive Vice President
and Treasurer
</TABLE>
________________
(1) Under Annual Compensation, the column titled "Salary" includes the Named
Executive Officer's base salary including all payroll deductions for health
insurance under the Bank's health insurance plan and pre-tax contributions
to the Bank's 401(k) Plan. The column titled "Bonus" includes a stipend of
$17,500 to be paid
-45-
<PAGE>
annually for a ten year period by the Bank to the Chief Executive Officer
to cover premiums due on a [term] life insurance policy owned by the Chief
Executive Officer. The Chief Executive Officer pays all taxes required on
these payments which are reported on the IRS Form W-2 issued to the
Officer. Directors' fees are not paid to the Chief Executive Officer who is
a member of the Bank's board of directors.
(2) For the fiscal year ended June 30, 1997, there were no: (a) perquisites
with an aggregate value for each Named Executive Officer in excess of the
lesser of $50,000 or 10% of the total of the Officer's 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; or (d) preferential discounts on
stock.
(3) During the fiscal year ended June 30, 1997, the Bank did not maintain any
restricted stock, stock option or other long-term incentive compensation
plans.
(4) Includes matching contributions made by the Bank to the 401(k) Plan on each
Named Executive Officer's behalf.
CERTAIN BENEFIT PLANS AND AGREEMENTS
General. Currently, the Bank contributes to tax-qualified savings and
retirement plans for the benefit of its eligible employees. In addition, the
Bank maintains group medical, dental, hospitalization, disability and life
insurance coverages for its personnel. It is anticipated that the Bank will
continue to provide these benefits to eligible employees after the Conversion is
completed.
In connection with the Conversion, the Company has adopted an ESOP for
the benefit of its eligible employees and those of its affiliates, such as the
Bank, which has adopted this plan. The ESOP, described below, will become
effective upon the effective date of the Bank's Conversion.
The Company has also approved employment agreements to be entered into
between the Company and two senior executive officers who also serve the Bank in
the same respective capacities. Similarly, the Bank has also approved employment
agreements for two commercial loan officers. These employment agreements,
described below, will become effective on the effective date of the Bank's
Conversion.
Basis for Awards of Benefits and Compensation. The respective boards
of directors of the Company and the Bank have evaluated and approved the terms
of the employment agreements and other benefits described below. In its review
of the benefits and compensation of the executive officers and the terms of the
employment agreements, the Boards have considered a number of factors, including
among others, the ability, performance, service and experience of these officers
and executives as well as the various legal and regulatory requirements
regarding the levels of compensation which may be paid to employees of a
depository institution.
Retirement Plans. The Bank is a participant in the retirement plans
sponsored by the Co operative Banks Employees Retirement Association ("CBERA").
Two plans are provided: a defined contribution plan (the "401(k) Plan"), under
which employee contributions are matched by contributions from the Bank, and a
defined benefit retirement plan ("Pension Plan") that is funded solely by
employer contributions made by the Bank. Employees of the Bank are eligible to
participate in these Plans after attaining age 21 and completing one year of
service (defined as a 12-month period commencing on the date of hire during
which the employee has worked at least 1,000 hours).
401(k) Plan. The 401(k) Plan permits eligible employees to save for
retirement by making pre-tax and post-tax contributions to the Plan of up to ten
percent (10%) of the annual salary paid to them by the Bank. Pre-tax
contributions made by participants are eligible to be "matched" by employer
contributions made by the Bank on each participating employee's behalf. Post-
tax contributions are not eligible for Bank matching
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contributions. Under the 401(k) Plan, the Bank will make a 50% "matching"
contribution for each pre-tax contribution made by a participant up to 5% of the
participant's total annual salary. An employee will always be 100% vested in any
pre-tax or post-tax contributions he makes to the 401(k) Plan and will become
incrementally vested in any matching contributions made on his behalf at a rate
of 20% for each year of service with the Bank, with initial vesting to begin
after two years of service and full vesting to occur after six years of service
or upon earlier disability, death or attainment of normal retirement age.
Distributions may be made at the election of a participant in either a single
lump sum payment or installments, as provided in the Plan.
Pension Plan. The Pension Plan provides a benefit for all eligible
Bank employees, including the Named Executive Officers listed in the Executive
Compensation Table, equal to the sum of: (a) the participant's accrued benefit
under the applicable Prior Plan determined as of December 31, 1988 plus (b) one
percent (1%) of the participant's "Final Average Compensation" (defined to mean
a participant's highest compensation averaged over three years) plus (c) one-
half of one percent (0.5%) of the participant's Final Average Compensation in
excess of covered compensation multiplied by the participant's benefit service
after December 31, 1988. A participant will become incrementally vested in
their accrued benefit under the Pension Plan at a rate of 20% each year
beginning after two years of service with the Bank, with full vesting to occur
after six years of service or earlier termination of employment due to
disability, death or attainment of normal retirement age. The Pension Plan is
funded by the Bank on an actuarial basis and all assets are held in trust by the
trustee.
The following table illustrates the annual benefit payable upon normal
retirement at age 65, in the form of a single life annuity, with no offset for
Social Security benefits, under the Pension Plan at various levels of
compensation and years of service under the Plan:
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------
FINAL AVERAGE COMPENSATION 10 15 20 25
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 50,000 $ 7,500 $11,250 $15,000 $18,750
75,000 11,250 16,875 22,500 28,125
100,000 15,000 22,500 30,000 37,500
125,000 18,750 28,125 37,500 46,875
150,000(1) 22,500 33,750 45,000 56,250
175,000(1) 26,250 39,375 52,500 65,625
200,000(1) 30,000 45,000 60,000 75,000
</TABLE>
________________
(1) These are hypothetical benefits based on the Pension Plan's normal
retirement benefit formula. The benefits shown above do not reflect an
offset for Social Security benefits and there are no other offsets. For the
Pension Plan year ended December 31, 1996, the compensation for calculating
benefits could not exceed $150,000. This compensation limitation will be
adjusted for subsequent years pursuant to Internal Revenue Code (the
"Code") provisions.
The following table sets forth the years of credited service
determined as of December 31, 1996, the end of the 1996 plan year, for each
Named Executive Officer listed in the Executive Compensation Table. The accrued
benefit of each Named Executive Officer under the Pension Plan is determined on
the basis of each Officer's "Years of Credited Service," shown below, and his
"Final Average Compensation," as defined above. Each Named Executive Officer's
"Final Average Compensation" will include the amounts listed under the "Salary"
and "Bonus" columns of the Executive Compensation Table.
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YEARS OF CREDITED SERVICE
-------------------------
<TABLE>
<CAPTION>
YEARS MONTHS
----- ------
<S> <C> <C>
Mr. Surabian 18 1
Mr. Dunham 8 9
</TABLE>
Employee Stock Ownership Plan and Trust. The Company has established,
and the Bank has adopted, for the benefit of eligible employees, an ESOP and
related trust to become effective upon completion of the Conversion. Employees
of the Bank or the Company who have attained age 21 and have completed one year
of service will be eligible to become participants in the ESOP. The ESOP intends
to purchase eight percent (8%) of the Common Stock issued in the Conversion. 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 Bank or the Company expects to
contribute to the ESOP sufficient funds to pay the par value of the Common Stock
to be purchased and the ESOP intends to borrow funds from the Company equal to
the balance of the aggregate purchase price of the Common Stock. Although
contributions to the ESOP will be discretionary, the Company or the Bank intends
to make annual contributions to the ESOP in an aggregate amount at least equal
to the principal and interest requirements on the debt. It is expected that
this loan will be for a term of up to 10 years, will bear interest at the rate
of 8% per annum, and will call for level annual payments of principal and
interest designed to amortize the loan over its term. It is anticipated that
the loan will also permit partial pre-payments. The Company and the Bank may
make additional annual contributions to the ESOP to the maximum extent
deductible for federal income tax purposes.
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 in the ESOP 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. Benefits generally become
vested at the rate of 20% per year with vesting to begin after an employee's
completion of three years of service and full vesting to occur after seven years
of service. Participants also become immediately vested upon termination of
employment due to death, retirement at age 65 or older, permanent disability or
upon the occurrence of a change of control. Forfeitures will be reallocated
among remaining participating employees, in the same proportion as
contributions. Vested benefits may be paid in a single sum or installment
payments and are payable upon death, retirement at age 65 or older, disability
or separation from service.
In connection with the establishment of the ESOP, a Committee of the
Company's board of directors will be appointed to administer the ESOP (the "ESOP
Committee"). An unrelated corporate trustee for the ESOP will be appointed prior
to the Conversion and will continue thereafter. The ESOP Committee may instruct
the trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to its fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of the participating employees.
Under the ESOP, unallocated shares will be voted in a manner calculated to most
accurately reflect the instructions it has received from participants regarding
the allocated stock as long as such vote is in accordance with the provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
The ESOP may purchase additional shares of Common Stock in the future,
in the open market or otherwise, and may do so either on a leveraged basis with
borrowed funds or with cash dividends, periodic employer contributions or other
cash flow. Whether such purchases will be made and the terms and conditions of
any such purchases will be determined by the ESOP's fiduciaries taking into
account such factors as they consider relevant at the time, including their
judgment as to the attractiveness of the Common Stock as an investment, the
price at which Common Stock may be purchased and, in the case of leveraged
purchases, the
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terms and conditions on which borrowed funds are available and the willingness
of the Company or the Bank to offer purchase money financing or guarantee
purchase money financing offered by third parties.
EMPLOYMENT AGREEMENTS
Employment Agreements between the Company and Two Senior Executives.
The board of directors of the Company has authorized the Company to enter into
Employment Agreements with each of Mr. Robert H. Surabian and Mr. Ralph W.
Dunham (the "Senior Executives"), on behalf of both the Company and the Bank, to
become effective upon consummation of the Conversion. These Employment
Agreements establish the respective duties and compensation of the Senior
Executives and are intended to ensure that the Company and the Bank will be able
to maintain a stable and competent senior executive management team after the
Conversion. The continued success of the Company and the Bank depends to a
significant degree on the skills and competence of these Senior Executives.
The Employment Agreements to be entered into between the Company and
Messrs. Surabian and Dunham will each have a three year term. The term of the
Employment Agreement between the Company and Mr. Surabian will be automatically
extended on a daily basis so that the remaining term of this Agreement will
always be three years unless written notice of non-renewal is given by the Board
or the Senior Executive. The Company's Employment Agreement with Mr. Dunham
provides that, commencing on the Agreement's first anniversary date and
continuing each anniversary date thereafter, the Board may, with the Senior
Executive's concurrence, extend the Employment Agreement for an additional year,
so that the remaining term will be three years, after conducting a performance
evaluation of the Senior Executive. Both Employment Agreements provide that
each Senior Executive's base salary will be reviewed annually. It is
anticipated that this review will be performed by non-employee members of the
Board, and each Senior Executive's base salary may be adjusted on the basis of
his job performance and the overall performance of the Company and the Bank.
The base salaries for Messrs. Surabian and Dunham commencing as of July 1, 1997,
were $153,363 and $96,408 respectively. In addition to the base salary, the
Employment Agreements provide for, among other things, entitlement to
participation in pension, savings, incentive and welfare benefit plans and
eligibility for fringe benefits applicable to executive personnel such as fees
for club and organization memberships deemed appropriate by the Company and the
Senior Executive. The Employment Agreements provide for termination by the
Company at any time for cause as defined in the Employment Agreements.
In the event of the termination of the Senior Executive's employment
with the Company and the Bank for reasons other than for cause, death or
disability, or in the event of the Senior Executive's resignation from the
Company and the Bank for reasons permitted under the Employment Agreements (such
as following a change in control), the Senior Executive would be entitled to a
lump sum cash payment in an amount equal to the present value of the remaining
base salary payments due for the remaining term of the Agreement. However, in
the event a Senior Executive's employment terminates following a change in
control of the Company (as described below), for purpose of computing the lump
sum severance amount payable, the remaining term of each Executive's Employment
Agreement will be deemed to be three years. The Agreements also provide for the
Company (or the Bank, if applicable) to continue the Senior Executive's life,
health and disability insurance coverages for the remaining term of the
Employment Agreement. In addition to the foregoing severance benefits, the
Company's Employment Agreement with Mr. Surabian provides for him to receive all
bonus payments and additional contributions or benefits he would have earned
under any employee benefit plan of the Company or the Bank during the remaining
term of his Employment Agreement as well as the payments that would have been
made under any incentive compensation plan during the remaining term of the
Employment Agreement. If permitted by applicable law, provision will also be
made for the cash out of stock options, appreciation rights or restricted stock
as if Mr. Surabian was fully vested. Reasons specified as grounds for
resignation by the Senior Executives for purposes of the Employment Agreements
include: failure to elect or re-elect the Senior Executive to his offices;
failure to vest in him the functions, duties or authority associated with such
offices; any material breach of contract by the Company or the Bank which is not
cured within 30 days after written notice thereof; and, following a "change in
control" (as defined in the Employment
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Agreements), demotion, loss of title, office or significant authority or
responsibility, any reduction in any element of compensation or benefits, any
adverse change or location of the principal place of employment or working
conditions or resignation for any other reason. In general, for purposes of the
Employment Agreements, the ESOP and any stock benefit plans to be maintained by
the Company or the Bank, a "change in control" will generally be deemed to occur
when a person or group of persons acting in concert acquires beneficial
ownership of 25% or more of any class of equity security of the Company or the
Bank, upon stockholder approval of a merger or consolidation or a change of the
majority of the board of directors of the Company or the Bank, or liquidation or
sale of substantially all the assets of the Company or the Bank. Based on
current compensation and benefit costs, cash payments to be made in the event of
a change of control of the Bank or the Company pursuant to the terms of the
Employment Agreements would be approximately $1,267,000 of which approximately
$876,000 would be payable to Mr. Surabian and $391,000 would be payable to Mr.
Dunham. However, the actual amount to be paid under the Employment Agreements in
the event of a change in control of the Company or the Bank cannot be estimated
at this time because the actual amount is based on the compensation and benefit
costs applicable to these individuals and other factors existing at the time of
the change in control which cannot be determined at this time.
Payments to the Senior Executives under the Company's Employment
Agreements may be paid by either the Bank or the Company and thus will not be
duplicative; the Employment Agreements provide that the Company will guarantee
that all payments to the Senior Executives will be made as provided under the
Employment Agreements. The Senior Executives would be entitled to reimbursement
of certain costs incurred in interpreting or enforcing the Employment
Agreements.
Cash and benefits paid to each Senior Executive under the Employment
Agreements together with payments under other benefit plans following a change
in control of the Company or the Bank may constitute an "excess parachute"
payment under Section 280G of the Code, resulting in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such excess
amounts to the Company and the Bank. The Company's Employment Agreements
include a provision indemnifying each Senior Executive on an after-tax basis for
any "golden parachute" excise taxes.
Employment Agreements between the Bank and Two Commercial Lending
Officers. The board of directors of the Bank has authorized the Bank to enter
into Employment Agreements with each of Mr. Thomas G. Burke and Mr. John
O'Donnell, who both currently serve the Bank as Commercial Loan Officers ("Loan
Officers"), to become effective upon consummation of the Conversion. The
purpose of these Employment Agreements is to secure the Loan Officers' continued
availability and attention to the Bank's affairs, relieved of distractions
arising from the possibility of a corporate change in control.
Both Agreements have three year terms that may be extended by the
Bank's board of directors, after a performance review of the Loan Officer, for
an additional year. The base salaries for Messrs. Burke and O'Donnell
commencing as of July 1, 1997, were $88,580 and $79,310, respectively. In
addition to the base salary, the Employment Agreements provide for, among other
things, eligibility for participation in the Bank's employee pension, savings,
incentive and welfare benefit plans. The Employment Agreements provide for
termination by the Bank at any time for cause as defined in the Employment
Agreements.
In the event that a Loan Officer's employment with the Bank is
terminated for reasons other than for cause, death or disability or in the event
that the Loan Officer resigns from employment with the Bank following a "change
in control" (as defined above), the Officer would be entitled to a lump sum cash
payment in an amount equal to the present value of the remaining base salary
payments due for the remaining term of the Agreement, as severance pay. In the
event that severance is payable to a Loan Officer due to his termination of
employment following a change in control of the Bank, for purpose of computing
the lump sum severance amount payable, the remaining term of each Officer's
Employment Agreement will be deemed to be three years. The Agreements also
provide for the Bank to continue the Loan Officer's life, health and disability
insurance coverages for the remaining term of the Employment Agreement, as an
additional severance benefit.
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Based on current compensation and benefit costs applicable to the Loan
Officers expected to be covered by the Employment Agreements, cash payments to
be made in the event of a change of control of the Bank would be approximately
$503,000. However, the actual amount to be paid under these Agreements in the
event of a change of control of the Bank or the Company cannot be estimated at
this time because it will be based on the compensation and benefit costs
applicable to the Loan Officers and other factors existing at the time of the
change of control which cannot be determined at this time.
FUTURE STOCK BENEFIT PLANS
In addition to the above-described benefit plans, in the future, but
not in the first year following consummation of the Conversion, the Company and
the Bank are expected to consider implementation of an Option Plan and a
Restricted Stock Plan. The significant terms and conditions of these future
stock benefit programs are described below.
Option Plan. At least one year following the Conversion, the Company
anticipates establishing an Option Plan for the benefit of officers, key
employees and directors of the Company and the Bank. The Option Plan will be
subject to stockholder approval and the approval of the Commissioner. An amount
of Common Stock equal to 10% of the shares of Common Stock to be issued in the
Conversion is expected to be reserved for issuance under the Option Plan. No
determinations have been made by the board of directors as to the specific terms
of the Option Plan or the amount of awards to be granted thereunder. While the
Company does not currently intend to implement the Option Plan within one year
following completion of the Conversion, FDIC regulations provide that if the
Option Plan is implemented within one year following completion of the
Conversion, no individual officer or employee may receive more than 25% of the
options granted, and non-employee directors may not receive more than 5%
individually or more than 30% in the aggregate of the options granted.
