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 March 31, 1998
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 X NO
--- ---
As of May 8, 1998, 2,711,125 shares of the registrant's common stock were
outstanding (See Note 3 to Unaudited Consolidated Financial Statements).
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Financial Statements:
Consolidated Balance Sheets - March 31, 1998
and June 30, 1997 1
Consolidated Statements of Income - Three and Nine
Months Ended March 31, 1998 and 1997 2
Consolidated Statement of Changes in Stockholders'
Equity-Nine Months Ended March 31, 1998 3
Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements -
March 31, 1998 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 22
PART II OTHER INFORMATION
-----------------
Item 2 Changes in Securities and Use of Proceeds 22
Item 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 23
----------
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 4,284 $ 3,953
Federal funds sold 16,061 2,075
Short-term investments 3,102 197
-------------------------
Total cash and cash equivalents 23,447 6,225
Securities available for sale, at fair value 12,127 3,819
Securities held to maturity, at amortized cost 14,006 17,504
Federal Home Loan Bank stock, at cost 997 858
Loans, net of allowance for loan losses of $1,204 and $977,
respectively 130,640 114,568
Mortgage loans held for sale, net 260 210
Bank premises and equipment, net 2,597 2,697
Real estate held for investment, net 1,799 1,840
Accrued interest receivable 1,029 870
Due from Co-operative Central Bank 669 669
Other assets 217 393
-------------------------
$187,788 $149,653
=========================
Liabilities and Stockholders' Equity
Deposits $137,228 $129,303
Federal Home Loan Bank borrowings 13,511 7,532
Mortgagors' escrow accounts 532 386
Accrued interest payable 280 249
Accrued expenses and other liabilities 440 243
-------------------------
Total liabilities 151,991 137,713
-------------------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued - -
Common stock $.01 par value, 5,000,000 shares authorized,
2,711,125 shares issued at March 31, 1998 27 -
Additional paid-in capital 25,733 -
Retained earnings 12,819 11,761
-------------------------
38,579 11,761
Net unrealized gain on securities available for sale, net
of tax effects 412 179
Loan due from ESOP (3,194) -
-------------------------
Total stockholders' equity 35,797 11,940
-------------------------
$187,788 $149,653
=========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $2,574 $2,103 $7,460 $6,128
Interest and dividends on investment securities 288 293 858 854
Other interest 309 85 575 268
------------------------------------------------------------
Total interest and dividend income 3,171 2,481 8,893 7,250
------------------------------------------------------------
Interest expense:
Deposits 1,223 1,169 3,711 3,486
Federal Home Loan Bank borrowings 167 61 502 108
------------------------------------------------------------
Total interest expense 1,390 1,230 4,213 3,594
------------------------------------------------------------
Net interest income 1,781 1,251 4,680 3,656
Provision for loan losses 65 37 215 122
------------------------------------------------------------
Net interest income, after provision for loan losses 1,716 1,214 4,465 3,534
------------------------------------------------------------
Other income:
Customer service fees 128 112 390 369
Gain (loss) on sales of mortgage loans 12 2 35 (35)
Gain on sales of securities available for sale, net 46 41 184 118
Co-operative Central Bank Share Insurance Fund Special
Dividend - - 49 44
Miscellaneous 66 53 142 131
------------------------------------------------------------
Total other income 252 208 800 627
------------------------------------------------------------
Operating expenses:
Salaries and employee benefits 743 646 2,165 2,050
Occupancy and equipment expenses 120 114 366 301
Data processing expenses 66 57 190 164
Other general and administrative expenses 264 185 775 669
------------------------------------------------------------
Total operating expenses 1,193 1,002 3,496 3,184
------------------------------------------------------------
Income before income taxes 775 420 1,769 977
Provision for income taxes 308 170 711 395
------------------------------------------------------------
Net income $ 467 $ 250 $1,058 $ 582
