UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number 0-23533
MYSTIC FINANCIAL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3401049
- ------------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 HIGH STREET
MEDFORD, MASSACHUSETTS 02155
- ------------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 395-2800
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
As of February 12, 1998, 2,711,125 shares of the registrant's common stock were
outstanding. (See Note 3 to Financial Statements).
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1 Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and
June 30, 1997 1
Consolidated Statements of Income - Three and Six months
ended December 31, 1997 and 1996 2
Consolidated Statement of Changes in Surplus - Six months
ended December 31, 1997 3
Consolidated Statements of Cash Flows - Six months ended
December 31, 1997 and 1996 4
Notes to Consolidated Financial Statements - December 31, 1997 5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ---------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 4,663 $ 3,953
Federal funds sold 27,883 2,075
Short-term investments 15,177 197
------------------------
Total cash and cash equivalents 47,723 6,225
Securities available for sale, at fair value 2,707 3,819
Securities held to maturity, at amortized cost 16,501 17,504
Federal Home Loan Bank stock, at cost 858 858
Loans, net of allowance for loan losses of $1,138 and $977,
respectively. 122,941 114,568
Mortgage loans held for sale, net 898 210
Bank premises and equipment, net 2,642 2,697
Real estate held for investment, net 1,813 1,840
Accrued interest receivable 937 870
Due from Co-operative Central Bank 669 669
Other assets 728 393
------------------------
$ 198,417 $ 149,653
========================
Liabilities and Surplus
Deposits $ 173,262 $ 129,303
Federal Home Loan Bank borrowings 11,518 7,532
Mortgagors' escrow accounts 526 386
Accrued interest payable 312 249
Accrued expenses and other liabilities 187 243
------------------------
Total liabilities 185,805 137,713
------------------------
Surplus 12,352 11,761
Net unrealized gain on securities available for sale, net
of tax effects 260 179
------------------------
Total surplus 12,612 11,940
------------------------
$ 198,417 $ 149,653
========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 1 -
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 2,491 $ 2,075 $ 4,886 $ 4,025
Interest and dividends on investment securities 276 298 570 561
Other interest 170 64 266 183
-------------------------------------------------------
Total interest and dividend income 2,937 2,437 5,722 4,769
-------------------------------------------------------
Interest expense:
Deposits 1,252 1,164 2,488 2,317
Federal Home Loan Bank borrowings 180 38 335 47
-------------------------------------------------------
Total interest expense 1,432 1,202 2,823 2,364
-------------------------------------------------------
Net interest income 1,505 1,235 2,899 2,405
Provision for loan losses 80 60 150 85
-------------------------------------------------------
Net interest income, after provision for loan losses 1,425 1,175 2,749 2,320
-------------------------------------------------------
Other income:
Customer service fees 135 133 262 257
Gain/(Loss) on sales of mortgage loans 16 (59) 23 (37)
Gain/(Loss) on sales of securities available for sale, net (3) 75 138 77
Co-operative Central Bank Share Insurance Fund Special Dividend 49 44 49 44
Miscellaneous 6 (3) 76 78
-------------------------------------------------------
Total other income 203 190 548 419
-------------------------------------------------------
Operating expenses:
Salaries and employee benefits 765 773 1,422 1,404
Occupancy and equipment expenses 95 72 246 187
Data processing expenses 65 42 124 82
Other general and administrative expenses 308 259 511 509
-------------------------------------------------------
Total operating expenses 1,233 1,146 2,303 2,182
-------------------------------------------------------
Income before income taxes 395 219 994 557
Provision for income taxes 159 86 403 225
-------------------------------------------------------
Net income $ 236 $ 133 $ 591 $ 332
=======================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 2 -
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statement of Changes in Surplus
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain on Securities Total
Surplus Available For Sale Surplus
-------- ------------------ --------
(Unaudited)
<S> <C> <C> <C>
Balance at June 30, 1997 $ 11,761 $ 179 $ 11,940
Net income 591 0 591
Change in net unrealized gain on securities