The Company's primary purpose of implementing the Option Plan will be
to attract and retain officers, key employees and directors of outstanding
competence and experience and to provide these individuals with a proprietary
interest in the Company as an incentive to contribute to the success of the
Company and its subsidiaries. Although the terms of the Option Plan have not
yet been determined, it is expected that the 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") and (ii) options that do not so qualify ("Non-Statutory Stock
Options").
Due to the requirements of Section 422 of the Code, Incentive Stock
Options may only be granted to employees of the Company or the Bank. Non-
Statutory Stock Options may be granted to both employees and non-employee
directors under the Plan. The terms and conditions of options granted to
employees of the Company or the Bank will be determined by a committee of the
Company's board of directors appointed to administer the Option Plan, in its
discretion. The terms of all options granted to non-employee directors will be
made pursuant to the formula contained in the Option Plan document which will be
submitted to the Company's stockholders for approval. It is expected that the
exercise price for any stock option granted under the Plan will in no event be
less than the fair market value of a share of the underlying Common Stock on the
date of grant. Options will generally become exercisable in 20% increments
beginning on the first anniversary of the grant date with full vesting to occur
on the fifth anniversary of such date or upon the earlier disability or death of
the optionee. It is also expected that the Option Plan will provide for the
accelerated vesting of option grants upon a "change in control" of the Company
or the Bank (as such term is defined for purposes of the Employment Agreements).
Unless sooner terminated, the Option Plan expected to be implemented by the
Company will remain in effect for a period of ten years.
Restricted Stock Plan. No earlier than one year following the
Conversion, the Company also intends to establish a Restricted Stock Plan as a
method of providing officers, key employees and directors of the Company and the
Bank with a proprietary interest in the Company in a manner designed to
encourage such
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persons to remain with the Company and the Bank. It is anticipated that the
Restricted Stock Plan would cover both eligible officers and employees of the
Company and the Bank and non-employee directors of the Company and the Bank. The
Restricted Stock Plan is subject to stockholder approval.
Subject to stockholder approval and approval of the Commissioner, the
Company expects to contribute funds to the Restricted Stock Plan to enable the
Restricted Stock Plan's trust to acquire, in the aggregate, an amount up to 4%
of the shares of Common Stock issued in the Conversion. Shares used to fund the
Restricted Stock Plan may be acquired through open market purchases, if
permitted, or from authorized but unissued shares. No determinations have been
made as to the specific terms of the Restricted Stock Plan or the amount of
awards thereunder. Although no specific award determinations have been made,
the Company anticipates that, if stockholder approval is obtained, it will
provide awards to eligible officers, employees and directors to the extent
permitted by applicable regulations. While the Company does not currently
intend to implement the Restricted Stock Plan within one year following
completion of the Conversion, FDIC regulations provide that if the Restricted
Stock Plan is implemented within one year following completion of the
Conversion, no individual employee may receive more than 25% of the shares of
any plan, and that non-employee directors may not receive more than 5% of the
shares individually or 30% in the aggregate for all directors.
It is expected that the Restricted Stock Plan adopted would be
administered by a Committee of the board of directors (the "Restricted Stock
Plan Committee"). This Committee would determine the terms and conditions of
all awards made to employees of the Company or the Bank participating in the
Restricted Stock Plan. It is anticipated that awards to non-employee directors
under the Restricted Stock Plan and the material terms and conditions thereof,
will be specified in a plan document that will be submitted to the Company's
stockholders for approval. Under the Restricted Stock Plan, awards are expected
to be granted in the form of shares of Common Stock held by the Restricted Stock
Plan. The Board intends to appoint an independent fiduciary to serve as trustee
of the trust to be established pursuant to the Restricted Stock Plan. The
Restricted Stock Plan is expected to provide for the vesting of awards granted
thereunder in the manner specified by the Restricted Stock Plan Committee
generally at a rate of no more than 20% per year. It is also expected that in
the event of an award recipient's death, grants would become 100% vested, and,
in the event of disability, grants would become 100% vested upon the termination
of employment of an officer or employee, or upon termination of service as a
director. It is also expected that the Restricted Stock Plan will provide for
awards to become automatically 100% vested upon a "change in control " of the
Company or the Bank, as described above.
When shares become vested in accordance with the Restricted Stock
Plan, participants will recognize income equal to the fair market value of the
Common Stock at that time. The amount of income recognized by the participants
may be a deductible expense for tax purposes for the Company. When shares
become vested and are actually distributed in accordance with the Restricted
Stock Plan, the participants will also receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants may
direct the voting of the shares awarded to them. Shares not subject to grants
will be voted by the trustee of the Restricted Stock Plan in proportion to the
directions provided with respect to shares subject to grants. Vested shares will
be 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 Restricted Stock Plan after the Conversion, the interests of
existing stockholders will be diluted. See, " Risk Factors -- Possible Dilutive
Effective of Future Stock Benefit Plans."
CERTAIN TRANSACTIONS
In the ordinary course of business, the Bank makes loans to its
directors and officers and parties related to them.
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The Federal Reserve's "Regulation O" generally prohibits loans above
the greater of $25,000 or 5% of the Bank's capital and surplus (up to $500,000)
to directors and officers and their affiliates, unless such loans are approved
in advance by a disinterested majority of the board of directors. As a matter
of policy, loans to directors of the Bank, as well as other affiliated persons
or entities, currently are made in the ordinary course of business and on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, do not
involve more than the normal risk of collectability or present other unfavorable
features, and are approved by a disinterested majority of the board of
directors.
In addition to these provisions of federal law, Massachusetts law
requires that loans by a co-operative bank to its officers and directors be made
on non-preferential terms and receive the prior approval of a disinterested
majority of the board of directors. Further, loans by a co-operative bank to its
own officers may not exceed $20,000 for general purposes; $75,000 for
educational purposes; and $275,000 for residential home mortgage purposes. All
loans by a co-operative bank to its officers and directors must be reported
annually to the Commissioner. At June 30, 1997, total loans to directors and
officers of the Bank greater than $60,000 on an individual basis amounted to
approximately $1.67 million.
REGULATION
GENERAL
As a co-operative bank chartered by the Commonwealth of Massachusetts,
the Bank is subject to extensive regulation under state law with respect to many
aspects of its banking activities; this state regulation is administered by the
Commissioner. In addition, as a bank whose deposits are insured by the FDIC
under the BIF, the Bank is subject to deposit insurance assessments by the FDIC,
and the FDIC has examination and supervisory authority over the Bank, with a
broad range of enforcement powers. Finally, the Bank is required to maintain
reserves against deposits according to a schedule established by the Federal
Reserve System. These laws and regulations have been established primarily for
the protection of depositors and the deposit insurance funds, not bank
stockholders.
The following references to the laws and regulations under which the
Bank is regulated are brief summaries thereof, do not purport to be complete and
are qualified in their entirety by reference to such laws and regulations.
MASSACHUSETTS BANKING LAWS AND SUPERVISION
Massachusetts co-operative banks such as the Bank are regulated and
supervised by the Commissioner. The Commissioner is required to regularly
examine each state-chartered bank. The approval of the Commissioner is required
to establish or close branches, to merge with another bank, to form a bank
holding company, to issue stock or to undertake many other activities. Any
Massachusetts bank that does not operate in accordance with the regulations,
policies and directives of the Commissioner is subject to sanctions. The
Commissioner may under certain circumstances suspend or remove directors or
officers of a bank who have violated the law, conducted a bank's business in a
manner which is unsafe, unsound or contrary to the depositors' interests, or
been negligent in the performance of their duties.
All Massachusetts-chartered co-operative banks are required to be
members of the Co-operative Central Bank and are subject to its assessments. The
Co-operative Central Bank maintains the Share Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Co-operative Central Bank acts as a source of
liquidity to its members in supplying them with low-cost funds, and purchasing
certain qualifying obligations from them.
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Major changes in Massachusetts law in 1982 and 1983 substantially
expanded the powers of co-operative banks, and made their powers virtually
identical to those of state-chartered commercial banks. The powers which
Massachusetts-chartered co-operative banks can exercise under these laws are
summarized below.
Lending Activities. A Massachusetts chartered co-operative bank may
make a wide variety of mortgage loans. Fixed-rate loans, adjustable-rate loans,
variable-rate loans, participation loans, graduated payment loans, construction
loans, condominium and co-operative loans, second mortgage loans and other types
of loans may be made in accordance with applicable regulations. Mortgage loans
may be made on real estate in Massachusetts or in another New England state if
the bank making the loan has an office there or under certain other
circumstances. In addition, certain mortgage loans may be made on improved real
estate located anywhere in the United States. Commercial loans may be made to
corporations and other commercial enterprises with or without security. With
certain exceptions, such loans may be made without geographic limitation.
Consumer and personal loans may be made with or without security and without
geographic limitation. Loans to individual borrowers generally will be limited
to 20% of the total of the Bank's capital accounts and stockholders' equity.
Investments Authorized. Massachusetts-chartered co-operative banks
have broad investment powers under Massachusetts law, including so-called
"leeway" authority for investments that are not otherwise specifically
authorized. The investment powers authorized under Massachusetts law are
restricted by federal law to permit, in general, only investments of the kinds
that would be permitted for national banks. The Bank has authority to invest in
all of the classes of loans and investments that are permitted by its existing
loan and investment policies.
Payment of Dividends. A co-operative bank may only pay dividends on
its capital stock if such payment would not impair the bank's capital stock and
surplus account. No dividends may be paid to stockholders of a bank if such
dividends would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
Branches. With the approval of the Commissioner, bank branches may be
established in any city or town in Massachusetts; in addition, co-operative
banks may operate automated teller machines at any of their offices or, with the
Commissioner's approval, anywhere in Massachusetts. Sharing of ATMs or
"networking" is also permitted with the Commissioner's approval. Massachusetts
chartered co-operative banks may also operate ATMs outside of Massachusetts if
permitted to do so by the law of the jurisdiction in which the ATM is located.
Interstate Acquisitions. In 1996, the Massachusetts legislature
passed a new interstate banking statute in anticipation of the June 1, 1997
effective date of the federal interstate banking law. Pursuant to this statute,
an out-of-state bank may (subject to various regulatory approvals and to
reciprocity in its home state) establish and maintain bank branches in
Massachusetts by (i) merging with a Massachusetts bank that has been in
existence for at least three years, (ii) acquiring a branch or branches of a
Massachusetts bank without acquiring the entire bank, or (iii) opening such
branches de novo. Massachusetts banks' ability to exercise similar interstate
banking powers in other states depends upon the laws of the other states. For
example, according to the law of the bordering state of New Hampshire, out-of-
state banks may acquire New Hampshire banks by merger, but may not establish de
novo branches in New Hampshire.
Parity Regulation. The Massachusetts regulation on parity with
national banks establishes procedures allowing state-chartered banks to exercise
additional or more flexible parallel powers granted to national banks under
federal law which are not otherwise permitted under state law. Under the parity
regulation, a bank which is either "adequately capitalized" or "well
capitalized," which has not been informed in writing by the Commissioner or an
applicable federal bank regulatory agency that it has been designated to be in
"troubled condition," and which has received at least a "satisfactory" CRA
rating at the most recent
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examination by the Commissioner or other applicable federal bank regulatory
agency may engage in certain activities in which Massachusetts chartered banks
ordinarily may not engage. Such activities include, but are not limited to, the
establishment of temporary branch offices, investment in corporate affiliates
and subsidiaries, engagement or mortgage in certain types of home equity loans,
financing of mutual fund distributions, engagement in lease financing
transactions, investment in community development and public welfare projects,
and the provision of tax planning and preparation, payroll and financial
planning services, among others. The procedures and requirements for engaging in
such activities range from an application process, expedited review and notice
process to activities requiring no application or notice whatsoever. The
applicable procedures and requirements vary according to the nature of the
activity to be engaged in and the capitalization of the bank. As of the date of
this prospectus, the Bank was "adequately capitalized," had received a CRA
rating of "satisfactory" and was not in "troubled condition" and was therefore
eligible to engage in certain of the above-referenced activities, subject to the
applicable procedure and requirements of Massachusetts regulation.
Other Powers. Massachusetts-chartered co-operative banks may also
lease machinery and equipment, act as trustee or custodian for tax qualified
retirement plans, establish trust departments and act as professional trustee or
fiduciary, provide payroll services for their customers, issue or participate
with others in the issuance of mortgage-backed securities and establish mortgage
banking companies and discount securities brokerage operations. Some of these
activities require the prior approval of the Commissioner.
Post-conversion Oversight. The Commissioner will continue to oversee
the Bank following the Conversion on a number of matters specifically pursuant
to its Post-Conversion Supervision Policy, the Bank has agreed to submit written
quarterly progress reports to the Division for three years following the
Conversion which detail the implementation of the Bank's conversion business
plan's objectives and goals. See "Management." In addition, the Bank's
Dividend Policy and Stock Repurchase Policy each provides that any modification
to that policy requires the Commissioner's prior notice and consent. See
"Dividends."
FEDERAL BANKING REGULATIONS
Capital Requirements. Under FDIC regulations, state-chartered banks
that are not members of the Federal Reserve System ("state non-member banks"),
such as the Bank, are required to comply with minimum leverage capital
requirements. For an institution determined by the FDIC to not be anticipating
or experiencing significant growth and to have well diversified risk, including
no undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and to be in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Ranking System (the CAMELS
rating system) established by the Federal Financial Institutions Examination
Council, the minimum capital leverage requirement is a ratio of Tier 1 capital
to total assets of 3%. For all other institutions, the minimum leverage capital
ratio is 3% plus an additional "cushion" amount of at least 100 to 200 basis
points. Tier 1 capital is the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and minority
investments in certain subsidiaries, less most intangible assets.
The FDIC has also adopted risk-based capital guidelines to which the
Bank is subject. The guidelines establish a systematic analytical framework
designed to make regulatory capital requirements sensitive to differences in
risk profiles among banking organizations. The FDIC guidelines require state
non-member banks to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk. Under the FDIC's risk-weighting system,
cash and securities backed by the full faith and credit of the U.S. government
are given a 0% risk weight. Mortgage-backed securities that qualify under the
Secondary Mortgage Enhancement Act, including those issued, or fully guaranteed
as to principal and interest, by the FNMA or the Federal Home Loan Mortgage
Corporation ("FHLMC"), are assigned a 20% risk weight. Single-family first
mortgages not more than 90 days past due with
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loan-to-value ratios under 80%, multi-family mortgages (maximum 36 dwelling
units) with loan-to-value ratios under 80% and average annual occupancy rates
over 80%, and certain qualifying loans for the construction of one- to four-
family residences pre-sold to home purchasers, are assigned a risk weight of
50%. Consumer loans and commercial real estate loans, repossessed assets and
assets more than 90 days past due, as well as all other assets not specifically
categorized, are assigned a risk weight of 100%.
State non-member banks must maintain a minimum ratio of qualifying
total capital to risk-weighted assets of at least 8%, of which at least one-half
must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus
Tier 2 or supplementary capital items, which include allowances for loan losses
in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock,
preferred stock with a maturity of over 20 years, and certain other capital
instruments. The includable amount of Tier 2 capital cannot exceed the amount of
the institution's Tier 1 capital. Qualifying total capital is further reduced
by the amount of the bank's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks and certain other deductions.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
for insured institutions to ensure that those standards take adequate account of
interest-rate risk ("IRR"), concentration of credit risk, and the risk of
nontraditional activities, as well as to reflect the actual performance and
expected risk of loss on multi-family residential loans. In August 1995, the
FDIC, along with the other federal banking agencies, adopted a regulation
providing that the agencies will take account of the exposure of a bank's
capital and economic value to the risks of changes in interest rates in
assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank, and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
also issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal to
develop a supervisory framework for measuring interest rate risk and to require
an explicit capital component for interest rate risk.
The following table shows the Bank's leverage ratio, its Tier 1 risk-
based capital ratio, and its total risk-based capital ratio, at June 30, 1997.
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<TABLE>
<CAPTION>
AT JUNE 30, 1997
PRO PRO FORMA
HISTORICAL PERCENT OF FORMA PERCENT CAPITAL PERCENT OF
CAPITAL ASSETS/(1)/ CAPITAL/(1)/ ASSETS/(1)/ EQUIREMENT ASSETS/(2)/
------------------------ -------------------------- --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory Tier 1 leverage capital...... $11,761 8.1% $19,277 12.14% $4,762 4.00%
Tier 1 risk-based capital............... 11,761 13.3 19,277 12.14 7,216 4.00
Total risk-based capital................ 12,738 14.4 20,251 22.45 7,216 8.00
</TABLE>
(1) Based on the midpoint of the Current Valuation Range.
(2) For purpose of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total average assets. In calculating Tier 1 risked-based
capital and total risk-based capital, assets are based on total risk-
weighted assets.
As the preceding table shows, the Bank exceeded the minimum capital
adequacy requirements at the date indicated.
Enforcement. The FDIC has extensive enforcement authority over
insured co-operative banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. See "-
- -Prompt Corrective Action." The FDIC may also appoint a conservator or receiver
for a state bank on the basis of the institution's financial condition or upon
the occurrence of certain events, including: (i) insolvency (whereby the assets
of the bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.