============================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands)
<TABLE>
<CAPTION>
Additional Net Unrealized Total
Common Paid in Retained Gain on Securities Loan Due Stockholders'
Stock Capital Earnings Available for Sale From ESOP Equity
------ ---------- -------- ------------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ - $ - $11,761 $179 $ - $11,940
Net proceeds from sale of
common stock 27 25,733 - - - 25,760
Loan to ESOP - - - - (3,194) (3,194)
Net income - - 1,058 - - 1,058
Change in net unrealized
gain on securities available
for sale, net of tax effects - - - 233 - 233
--------------------------------------------------------------------------------
Balance at March 31, 1998 $27 $25,733 $12,819 $412 $(3,194) $35,797
================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
March 31, 1998 March 31, 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,058 $ 582
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 215 122
Loss on sales of loans - 18
Gain on sales of securities available for sale (184) (118)
Depreciation expense 251 244
Mortgage loans originated for sale (5,396) (959)
Principal balance of mortgage loans sold 5,346 1,926
Increase in accrued interest receivable (159) (19)
Decrease in other assets 50 91
Increase in accrued interest payable 31 48
Increase (decrease) in accrued expenses and
other liabilities 197 (79)
-----------------------------
Net cash provided by operating activities 1,409 1,856
-----------------------------
Cash flows from investing activities:
Proceeds from certificates of deposit - 1,000
Loan to ESOP (3,194) -
Proceeds from maturities of securities held to
maturity 5,001 11,947
Purchase of securities held to maturity (1,503) (12,513)
Purchase of securities available for sale (13,155) (3,003)
Proceeds from sales of securities available for sale 5,390 2,327
Loans originated, net of payments received (16,287) (16,448)
Proceeds from sale of loans - 5,343
Purchase of FHLB stock (139) (70)
Purchases of banking premises and equipment (110) (129)
-----------------------------
Net cash used by investing activities (23,997) (11,546)
-----------------------------
Cash flows from financing activities:
Net increase in deposits 7,925 5,654
Proceeds from borrowings 27,055 8,010
Repayment of borrowings (21,076) (3,669)
Proceeds from sale of common stock 25,760 -
Net increase in mortgagors' escrow accounts 146 84
-----------------------------
Net cash provided by financing activities 39,810 10,079
-----------------------------
Net change in cash and cash equivalents 17,222 389
Cash and cash equivalents at beginning of period 6,225 8,771
-----------------------------
Cash and cash equivalents at end of period $ 23,447 $ 9,160
=============================
Supplemental cash flow information:
Interest paid on deposits $ 3,680 $ 3,438
Interest paid on Federal Home Loan Bank
borrowings $ 502 $ 108
Income taxes paid $ 659 $ 541
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
March 31, 1998
1) Basis of Presentation and Consolidation
The unaudited consolidated interim financial statements of Mystic Financial,
Inc. and subsidiary ("Mystic" or the "Company") presented herein should be
read in conjunction with the consolidated financial statements of Medford
Co-operative Bank (the "Bank") for the year ended June 30, 1997, included in
the registration statement on Form S-1 of Mystic Financial, Inc., the
holding company for Medford Co-operative Bank. The operating results for
the period ended March 31, 1998 are those of the Bank and Company. Mystic
had not issued any stock and had not conducted any business other than that
of an organizational nature until January 8, 1998 when Mystic became the
Bank's holding company in connection with the Bank's conversion from mutual
to stock form. Operating results prior to January 8, 1998 include only the
Bank and not the Company.
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 March 31, 1998, the Bank had outstanding commitments to originate loans
amounting to approximately $8.9 million, and unadvanced funds on
construction loans and lines of credit amounting to approximately $246,000
and $3.1 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.
4) Earnings Per Share
Earnings per share data is not presented for the three and nine months ended
March 31, 1998 since there were no outstanding shares of common stock until
the Conversion on January 8, 1998.