available for sale, net of tax effects 0 81 81
------------------------------------------
Balance at December 31, 1997 $ 12,352 $ 260 $ 12,612
==========================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
- 3 -
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six months ended Six months ended
December 31, 1997 December 31, 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 591 $ 332
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provision for loan losses 150 85
Loss on sales of loans 0 18
Gain on sales of securities available for sale (138) (77)
Depreciation expense 170 155
Mortgage loans originated for sale (3,459) (1,234)
Principal balance of mortgage loans sold 2,771 2,055
Increase in accrued interest receivable (67) (11)
Increase in other assets (378) (137)
Increase in accrued interest payable 63 42
Decreases in accrued expenses and other liabilities (56) (162)
-----------------------------
Net cash provided (used) by operating activities (353) 1,066
-----------------------------
Cash flows from investing activities:
Net decrease in certificates of deposit -- 1,000
Proceeds from maturities of securities held to maturity 1,003 9,900
Purchase of securities held to maturity -- (11,496)
Purchase of securities available for sale (922) (2,432)
Proceeds from sales of securities available for sale 2,296 815
Loans originated, net of payments received (8,523) (12,842)
Proceeds from sale of loans -- 5,343
Purchases of banking premises and equipment (88) (12)
-----------------------------
Net cash used by investing activities (6,234) (9,724)
-----------------------------
Cash flows from financing activities:
Net increase in deposits 43,959 3,336
Proceeds from borrowings 20,054 7,065
Repayment of borrowings (16,068) (2,873)
Net increase in mortgagors' escrow accounts 140 79
-----------------------------
Net cash provided by financing activities 48,085 7,607
-----------------------------
Net change in cash and cash equivalents 41,498 (1,051)
Cash and cash equivalents at beginning of period 6,225 8,771
-----------------------------
Cash and cash equivalents at end of period $ 47,723 $ 7,720
=============================
Supplemental cash flow information:
Interest paid on deposits $ 2,447 $ 2,297
Interest paid on Federal Home Loan Bank borrowings 313 25
Income taxes paid 417 386
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 4 -
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
December 31, 1997
1) Basis of Presentation and Consolidation
The unaudited consolidated interim financial statements of Medford Co-operative
Bank and subsidiaries (the "Bank") presented herein should be read in
conjunction with the consolidated financial statements of Medford Co-operative
Bank for the year ended June 30, 1997, included in the registration statement
on Form S-1 of Mystic Financial, Inc. ("Mystic" or the "Company"), the holding
company for Medford Co-operative Bank. The financial statements of Mystic have
been omitted because Mystic had not issued any stock, had no liabilities and
had not conducted any business other than that of an organizational nature as
of December 31, 1997.
The unaudited consolidated interim financial statements herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, the consolidated financial statements reflect
all adjustments (consisting solely of normal recurring accurals) necessary
for a fair presentation of such information. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) Commitments and Contingencies
At December 31, 1997, the Bank had outstanding commitments to originate loans
amounting to approximately $9.0 million, and unadvanced funds on construction
loans and lines of credit amounting to approximately $390,000 and $3.0 million,
respectively.
3) Stock Conversion
The Bank is a Massachusetts chartered stock co-operative bank founded in 1886.
The Bank converted from a mutual institution on January 8, 1998. Mystic
Financial, Inc. ("Mystic" or the "Company") has been organized at the direction
of the Board of Directors of the Bank and has acquired all of the capital stock
of the Bank. 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 Company issued 2,711,125 shares at an initial offering price of $10.00 per
share on January 8, 1998 raising gross proceeds of $27,111,250 and began
trading on the Nasdaq National Market under the symbol "MYST" on January 9,
1998. Net proceeds of the initial offering were approximately $25.8 million. On
January 8, 1998, the Company loaned approximately $3.2 million to the Company's
Employee Stock Ownership Plan to fund its purchase of 216,890 shares of common
stock of the Company in open-market purchases following completion of the
Conversion.