Deposit Insurance. The FDIC has adopted a risk-based deposit
insurance assessment system. The FDIC assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending 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 that 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 BIF deposits
currently range from 0 basis points to 27 basis points. The Bank's assessment
rate is currently 0 basis points. The FDIC is authorized to raise the
assessment rates in certain circumstances, including to maintain or achieve the
designated reserve ratio of 1.25%, which requirement the BIF currently meets.
The FDIC has exercised its authority to raise rates 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. In addition, recent
legislation requires BIF-insured institutions like the Bank to assist in the
payment of FICO bonds.
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Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the FICO bonds was expanded to add,
beginning January 1, 1997, the deposits of BIF-insured institutions, such as the
Bank. Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on January 1, 1997 was 0.0130% for BIF-assessable deposits and
0.0648% for SAIF-assessable deposits and for the semi-annual period beginning on
July 1, 1997 was 0.0126% for BIF-assessable deposits and 0.0630% for SAIF-
assessable deposits.
Under the Federal Deposit Insurance Act (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 Division. The management of the Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.
Transactions with Affiliates and Insiders of the Bank. Transactions
between an insured bank, such as the Bank, and any of its affiliates is governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is
any company or entity which controls, is controlled by or is under common
control with the bank. Generally, Sections 23A and 23B (i) limit the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. In addition, any purchase of assets or services by a bank from an
affiliate must be on terms that are substantially the same, or at least as
favorable, to the institution as those that would be provided to a non-
affiliate. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and similar other types of transactions.
Further, most loans by a bank to its affiliate must be supported by collateral
in amounts ranging from 100 to 130 percent of the loan amounts.
Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the Federal Reserve Board's Regulation O
thereunder on loans to executive officers, directors and principal stockholders.
Under Section 22(h), loans to a director, an executive officer or a greater than
10% stockholder of a bank as well as certain affiliated interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the loans-to-one-borrower limit applicable to
national banks (generally 15% of the institution's unimpaired capital and
surplus), and all loans to all such persons in the aggregate may not exceed the
institution's unimpaired capital and unimpaired surplus. Regulation O also
prohibits the making of loans in an amount greater than $25,000 or 5% of capital
and surplus but in any event over $500,000, to directors, executive officers and
greater than 10% stockholders of a bank, and their respective affiliate, unless
such loans are approved in advance by a majority of the board of directors of
the bank with any "interested" director not participating in the voting.
Further, Regulation O requires that loans to directors, executive officers and
principal stockholders be made on terms substantially the same as those that are
offered in comparable transactions to other persons. Regulation O also prohibits
a depository institution from paying the overdrafts over $1,000 of any of its
executive officers or directors unless they are paid pursuant to written pre-
authorized extension of credit or transfer of funds plans.
State chartered non-member banks are further subject to the
requirements and restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Specifically, this
statute (i) prohibits a depository institution from extending credit to or
offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions, and (ii) also prohibits extensions of credit to executive officers,
directors, and greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship with the
institution, unless such extension of credit is on substantially the
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same terms as those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of repayment or
present other unfavorable features.
Real Estate Lending Policies. Under FDIC regulations which became
effective March 19, 1993, state-chartered nonmember banks must adopt and
maintain written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens or interest in real estate or are
made for the purpose of financing permanent improvements to real estate. These
policies must establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are clear and
measurable, loan administration procedures and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
(the "Interagency Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non owner occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
Safety and Soundness Standards. Pursuant to the requirements of
FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal shareholder. In
addition, the FDIC adopted regulations to require a bank that is given notice by
the FDIC that it is not satisfying any of such safety and soundness standards to
submit a compliance plan to the FDIC. If, after being so notified, a bank fails
to submit an acceptable compliance plan or fails in any material respect to
implement an accepted compliance plan, the FDIC may issue an order directing
corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC
may seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions. The
FDIC, as well as the other federal banking regulators, adopted regulations
governing the supervisory actions that may be taken against undercapitalized
institutions. The regulations establish five categories, consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The FDIC's regulations
defines the five capital categories as follows: Generally, an institution will
be treated as "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of core capital to risk-weighted assets is at
least 6%, its ratio of core capital to total assets is at least 5%, and it is
not subject to any order or directive by the FDIC to meet a specific capital
level. An institution will be treated as "adequately capitalized" if its ratio
of total capital to risk-weighted assets is at least 8%, its ratio of core
capital to risk-weighted assets is at least 4%, and its ratio of core capital to
total assets is at least
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4% (3% if the bank receives the highest rating on the CAMELS financial
institutions rating system) and it is not a well-capitalized institution. An
institution that has total risk-based capital of less than 8%, Tier 1 risk
- -based-capital of less than 4% or a leverage ratio that is less than 4% (or less
than 3% if the institution is rated a composite "1" under the CAMELS rating
system) would be considered to be "undercapitalized." An institution that has
total risk-based capital of less than 6%, core capital of less than 3% or a
leverage ratio that is less than 3% would be considered to be "significantly
undercapitalized," and an institution that has a tangible capital to assets
ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." At June 30, 1997 and June 30, 1996, the Bank was categorized
as "well capitalized."
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as a bank's capital
deteriorates within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. The FDIC is required to monitor closely the
condition of an undercapitalized bank and to restrict the growth of its assets.
An undercapitalized bank is required to file a capital restoration plan within
45 days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of: (i) an amount equal to the five percent of the bank's total
assets at the time it became "undercapitalized," and (ii) the amount which is
necessary (or would have been necessary) to bring the bank into compliance with
all capital standards applicable with respect to such bank as of the time it
fails to comply with the plan. If a bank fails to submit an acceptable plan, it
is treated as if it were "significantly undercapitalized." Banks that are
significantly or critically undercapitalized are subject to a wider range of
regulatory requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
FDICIA, the FDIC is required to appoint a receiver or a conservator for a
critically undercapitalized bank within 90 days after the bank becomes
critically undercapitalized or to take such other action that would better
achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if
the bank continues to be critically undercapitalized on average during the
quarter that begins 270 days after it first became critically undercapitalized,
a receiver must be appointed, unless the FDIC makes certain findings that the
bank is viable.
COMMUNITY REINVESTMENT.
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a bank savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a bank, to assess the
bank's record of meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications by such bank. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The Bank received a "Outstanding" CRA rating in its most recent
examination.
In April 1995, the FDIC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
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in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small banks would be
assessed pursuant to a streamlined approach focusing on a lesser range of
information and performance standards. The term "small bank" is defined as
including banks with less than $250 million in assets or an affiliate of a
holding company with banking and thrift assets of less than $1 billion, which
would include the Bank.
Massachusetts Regulation. The Bank is also subject to provisions of
the Massachusetts law which impose continuing and affirmative obligations upon
banking institutions organized in Massachusetts to serve the credit needs of its
local community ("MCRA"), which are similar to those imposed by the CRA. The
MCRA also requires the Commissioner to consider a bank's MCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Bank's latest MCRA rating, received from
the Division of Banks was "satisfactory."
HOLDING COMPANY REGULATION
Following the consummation of the Conversion, the Company will be
subject to examination, regulation and periodic reporting under the Bank Holding
Company Act (the "BHCA"), as administered by the FRB. The FRB has adopted
capital adequacy guidelines for bank holding companies on a consolidated basis
substantially similar to those of the FDIC for the Bank. On a pro forma basis
after the Conversion, the Company's pro forma total capital and Tier 1 capital
ratios will exceed these minimum capital requirements.
The Company will be required to obtain the prior approval of the FRB
to acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
The Company will be required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of any company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking as to be a proper incident thereto are: (i) making
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or servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor, (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring a savings and loan association.
Under FIRREA, depository institutions are liable to the FDIC for
losses suffered or anticipated by the FDIC in connection with the default of a
commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if the Company ever acquired as a separate subsidiary a depository
institution in addition to the Bank. There are no current plans for such an
acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stocks or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
Moreover, banks are prohibited from engaging in certain tie-in arrangements
(with the bank's parent holding company or any of the holding company's
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institution. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. The Bank was in compliance with this requirement with an
investment in FHLB stock at June 30, 1997, of $857,800.
The FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It offers
advances to members in accordance with policies and procedures established by
the FHFB and the board of directors of the FHLB. Long-term advances may only be
made for the purpose of providing funds for residential housing finance.
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3% on the first $54 million of net transaction accounts, plus
10% on the remainder. This percentage is subject to adjustment by the FRB.
Because required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. Effective December 19, 1995, the amount above which the 10%
reserve requirement applies will be lowered to $52 million, thereby increasing
reserve requirements for banks with transaction account balances in excess of
that threshold. As of June 30, 1997, the Bank met its reserve requirements.
FEDERAL SECURITIES LAWS
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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.
TAXATION
FEDERAL TAXATION
General. The Company and the Bank will file consolidated federal
income tax returns and report their income on the basis of a taxable year ending
June 30 using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions.
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.
Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift institutions
such as the Bank, which met certain definitional tests primarily relating to
their assets and the nature of their business, were permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions
could, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the
Bank, as a "small bank" (one with assets having an adjusted basis of $500
million or less), is required to use the Experience Method of computing
additions to its bad debt reserve for taxable years beginning with the Bank's
taxable year beginning July 1, 1996. In addition, the Bank is required to
recapture (i.e., take into taxable income) over a six-year period, beginning
with the Bank's taxable year beginning July 1, 1996, the excess of the balance
of its bad debt reserves (other than the supplemental reserve) as of June 30,
1996 over the greater of (a) the balance of its "base year reserve," i.e., its
reserves as of June 30, 1988 or (b) an amount that would have been the balance
of such reserves as of June 30, 1996 had the Bank always computed the additions
to its reserves using the Experience Method. However, such recapture
requirements were suspended for each of the two successive taxable years
beginning July 1, 1996 in which the Bank originates a minimum amount of certain
residential loans during such years that is not less than the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding July 1, 1996. The Small Business Act will result in no tax liability.
Since the Bank has
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already provided a deferred income tax liability for financial reporting
purposes on its bad debt reserves since June 1988, there will be no adverse
impact to the Bank's financial condition or results of operations from the
enactment of this legislation.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
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 constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Maximum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating losses. AMTI is also adjusted by determining the
tax treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Thus, the Bank's 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
adjustment and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Maximum Tax ("AMT") is paid. The Bank does not expect to be
subject to the AMT. The Bank was not subject to an environmental tax liability
for the year ended June 30, 1996.
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 owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted. Under President Clinton's fiscal year 1998 budget
proposal, as submitted to Congress on February 6, 1997, the 70% dividends-
received deduction would be reduced to 50% with respect to dividends paid after
enactment of any such legislation.
STATE TAXATION
Prior to July, 1995, the Bank was subject to an annual Massachusetts
excise (income) tax equal to 12.54% of its pre-tax income. In 1995, legislation
was enacted to reduce the Massachusetts bank excise (income) tax rate and to
allow Massachusetts-based financial institutions to apportion income earned in
other states. Further, this legislation expands the applicability of the tax to
non-bank entities and out-of-state financial institutions. The Massachusetts
excise tax rate for co-operative banks is currently 11.32% of federal taxable
income, adjusted for certain items. It is anticipated that this rate will be
gradually reduced over the next few years so that the Bank's tax rate will
become 10.5% by March 31, 2000. Taxable income includes gross income as
defined under the Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but not the
credits, allowable under the provisions of the Code. No deductions, however,
are allowed for dividends received until July 1, 1999. In addition,
carryforwards and carrybacks of net operating losses are not allowed.
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The Bank's active subsidiary, Mystic Securities Corporation, was
established solely for the purpose of acquiring and holding investments which
are permissible for banks to hold under Massachusetts law. Mystic Securities
Corporation is classified with the Massachusetts Department of Revenue as a
"security corporation" under Massachusetts law, qualifying it to take advantage
of the low 1.32% income tax rate on gross income applicable to companies that
are so classified. The Company also qualifies as a "security corporation" under
Massachusetts law, and will likewise be taxed at the rate of 1.32%.
The Bank has received opinions regarding certain federal and state
income tax issues. See "The Conversion of Conversion to Stock Form on
Depositors and Borrowers of the Bank."
For additional information regarding taxation, see Note 9 of the Notes
to Consolidated Financial Statements.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 6,000,000 shares of capital stock
divided into two classes consisting of 5,000,000 shares of Common Stock and
1,000,000 shares of serial preferred stock, par value $0.01 per share (the
"Preferred Stock"). The Company currently expects to issue 2,050,000 shares of
its Common Stock in the Conversion, subject to adjustment. The Company does not
intend to issue any shares of serial Preferred Stock in the Conversion, nor are
there any present plans to issue Preferred Stock following the Conversion.
Except for shares issued in connection with the Conversion and in connection
with the Option Plan and Restricted Stock Plan, the Company presently does not
have plans to issue Common Stock. 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 of Conversion, all such stock will be
duly authorized, fully paid and non-assessable. See "Capitalization." THE
CAPITAL STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL AND WILL
NOT BE INSURED BY THE FDIC.
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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 "Dividends" 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, except to the
extent that outstanding shares of serial Preferred Stock may or may not have
voting rights. 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. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
its Common Stock. Each holder of the Common Stock will be entitled to one vote
for each share held of record on all matters submitted to a vote of holders of
its Common Stock. The Company's proposed stock charter provides, however, that
there will not be cumulative voting for the first five years following the
Conversion. Except as discussed in "Certain 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.
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If the Company issues Preferred Stock, holders of the Preferred Stock may also
possess voting rights. Certain matters require an 80% or two-thirds shareholder
vote. See "Certain Restrictions on Acquisition of the Company and the Bank."
As a Massachusetts state mutual co-operative 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. Currently, depositors of the Bank elect the Bank's board
of directors. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which owner will be
the Company, and voted at the direction of the Company's board of directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank -- Liquidation Account"), 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 in cash or in kind after
payment or provision for payment of (i) all debts and liabilities of the Bank
(including all savings accounts and accrued interest thereon); (ii) any accrued
dividend claims; (iii) liquidation preferences upon serial preferred stock which
may be issued in the future; and (iv) any interests in the liquidation account.
If Preferred Stock is issued, the holders thereof may have a priority over the
holders of the Common Stock in the event of the liquidation or dissolution of
the Company.
Preemptive Rights; Redemption. Holders of the Common Stock will be
entitled to the payment of dividends when, as and if declared by the board of
directors and paid out of the earnings of the Company, if any, and subject to
federal and state regulatory restrictions. See "--Serial Preferred Stock" for
certain information regarding dividend rights and preferences of serial
Preferred Stock. Holders of the Common Stock will not be entitled to preemptive
rights with respect to additional shares of Common Stock that may be issued. The
Common Stock will not be subject to redemption. Upon receipt by the Company of
the Purchase Price, each share of its Common Stock will be fully paid and non-
assessable.
Except in connection with the Conversion and in connection with the
Option Plan and Restricted Stock Plan, the Company has no present plans,
proposals, arrangements or understandings to issue additional authorized shares
of its Common Stock. In the future, the authorized but unissued and unreserved
shares of the Common Stock will be available for general corporate purposes,
including, but not limited to, possible issuance as stock dividends, in
connection with mergers or acquisitions, under a cash dividend reinvestment or
stock purchase plan, in a public or private offering, or under any employee
stock ownership or option plan. Normally, no stockholder approval would be
required for the issuance of these shares, except as required to approve a
transaction in which additional authorized shares of Common Stock are to be
issued.
Indemnification and Limit on Liability. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that 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, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporate Law (the "DGCL") against all expense,
liability and loss reasonably incurred. Under certain circumstances, the right
to indemnification shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. In addition, a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages except for
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liability for any breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, under Section 174 of the DGCL, or from any transaction from which the
director derived an improper personal benefit.
SERIAL PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. After the Conversion, the board of directors of the
Company will be authorized to issue shares of serial Preferred Stock in series
and to fix the voting powers, designation, preferences and relative,
participation, optional, conversion or other special rights of the shares of
each such series and any qualifications, limitations or restrictions thereof.
Such stock may be issued with such preferences and designations as the board of
directors may from time to time determine. Any serial preferred stock issued
may rank prior to the Common Stock as to dividend rights, liquidation
preferences or both and may have full or limited voting rights. The board of
directors of the Company has no present plans, proposals, arrangements or
understandings to issue serial preferred stock.
OTHER CHARACTERISTICS
See "Dividends" and "Taxation" with respect to restrictions on the
payment of cash dividends; and "The Conversion -- Restrictions on
Transferability by Directors and Officers" relating to certain restrictions on
the transferability of shares purchased by officers and directors; and "Certain
Restrictions on Acquisition of the Company and the Bank" for information
regarding restrictions on acquiring capital stock of the Company.
CERTAIN 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 stock charter and bylaws to be adopted by depositors of the Bank. The Plan
also provides for the concurrent formation of a holding company. See "The
Conversion -- General." As described below, certain provisions in the Company's
Certificate of Incorporation and bylaws and in its management remuneration plans
and agreements entered into in connection with the Conversion, together with
provisions of Delaware 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 plans and agreements 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.
REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Massachusetts Division of Banks Conversion Regulations. Regulations
issued by the Commissioner provide that for a period of three years following
the date of the completion of the Conversion, no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than ten
percent (10%) of any class of any equity security of the Company without prior
written notice to the Company and the prior written approval of the
Commissioner. Where any person, directly or indirectly, acquires beneficial
ownership of more than ten percent (10%) of any class of any equity security of
the Company without prior written notice to the Company and the prior written
approval of the Commissioner, the securities beneficially owned by such person
in excess of ten percent (10%) shall not be voted by any person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote, and shall not be counted as outstanding for purposes of determining the
affirmative vote necessary to approve any matter submitted to
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the stockholders for a vote. The Commissioner may take any further action to
enforce these regulatory restrictions as he deems appropriate.