5) Investment Securities
The following table sets forth the Company's investment securities at the
dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government & Federal Agency
Obligations $ 9,049 $ 9,019 $ - $ -
Marketable equity securities 2,443 3,108 3,543 3,819
-------------------------------------------
Total $11,492 $12,127 $ 3,543 $ 3,819
===========================================
Securities held to maturity:
U.S. Government & Federal
Agency Obligations $11,496 $11,517 $14,976 $14,908
Other bonds & obligations 2,510 2,519 2,528 2,523
-------------------------------------------
Total $14,006 $14,036 $17,504 $17,431
===========================================
</TABLE>
6) Loans
The following table presents selected data relating to the composition of
the Company's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
------------------- -------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential mortgage loans $ 99,682 76.3% $ 90,203 78.7%
Commercial real estate loans 23,231 17.8 17,847 15.6
Commercial loans 4,695 3.6 3,677 3.2
Consumer loans 1,832 1.4 1,655 1.4
Home equity loans 1,616 1.2 1,564 1.4
Construction loans 1,050 0.8 976 0.9
----------------------------------------
Total loans 132,106 101.1 115,922 101.2
Less:
Deferred loan origination fees 16 - 37 -
Unadvanced principal 246 0.2 340 0.3
Allowance for loan
losses 1,204 0.9 977 0.9
----------------------------------------
$130,640 100.0% $114,568 100.0%
========================================
</TABLE>
7) Allowance for Loan Losses
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $121,752 $100,930
==========================
Period-end net loans $130,640 $105,847
==========================
Allowance for loan losses at beginning of period $ 977 $ 742
Provision for loan losses 215 122
Plus recoveries 14 18
Loans charged-off (2) (25)
--------------------------
Allowance for loan losses at end of period $ 1,204 $ 857
==========================
Non-performing loans $ 473 $ 513
==========================
Ratios:
Allowance for loan losses to period end net loans 0.91% 0.81%
Allowance for loan losses to non-performing loans 254.55% 167.06%
Net charge-offs (recoveries) to average loans, net (0.01)% 0.01%
</TABLE>
8) Deposits and Borrowed Funds
The following tables set forth the various types of deposit accounts at the
Company and the balances in these accounts as well as the borrowings of the
Company at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
------------------- -------------------
Deposits: Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Savings deposits $ 39,412 28.7% $ 40,794 31.6%
NOW accounts 27,549 20.1 17,975 13.9
Money market deposits 6,506 4.7 6,489 5.0
Demand deposits 6,427 4.7 4,910 3.8
Certificates of deposits 57,334 41.8 59,135 45.7
----------------------------------------
Total deposits $137,228 100.0% $129,303 100.0%
========================================
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston:
Maturities less than one year $ 4,100 30.3% 2,100 27.9%
Maturities greater than one year 9,411 69.7% 5,432 72.1%
----------------------------------------
Total borrowed funds $ 13,511 100.0% $ 7,532 100.0%
========================================
</TABLE>
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1998
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 Company 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 Company's
financial results are included in the registration statement on Form S-1 of
Mystic.
The Company'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 Company'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 Company, 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 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
Company'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.
The investment securities in the following tables are presented at amortized
cost.
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
---------------------------------- ----------------------------------
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 $126,501 $2,574 8.14% $103,605 $2,103 8.12%
Investments 21,114 288 5.46% 21,162 293 5.54%
Other earning assets 24,703 309 5.00% 6,283 85 5.41%
--------------------- ---------------------
Total interest-earning assets 172,318 3,171 7.36% 131,050 2,481 7.57%
------ ------
Cash and due from banks 2,492 1,987
Other assets 6,421 5,748
-------- --------
Total assets $181,231 $138,785
======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 44,669 310 2.78% $ 39,845 270 2.71%
Now accounts 22,968 89 1.55% 13,545 64 1.89%
Money market deposits 6,795 45 2.65% 6,017 38 2.53%
Certificates of deposit 57,381 779 5.43% 58,462 797 5.45%
--------------------- ---------------------
Total interest-bearing deposits 131,813 1,223 3.71% 117,869 1,169 3.97%
FHLB borrowings 10,969 167 6.09% 3,967 61 6.15%
--------------------- ---------------------
Total interest-bearing liabilities 142,782 1,390 3.89% 121,836 1,230 4.04%