- 5 -
4) Investment Securities
The following table sets forth the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities $ 2,307 $ 2,707 $ 3,543 $ 3,819
==============================================
Securities held to maturity:
U.S. Government & Federal Agency Obligations $ 13,988 $ 13,989 $ 14,976 $ 14,908
Other bonds & Obligations 2,513 2,519 2,528 2,523
----------------------------------------------
Total $ 16,501 $ 16,508 $ 17,504 $ 17,431
==============================================
</TABLE>
- 6 -
5) Loans
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>
December 31, 1997 June 30, 1997
-------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential mortgage loans $ 97,016 78.9% $ 90,203 78.7%
Commercial real estate loans 18,874 15.4 17,847 15.6
Commercial loans 4,280 3.5 3,677 3.2
Consumer loans 1,717 1.4 1,655 1.4
Home equity loans 1,796 1.4 1,564 1.4
Construction loans 812 0.6 976 0.9
------------------------------------------
Total loans 124,495 101.2 115,922 101.2
Less:
Deferred loan origination fees 26 -- 37 --
Unadvanced principal 390 0.3 340 0.3
Allowance for loan losses 1,138 0.9 977 0.9
------------------------------------------
$ 122,941 100.0% 114,568 100.0%
==========================================
</TABLE>
- 7 -
6) Allowance for Loan Losses
The following table analyzes activity in the Bank's allowance for loan losses
for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $ 119,378 $ 99,593
==============================
Period-end net loans $ 122,941 $ 102,286
==============================
Allowance for loan losses at beginning of period $ 977 $ 742
Provision for loan losses 150 85
Plus recoveries 12 13
Loans charged-off (1) (17)
------------------------------
Allowance for loan losses at end of period $ 1,138 $ 823
==============================
Non-performing loans $ 361 $ 713
==============================
Ratios:
Allowance for loan losses to period end net loans 0.93% 0.80%
Allowance for loan losses to non-performing loans 315.24% 115.43%
Net charge-offs (recoveries) to average loans, net (0.02)% 0.01%
</TABLE>
- 8 -
7) Deposits and Borrowed Funds
The following tables set forth the various types of deposit accounts at the
Bank and the balances in these accounts as well as the borrowings of the Bank
at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
-------------------- --------------------
Amount Percent Amount Percent
--------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits:
Savings deposits $ 76,318 44.1% $ 40,794 31.6%
NOW accounts 25,985 15.0 17,975 13.9
Money market deposits 7,230 4.2 6,489 5.0
Demand deposits 5,782 3.3 4,910 3.8
Certificates of deposits 57,947 33.4 59,135 45.7
------------------------------------------
Total deposits $ 173,262 100.0% $ 129,303 100.0%
==========================================
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston:
Maturities less than one year $ 6,100 53.0% $ 2,100 27.9%
Maturities greater than one year 5,418 47.0% 5,432 72.1%
------------------------------------------
Total borrowed funds $ 11,518 100.0% $ 7,532 100.0%
==========================================
</TABLE>
- 9 -
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
December 31, 1997
General
Medford Co-operative Bank (the "Bank") completed its conversion from a
mutual to a stock institution and was simultaneously acquired by Mystic
Financial, Inc. ("Mystic" or the "Company") on January 8, 1998. The following
discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes thereto included within this report.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties
include changes in interest rates generally and changes in real estate values
and other economic conditions in eastern Massachusetts, the Bank's principal
market area. The Bank undertakes no obligation to publicly release the results
of any revisions to those forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Additional information on potential factors
which could affect the Bank's financial results are included in the
registration statement on Form S-1 of Mystic.
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 Federal Home Loan Bank of Boston.
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 income
and operating expenses. Other income consists primarily of service fees, loan
servicing and other loan fees, and gains on sales of investment securities
available for sale. 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 the financial institution's regulatory agencies. Deposit
flows and the cost of funds are influenced by interest rates on competing
- 10 -
investments and general market rates of interest. Lending activities are
affected by the demand for real estate financing 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.