Change in Bank Control Act. In addition to the foregoing
restrictions, the acquisition of more than ten percent (10%) of the Common Stock
outstanding may, in certain circumstances, be subject to the provisions of the
Change in Bank Control Act. The FDIC has also adopted a regulation pursuant to
the Change in Bank Control Act which generally requires persons who at any time
intend to acquire control of an FDIC-insured state-chartered non-member bank,
including a converted co-operative bank such as the Bank, to provide 60 days
prior written notice and certain financial and other information to the FDIC.
The 60-day notice period does not commence until the information is deemed to be
substantially complete. Control for the purpose of this Act exists in situations
in which the acquiring party has voting control of at least twenty-five percent
(25%) of any class of the Bank's voting stock or the power to direct the
management or policies of the Bank. However, under FDIC regulations, control is
presumed to exist where the acquiring party has voting control of at least ten
percent (10%) of any class of the Bank's voting securities if (i) the Bank has a
class of voting securities which is registered under Section 12 of the Exchange
Act or (ii) the acquiring party would be the largest holder of a class of voting
shares of the Bank. The statute and underlying regulations authorize the FDIC to
disapprove a proposed acquisition on certain specified grounds. In some
circumstances, similar filings with the Commissioner may be required under the
Massachusetts Change in Bank Control Act.
FRB Regulations. Prior approval of the FRB would be required for any
acquisition of control of the Bank by any bank holding company under the BHCA
and approval by the Board of Bank Incorporation would be required under
Massachusetts law. Control for purposes of the BHCA would be based on, among
other things, a twenty-five percent (25%) voting stock test or on the ability of
the holding company otherwise to control the election of a majority of the board
of directors of the Bank. As part of such acquisition, the acquiring company
(unless already so registered) would be required to register as a bank holding
company under the BHCA. A bank holding company's business activities are limited
to those activities which the FRB determines to be closely related to banking
and a proper incident thereto. See "Regulation."
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
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, that might have a potential
"anti-takeover" effect. A number of provisions of the Company's Certificate of
Incorporation and bylaws deal with matters of corporate governance and certain
rights of stockholders. These provisions might have the effect of discouraging
future takeover attempts which are not approved by the board of directors but
which individual Company stockholders may deem to be in their best interests or
in which stockholders may receive substantial premiums for their shares over
then current market prices. As a result, stockholders who might desire to
participate in such transactions 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 each
share held in excess of the Limit. Any Person so prohibited who directly or
indirectly acquires or holds the beneficial owner-
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ship of more than ten percent (10%) of the issued and outstanding voting stock
in violation of Section 2 of the Company's Certificate of Incorporation of any
person so prohibited who directly or indirectly acquires or holds the beneficial
owner ship of more than ten percent (10%) of the issued and outstanding voting
stock in violation of Section 2 of the Company's Certificate of Incorporation
shall be subject to the provisions of Sections 3 and 4 of Article V of the
Company's Certificate of Incorporation. 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 pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options and otherwise and shares as to
which such person and his affiliates have sole or shared investment or voting
power, but shall not include shares beneficially owned by the ESOP or any
similar plan of the Company or the Bank or any trustee with respect thereto
(solely by reason of such trustee's capacity) be deemed to beneficially own any
shares held under any such plan. Neither does beneficial ownership include
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. No director of officer (or affiliate thereof) of the
Company shall, solely by reason or any of all of such directors or officers
acting in their capacities as such, be deemed to beneficially own any shares
beneficially owned by any other director or officer (or affiliate thereof). The
Certificate of Incorporation further provides that this provision limiting
voting rights may only be amended upon (i) the approval of a majority of the
directors of the Company, and (ii) the affirmative vote of the holders of a
majority of the total votes eligible to be cast by the holders of all
outstanding shares of capital stock entitled to vote thereon, and (iii) if the
amendment is proposed by or on behalf of an interested shareholder or a director
who is an Affiliate or Associate (as such terms are defined in the Company's
Certificate of Incorporation) of an interested shareholder, by the affirmative
vote of not less than a majority of the total votes eligible to be cast by
holders of all outstanding shares of capital stock entitled to vote thereon not
beneficially owned by an interested shareholder or an Affiliate or Associate
thereof.
Board of Directors. Subject to the rights of any holders of any
series of Preferred Stock that may be issued by the Corporation pursuant to a
resolution or resolutions of the board of directors providing for such issuance,
the directors of the Corporation are divided into three classes, each class
serving a staggered term, and each class containing as near as may be possible,
one-third of the entire number of the board, with the terms of office of one
class expiring each successive year. In accordance with state law, the size of
the board of directors is determined by the Company's bylaws or by resolution of
the board of directors but shall not be less than seven (7) nor more than
twenty-five (25). The Certificate of Incorporation and the bylaws provide that
any vacancy occurring in the board of directors, including a vacancy created by
newly created directorships resulting in an increase in the number of directors,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the directors then in office, whether or not a quorum. The
classified board of directors 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 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 total votes eligible to be cast by the holders of all
outstanding shares of capital stock entitled to vote generally in the election
of directors at a meeting of shareholders expressly called for that purpose.
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, the Company's bylaws provide that special meetings of
stockholders of the Company may be called only by the Chairperson of the Board,
the President or by resolution of at least three-fourths of the board of
directors then in office. The Certificate of Incorporation also provides that
any corporate action or consent to any action required or permitted to be taken
by the stockholders of the Company may be taken only at an annual or special
meeting of shareholders 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 6,000,000 shares of capital stock, of which 1,000,000 shares shall
be Preferred Stock and 5,000,000 shares shall be Common Stock. The Preferred
Stock and Common Stock are sometimes hereinafter collectively referred to as the
"capital stock."
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, whether stock shall be redeemable and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the board of directors 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 Restricted Stock Plan and upon exercise of
stock options to be issued pursuant to the terms of the Option Plan. Although
the Company currently does not anticipate implementing the Option Plan or the
Restricted Stock Plan before one year following consummation of the Conversion,
if implemented prior to the first anniversary of the Conversion, each of the
plans will be presented to stockholders for approval at a meeting of
stockholders to be held no earlier than six months after completion of the
Conversion.
Stockholder Vote Required to Approve Business Combinations with
Principal. The Certificate of Incorporation requires the approval of the
holders of not less than 80% of the total number of votes eligible to be cast by
the holders of all of the Company's outstanding shares of voting stock, together
with the affirmative vote of at least 50% of the total number of votes eligible
to be cast by the holders of all outstanding shares of the voting stock not
beneficially owned by an Interested Shareholder (as defined below) involved or
any affiliate or associate thereof, voting together as a single class 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 stockholders is required in connection
with any transaction involving an Interested Stockholder except (i) in cases
where the proposed transaction has been approved in advance by a majority of the
disinterested directors then in office; or (ii) all of the conditions specified
in the subsections of the Company's Certificate of Incorporation, Article VIII,
Section 2, subsections (a) through (g) have been met.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the board of directors of the Company, when evaluating any
offer to the Company or to the shareholders of the Company from another party to
(a) purchase for cash, or exchange any securities or property for any
outstanding equity securities of the Company, (b) merge or consolidate the
Company with another corporation, or (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the Company, shall, in
connection with the exercise of its judgment in determining what is in the best
interest of the Company and its shareholders, give due consideration not only to
the price or other consideration being offered, but also to all other relevant
factors including, without limitation, the financial and managerial resources
and future prospects of the other party, the possible effects on the business of
the Company and its subsidiaries and on the employees, customers, suppliers and
creditors of the Company and its subsidiaries, and the effects on the
communities in which the Company's and its subsidiaries' facilities are located.
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 of directors concludes that the transaction would not
be in the best interests 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. The Certificate
of Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors
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then in office and by (2) the affirmative vote of the holders of a majority (or
such greater proportion as may otherwise be required pursuant to any specific
provision of the Certificate of Incorporation) of the total votes eligible to be
cast by the holders of all outstanding shares of capital stock entitled to vote
thereon; provided, however, that if any such change relates to Section 13 of
Article X or Articles V, VI, VII or XI of the Certificate of Incorporation, such
change must be approved either (i) by not less than a majority of the au
thorized number of directors and, if one or more Interested Shareholders (as
defined in Article VIII of the Certificate of Incorporation) exist, by not less
than a majority of the disinterested directors (as defined in Article VIII of
the Certificate of Incorporation), or (ii) by the affirmative vote of the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the change is proposed by or on behalf of an interested shareholder or a
director who is an affiliate or associate (as such terms are defined in Article
VIII of the Certificate of Incorporation) of an interested shareholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares of capital stock
entitled to vote thereon not beneficially owned by an interested shareholder or
an affiliate or associate thereof.
Except as may otherwise be provided in the Certificate of
Incorporation, the Company reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in the
Certificate of Incorporation, and to add or insert any other provisions
authorized by the laws of the State of Delaware at the time in force, in the
manner now or hereafter prescribed by law, and all rights, preferences and
privileges of any nature conferred upon shareholders, directors or any other
persons whomsoever by and pursuant to the Certificate of Incorporation in its
present form or as hereafter amended are granted subject to the rights reserved
in Section 1 of the Company's Certificate of Incorporation.
Furthermore, the Company's Certificate of Incorporation provides that
provisions of the bylaws that contain supermajority voting requirements may not
be altered, amended, repealed or rescinded without a vote of the board or
holders of shares of capital stock entitled to vote thereon that is not less
than the supermajority specified in such provision. Absent these provisions,
the DGCL provides that a corporation's Certificate of Incorporation and bylaws
may be amended by the holders of a majority of the corporation's outstanding
capital stock. The Certificate of Incorporation also provides that the board of
directors is authorized to make, alter, amend, rescind or repeal any of the
Company's bylaws in accordance with the terms thereof, regardless of whether the
bylaw was initially adopted by the stockholders. However, this authorization
neither divests the stockholders of their right, nor limits their power to
adopt, amend, rescind or repeal any bylaw under the DGCL. These provisions
could have the effect of discouraging a tender offer or other takeover attempt
where the ability to make fundamental changes through bylaw amendments is an
important element of the takeover strategy of the acquiror.
Certain Bylaw Provisions. The bylaws of the Company also require that
except in the case of a nominee substituted as a result of the death,
incapacity, withdrawal or other inability to serve of a nominee, the board, or a
committee thereof, shall deliver written nominations to the Secretary at least
sixty (60) days prior to the date of the annual meeting. Provided the board of
directors, or committee thereof, makes such nominations, no nominations for
directors except those made by the board or such committee shall be voted upon
at the annual meeting of stockholders unless other nominations by stockholders
are made in accordance with the provisions of Section 11 of the Company's
bylaws. Nominations of individuals for election to the board of directors at an
annual meeting of stockholders may be made by any stockholder of record of the
corporation entitled to vote for the election of directors at such meeting who
provides timely notice in writing to the Secretary as set forth in Section 11 of
the Company's bylaws. To be timely, a stockholder's notice must be delivered to
or received by the Secretary not later than the following dates: (i) with
respect to an election of directors to be held at an annual meeting of
stockholders, sixty (60) days in advance of such meeting if such meeting is to
be held on a day which is within thirty (30) days preceding the anniversary of
the previous year's annual meeting, or ninety (90) days in advance of such
meeting if such meeting is to be held on or after the anniversary of the
previous year's annual meeting; and (ii) with respect to an election to be held
at an annual meeting of stockholders held at a time other than within the time
periods set forth in the immediately preceding
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clause (i), or at a special meeting of stockholders for the election of
directors, the close of business on the tenth (10th) day following the date on
which notice of such meeting is first given to stockholders.
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 proposing stockholder and the stockholder's interest in
the business matter. Similarly, a stockholder wishing to nominate any person for
election as a director must provide the Company with certain information
concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its board of directors. Certain
provisions of the employment agreements with officers, the Restricted Stock Plan
and the Option Plan expected to be established may provide for accelerated
benefits to participants in the event of a change in control of the Company or
the Bank or a tender or exchange offer for their stock. See "Management of the
Bank -- Employment Agreements," and "-- Certain Benefit Plans and Agreements."
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 interests of the Company and its stockholders. An
unsolicited non-negotiated takeover 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 interests 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 DGCL ("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
(a "DGCL 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 a DGCL 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 a DGCL Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming a DGCL 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 a DGCL Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
Company's directors who are also officers and certain employee stock plans;
(iii) any business combination with a DGCL 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 DGCL Interested Stockholder; and (iv) certain
business combinations that are
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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 requirement of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203 of the DGCL. At the present
time, the board of directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S AMENDED 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 Massachusetts General Laws to protect the interests of the
converted Bank and its shareholders 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 -- Anti-Takeover Provisions and Voting Control
of Management."
The Bank's stock charter will contain a provision whereby without the
prior approval by a two-thirds vote of the Bank's board of directors, no person
shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10 percent of any class of any equity security of the
Bank. This limitation shall not apply to a transaction in which the Bank forms
a holding company without change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter and appraisal rights or the purchase of shares by underwriters in
connection with a public offering. In the event shares are acquired in
violation of this provision of the Bank's stock charter, all shares
beneficially owned by any person in excess of 10 percent shall be considered
"excess shares" and 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 the stockholders for a vote.
THE CONVERSION
THE COMMISSIONER HAS GIVEN APPROVAL TO THE PLAN SUBJECT TO THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE COMMISSIONER IN HIS APPROVAL.
COMMISSIONER APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN.
GENERAL
The board of directors of the Bank adopted the Plan pursuant to which
the Bank would be converted from a Massachusetts chartered mutual co-operative
bank to a Massachusetts chartered stock co-operative bank. The Conversion will
be accomplished through the simultaneous adoption of a new stock charter and
bylaws to authorize the issuance of capital stock by the Bank to the Company.
Under the Plan, the Company is offering shares of the Common Stock in a
Subscription Offering to the Bank's Eligible Account Holders, the Supplemental
Eligible Account Holders and the Bank's ESOP.
Concurrent with or at any time during the Subscription Offering, the
board of directors of the Company may elect to offer those shares of Common
Stock not subscribed for in the Subscription Offering by the Eligible Account
Holders to the general public, with preference given to persons who are
residents of Medford, Malden, Everett, Stoneham, Arlington, Winchester,
Somerville, Melrose, Lexington and Bedford, Massachusetts in a Direct Community
Offering, and subject to the Company's right to reject orders in the Direct
Community Offering in whole or in part. Subscriptions for Common Stock received
from members of the general public in the Direct Community Offering will be
subject to availability of shares of Common Stock for purchase after
satisfaction of all subscriptions in the Subscription Offering, to the maximum
and minimum purchase limitations set forth in the Plan and to the right of the
Company to reject any such subscriptions, in whole or in part.
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Applicable conversion regulations require, with certain exceptions,
that all shares offered in the Conversion must be sold in order for the
Conversion to become effective. All Common Stock not sold in the Subscription
Offering is expected to be sold in the Direct Community Offering. Applicable
regulations require that the Direct Community Offering be completed within 45
days after completion of the Subscription Offering period unless such period is
extended by the Company with the approval of the regulatory authorities. If the
Direct Community Offering is determined not to be feasible, an occurrence that
is not currently anticipated, the board of directors of the Company and the Bank
will consult with the regulatory authorities to determine an appropriate
alternative method of selling all unsubscribed shares of Common Stock. The Plan
provides that the Conversion must be completed within 24 months after the date
of the approval of the Plan by the board of directors of the Bank.
At the board of directors' discretion, the Direct Community Offering
may be commenced concurrently with or at any time during the Subscription
Offering. The completion of the Subscription Offering and Direct Community
Offering, however, is subject to market conditions and other factors beyond the
Bank's control. As a final step in the Conversion, shares not subscribed for in
the Subscription Offering and the Direct Community Offering, if any, will be
offered to certain members of the general public in the Syndicated Offering. No
assurance can be given as to the length of time that will be required to
complete the Direct Community Offering or other sale of the Common Stock. If
delays are experienced, significant changes may occur in the estimated pro forma
market value of the Bank upon conversion together with corresponding changes in
the offering price and the net proceeds realized by the Company from the sale of
the Common Stock. If the pro forma market value of the Common Stock falls below
$17,425,000 or rises above $27,111,250, investors in the Offerings will be able
to rescind or amend their orders. Under such circumstances, the Bank would also
incur substantial additional printing, legal and accounting expenses in
completing the Conversion. In the event the Conversion is terminated, the Bank
would be required to charge all conversion expenses against current income.
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
Voting Rights. Depositors as such will have no voting rights in the
Bank after the Conversion and will therefore not be able to elect directors of
the Bank or vote on other corporate actions. (Currently these rights are
accorded to depositors of the Bank.) After the Conversion, voting rights will be
vested exclusively in the stockholders of the Company. Each holder of the
Company's Common Stock shall be entitled to vote on any matter to be considered
by the stockholders of the Company.
Savings Accounts and Loans. THE BANK'S SAVINGS ACCOUNTS, THE BALANCES
OF THE INDIVIDUAL ACCOUNTS AND THE EXISTING FDIC AND SHARE INSURANCE FUND
INSURANCE COVERAGE WILL NOT BE AFFECTED BY THE CONVERSION. Furthermore, the
Conversion will not affect the loan accounts, the balances of these accounts and
the obligations of the borrowers under their individual contractual arrangements
with the Bank.
Tax Aspects. The Bank has received an opinion of its counsel, Thacher
Proffitt & Wood, 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 by the Bank or the Company upon the purchase
of the Bank's capital stock by the Company or by 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 by Supplemental Eligible Account Holders upon the
issuance to them of deposit accounts in the Bank in its stock form plus their
interests in the liquidation account in exchange for their deposit accounts in
the Bank; (iv) the tax basis of the depositors' deposit 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 each 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 by Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
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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
shareholders of the Common Stock of the Company purchased in the Conversion
pursuant to the subscription rights 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. Such opinion
has been filed as an exhibit to the registration statement on Form S-1 of which
this Prospectus forms a part.