------ ------
Demand deposit accounts 5,711 4,698
Other liabilities 2,841 741
-------- --------
Total liabilities 151,334 127,275
Stockholders' equity 29,897 11,510
-------- --------
Total liabilities and stockholders' equity $181,231 $138,785
======== ========
Net interest income $1,781 $1,251
====== ======
Interest rate spread 3.47% 3.53%
Net interest margin 4.13% 3.82%
Interest earning assets/interest-bearing liabilities 1.21x 1.08x
</TABLE>
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1998 Nine Months Ended March 31, 1997
---------------------------------- ----------------------------------
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 $121,752 $7,460 8.17% $100,930 $6,128 8.10%
Investments 20,554 858 5.57% 19,825 854 5.74%
Other earning assets 14,708 575 5.21% 6,602 268 5.41%
--------------------- ---------------------
Total interest-earning assets 157,014 8,893 7.55% 127,357 7,250 7.59%
------ ------
Cash and due from banks 2,780 1,940
Other assets 6,135 5,716
-------- --------
Total assets $165,929 $135,013
======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 44,100 847 2.56% $ 39,983 838 2.79%
Now accounts 20,920 259 1.65% 13,759 207 2.01%
Money market deposits 6,661 132 2.97% 6,003 117 2.60%
Certificates of deposit 58,249 2,473 5.66% 56,466 2,324 5.49%
--------------------- ---------------------
Total interest-bearing deposits 129,930 3,711 3.81% 116,211 3,486 4.00%
FHLB borrowings 10,797 502 6.20% 2,306 108 6.24%
--------------------- ---------------------
Total interest-bearing liabilities 140,727 4,213 3.99% 118,517 3,594 4.04%
Demand deposit accounts 5,592 4,394
Other liabilities 398 768
-------- --------
Total liabilities 146,717 123,679
Stockholders' equity 19,212 11,334
-------- --------
Total liabilities and stockholders' equity $165,929 $135,013
======== ========
Net interest income $4,680 $3,656
====== ======
Interest rate spread 3.56% 3.55%
Net interest margin 3.97% 3.83%
Interest earning assets/interest-bearing liabilities 1.12x 1.07x
</TABLE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in interest income and interest expense of the Company 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>
Nine Months Ended March 31, Three Months Ended March 31,
1998 vs. 1997 1998 vs 1997
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 $ 53 $1,279 $1,332 $ 5 $466 $471
Investments (36) 40 4 (4) (1) (5)
Other earning assets (10) 317 307 (6) 230 224
--------------------------------------------------------
Total 7 1,636 1,643 (5) 695 690
--------------------------------------------------------
Interest expense:
Deposits (169) 394 225 (79) 133 54
Borrowed funds (1) 395 394 (2) 108 106
--------------------------------------------------------
Total (170) 789 619 (81) 241 160
--------------------------------------------------------
Change in net interest income $ 177 $ 847 $1,024 $ 76 $454 $530
========================================================
</TABLE>
Financial Condition and Results of Operations
Comparison of Financial Condition at March 31, 1998 and June 30, 1997
The Bank's total assets amounted to $187.8 million at March 31, 1998
compared to $149.7 million at June 30, 1997, an increase of $38.1 million or
25.5%. The increase in total assets is primarily attributable to a $14.0
million increase in federal funds sold, a $2.9 million increase in short-
term investments, and an increase in net loans of $16.1 million.
Federal funds sold were $16.1 million at March 31, 1998 compared to
$2.1 million at June 30, 1997. Short-term investments were $3.1 million at
March 31, 1998 compared to $197,000 at June 30, 1997. Federal funds sold
and short-term investments increased at March 31, 1998 due to the Bank's
need to maintain liquidity for a large deposit relationship with a law firm
which maintains short-term deposits in real estate conveyancing accounts and
has significant fluctuations in its deposit account balances.
Net loans increased by $16.1 million or 14.0% to $130.6 million or
69.6% of total assets at March 31, 1998 as compared to $114.6 million or
76.6% of total assets at June 30, 1997 as the Bank continued its emphasis
on originating and retaining residential mortgage loans and commercial and
commercial real estate loans. Investment securities held by the Bank
increased by $4.8 million or 22.6% to $26.1 million at March 31, 1998 from
$21.3 million at June 30, 1997.
Total deposits increased by $7.9 million or 6.1% to $137.2 million at
March 31, 1998 from $129.3 million at June 30, 1997 as a result of a general
increase in deposit balances. Total borrowings increased by $6.0 million
to $13.5 million at March 31, 1998 from $7.5 million at June 30, 1997. The
Bank's continued use of borrowed funds reflects additional funding needed to
support its growth in net loans. Net loan growth exceeded the increase in
total deposits by $8.1 million from June 30, 1997 through March 31, 1998.