In addition to those factors previously disclosed by the Company and Bank
and those factors identified elsewhere herein, the following factors could
cause actual results to differ materially from such forward-looking statements:
continued pricing pressures on loan and deposit products, actions of
competitors, changes in economic conditions, the extent and timing of actions
of the Federal Reserve Board, customer disintermediation, customers' acceptance
of the Bank's products and services, the extent and timing of legislative and
regulatory actions and reforms, and the ability of the Company and Bank to
effectively deploy the capital it raised in its initial offering.
Average Balances, Interest and Average Yields
The following tables set forth certain information relating to the Bank's
average balance sheet and reflect the interest earned on assets and interest
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 tables. Interest earned on loan
portfolios is net of reserves for uncollected interest. The investment
securities in the following tables are presented at amortized cost.
- 11 -
MEDFORD COOPERATIVE BANK
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
3 MONTHS ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
Three Months Ended December 31, 1997 Three Months Ended December 31, 1996
-------------------------------------- -------------------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE INCOME/EXPENSE RATE BALANCE INCOME/EXPENSE RATE
--------- -------------- ------- --------- -------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net $ 121,425 $ 2,491 8.21% $ 101,384 $ 2,075 8.18%
Investments 20,324 276 5.43% 20,782 298 5.74%
Other earning assets 11,865 170 5.73% 5,010 64 5.11%
-------------------------------------------------------------------------------
Total interest-earning assets 153,614 2,937 7.65% 127,176 2,437 7.66%
------- -------
Cash and due from banks 3,150 1,898
Other assets 6,085 5,703
--------- ---------
Total assets $ 162,849 $ 134,777
========= =========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 46,786 306 2.62% $ 39,841 236 2.37%
Now accounts 20,696 84 1.62% 13,732 66 1.92%
Money market deposits 6,669 44 2.64% 6,000 39 2.60%
Certificates of deposit 58,366 818 5.61% 56,190 823 5.86%
----------------------- -----------------------
Total interest-bearing deposits 132,517 1,252 3.78% 115,763 1,164 4.02%
FHLB-borrowings 11,523 180 6.25% 2,425 38 6.27%
----------------------- -----------------------
Total interest-bearing liabilities 144,040 1,432 3.98% 118,188 1,202 4.07%
------- -------
Demand deposit accounts 5,551 4,423
Other liabilities 1,003 826
--------- ---------
Total liabilities 150,594 123,437
Surplus 12,255 11,340
--------- ---------
Total liabilities and surplus $ 162,849 $ 134,777
========= =========
Net interest income $ 1,505 $ 1,235
======= =======
Interest rate spread 3.67% 3.59%
Net interest margin 3.92% 3.88%
Interest earning assets/interest-bearing
liabilities 1.07x 1.08x
</TABLE>
- 12 -
MEDFORD COOPERATIVE BANK
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
6 MONTHS ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
Six Months Ended December 31, 1997 Six Months Ended December 31, 1996
----------------------------------- -----------------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE INCOME/EXPENSE RATE BALANCE INCOME/EXPENSE RATE
--------- -------------- ------ --------- -------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net $ 119,378 $ 4,886 8.19% $ 99,593 $ 4,025 8.08%
Investments 20,276 570 5.62% 19,157 561 5.86%
Other earning assets 9,710 266 5.48% 6,760 183 5.41%
---------------------- ----------------------
Total interest-earning assets 149,364 5,722 7.66% 125,510 4,769 7.60%
------- -------
Cash and due from banks 2,924 1,917
Other assets 5,990 5,701
--------- ---------
Total assets $ 158,278 $ 133,128
========= =========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 43,815 537 2.45% $ 40,051 471 2.35%
Now accounts 19,896 170 1.71% 13,866 144 2.08%
Money market deposits 6,595 87 2.64% 5,996 78 2.60%
Certificates of deposit 58,682 1,694 5.77% 55,469 1,624 5.86%
---------------------- ----------------------
Total interest-bearing deposits 128,988 2,488 3.86% 115,382 2,317 4.02%
FHLB-borrowings 10,711 335 6.26% 1,476 47 6.37%
---------------------- ----------------------
Total interest-bearing liabilities 139,699 2,823 4.04% 116,858 2,364 4.05%
------- -------
Demand deposit accounts 5,533 4,242
Other liabilities 920 788
--------- ---------
Total liabilities 146,152 121,888
Surplus 12,126 11,240
--------- ---------
Total liabilities and surplus $ 158,278 $ 133,128
========= =========
Net interest income $ 2,899 $ 2,405
======= =======
Interest rate spread 3.62% 3.55%
Net interest margin 3.88% 3.83%
Interest earning asset/interest-bearing liabilities 1.07x 1.07x
</TABLE>
- 13 -
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.