Unlike private rulings, opinions of counsel are not binding on the IRS
and the IRS could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
Certain portions of the federal tax opinion are based upon the opinion
of R.P. Financial that subscription rights issued in connection with the
Conversion will have no value. In the opinion of R.P. Financial, which opinion
is not binding on the IRS, 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. If the subscription rights granted to Eligible Account
Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, such Eligible Account Holders or Supplemental Eligible
Account Holders could be taxed upon the receipt or exercise of 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 advisors as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable tax value.
The Bank has also received an opinion from its independent auditors
that, with respect to Massachusetts bank and corporate excise taxes, the
conversion will not result in any tax liability with respect to Massachusetts
tax laws. Such opinion has been filed as an exhibit to the registration
statement on Form S-1 of which this Prospectus forms a part.
Liquidation Account. In the unlikely event of a complete liquidation of
the Bank, each holder of a deposit account in the Bank would receive his or her
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). His or her pro rata share of such remaining assets would be the
same proportion of such assets as the value of his deposit account was to the
total of the value of all deposit accounts in the Bank at the time of
liquidation.
The Plan of Conversion provides that, at the time of Conversion, a
memorandum account called a Liquidation Account will be established on the
Bank's books for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who maintain their deposit accounts in the Bank
following the Conversion. The amount of the Liquidation Account will be equal to
the net worth of the Bank as of June 30, 1997. After the Conversion, each
Eligible Account Holder and Supplemental Eligible Account Holder will be
entitled, in the event of a complete liquidation of the Bank, to receive
liquidating distributions of any assets remaining after payment of all claims of
creditors (including those of all depositors, to the extent of deposit
balances), but before any distributions are made on the Bank's capital stock,
from the Liquidation Account equal to their adjusted Subaccount Balances (as
defined below).
The initial Subaccount Balances for each Eligible Account Holder and
Supplemental Eligible Account Holder shall be determined by multiplying the
opening balance in the Liquidation Account by a fraction, the numerator of which
is the amount of Qualifying Deposits held by such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or the
Supplemental Eligibility Record Date, and the denominator of which is the
aggregate amount of all Qualifying Deposits on such dates. For
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deposit accounts in existence on both dates, separate Subaccount Balances shall
be determined on the basis of the Qualifying Deposits in such deposit accounts
on such dates.
If, however, on the last day of any fiscal year of the Bank commencing
after the Eligibility Record Date or Supplemental Eligibility Record Date, as
the case may be, the deposit balance in any deposit account of an Eligible
Account Holder or Supplemental Eligible Account Holder is less than either: (i)
the amount of Qualifying Deposits of such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, or (ii) the deposit
balance in such deposit account at the close of business on the last day of any
previous fiscal year of the Bank commencing after the Eligibility Record Date or
the Supplemental Eligibility Record Date, then such Eligible Account Holder's or
Supplemental Eligible Account Holder's Subaccount Balance would be reduced in an
amount equal to the reduction in such deposit balance, and such Subaccount
Balance will cease to exist if such deposit account is closed. In addition, no
interest in the Liquidation Account would ever be increased despite any
subsequent increase in the deposit balances of any Eligible Account Holder or
Supplemental Eligible Account Holder. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Supplemental Eligible Account
Holders are satisfied would be distributed to the stockholders of the Company.
A merger, consolidation, sale of bulk assets, or similar combination
or transaction in which the Bank is not the surviving entity would not be
considered to be a "liquidation" requiring a distribution of the Liquidation
Account. In such a transaction, the Liquidation Account would be assumed by the
surviving entity.
The creation and maintenance of the Liquidation Account will not
restrict the use or application of any of the capital accounts of the Bank,
except that the Bank may not declare a dividend to the Company if the effect of
such dividend would be to cause its retained earnings to be reduced below the
aggregate amount then required for the Liquidation Account.
SUBSCRIPTION RIGHTS
All persons entitled to purchase stock in the Subscription Offering
have received nontransferable subscription rights to purchase stock at no cost
to such persons. The amount of stock which these parties may purchase will be
determined, in part, by the total stock to be issued, and the availability of
stock for purchase under the categories set forth in the Plan. If the Direct
Community Offering, as described below, extends beyond 45 days following the
expiration of the Subscription Offering, subscribers will have the opportunity
to increase, decrease or rescind their orders to purchase stock submitted in the
Subscription Offering. Preference categories have been established for the
allocation of stock to the extent that said stock is available. These categories
are as follows:
CATEGORY 1 is reserved for the Bank's Eligible Account Holders (i.e.,
depositors at the Bank on March 31, 1996 with account balances of $50.00 or
more) who, together with associates and/or with persons acting in concert, will
each receive nontransferable subscription rights to purchase up to $600,000 of
Common Stock. See "--Limitations on Purchases of Shares." In the event that
subscriptions for the Common Stock are received from Eligible Account Holders in
excess of the number of shares available for subscription, the Common Stock
available for purchase will be allocated among the subscribing Eligible Account
Holders so as to permit each subscribing Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation of Common Stock equal to the lesser of 100 shares or the number of
shares subscribed by such Eligible Account Holder. Any shares remaining after
such allocation will be allocated among the subscribing Eligible Account Holders
whose subscriptions remain unsatisfied proportionately, based on the amount of
their respective qualifying deposits as compared to total qualifying deposits of
all Eligible Account Holders whose subscriptions remain unsatisfied. If the
amount so allocated exceeds the amount subscribed for by any one or more
Eligible Account Holders, the excess shall be reallocated on the same principle
(one or more times as necessary) among those Eligible Account Holders whose
subscriptions are still not fully satisfied until all available shares have been
allocated or all subscriptions are
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satisfied. Subscription rights received by officers and directors in this
category based on their increased deposits in the Bank in the one-year period
preceding March 31, 1996 are subordinated to the subscription rights of other
Eligible Account Holders.
CATEGORY 2 is reserved for the Bank's Supplemental Eligible Account
Holders as of March 31, 1997 who, together with associates and/or persons acting
in concert, will each receive nontransferable subscription rights to purchase up
to $600,000 of Common Stock. See "--Limitations on Purchases of Shares". In the
event that subscriptions for Common Stock are received from Supplemental
Eligible Account Holders upon exercise of Subscription Rights in excess of the
number of Shares available for subscription, the Common Stock available for
purchase will be allocated among the subscribing Supplemental Eligible Account
Holders 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 of Common Stock equal to the lesser of 100 Shares or the number
of Shares subscribed for by such Supplemental Eligible Account Holder. Any
Shares remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Supplemental Eligible
Account Holders, the excess shall be reallocated on the same principle (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the one-year period preceding March 31, 1997 are subordinated to the
subscription rights of other Supplemental Eligible Account Holders.
CATEGORY 3 is reserved for the ESOP of the Bank, which shall receive
nontransferable subscription rights to purchase up to 8% of the Common Stock. It
is expected that the Bank's ESOP will subscribe for approximately 188,600
shares, or 8%, of the Common Stock at the maximum of the Current Valuation
Range. If, after the filling of subscriptions of Eligible Account Holders and
Supplemental Eligible Account Holders, a sufficient number of shares are not
available to fill the subscriptions by the ESOP, the subscription by the ESOP
shall be filled to the maximum extent possible. If all the shares of Common
Stock offered in the Subscription Offering are purchased by Eligible Account
Holders and Supplemental Eligible Account Holders, then the ESOP will purchase
shares in the open market following consummation of the conversion. The ESOP
shall not be deemed to be an Associate or Affiliate of, or a Person Acting in
Concert with, any director or officer of the Company or the Bank.
Notwithstanding any provision contained herein to the contrary, the Bank may
make scheduled discretionary contributions to the ESOP; provided, that such
contributions do not cause the Bank to fail to meet its regulatory capital
requirements.
SUBSCRIPTION OFFERING
Expiration Date of Subscription Offering. The Subscription Offering
will expire at 3:30 p.m., Eastern Standard Time, on _______, 1997 unless
extended by the board of directors of the Bank. Such date and time are referred
to herein as the "Expiration Date." The latest possible Expiration Date is
twenty-four months from the date that the Plan of Conversion was approved by the
board of directors of the Bank (June 10, 1999). Subscription rights not
exercised prior to the Expiration Date may be void.
Orders will not be executed by the Bank until all shares of Common
Stock have been subscribed for or sold. If all shares have not been subscribed
for or sold within 45 days of the end of the Subscription Offering, or by
_______, 199_ (unless such period is extended with consent of the Commissioner),
all funds delivered to the Bank pursuant to the Subscription Offering will be
promptly returned to the subscribers with interest at the Bank's passbook rate,
currently 2.60% and all charges to savings accounts will be rescinded.
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Use of Order Forms. Rights to subscribe may be exercised only by
completion of order forms. Any person receiving an order form who desires to
subscribe for shares of stock must do so prior to the Expiration Date by
delivering (by mail or in person) to Mystic a properly executed and completed
order form, together with full payment for all shares for which the subscription
is made. Facsimiles of order forms will not be accepted as properly completed
and executed order forms. All checks or money orders must be made payable to the
order of "Mystic Financial, Inc. " The order form must be received by the
Expiration Date. All subscription rights under the Plan will expire on the
Expiration Date, whether or not the Bank has been able to locate each person
entitled to such subscription rights. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT
BE REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE BANK.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. THE SUBSCRIPTION RIGHTS UNDER THE
PLAN ARE NONTRANSFERABLE. Each person subscribing for shares is required to
represent to the Bank that he or she is purchasing such shares for his or her
own account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event order forms: (i) are not delivered and are returned to
Mystic by the United States Postal Service or the Bank and/or the Company is
unable to locate the addressee, or (ii) are not returned or are received after
the Expiration Date, or (iii) are defectively filled out or executed, or (iv)
are not accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the subscription rights for the person to whom such rights have been
granted will lapse as though such person failed to return the completed order
form within the time period specified. However, Mystic may waive any
irregularity on any order form or require the submission of corrected order
forms or the remittance of full payment for subscribed shares by such date as
Mystic may specify. The interpretation by Mystic of the terms and conditions of
the Plan and of the order form will be final.
Payment for Shares. Payment for all subscribed shares computed on the
basis of the Purchase Price will be required to accompany all completed order
forms for subscriptions to be valid. Payment for subscribed shares may be made
(i) in cash, if delivered in person, (ii) by check, bank draft or money order,
or (iii) by authorization of withdrawal from deposit accounts maintained with
the Bank. Wire transfers as payment for shares ordered for purchase will not be
permitted or accepted as proper payment. Appropriate means by which withdrawals
from deposit accounts may be authorized are provided in the order forms. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by a subscriber for any purpose other than to purchase stock for
which subscription has been made while the Plan remains in effect. In the case
of payments authorized to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contract
rate until the date of consummation of the sale. In the case of payments made in
cash or by check or money order, such funds will be placed in a segregated
savings account established for each subscriber specifically for this purpose
(each federally insured up to the applicable $100,000 limit and insured by the
Share Insurance Fund of the Co-operative Central Bank for amounts in excess of
$100,000), and interest will be paid at the passbook rate then offered from the
date payment is received until the Conversion is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
partial withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the passbook rate subsequent to the withdrawal. An
executed order form, once received by Mystic, may not be modified, amended or
rescinded without the consent of Mystic, unless the Conversion is not completed
within 45 days of the termination of the Subscription Offering.
The ESOP may subscribe for shares by submitting its order form for the
purchase of the shares during the Subscription Offering and by making payment
for the shares on the date of the closing. The ESOP will obtain a loan for the
purchase of shares from the Company.
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<PAGE>
Shares Purchased. Subscribers will be notified of the number of
shares for which their subscriptions have been accepted by mail promptly on
completion of the sale of all the Common Stock. Certificates representing shares
of Common Stock will be delivered to subscribers promptly thereafter.
DIRECT COMMUNITY OFFERING
Concurrently with or at any time during or after the Subscription
Offering, the board of directors of the Company may elect to offer shares of the
Common Stock in a Direct Community Offering to the extent such shares remain
available after satisfaction of all orders received in the Subscription
Offering. The Company intends to give preference to orders received in the
Direct Community Offering from natural persons who reside in the Bank's local
community, which is defined as the communities of Medford, Malden, Everett,
Stoneham, Arlington, Winchester, Somerville, Melrose, Lexington and Bedford,
Massachusetts. THE DIRECT COMMUNITY OFFERING MAY EXPIRE AS EARLY AS 3:30 P.M.,
EASTERN STANDARD TIME ON ________________, 199___, UNLESS EXTENDED UNTIL NOT
LATER THAN _______, 199_. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE
DIRECT COMMUNITY OFFERING IS SUBJECT TO THE RIGHT OF THE COMPANY TO ACCEPT OR
REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE COMPANY PRESENTLY INTENDS TO
TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED ORDERS FOR AT
LEAST THE MINIMUM NUMBER OF SHARES OFFERED.
Purchasers in the Direct Community Offering, together with their
associates and groups acting in concert, are each eligible to purchase up to
$600,000 of Common Stock.
If all of the Common Stock is subscribed for in the Subscription
Offering, no Common Stock will be available for purchase in the Direct Community
Offering, and all funds submitted pursuant to the Direct Community Offering will
be promptly refunded. In the event an insufficient number of shares are
available to fill orders in the Direct Community Offering, the available shares
will be allocated on a pro rata basis determined by the amount of the respective
orders, provided however, that orders received in the Direct Community Offering
shall first be filled up to a maximum of 2% of the shares being offered. If the
Direct Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for shares previously submitted.
Except as noted below, cash and checks received in the Direct
Community Offering will be placed in segregated savings accounts (each federally
insured up to the applicable $100,000 limit and insured by the Share Insurance
Fund of the Co-operative Central Bank for amounts in excess of $100,000)
established specifically for this purpose. Interest will be paid on orders made
by check or in cash at the passbook rate then offered, from the date the payment
is received by the Bank until the consummation of the Conversion. In the event
that the Conversion is not consummated for any reason, all funds submitted
pursuant to the Direct Community Offering will be promptly refunded with
interest as described above.
SYNDICATED OFFERING
As a final step in the Conversion, the Plan of Conversion provides
that, if necessary, all shares of Common Stock not purchased in the Direct
Community Offering, if any, will be offered for sale in the Syndicated Offering
to the general public and/or through a syndicate of registered broker-dealers to
be formed and managed by Trident Securities acting as agent to assist the Bank
in the sale of the Common Stock. The Bank has the right to reject orders, in
whole or in part, in their sole discretion in the Syndicated Offering. Neither
Trident Securities nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated Offering.
Common Stock sold in the Syndicated Offering will be sold at the
Purchase Price and hence will be sold at the same price as all other shares in
the Offerings. See "--Stock Pricing and Number of Shares to be Issued."
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<PAGE>
No person together with any associate or group of persons acting in
concert will be permitted to subscribe in the Syndicated Offering for more than
$600,000 in the Offering. Selected dealers will receive a fee of up to 4.5% of
the amount of Common Stock sold by the selected dealers in the Syndicated
Offering payable by the Company. Such fee will be at a stated rate (at a
particular sales level) and will be negotiated on a case-by-case basis.
Selected dealers may only 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 fifth business day after the
customer has confirmed his intent to purchase ("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. Purchasers' funds are not
required to be in their accounts with selected dealers until the debit date.
The Syndicated Offering may terminate on ___________________, 199___
and will terminate no later than _______, 199_, unless extended by the Bank with
the approval of the Commissioner and the FDIC. See "--Stock Pricing and Number
of Shares to be Issued" for a discussion of rights of subscribers, if any, in
the event an extension is granted.
PLAN OF DISTRIBUTION AND FINANCIAL ADVISORY ARRANGEMENTS
The Bank has retained Trident Securities to consult with and advise
the Bank and, to assist the Bank, on a best efforts basis, in the distribution
of shares in the Offerings. Trident Securities is a broker-dealer registered
with the SEC and a member of the National Association of Securities Dealers,
Inc. ("NASD"). Trident Securities will assist the Company in the Offerings as
follows: (i) it will act as marketing advisor with respect to the Offerings and
will represent the Company as placement agent on a best efforts basis in the
sale of the Common Stock in the Direct Community Offering and Syndicated
Offering; (ii) members of its staff will conduct training sessions for
directors, officers and employees of the Bank regarding the Offerings process;
and (iii) it will provide assistance in the establishment and supervision of the
Stock Information Center, including training staff to properly record and
tabulate orders for the purchase of Common Stock and to appropriately respond to
customer inquiries. Trident Securities has agreed to act as a market maker for
the Company's Common Stock following consummation of the Conversion.
For rendering its services, Trident Securities will receive a
management fee of .40% and a commission equal to 2% of the aggregate value of
Common Stock sold in the Offerings, excluding shares purchased by the ESOP,
directors and officers and their associates.
If the Offering is extended beyond the Expiration Date, Trident
Securities may make sales to the general public and/or assemble and manage a
syndicate of selected dealers to assist the Bank in the sale of the Common Stock
during a Syndicated Offering. See "--Syndicated Offering." Under the federal
securities laws, Trident Securities and the selected dealers may be deemed to be
underwriters.
The Bank has agreed to reimburse Trident Securities for its reasonable
out-of-pocket expenses, including but not limited to travel, communications,
legal fees and postage (up to an aggregate of $44,000) and to indemnify Trident
Securities against certain claims or liabilities, including certain liabilities
under the Securities Act of 1933, as amended. Total underwriting fees to Trident
Securities are expected to be between $401,384, $469,280, $537,176 and $615,256
at the minimum, midpoint, maximum and the super max, respectively, of the
Current Valuation Range. See "Pro Forma Data" for the assumptions used to
determine these estimates.