Stockholders' equity increased by $23.9 million to $35.8 million at March
31, 1998 from $11.9 million at June 30, 1997 as a result of net proceeds
from the issuance of common stock of $25.8 million, net income of $1,058,000
and an increase in the net unrealized gain on securities available for sale
of $233,000. These increases were offset by the Company's $3.2 million loan
to the Employee Stock Ownership Plan ("ESOP").
Comparison of the Operating Results for the Three and Nine Months Ended
March 31, 1998 and 1997
Net Income. Net income was $467,000 and $1,058,000 for the three and
nine months ended March 31, 1998, respectively, compared to $250,000 and
$582,000 for the corresponding periods a year ago. Return on average assets
was 1.03% and .85% for the three and nine months ended March 31, 1998,
respectively, compared to .72% and .57% for the corresponding periods a year
ago. Return on average equity was 6.25% and 7.34% for the three and nine
months ended March 31, 1998, respectively, compared to 8.69% and 6.85% for
the corresponding periods a year ago.
The increase in net income for the three months ended March 31, 1998
compared to the three months ended March 31, 1997 was attributable to an
increase in net interest income of $530,000 and an increase of $44,000 in
other income, which were offset by an increase in provision for loan losses
of $28,000 and an increase in operating expenses of $191,000. The increase
in net income for the nine months ended March 31, 1998 compared to the nine
months ended March 31, 1997 was attributable to an increase of $1.0 million
in net interest income and an increase of $173,000 in other income, offset
by an increase of $93,000 in provision for loan losses, and an increase of
$312,000 in operating expenses.
Interest Income. Total interest and dividend income increased by
$690,000 or 27.8% to $3.2 million for the three months ended March 31, 1998
from $2.5 million for the three months ended March 31, 1997. 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 March 31, 1998 was
$126.5 million compared to $103.6 million for the three months ended March
31, 1997. The average yield on net loans was 8.14% for the three months
ended March 31, 1998 compared to 8.12% for the three months ended March 31,
1997.
Total interest and dividend income increased by $1.6 million or 22.7%
to $8.9 million for the nine months ended March 31, 1998 from $7.3 million
for the nine months ended March 31, 1997. 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 nine months ended March 31, 1998 was $121.8 million compared
to $100.9 million for the nine months ended March 31, 1997. The average
yield on net loans was 8.17% for the nine months ended March 31, 1998
compared to 8.10% for the nine months ended March 31, 1997.
Interest Expense. Total interest expense increased by $160,000 or
13.0% to $1.4 million for the three months ended March 31, 1998 from $1.2
million for the three months ended March 31, 1997. 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 $13.9 million or
11.8% to $131.8 million for the three months ended March 31, 1998. Average
borrowings increased by $7.0 million to $11.0 million for the three months
ended March 31, 1998 from $4.0 million for the three months ended March 31,
1997.
Total interest expense increased by $619,000 or 17.2% to $4.2 million
for the nine months ended March 31, 1998 from $3.6 million for the nine
months ended March 31, 1997. The primary reasons for the increase in
interest expense were the increase in the overall deposit balances and an
increase in Federal Home Loan Bank of Boston borrowings. Average interest-
bearing deposits increased by $13.7 million or 11.8% to $129.9 million for
the nine months ended March 31, 1998. Average borrowings increased by $8.5
million to $10.8 million for the nine months ended March 31, 1998 from $2.3
million for the nine months ended March 31, 1997.
Net Interest Income. Net interest income for the three months ended
March 31, 1998 was $1.8 million as compared to $1.3 million for the three
months ended March 31, 1997. The $530,000 or 42.4% increase can be
attributed to a combination of the $690,000 increase in interest and
dividend income and the $160,000 increase in interest expense on deposits
and borrowed funds. The average yield on interest earning assets decreased
21 basis points to 7.36% for the three months ended March 31, 1998 from
7.57% for the three months ended March 31, 1997, while the average cost on
interest-bearing liabilities decreased by 15 basis points to 3.89% for the
three months ended March 31, 1998 from 4.04% for the three months ended
March 31, 1997. As a result, the interest rate spread decreased to 3.47%
for the three months ended March 31, 1998 from 3.53% for the three months
ended March 31, 1997. The interest rate spread also declined due to the
receipt of net conversion proceeds which have been invested in federal funds
sold, short-term investments and investment securities at interest rates
lower than the Company's average yield on loans. The Company's net loan to
total assets ratio also declined to 69.6% at March 31, 1998 from 76.6% at
June 30, 1997 as a result of the conversion proceeds being invested in
federal funds sold, short-term investments and investment securities.