- 14 -
<TABLE>
<CAPTION>
Six Months Ended December 31, Three Months Ended December 31,
1997 vs. 1996 1997 vs 1996
Increase (decrease) Increase (decrease)
----------------------------- -------------------------------
Due to Due to
------------------ ------------------
Rate Volume Total Rate Volume Total
----- ------ ----- ---- ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans, net $ 55 $ 806 $ 861 $ 7 $ 409 $ 416
Investments (24) 33 9 (16) (6) (22)
Other earning assets 2 81 83 8 98 106
-------------------------------------------------------------
Total 33 920 953 (1) 501 500
-------------------------------------------------------------
Interest expense:
Deposits (95) 266 171 (73) 161 88
Borrowed funds (2) 290 288 -- 142 142
-------------------------------------------------------------
Total (97) 556 459 (73) 303 230
-------------------------------------------------------------
Change in net interest income $ 130 $ 364 $ 494 $ 72 $ 198 $ 270
=============================================================
</TABLE>
- 15 -
Financial Condition and Results of Operations
Comparison of Financial Condition at December 31, 1997 and June 30, 1997
The Bank's total assets amounted to $198.4 million at December 31, 1997
from $149.7 million at June 30, 1997, an increase of $48.8 million or 32.6%.
The increase in total assets is primarily attributable to receipt of stock
subscription deposits which were held on a contingent basis pending closing of
the offering which resulted in a $25.8 million increase in federal funds sold
and a $15.0 million increase in short-term investments. Federal funds sold were
$27.9 million at December 31, 1997 compared to $2.1 million at June 30, 1997.
Short-term investments were $15.2 million at December 31, 1997 compared to
$197,000 at June 30, 1997. Total net loans increased by $8.4 million or 7.3% to
$122.9 million or 62.0% of total assets at December 31, 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 $2.1 million or 9.9% to $19.2 million at December
31, 1997 from $21.3 million at June 30, 1997.
Total deposits increased by $44.0 million or 34.0% to $173.3 million at
December 31, 1997 from $129.3 million at June 30, 1997. Total deposits
increased reflecting the receipt of stock subscription payments which were held
by the Bank as deposits. Total borrowings increased by $4.0 million to $11.5
million at December 31, 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 $672,000 or 5.6% to
$12.6 million at December 31, 1997 from $11.9 million at June 30, 1997 as a
result of net income of $591,000 and an increase in the net unrealized gain on
securities available for sale of $81,000.
Comparison of the Operating Results for the Three and Six Months Ended
December 31, 1997 and 1996
Net Income. Net income was $236,000 and $591,000 for the three and six
months ended December 31, 1997, respectively, compared to $133,000 and $332,000
for the corresponding periods a year ago. Return on average assets was .58% and
.75% for the three and six months ended December 31, 1997, respectively,
compared to .39% and .50% for the corresponding periods a year ago. Return on
average surplus was 7.70% and 9.75% for the three and six months ended December
31, 1997, respectively, compared to 4.69% and 5.91% for the corresponding
periods a year ago.