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<PAGE>
Sales of Common Stock will be made primarily by registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law, executive
officers of the Bank may participate in the solicitation of offers to purchase
Common Stock. Other employees of the Bank may participate in the Offerings in
clerical capacities, providing administrative support in effecting sales
transactions or answering questions of a mechanical nature. Questions relating
to the proper execution or nature of the investment, will be directed to
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. Subject to applicable state law, the Bank will rely on Rule
3a4-1 under the Exchange Act, and sales of Common Stock will be conducted with
the requirements of Rule 3a4-1, so as to permit officers and current full and
part-time Bank employees to participate in the sale of Common Stock. No officer,
director or employee of 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.
The Common Stock will be offered principally by the distribution of
this Prospectus and through the efforts of management of the Bank. A conspicuous
legend that the Common Stock is not a federally-insured or guaranteed deposit
account appears on the Common Stock certificate and on all offering documents
used in connection with the Offerings. Any person purchasing the Common Stock
from the Bank's office will be required to sign an acknowledgment that the
Common Stock is not a federally-insured or guaranteed instrument and that the
purchaser has received a Prospectus and understands the investment risks
involved.
In addition, certain executive officers of the Bank will participate
in the Offerings and may contact potential offerees. It is expected that the
President and Chief Executive Officer of the Bank and members of the Bank's
board of directors will contact certain depositors as well as others to discuss
the Offerings. None of the Bank's employees or directors who participate in the
Offerings will receive any special compensation or other remuneration for such
activities.
None of the Bank's personnel participating in the Offerings are
registered or licensed as a broker or dealer or an agent of a broker or dealer.
The Bank's personnel will assist in the above described sales activities
pursuant to an exemption from registration as a broker or dealer provided by
Rule 3a4-1 promulgated under the Exchange Act, which generally provides that an
"associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions. Such conditions include, but are
not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities. For purposes of this exemption, "associated person of an issuer" is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
R.P. Financial, which is experienced in the evaluation and appraisal
of business entities, including banking institutions involved in the conversion
process, has been retained by the Bank to prepare an appraisal of the estimated
pro forma market value of the Common Stock. R.P. Financial will receive a fee
not to exceed $20,000 for its appraisal, plus reasonable selected travel
expenses. The Bank has agreed to indemnify R.P. Financial, and R.P. Financial's
directors, officers and other employees, to the maximum extent permitted by law
and hold R.P. Financial harmless from any losses, actions, claims, damages,
expenses or liabilities related to or arising out of any acts or decisions made
by R.P. Financial in good faith and believed to be in the best interest of the
Bank.
The appraisal contains an analysis of a number of factors including,
but not limited to, the Bank's financial condition and operating trends, the
competitive environment within which the Bank operates,
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<PAGE>
operating trends of certain banking institutions and savings and loan holding
companies, relevant economic conditions, both nationally and in Massachusetts,
which affect the operations of banking institutions and stock market values of
certain institutions. In addition, R.P. Financial has advised the Bank that it
has considered and will consider the effect of the additional capital raised by
the sale of the Common Stock on the estimated pro forma market value of such
shares.
R.P. Financial has determined that as of August 15, 1997 and updated
as of _______________, 1997, the estimated pro forma market value of the Common
Stock was $20,500,000. R.P. Financial has established a Current Valuation Range
of $17,425,000 to $23,575,000 for this offering to allow for fluctuations in the
aggregate value of the stock due to changes in the market and other factors from
the time of commencement of the Subscription Offering until completion of the
Direct Community Offering. The Bank has determined to offer the shares of the
Common Stock at a purchase price of $10.00 per share and, by dividing the price
per share into the estimated aggregate value, initially plans to offer up to
2,357,500 shares at the maximum of the Current Valuation Range.
Should it be determined at the close of the offering that the
aggregate pro forma market value of the Common Stock is higher or lower than
$23,575,000 (the maximum of the Current Valuation Range), the Bank will make an
appropriate adjustment by raising or lowering the total number of shares being
offered. Unless the Bank decides, or is otherwise required by the Commissioner,
to do so, the Bank will not resolicit subscribers and other purchasers because
of any such change in the number of shares to be issued unless the aggregate
purchase price of the Common Stock is below $17,425,000, or 1,742,500 shares
(the low end of the Current Valuation Range) or is more than $27,111,250, or
2,711,125 shares (15% above the high end of the Current Valuation Range), in
which case subscribers and other purchasers will be offered the opportunity to
change or withdraw their orders. THE ESTABLISHMENT OF ANY NEW PRICE RANGE MAY
BE EFFECTED WITHOUT A RESOLICITATION OF VOTES FROM THE BANK'S DEPOSITORS TO
APPROVE THE CONVERSION.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the valuation, R.P. Financial has relied upon and assumed
the accuracy and completeness of financial and statistical information provided
by the Bank. R.P. Financial did not independently verify the financial
statements and other information provided by the Bank, nor did R.P. Financial
value independently the assets and liabilities of the Bank. The valuation
considers the Bank only 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 the Common Stock will thereafter be able to
sell such shares at prices within the Current Valuation Range.
LIMITATIONS ON PURCHASES OF SHARES
The Plan provides for certain additional limitations to be placed upon
the purchase of shares by eligible subscribers and others in the Conversion.
Each subscriber must subscribe for a minimum of 25 shares; provided, that if the
Purchase Price of 25 shares exceeds $500, the minimum number of shares will be
reduced accordingly. Additionally, no person by himself or herself or with an
associate or a group of persons acting in concert shall purchase shares of
Common Stock with an aggregate Purchase Price of more than $600,000, except for
the ESOP of the Bank, which intends to purchase 8% of the total shares offered
in the Conversion. Officers and directors and their associates may not purchase,
in the aggregate, more than 30% of the shares offered pursuant to the
Conversion. For purposes of the Plan, the directors are not deemed to be acting
in concert solely by reason of their membership on the Bank's board of
directors.
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<PAGE>
The term "officer" is defined in the Plan to mean the president, vice
presidents, clerk and the treasurer of the Bank.
The term "acting in concert" is defined in the Plan of Conversion to
mean: persons seeking to combine or pool their voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. When persons act together for such purpose, their group is deemed to
have acquired their stock. The term "associate" of a person is defined in the
Plan of Conversion to mean: (i) any corporation or organization (other than the
Bank or a majority-owned subsidiary of the Bank) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity (excluding tax-qualified
employee plans); 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 or any of its parents or subsidiaries. The
Company and the Bank may presume that certain persons are acting in concert
based upon, among other things, joint account relationships and the fact that
such persons have filed joint Schedules 13D with the SEC with respect to other
companies.
The Common Stock will be freely transferable, except for shares
purchased by officers and directors of the Bank. (For restrictions on stock
purchased by officers and directors, see "--Restrictions on Transferability by
Directors and Officers," below.)
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 Common Stock pursuant to the Plan reside. However, no such person will be
offered or receive any stock under the Plan who resides in a foreign country or
in a state of the United States with respect to which all of the following
apply: (a) a small number of persons otherwise eligible to subscribe for shares
under the Plan reside in such country or state; (b) the granting of subscription
rights or offer or sale of shares of stock of the Company to such persons would
require the Company, under the securities laws of such state, to register as a
broker or dealer or to register or otherwise qualify its securities for sale in
such state; and (c) such registration or qualification would be impracticable
for reasons of cost or otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS
Shares purchased by directors or officers of the Bank shall be subject
to the restriction that said shares shall not be sold for a period of one year
after completion of the Conversion, except in the event of the death of the
stockholder or in any exchange of such shares in connection with a merger or
acquisition of the Company approved by the Commissioner. Accordingly, shares of
stock issued by the Company to directors and officers shall bear a legend giving
appropriate notice of the restriction imposed upon it, and, in addition, the
Company will give appropriate instructions to the transfer agent for the
Company's stock with respect to the applicable restriction for transfer of any
restricted stock. Any shares issued to directors and officers as a stock
dividend, stock split or otherwise with respect to restricted stock shall be
subject to the same restrictions.
Shares purchased by an affiliate of the Company will be subject to the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of: (i) 1% of the outstanding shares of the Company or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
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<PAGE>
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final; however, such interpretations have no binding effect on the
Commissioner. The Plan provides that, if deemed necessary or desirable by the
board of directors, the Plan may be substantively amended by a two-thirds vote
of the board of directors as a result of comments from regulatory authorities or
otherwise, prior to the vote of the Bank's depositors and at any time thereafter
with the concurrence of the Commissioner, except that in the event the
regulations under which the Plan was adopted are liberalized subsequent to
approval of the Plan by the Commissioner, the board of directors may amend the
Plan to conform to the regulations without further approval of the depositors,
to the extent permitted by law.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the sale of all shares of the
Common Stock within 24 months following approval of the Plan by the mutual
depositors of the Bank. If this condition is not satisfied, the Plan will be
terminated and the Bank will continue its business in the mutual form of
organization. The Plan may be terminated by the board of directors at any time
with the approval of the Commissioner.
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 by Thacher
Proffitt & Wood, Washington, D.C. Thacher Proffitt & Wood has consented to the
reference herein to their opinion. Foley, Hoag & Eliot, LLP, Boston,
Massachusetts has passed upon certain legal matters for Trident Securities.
EXPERTS
The consolidated financial statements of Medford Co-operative Bank and
its subsidiaries as of June 30, 1997 and 1996 and for each of the years in the
three-year period ended June 30, 1997, have been included herein and elsewhere
in the Prospectus in reliance upon the report of Wolf & Company, P.C.,
independent certified public accountants appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
R.P. Financial has consented to the publication herein of the summary
of its letters to Medford Co-operative Bank, setting forth its opinion as to the
estimated pro forma market value of the Common Stock and the value of
subscription rights in the Subscription Offering and to the use of its name and
the statements with respect to R.P. Financial appearing herein.
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ADDITIONAL INFORMATION
The Bank has filed with the Commissioner an Application for
Conversion. This document omits certain information contained in such
application. The Application for Conversion and the exhibits and financial
statements that are part thereof may be inspected at the offices of the
Massachusetts Division of Banks, 100 Cambridge Street, Boston, Massachusetts
02202 or at the Bank's main office, 60 High Street, Medford, Massachusetts
02155.
The Company has filed with the SEC a Registration Statement on Form S-
1 (File No. 333-34447) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC at 75 Park Place,
Fourteenth Floor, New York, New York 10007 and Room 3190, John C. Kluczynski
Building, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such
material can be obtained by mail from the SEC at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Such information is also available on the SEC's Electronic Data
Gathering Analysis and Retrieval ("EDGAR") System. In addition, the SEC
maintains a Worldwide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Company. The address for the SEC's Worldwide
Website is "http://www.sec.gov. " 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, a brief description thereof and are
not necessarily complete; each such statement is qualified by reference to such
contract or document.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12(g) 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%
shareholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Where required by the Exchange Act, such reports will
contain financial information that has been examined and reported upon, with an
opinion expressed by, an independent public or certified public accountant.
Under the Plan of Conversion, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion.
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MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-2
Consolidated Statements of Income for each of the years
in the three-year period ended June 30, 1997 F-3
Consolidated Statements of Changes in Surplus for
each of the years in the three-year period ended
June 30, 1997 F-4
Consolidated Statements of Cash Flows for
each of the years in the three-year period ended
June 30, 1997 F-5
Notes to Consolidated Financial Statements F-7
_______________
The financial statements for Mystic Financial, Inc. have been omitted because
Mystic Financial, Inc. has not yet issued any stock, has no liabilities, and has
not conducted any business other than of an organizational nature.
All schedules have been omitted either because they are not required, not
applicable, or are included in the notes to consolidated financial statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Medford Co-operative Bank
We have audited the consolidated balance sheets of Medford Co-operative Bank and
subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in surplus and cash flows for each of the years in
the three-year period ended June 30, 1997. 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 Medford Co-operative
Bank and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997 in conformity with generally accepted accounting principles.
WOLF & COMPANY, P.C.
Boston, Massachusetts
July 29, 1997
F-1
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Cash and due from banks $ 3,953 $ 5,032
Federal funds sold 2,075 1,683
Short-term investments 197 2,056
----------- -----------
Total cash and cash equivalents 6,225 8,771
Certificates of deposit - 1,000
Securities available for sale, at fair value (Note 2) 3,819 1,568
Securities held to maturity, at amortized cost (Note 2) 17,504 16,926
Federal Home Loan Bank stock, at cost 858 788
Loans, net of allowance for loan losses of $977 and
$742, respectively (Note 3) 114,568 94,760
Mortgage loans held for sale, net 210 1,132
Banking premises and equipment, net (Note 5) 2,697 2,538
Real estate held for investment, net (Note 6) 1,840 1,894
Accrued interest receivable 870 822
Due from Co-operative Central Bank 669 669
Other assets (Note 9) 393 498
----------- -----------
$149,653 $131,366
=========== ===========
LIABILITIES AND SURPLUS
Deposits (Note 7) $129,303 $119,634
Federal Home Loan Bank borrowings (Note 8) 7,532 -
Mortgagors' escrow accounts 386 338
Accrued interest payable 249 195
Accrued expenses and other liabilities 243 250
----------- -----------
Total liabilities 137,713 120,417
----------- -----------
Commitments and contingencies (Notes 10 and 15)
Surplus (Notes 11 and 15) 11,761 11,020
Net unrealized gain (loss) on securities available
for sale, net of tax effects (Notes 2 and 9) 179 (71)
----------- -----------
Total surplus 11,940 10,949
----------- -----------
$149,653 131,366
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1997 1996 1995
---------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $8,397 $7,115 $6,323
Interest and dividends on investment securities 1,208 1,364 1,358
Other interest 294 449 484
---------- --------- ----------
Total interest and dividend income 9,899 8,928 8,165
---------- --------- ----------
Interest expense:
Deposits 4,700 4,569 3,885
Federal Home Loan Bank borrowings 211 - -
---------- --------- ----------
Total interest expense 4,911 4,569 3,885
---------- --------- ----------
Net interest income 4,988 4,359 4,280
Provision for loan losses (Note 3) 272 100 100
---------- --------- ----------
Net interest income, after provision for loan losses 4,716 4,259 4,180
---------- --------- ----------
Other income (charges):
Customer service fees 536 512 410
Loan servicing and other loan fees 56 52 59
Gain on sales of mortgage loans 8 8 6
Writedown of mortgage loans held for sale - (41) -
Gain on sales of securities available for sale, net (Note 2) 168 4 -
Rental income, net of expenses (Note 6) 29 44 45
Co-operative Central Bank Share Insurance Fund
special dividend 44 44 -
Miscellaneous 41 35 16
---------- --------- ----------
Total other income 882 658 536
---------- --------- ----------
Operating expenses:
Salaries and employee benefits (Note 13) 2,734 2,486 2,113
Occupancy and equipment expenses (Note 5) 412 321 247
Data processing expenses 207 179 175
FDIC insurance expense 8 7 251
Foreclosed real estate, net (Note 4) - (5) 77
Other general and administrative expenses 969 890 713
---------- --------- ----------
Total operating expenses 4,330 3,878 3,576
---------- --------- ----------
Income before income taxes 1,268 1,039 1,140
Provision for income taxes (Note 9) 527 440 480
---------- --------- ----------
Net income $ 741 $ 599 $ 660
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain (loss)
on Securities
Available Total
Surplus For Sale Surplus
------------- ------------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at June 30, 1994 $ 9,761 $(78) $ 9,683
Net income 660 - 660
Decrease in net unrealized loss on
securities available for sale - 23 23
---------- --------- ---------
Balance at June 30, 1995 10,421 (55) 10,366
Net income 599 - 599
Increase in net unrealized loss on
securities available for sale - (16) (16)
---------- --------- ---------
Balance at June 30, 1996 11,020 (71) 10,949
Net income 741 - 741
Change in net unrealized gain (loss) on
securities available for sale,
net of tax effects - 250 250
---------- --------- ---------
Balance at June 30, 1997 $11,761 $179 $11,940
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1997 1996 1995
---------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 741 $ 599 $ 660
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 272 100 100
Net amortization (accretion) of investment securities (4) 8 63
Amortization of deferred loan fees (14) (28) (18)
(Gain) loss on sale of loans 18 - (1)
Net (gain) loss on sales of foreclosed real estate - (7) 30
Provision for losses on foreclosed real estate - - 26
Gain on sales of securities available for sale (168) (4) -
Depreciation expense 266 213 186
Deferred income tax provision (benefit) (87) 18 8
Mortgage loans originated for sale (2,467) (2,772) (358)
Principal balance of mortgage loans sold 3,389 1,598 358
Writedown of mortgage loans held for sale - 41 -
(Increase) decrease in accrued interest receivable (48) 26 (55)
(Increase) decrease in other assets 95 46 (24)
Increase in accrued interest payable 54 2 38
Increase (decrease) in accrued expenses and
other liabilities (7) 34 (20)
---------- -------- -------
Net cash provided (used) by operating
activities 2,040 (126) 993
---------- --------- -------
Cash flows from investing activities:
Net (increase) decrease in certificates of deposit 1,000 (150) 1,650
Proceeds from maturities of securities held to maturity 12,916 16,017 8,014
Purchase of securities held to maturity (13,490) (7,899) (7,976)
Purchase of securities available for sale (2,834) (137) (18)
Proceeds from sales of securities available for sale 1,098 20 -
Purchase of Federal Home Loan Bank stock (70) - -
Loans originated, net of payments received (25,427) (14,697) (2,704)
Proceeds from sales of loans 5,343 - 95
Proceeds from sales of foreclosed real estate - 194 408
Purchases of banking premises and equipment (369) (932) (371)
Additions to real estate held for investment (2) - (2)
Refund of construction costs on real estate held
for investment paid in prior years - - 31
---------- -------- -------
Net cash used by investing activities (21,835) (7,584) (873)
---------- -------- -------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1997 1996 1995
------------- ------------ ---------
(In Thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 9,669 5,810 3,159
Proceeds from borrowings 7,550 - -
Repayment of borrowings (18) - -
Net increase (decrease) in mortgagors' escrow
accounts 48 (29) 42
------------- ------------- --------
Net cash provided by financing
activities 17,249 5,781 3,201
------------- ------------- --------
Net change in cash and cash equivalents (2,546) (1,929) 3,321
Cash and cash equivalents at beginning of year 8,771 10,700 7,379
------------- ------------- --------
Cash and cash equivalents at end of year $ 6,225 $ 8,771 $10,700
============= ============= ========
Supplemental information:
Interest paid $ 4,857 $ 4,566 $ 3,847
Income taxes paid 693 375 485
Transfer from loans to foreclosed real estate - 83 298
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS
The consolidated financial statements include the accounts of Medford
Co-operative Bank and its wholly-owned subsidiaries, Mystic Securities
Corp., which was organized during 1997, and engages in the purchase and
sale of investment securities and Mystic Investment Inc. which is
inactive. All significant intercompany accounts have been eliminated in
consolidation.
The Bank provides a variety of financial services to individuals and
small businesses through its four offices in Medford, Massachusetts. Its
primary deposit products are checking, savings and term certificate
accounts, and its primary lending products are residential and
commercial mortgage loans, commercial and consumer loans.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation reserve
for deferred tax assets.
RECLASSIFICATIONS
Certain amounts have been reclassified in the 1996 and 1995
consolidated financial statements to conform to the 1997 presentation.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks, federal funds sold and
short-term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are carried at cost, which approximates fair
value, and consist of money market funds and interest-bearing deposits
in the Bank Investment Fund-Liquidity Fund.
F-7
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTIFICATES OF DEPOSIT
Certificates of deposit mature within one year and are carried at cost,
which approximates fair value.
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent
and ability to hold to maturity are classified as "held to maturity" and
carried at amortized cost. Investments classified as "available for
sale" are carried at fair value, with unrealized gains and losses
reported as a separate component of surplus, net of tax effects where
applicable.
Purchase premiums and discounts are amortized to earnings by a method
which approximates the interest method over the terms of the
investments. Gains and losses on the sale of securities are recorded on
the trade date using the specific identification method.
LOANS
The Bank grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio consists of mortgage loans in
the Greater Boston area. The ability of the Bank's debtors to honor
their contracts is dependent upon the local real estate market and
economy in this area.
Loans, as reported, have been reduced by amounts due to borrowers on
incomplete loans, net deferred loan fees and the allowance for loan
losses.
Interest on loans is not accrued on loans which are identified as
impaired or loans which are ninety days or more past due. Interest
income previously accrued on such loans is reversed against current
period interest income. Interest income on all non-accrual loans is
recognized only to the extent of interest payments received.
Net deferred loan fees are amortized as an adjustment of the related
loan yields using the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to earnings and is maintained at a level considered
adequate to provide for reasonably foreseeable loan losses.
F-8
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONCLUDED)
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of
the collectibility of the loans in light of known and inherent risks in
the nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions.
The allowance is an estimate and ultimate losses may vary from current
estimates and future additions to the allowance may be necessary. As
adjustments become necessary, they are reported in earnings for the
periods in which they become known. Loan losses are charged against the
allowance when management believes the collectibility of the loan
balance is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
Effective July 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118. Under SFAS No. 114, a
loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Impairment is measured on a
loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. All of the Bank's loans which have been
identified as impaired have been measured by the fair value of existing
collateral.
SFAS No. 114 is not applicable to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, and
loans that are measured at fair value. Accordingly, the Bank has not
applied SFAS No. 114 to its consumer loans which are collectively
evaluated for impairment.
SFAS No. 114 also limits the classification of loans as in-substance
foreclosures to situations where the creditor actually receives physical
possession of the debtor's assets. The adoption of SFAS No. 114 had no
effect on the Bank's assessment of the overall adequacy of the allowance
for loan losses. The restatement of previously issued financial
statements to conform with SFAS No. 114 is expressly prohibited.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market.
F-9
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE
Foreclosed real estate is held for sale and carried at the lower of cost
or fair value less estimated costs to sell. Troubled loans are
transferred to foreclosed real estate upon completion of formal
foreclosure proceedings.
Real estate properties acquired through foreclosure are initially
recorded at fair value at the date of foreclosure. Costs relating to the
development and improvement of property are capitalized, whereas costs
relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance
for losses is established through a charge to earnings if the carrying
value of a property exceeds its fair value less estimated costs to sell.
BANKING PREMISES AND EQUIPMENT AND REAL ESTATE HELD FOR INVESTMENT
Land is carried at cost. Buildings, equipment and improvements are
stated at cost, less accumulated depreciation, computed on the straight-
line method over the estimated useful lives of the assets.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for improvements are
capitalized and depreciated.
PENSION PLAN
It is the Bank's policy to fund pension plan costs in the year of
accrual.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes
in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted accordingly through the provision for income taxes. The
Bank's base amount of its federal income tax reserve for loan losses is
a permanent difference for which there is no recognition of a deferred
tax liability. However, the loan loss allowance maintained for financial
reporting purposes is a temporary difference with allowable recognition
of a related deferred tax asset, if it is deemed realizable.
F-10
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The accounting and reporting
standards of this Statement are based on a financial components approach
that focuses on control, whereby after a transfer of financial assets,
an entity recognizes only financial and servicing assets it controls and
liabilities it has incurred. Liabilities incurred will be initially
recognized at fair value, if practicable. Financial assets are
derecognized when control has been surrendered, and liabilities are
derecognized when extinguished. The determination of whether control
over a financial asset has been surrendered is based on meeting specific
criteria as defined in the Statement.
The Bank adopted the Statement on January 1, 1997 for transfers and
servicing of financial assets and extinguishments of liabilities. In
December 1996, the FASB voted to defer for one year the provisions of
the Statement that relate to secured borrowings and collateral.
Effective July 1, 1996, the Bank prospectively adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights" whereby rights to service
mortgage loans for others are capitalized as separate assets, whether
acquired through purchase or origination, if such loans are sold or
securitized with servicing rights retained. Accordingly, the total cost
of the mortgage loan is allocated to the related servicing right and to
the loan based on the relative fair values if it is practicable to
estimate those fair values. The Bank estimates fair value based on the
present value of estimated expected future cash flows using prepayment
speeds and discount rates commensurate with the risks involved, and
servicing costs determined on an incremental cost basis. Prior to the
adoption of SFAS No. 122, the capitalization of originated mortgage
servicing rights was not allowed under generally accepted accounting
principles. Capitalized mortgage servicing rights are amortized to
servicing revenue in proportion to, and over the period of, estimated
net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. The adoption of SFAS
No. 122 had no material effect on the Bank's consolidated financial
statements.
F-11
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities
with gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Available for Sale
-------------------
Marketable equity securities:
Co-operative Bank
Investment Fund One $ 1,500 $ - $ (78) $ 1,422
Other equity securities 2,043 403 (49) 2,397
------- ---------- ----- -------
Total $ 3,543 $ 403 $(127) $ 3,819
======= ========== ===== =======
Held to Maturity
----------------
U.S. Government and
federal agency obligations $14,976 $ 13 $ (81) $14,908
Other bonds 2,528 - (5) 2,523
------- ---------- ----- -------
Total $17,504 $ 13 $ (86) $17,431
======= ========== ===== =======
</TABLE>
F-12
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ----------- ----------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Available for Sale
------------------
Marketable equity securities:
Co-operative Bank
Investment Fund One $ 1,500 $ - $ (89) $ 1,411
Other equity securities 139 20 (2) 157
------- ---------- --------- -------
Total $ 1,639 $ 20 $ (91) $ 1,568
======= ========== ========= =======
Held to Maturity
----------------
U.S. Government and
federal agency obligations $16,899 $ 21 $ (153) $16,767
Other bonds 27 - - 27
------- ---------- --------- -------
Total $16,926 $ 21 $ (153) $16,794
======= ========== ========= =======
</TABLE>
F-13
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES (CONCLUDED)
The amortized cost and estimated fair value of debt securities held to
maturity by contractual maturity is as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 5,002 $ 4,973 $ 8,003 $ 8,021
Over 1 year to 5 years 12,502 12,458 8,923 8,773
------- ------- ------- -------
Total $17,504 $17,431 $16,926 $16,794
======= ======= ======= =======
</TABLE>
During the years ended June 30, 1997 and 1996, proceeds from sales of
securities available for sale amounted to $1,098,000 and $20,000,
respectively. Gross realized gains amounted to $172,000 and $4,000,
respectively. Gross realized losses for 1997 were $4,000. There were no
sales of securities during the year ended June 30, 1995.
F-14
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
-------- -------
(In Thousands)
<S> <C>
Mortgage loans on real estate:
Residential $ 90,203 $82,459
Commercial 17,847 8,280
Construction 976 285
Home equity lines of credit 1,564 1,176
-------- -------
110,590 92,200
Less: Due to borrowers on incomplete loans (340) (134)
Net deferred loan fees (37) (60)
-------- -------
110,213 92,006
-------- -------
Other loans:
Personal 1,203 1,271
Commercial 2,672 1,333
Commercial lines of credit 1,005 382
Share secured 244 252
Home improvement 208 258
-------- -------
5,332 3,496
-------- -------
Total loans 115,545 95,502
Less allowance for loan losses (977) (742)
-------- -------
Loans, net $114,568 $94,760
======== =======
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1997 1996 1995
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 742 $ 757 $ 749
Provision for loan losses 272 100 100
Recoveries 20 23 27
Charge-offs (57) (138) (119)
----- ----- -----
Balance at end of year $ 977 $ 742 $ 757
===== ===== =====
</TABLE>
F-15
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOANS (CONCLUDED)
At June 30, 1997, the recorded investment in impaired loans (see Note 1)
totaled $365,000 with no valuation allowance. At June 30, 1996, the
recorded investment in impaired loans totaled $622,000 with no valuation
allowance. No additional funds are committed to be advanced in
connection with impaired loans.
For the years ended June 30, 1997 and 1996, the average recorded
investment in impaired loans amounted to $589,000 and $867,000,
respectively. The Bank recognized $31,000 and $51,000, respectively, of
interest income on impaired loans, during the period that they were
impaired, on a cash basis.
At June 30, 1997 and 1996, non-accrual loans amounted to $365,000 and
$622,000, respectively. Accordingly, $26,000 and $11,000 of accrued
interest receivable applicable to these loans was not recognized at June
30, 1997 and 1996, respectively.
On a fee basis, the Bank services loans it has originated and sold to
others. At June 30, 1997 and 1996, such loans amounted to approximately
$15,842,000 and $9,440,000, respectively. As of June 30, 1997 and 1996,
the Bank has no capitalized mortgage servicing rights. All loans
serviced for others were sold without recourse provisions.
4. FORECLOSED REAL ESTATE
There was no foreclosed real estate at June 30, 1997 and 1996.
An analysis of the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 1996 1995
----------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ - $ 16 $ -
Provision for losses on foreclosed real estate - - 26
Charge-offs - (16) (10)
----------- ---------- ---------
Balance at end of year $ - $ - $ 16
=========== ========== =========
</TABLE>
F-16
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORECLOSED REAL ESTATE (CONCLUDED)
Net (gains) losses applicable to foreclosed real estate include the
following:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net (gain) loss on sales of foreclosed real estate $ - $ (7) $ 30
Provision for losses on foreclosed real estate - - 26
Operating expenses, net of rental income - 2 21
-------- -------- --------
$ - $ (5) $ 77
======== ======== ========
</TABLE>
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises
and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
June 30, Estimated
-------------------
1997 1996 Useful Lives
-------- -------- ------------
(In Thousands)
<S> <C> <C> <C>
Banking premises:
Land $ 242 $ 242
Buildings and improvements 2,434 2,583 10 - 40 years
Equipment 1,498 1,495 3 - 10 years
-------- --------
4,174 4,320
Less accumulated depreciation (1,477) (1,782)
-------- --------
$ 2,697 $ 2,538
======== ========
</TABLE>
Depreciation expense for the years ended June 30, 1997, 1996 and 1995
amounted to $210,000, $157,000 and $129,000, respectively.
F-17
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment represents property adjacent to the
Bank's main office which is primarily leased as commercial retail and
office space. The Bank occupies a portion of the building for its own
activities. A summary of the cost and accumulated depreciation and
estimated useful life is as follows:
<TABLE>
<CAPTION>
June 30, Estimated
-------------------------
1997 1996 Useful Life
------ ------ ----------------
(In Thousands)
<S> <C> <C> <C>
Land $ 34 $ 34
Building 2,226 2,224 40 years
-------- ----------
2,260 2,258
Less accumulated depreciation (420) (364)
-------- ----------
$ 1,840 $ 1,894
======== ==========
</TABLE>
Depreciation expense for the years ended June 30, 1997, 1996 and 1995
amounted to $56,000, $56,000 and $57,000, respectively.
The following is a schedule of minimum future rental income on
noncancelable leases:
<TABLE>
<CAPTION>
Year Ending
June 30, (In Thousands)
---------------
<S> <C>
1998 $ 104
1999 95
2000 24
-----------
$ 223
===========
</TABLE>
The provisions of the lease agreements provide that the tenants are
responsible for utilities and certain repairs. Certain of the leases
also contain provisions that the tenants are responsible for a
percentage of real estate taxes and certain other costs.
Rental income for the years ended June 30, 1997, 1996 and 1995
amounted to approximately $135,000, $148,000 and $149,000,
respectively.
F-18
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS
A summary of deposit balances by type is as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
------------- --------
(In Thousands)
<S> <C> <C>
NOW accounts $ 17,975 $ 15,480
Demand deposits 4,910 4,103
Regular and other deposits 40,794 40,019
Money market deposits 6,489 6,366
--------- ---------
Total non-certificate accounts 70,168 65,968
--------- ---------
Term certificates less than $100,000 49,916 46,207
Term certificates of $100,000 or more 9,219 7,459
--------- ---------
Total certificate accounts 59,135 53,666
--------- ---------
Total deposits $129,303 $119,634
========= =========
</TABLE>
A summary of certificate accounts by maturity, is as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
--------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Within 1 year $48,316 5.46% $37,283 5.31%
Over 1 year to 3 years 10,475 5.89 15,836 5.61
Over 3 years to 5 years 344 6.15 547 6.62
------- -------
$59,135 5.54% $53,666 5.41%
======= =======
</TABLE>
F-19
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank borrowings at June 30, 1997 consist of the
following:
<TABLE>
<CAPTION>
Interest
Maturity Rate Amount
------------------------------- ---- ------
(In Thousands)
<S> <C> <C>
July 2, 1997 5.58% $1,000
April 16, 1998 6.22 1,100
December 6, 1999 5.99 1,200
May 5, 2000 6.69 1,100
December 4, 2001 6.12 1,200
March 25, 2002 6.90 950
Amortizing advance, due on
August 14, 2006, requiring
monthly payments of $7,793
including interest 6.97 982
---- --------
$ 7,532
========
</TABLE>
The following is a summary of maturities of borrowings at June 30, 1997:
<TABLE>
<CAPTION>
Year Ending
June 30, (In Thousands)
---------------
<S> <C>
1998 $ 2,125
1999 27
2000 2,328
2001 31
2002 2,183
Thereafter 838
--------
$ 7,532
========
</TABLE>
F-20
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL HOME LOAN BANK BORROWINGS (CONCLUDED)
The Bank also has an available line of credit of $2,515,000 with the
Federal Home Loan Bank of Boston ("FHLB") at an interest rate that
adjusts daily. Borrowings under the line are limited to 2% of the Bank's
total assets. All borrowings from the Federal Home Loan Bank of Boston
are secured by a blanket lien on qualified collateral, defined
principally as 75% of the carrying value of first mortgage loans on
owner-occupied residential property and 90% of the market value of U.S.
government and federal agency securities.
9. INCOME TAXES
Allocation of federal and state income taxes between current and
deferred portions is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Current tax provision:
Federal $ 444 $ 300 $ 330
State 170 122 142
--------- ------- --------
Total current 614 422 472
--------- ------- --------
Deferred tax provision (benefit):
Federal (65) 4 5
State (22) 14 3
- --------- --------- ------- --------
Total deferred (87) 18 8
--------- ------- --------
Total provision $ 527 $ 440 $ 480
========= ======= ========
</TABLE>
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1996 1995 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 7.7 8.6 8.4
Other, net (0.1) (0.2) (0.3)
------ ------ ------
Effective tax rates 41.6% 42.4% 42.1%
====== ====== ======
</TABLE>
F-21
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
The components of the net deferred tax asset included in other assets
are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Deferred tax asset:
Federal $ 350 $ 286
State 121 99
-------- --------
471 385
Valuation reserve on asset (24) (24)
-------- --------
447 361
-------- --------
Deferred tax liability:
Federal (111) (20)
State (12) (7)
-------- --------
(123) (27)
-------- --------
Net deferred tax asset $ 324 $ 334
======== ========
</TABLE>
The tax effects of each type of income and expense item that give rise
to deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
-------- -------
(In Thousands)
<S> <C> <C>
Allowance for loan losses $ 409 $ 302
Net unrealized gain on securities available
for sale (97) -
-------- -------
Other 36 56
-------- -------
348 358
Valuation reserve (24) (24)
-------- -------
Net deferred tax asset $ 324 $ 334
======== =======
</TABLE>
F-22
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONCLUDED)
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 334 $ 352 $ 360
Deferred tax (provision) benefit 87 (18) (8)
Deferred tax on unrealized gain on securities
available for sale (97) - -
----- ----- -----
Balance at end of year $ 324 $ 334 $ 352
===== ===== =====
</TABLE>
The change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------
1997 1996 1995
----- ----- -----
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 24 $ 33 $ 30
Unrecognized current year tax benefits - - 3
Recognition of prior years' benefits - (9) -
----- ----- -----
Balance at end of year $ 24 $ 24 $ 33
===== ===== =====
</TABLE>
The federal income tax reserve for loan losses at the Bank's base year
amounted to approximately $2,665,000. If any portion of the reserve is
used for purposes other than to absorb the losses for which established,
approximately 150% of the amount actually used (limited to the amount of
the reserve) would be subject to taxation in the fiscal year in which
used. As the Bank intends to use the reserve only to absorb loan losses,
a deferred income tax liability of approximately $1,090,000 has not been
provided.