The increase in net income for the three months ended December 31, 1997
compared to the three months ended December 31, 1996 was attributable to an
increase in net interest income of $270,000 and an increase of $13,000 in other
income, which were offset by an increase in provision for loan losses of
$20,000 and an increase in operating expenses of $87,000. The increase in net
income for the six months ended December 31, 1997 compared to the six months
ended December 31, 1996 was attributable to an increase of $494,000 in net
interest income and an increase of $129,000 in other income, offset by an
increase of $65,000 in provision for loan losses, and an increase of $121,000
in operating expenses.
- 16 -
Interest Income. Total interest and dividend income increased by $500,000
or 20.5% to $2.9 million for the three months ended December 31, 1997 from $2.4
million for the three months ended December 31, 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 December 31, 1997 was $121.4 million
compared to $101.4 million for the three months ended December 31, 1996. The
average yield on net loans was 8.21% for the three months ended December 31,
1997 compared to 8.18% for the three months ended December 31, 1996.
Total interest and dividend income increased by $953,000 or 20.0% to $5.7
million for the six months ended December 31, 1997 from $4.8 million for the
six months ended December 31, 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 six months ended December 31, 1997 was $119.4 million compared to
$99.6 million for the six months ended December 31, 1996. The average yield on
net loans was 8.19% for the six months ended December 31, 1997 compared to
8.08% for the six months ended December 31, 1996.
Interest Expense. Total interest expense increased by $230,000 or 19.1%
to $1.4 million for the three months ended December 31, 1997 from $1.2 million
for the three months ended December 31, 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 $16.8 million or 14.5% to $132.5 million
for the three months ended December 31, 1996. Average borrowings increased by
$9.1 million to $11.5 million for the three months ended December 31, 1997 from
$2.4 million for the three months ended December 31, 1996.
Total interest expense increased by $459,000 or 19.4% to $2.8 million for
the six months ended December 31, 1997 from $2.4 million for the six months
ended December 31, 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 $13.6 million or 11.8% to $129.0 million for the six months ended
December 31, 1997 from $115.4 million for the six months ended December 31,
1997. Average borrowings increased by $9.2 million to $10.7 million for the six
months ended December 31, 1997 from $1.5 million for the six months ended
December 31, 1996.
Net Interest Income. Net interest income for the three months ended
December 31, 1997 was $1.5 million as compared to $1.2 million for the three
months ended December 31, 1996. The $270,000 or 21.9% increase can be
attributed to a combination of the $500,000 increase in interest and dividend
income and the $230,000 increase in interest expense on deposits and borrowed
funds. The average yield on interest earning assets decreased 1 basis point to
7.65% for the three months ended December 31, 1997 from 7.66% for the three
- 17 -
months ended December 31, 1996, while the average cost on interest-bearing
liabilities decreased by 9 basis points to 3.98% for the three months ended
December 31, 1997 from 4.07% for the three months ended December 31, 1996. As a
result, the interest rate spread increased to 3.67% for the three months ended
December 31, 1997 from 3.59% for the three months ended December 31, 1996.
Net interest income for the six months ended December 31, 1997 was $2.9
million as compared to $2.4 million for the six months ended December 31, 1996.
The $494,000 or 20.5% increase can be attributed to a combination of the
$953,000 increase in interest and dividend income and the $459,000 increase in
interest expense on deposits and borrowed funds. The average yield on interest
earning assets increased 6 basis points to 7.66% for the six months ended
December 31, 1997 from 7.60% for the six months ended December 31, 1996, while
the average cost on interest-bearing liabilities decreased by 1 basis point to
4.04% for the six months ended December 31, 1997 from 4.05% for the six months
ended December 31, 1996. As a result, the interest rate spread increased to
3.62% for the six months ended December 31, 1997 from 3.55% for the six months
ended December 31, 1996.