F-23
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Loan commitments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and advance funds under lines of credit and credit card
loans. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated financial statements.
The Bank's exposure to credit loss is represented by the contractual
amount of these instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance-sheet instruments. A
summary of financial instruments outstanding whose contract amounts
represent credit risk is as follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1997 1996
---------- -----------
(In Thousands)
<S> <C> <C>
Commitments to grant mortgage loans $2,146 $2,449
Commitments to grant commercial loans 2,267 470
Unadvanced funds on home equity lines of credit 1,649 1,157
Unadvanced funds on credit card loans 1,260 1,266
Unadvanced funds on commercial lines of credit 2,031 618
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The commitments
for lines of credit and credit card loans may expire without being
drawn upon; therefore, 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 commitments for mortgage
loans and home equity lines of credit are collateralized by real
estate. Commercial loans and lines of credit are secured by various
assets of the borrowers. Credit card loans are generally unsecured.
F-24
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS AND CONTINGENCIES (CONCLUDED)
Contingencies
Various legal claims arise from time to time in the normal course of
business which, in the opinion of management, will have no material
effect on the Bank's consolidated financial position or results of
operations.
11. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1997,
that the Bank meets all capital adequacy requirements to which it is
subject.
F-25
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONCLUDED)
As of June 30, 1997 and 1996, the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the
Bank must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the following table. There are no
conditions or events that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total Capital
(to Risk Weighted Assets) $12,738 14.4% $7,073 8.0% $8,842 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,761 13.3 3,537 4.0 5,305 6.0
Tier I Capital
(to Average Assets) 11,761 8.1 5,820 - 4.0 - 7,274 5.0
7,274 5.0
As of June 30, 1996:
Total Capital
(to Risk Weighted Assets) 11,691 16.4 5,688 8.0 7,110 10.0
Tier I Capital
(to Risk Weighted Assets) 10,949 15.4 2,844 4.0 4,266 6.0
Tier I Capital
(to Average Assets) 10,949 8.5 5,146 - 4.0 - 6,433 5.0
6,433 5.0
</TABLE>
F-26
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS
At June 30, 1997 and 1996, total loans to directors and officers of the
Bank greater than $60,000 on an individual basis amounted to
approximately $1,667,000 and $1,521,000, respectively. During the years
ended June 30, 1997 and 1996, total principal additions were $198,000
and $207,000, respectively, and total principal payments were $52,000
and $41,000, respectively.
13. PENSION PLAN
The Bank provides pension benefits for its employees through membership
in Plan C of the Defined Benefit Plan of the Co-operative Banks
Employees Retirement Association. The plan is a multi-employer plan
where the contributions by each bank are not restricted to provide
benefits to the employees of the contributing bank. Each employee
reaching the age of 21 and having completed 1,000 hours of service in
one consecutive twelve-month period beginning with such employee's date
of employment automatically becomes a participant in the retirement
plan. A participant in the plan is not vested until they have performed
two years of service, at which time they become 20% vested. Participants
become 100% vested when credited with six years of service.
Total pension expense for the years ended June 30, 1997, 1996 and 1995
amounted to approximately $104,000, $107,000 and $127,000,
respectively.
In addition to the defined benefit plan, the Bank has a savings and
retirement plan which qualifies under Section 401(k) of the Internal
Revenue Code. Each employee reaching the age of 21 and having completed
1,000 hours of service in one consecutive twelve-month period beginning
with such employee's date of employment automatically becomes a
participant in the savings and retirement plan. The plan provides for
voluntary contributions by participating employees ranging from one
percent to ten percent of their compensation, subject to certain
limitations. The Bank matches 50% of an employee's voluntary
contribution up to ten percent of the employee's compensation.
Total expense under the Section 401(k) plan for the years ended June
30, 1997, 1996 and 1995 amounted to approximately $58,000, $49,000 and
$46,000, respectively.
F-27
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values of all financial
instruments where it is practicable to estimate such values. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Accordingly, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash, federal
-------------------------
funds sold and short-term investments approximate fair values.
Certificates of deposit: The carrying amounts of certificates of
-----------------------
deposit approximate their fair values.
Investment securities: Fair values for investment securities,
---------------------
excluding Federal Home Loan Bank stock, are based on quoted
market prices. The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions
of the Federal Home Loan Bank.
Loans receivable: For variable-rate loans that reprice
----------------
frequently and with no significant change in credit risk, fair
values are based on carrying values. Fair values for loans held
for sale are based on quoted market prices. Fair values for all
other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair
values for non-performing loans are estimated using underlying
collateral values.
Deposit liabilities: Fair values for interest and non-interest
-------------------
checking, passbook savings, and certain types of money market
accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts).
Fair values for term certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated expected monthly maturities.
F-28
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Federal Home Loan Bank borrowings: Fair values for borrowings
---------------------------------
are estimated using discounted cash flow analysis based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
----------------
fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
-----------------------------
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing and are not
material.
The estimated fair values, and related carrying amounts, of the Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1997 1996
----------------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,225 $ 6,225 $ 8,771 $ 8,771
Certificates of deposit - - 1,000 1,000
Securities available for sale 3,819 3,819 1,568 1,568
Securities held to maturity 17,504 17,431 16,926 16,794
Federal Home Loan Bank stock 858 858 788 788
Loans, net 114,568 114,898 94,760 93,530
Mortgage loans held for sale, net 210 210 1,132 1,132
Accrued interest receivable 870 870 822 822
Financial liabilities:
Deposits 129,303 129,516 119,634 119,814
Federal Home Loan Bank borrowings 7,532 7,534 - -
Accrued interest payable 249 249 195 195
</TABLE>
F-29
<PAGE>
MEDFORD CO-OPERATIVE BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
15. CONVERSION TO STOCK FORM OF OWNERSHIP
On June 11, 1997, the Board of Directors of the Bank adopted a plan of
conversion pursuant to which the Bank will convert from a state chartered
mutual co-operative bank to a state chartered stock co-operative bank, all
of the outstanding common stock of which will be acquired by Mystic
Financial, Inc., (the "Company"), a holding company formed expressly for
such purpose, in exchange for a portion of the net conversion proceeds. All
of the stock to be issued in the conversion is being offered to eligible
account holders in a subscription offering pursuant to subscription rights
in order of priority as set forth in the plan of conversion. The Bank plans
to establish an Employee Stock Ownership Plan ("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
from the proceeds of a loan from the Company. The Bank expects to make
annual contributions adequate to fund the repayment of any indebtedness of
the ESOP.
Effective upon the conversion, the Company intends to enter into employment
agreements with two senior executives and the Bank intends to enter into
employment agreements with two commercial loan officers. The agreements
will include, among other things, provisions for minimum annual
compensation and certain lump-sum severance payments in the event of a
"change in control."
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the Conversion. If the Conversion is not completed, all
costs incurred will be charged to expense. At June 30, 1997, no significant
cost had been incurred.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of account
holders in an amount equal to the retained earnings of the Bank as of the
date of its latest balance sheet contained in the final prospectus used in
connection with the conversion. Each 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. Upon completion of the conversion, the Bank's retained earnings will
be substantially restricted with respect to payment of dividends to
stockholders due to the liquidation account.
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, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERINGS MADE HEREBY, AND, IF GIVEN OR
MADE, ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
OF HAVING BEEN AUTHORIZED BY MYSTIC FINANCIAL, INC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
MYSTIC SECURITIES OFFERED HEREBY, OR ANY OTHER SECURITIES, 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 AUTHORIZED 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 COMMON STOCK IN THE AFFAIRS OF MYSTIC FINANCIAL, INC. SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
_____________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY................................................................................................ iii
SUMMARY OVERVIEW....................................................................................... x
SELECTED FINANCIAL AND OTHER DATA...................................................................... xiii
RECENT DEVELOPMENTS.................................................................................... xvi
RISK FACTORS........................................................................................... 1
MYSTIC FINANCIAL, INC.................................................................................. 4
MEDFORD CO-OPERATIVE BANK.............................................................................. 5
DIVIDENDS.............................................................................................. 5
BUSINESS PURPOSES...................................................................................... 6
USE OF PROCEEDS........................................................................................ 8
MARKET FOR COMMON STOCK................................................................................ 9
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS................................... 10
CAPITALIZATION......................................................................................... 11
PRO FORMA DATA......................................................................................... 12
CONSOLIDATED STATEMENTS OF INCOME...................................................................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 16
BUSINESS............................................................................................... 26
MANAGEMENT OF THE COMPANY.............................................................................. 41
MANAGEMENT OF THE BANK................................................................................. 42
REGULATION............................................................................................. 52
TAXATION............................................................................................... 62
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY............................................................ 64
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK........................................ 66
THE CONVERSION......................................................................................... 72
LEGAL AND TAX OPINIONS................................................................................. 83
EXPERTS................................................................................................ 83
ADDITIONAL INFORMATION................................................................................. 84
CONSOLIDATED FINANCIAL STATEMENTS...................................................................... F-1
</TABLE>
UP TO
2,357,500 SHARES OF
COMMON STOCK
========================
MYSTIC
FINANCIAL, INC.
(Proposed Holding
Company for Medford
Co-operative Bank)
========================
________________
PROSPECTUS
________________
TRIDENT SECURITIES, INC.
________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
<S> <C>
Massachusetts Commissioner of Banks registration fee(2).......... 5,000
SEC registration fee(2).......................................... 8,215
NASD filing fee(2)............................................... 1,600
NASDAQ National Market Listing Fee(2)............................ 18,500
Printing, postage and mailing.................................... 45,000
Legal fees and expenses.......................................... 150,000
Accounting fees and expenses..................................... 35,000
Appraiser's fees and expenses (including business plan).......... 25,000
Marketing fees, selling commissions, and
underwriter's expenses (including counsel fees)(3).............. 469,280
Conversion agent fees and expenses............................... 6,500
Certificate printing............................................. 2,000
Blue Sky fees and expenses (including fees of counsel)........... 8,000
Miscellaneous ................................................... 8,685
--------
TOTAL............................................................ $814,095
========
</TABLE>
___________
(1) All expenses are estimated except where otherwise indicated.
(2) Based upon the registration of 2,711,125 shares at $10.00 per share.
(3) Based upon the sale of midpoint shares of Conversion Stock at $10.00 per
share.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of any such threatened, pending or completed
<PAGE>
action or suit if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and
provided further that (unless a court of competent jurisdiction otherwise
provides) such person shall not have been adjudged liable to the corporation.
Any such indemnification may be made only as authorized in each specific case
upon a determination by the stockholders or disinterested directors or by
independent legal counsel in a written opinion that indemnification is proper
because the indemnitee has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent 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 enterprise,
against any liability asserted against him, and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Article IX of the Certificate of Incorporation of Mystic Financial, Inc.
(the "Company") provides that a director shall not be personally liable to the
Company or its stockholders for damages for breach of his fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is expressly prohibited by the DGCL. Article X, Section 1 of the
Company's Certificate of Incorporation requires the Company, among other things,
to indemnify to the fullest extent permitted by the DGCL, any person who is or
was or has agreed to become a director or officer of the Company, who was or is
made a party to, or is threatened to be made a party to, or has become a witness
in, any threatened, pending or completed action, suit or proceeding, including
actions or suits by or in the right of the Company, by reason of such agreement
or service or the fact that such person is, was or has agreed to serve as a
director, officer, employee or agent of another corporation or organization at
the request of the Company.
Article X, Section 11 also empowers the Company to purchase and maintain
insurance to protect itself and its directors and officers, and those who were
or have agreed to become directors or officers, against any liability,
regardless of whether or not the Company would have the power to indemnify those
persons against such liability under the law or the provisions set forth in the
Certificate of Incorporation. The Company is also authorized by its Certificate
of Incorporation to enter into individual indemnification contracts with
directors and officers. Medford Co-operative Bank currently maintains and the
Company expects to purchase directors' and officers' liability insurance
consistent with the provisions of the Certificate of Incorporation as soon as
practicable.
The Company expects to enter into employment agreements with certain
executive officers, which agreements are expected to require that the Company
will obtain a directors' and officers' liability policy for the benefit of such
officers or that the Company will indemnify such officers to the fullest extent
provided by law.
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
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 dated May 15, 1997 between Medford Co-operative Bank
and Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement between Medford Co-operative Bank and
Trident Securities, Inc.**
2.1 Amended Plan of Conversion for Medford Co-operative Bank (including
the Stock Charter and Bylaws of Medford Co-operative Bank)**
3.1 Certificate of Incorporation of Mystic Financial, Inc.*
3.2 Bylaws of Mystic Financial, Inc.*
4.1 Draft Stock Certificate of Mystic Financial, Inc.*
5.1 Form of Opinion of Thacher Proffitt & Wood Regarding Legality of
Shares to be Issued*
8.1 Form of Opinion of Thacher Proffitt & Wood Regarding Federal Taxation*
8.2 Form of Opinion of Wolf & Company, P.C. regarding State Taxation**
10.1 Employee Stock Ownership Plan of Mystic Financial, Inc.*
10.2 Form of Employment Agreement between Medford Co-operative Bank
and Robert H. Surabian*
10.3 Form of Employment Agreement between Medford Co-operative Bank
and Ralph W. Dunham*
10.4 Form of Employment Agreement between Medford Co-operative Bank
and John O'Donnell*
10.5 Form of Employment Agreement between Medford Co-operative Bank
and Thomas G. Burke*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and
8.1)*
23.3 Consent and Subscription Rights Opinion of R.P. Financial,
Inc.*
24.1 Powers of Attorney (Included in Signature Page of this
Registration Statement)
27.1 Financial Data Schedule
99.1 Appraisal Report of R.P. Financial, Inc.*
99.2 Draft Marketing Materials in Connection with the Offerings**
*Included with Registration Statement on Form S-1 as filed with the
Commission on August 27, 1997
**Included with Amendment No. 1 to the Registration Statement on
Form S-1 as filed with the Commission on October 21, 1997
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
<PAGE>
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 end 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 a
20% 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 by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, 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 Securities 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 director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, 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
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus 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.
<PAGE>
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 City of Medford, Commonwealth of
Massachusetts on November 5, 1997.
MYSTIC FINANCIAL, INC.
/s/ Robert H. Surabian
----------------------------------------
By: Robert H. Surabian
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert H. Surabian, as their true and lawful
attorney-in-fact in any and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Form S-1 Registration Statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or either one of his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
any rules and regulations promulgated thereunder, this Registration Statement,
has been signed by the following persons in the capacities and on the dates
indicated.
Name Title Date
---- ----- ----
/s/Robert H. Surabian President, Chief Executive November 5, 1997
- ------------------------- Officer and Director
Robert H. Surabian
/s/John J. McGlynn Director and Chairman November 5, 1997
- ------------------------- of the Board
John J. McGlynn
/s/Ralph W. Dunham Chief Accounting Officer, November 5, 1997
- ------------------------- Executive Vice President and
Ralph W. Dunham Treasurer
/s/Lorraine P. Silva Secretary November 5, 1997
- -------------------------
Lorraine P. Silva
/s/Julie Bernardin Director November 5, 1997
- -------------------------
Julie Bernardin
/s/John A. Hackett Director November 5, 1997
- -------------------------
John A. Hackett
<PAGE>
/s/ Richard M. Kazanjian Director November 5, 1997
- -------------------------
Richard M. Kazanjian
/s/ Dennis Raimo Director November 5, 1997
- -------------------------
Dennis Raimo
<PAGE>
[LETTERHEAD OF WOLF COMPANY, P.C.]
================================================================================
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-1 and Prospectus
of Mystic Financial, Inc. (proposed holding company for Medford Co-operative
Bank) of our report dated July 29, 1997, on the consolidated balance sheets of
Medford Co-operative Bank as of June 30, 1997 and 1996, and the related
consolidated statements of income, changes in surplus and cash flows for each of
the years in the three-years period ended June 30, 1997 and to the use of our
name and the statements with respect to us, as appearing under the heading
"Experts" in the Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
November 5, 1997
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,953
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<FED-FUNDS-SOLD> 2,075
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<LOANS> 115,545
<ALLOWANCE> 977
<TOTAL-ASSETS> 149,653
<DEPOSITS> 129,303
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<LIABILITIES-OTHER> 878
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0
0
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<INTEREST-DEPOSIT> 4,700
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<EXPENSE-OTHER> 4,330
<INCOME-PRETAX> 1,268
<INCOME-PRE-EXTRAORDINARY> 1,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741
<EPS-PRIMARY> 0
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<YIELD-ACTUAL> 3.84
<LOANS-NON> 365
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 742
<CHARGE-OFFS> 57
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