Provision for Loan Losses. The provision for loan losses for the three
and six months ended December 31, 1997 was $80,000 and $150,000, respectively,
compared to $60,000 and $85,000 for the same periods a year ago. At December
31, 1997, the balance of the allowance for loan losses was $1,138,000 or .93%
of total loans. During the six months ended December 31, 1997, $1,000 was
charged against allowance for loan losses while $12,000 in recoveries was
credited to the allowance for loan losses. At December 31, 1996, the balance of
the allowance for loan loses was $823,000 or .80% of total loans. During the
six months ended December 31, 1996, $17,000 was charged against allowance for
loan losses while $13,000 in recoveries was credited to the allowance for loan
losses. Non-performing loans at December 31, 1997 and 1996 were $361,000 and
$713,000, respectively.
Other Income. Other income was $203,000 for the three months ended
December 31, 1997 compared to $190,000 for the three months ended December 31,
1996. The $13,000 or 6.8% increase was primarily the result of a $78,000
decrease in gain on sales of investment securities, partially offset by an
increase in the gain on the sale of mortgage loans of $75,000. Other income was
$548,000 for the six months ended December 31, 1997 compared to $419,000 for
the six months ended December 31, 1996. The $129,000 or 30.8% increase was
primarily the result of an increase in the gain on the sale of mortgage loans
of $60,000 and a $61,000 increase in gain on sales of investment securities.
Operating Expenses. Operating expenses increased to $1.2 million for the
three months ended December 31, 1997 from $1.1 million for the three months
ended December 31, 1996. The increase of $87,000 or 7.6% mainly resulted from a
general increase in operating expenses. Operating expense increased to $2.3
million for the six months ended December 31, 1997 from $2.2 million for the
six months ended December 31, 1996. The increase of $121,000 or 5.5% 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.
- 18 -
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. Banking institutions have generally sought
to reduce their exposure to adverse changes in interest rates by attempting to
achieve a closer match between the periods in which their 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. Thrift institutions have historically operated in a
mismatched position with interest-sensitive liabilities exceeding
interest-sensitive assets in the short-term time periods. As noted above, one
of the principal goals of the Bank's asset/liability program is to more closely
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. Historically, the Bank attempts to sell 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 Federal Home Loan Bank of Boston to match-fund the
maturity or repricing interval of several larger commercial real estate
mortgages.
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.
- 19 -
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 December 31, 1997 was
36.0%.
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.
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 form the Federal
Home Loan Bank of Boston. At December 31, 1997, the Bank had borrowings of
$11.5 million from the FHLB of Boston.
At December 31, 1997, the Bank had $9.0 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 $47.7 million at December 31, 1997. Based upon historical experience,
management believes that a significant portion of such deposits will remain
with the Bank.
At December 31, 1997, the Bank exceeded all of its regulatory capital
requirements.
- 20 -
Year 2000
The Company and the Bank are aware of the issues associated with the
programing 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 that 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 and the Bank's primary
processing vendors that plans are being developed to address processing of
transactions in the year 2000. Although the Company cannot currently estimate
the extent to which any failure to process date information correctly could
have a material adverse effect on the Company's business, operations or
financial condition, management believes that, if not adequately addressed,
such delays, errors or failures could have a significant adverse impact on
the financial condition and results of operation of the Company.
In addition, monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Bank. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for year 2000 compliance, and any
resulting costs for developing and implementing contingency plans for critical
software products which are not enhanced. Indirect costs will principally
consist of the time devoted by existing employees in monitoring software vendor
progress, testing enhanced software products and implementing any necessary
contingency plans. Management has not yet assessed the year 2000 compliance
expense and related potential affect on the Company's or the Bank's earnings.
Actual costs will be charged to earnings as incurred. Such costs have not been
material to date.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
- 21 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MYSTIC FINANCIAL, INC.
Date: February 13, 1998 By: /s/ Robert H. Surabian
--------------------------- ----------------------------------------
Robert H. Surabian
President and Chief Executive Officer
Date: February 13, 1998 By: /s/ Ralph W. Dunham
--------------------------- ----------------------------------------
Ralph W. Dunham
Executive Vice-President, Chief
Financial Officer, and Treasurer
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