Net interest income for the nine months ended March 31, 1998 was $4.7
million as compared to $3.7 million for the nine months ended March 31,
1997. The $1.0 million or 28.0% increase can be attributed to a combination
of the $1.6 million increase in interest and dividend income and the
$619,000 increase in interest expense on deposits and borrowed funds. The
average yield on interest earning assets decreased 4 basis points to 7.55%
for the nine months ended March 31, 1998 from 7.59% for the nine months
ended March 31, 1997, while the average cost on interest-bearing liabilities
decreased by 5 basis points to 3.99% for the nine months ended March 31,
1998 from 4.04% for the nine months ended March 31, 1997. As a result, the
interest rate spread was 3.56% for the nine months ended March 31, 1998 and
3.55% for the nine months ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses for the
three and nine months ended March 31, 1998 was $65,000 and $215,000,
respectively, compared to $37,000 and $122,000 for the same periods a year
ago. These increases reflect the increased volume in commercial and
commercial real estate loans. At March 31, 1998, the balance of the
allowance for loan losses was $1,204,000 or .91% of total loans. During the
nine months ended March 31, 1998, $2,000 was charged against allowance for
loan losses while $14,000 in recoveries was credited to the allowance for
loan losses. At June 30, 1997, the balance of the allowance for loan losses
was $977,000 or .85% of total loans. During the nine months ended March 31,
1997, $25,000 was charged against allowance for loan losses while $18,000 in
recoveries was credited to the allowance for loan losses. Non-performing
loans at March 31, 1998 and 1997 were $473,000 and $513,000, respectively.
Other Income. Other income was $252,000 for the three months ended
March 31, 1998 compared to $208,000 for the three months ended March 31,
1997. The $44,000 or 21.2% increase was primarily the result of an increase
in the gain on the sale of mortgage loans of $10,000, and an increase in
miscellaneous income of $13,000.
Other income was $800,000 for the nine months ended March 31, 1998
compared to $627,000 for the nine months ended March 31, 1997. The $173,000
or 27.6% increase was primarily the result of a $66,000 increase in gain on
sales of investment securities and a $70,000 increase in gain on sales of
mortgage loans.
Operating Expenses. Operating expenses increased to $1.2 million for
the three months ended March 31, 1998 from $1.0 million for the three months
ended March 31, 1997. The increase of $191,000 or 19.1% mainly resulted
from an increase in salaries and employee benefits of $97,000 attributable
to the Company's adoption of an Employee Stock Ownership Plan ("ESOP") and
an increase in other general and administrative expenses of $79,000 caused
by higher professional fees and liability insurance costs from operating as
a public company. Operating expense increased to $3.5 million for the nine
months ended March 31, 1998 from $3.2 million for the nine months ended
March 31, 1997. The increase of $312,000 or 9.8% mainly resulted from an
increase in salaries and employee benefits attributable to the Company's
adoption of an Employee Stock Ownership Plan and an increase in other
general and administrative expenses caused by higher professional fees and
liability insurance costs from operating as a public company. Annual
operating expenses are also expected to increase in future periods due to
the increased cost of operating as a publicly held stock institution.
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.
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 March
31, 1998 was 32.7%.
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 March 31, 1998, the Bank had
borrowings of $13.5 million from the FHLB of Boston.
At March 31, 1998, the Bank had $8.9 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 $45.8 million at March 31, 1998. Based upon historical experience,
management believes that a significant portion of such deposits will remain
with the Bank.
At March 31, 1998, the Bank exceeded all of its regulatory capital
requirements.
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 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 and the Bank's
primary data 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.
The Bank has contacted its significant vendors and requested their
year 2000 compliance plans. The Bank has reviewed vendor plans that have
been received and has notified such vendors of its reliance upon their
representations. Where possible, the Bank has begun testing core mission
critical systems. The Federal Deposit Insurance Corporation ("FDIC") has
conducted a review to determine the Bank's progress in achieving year 2000
compliance for automated systems and determined that the Bank's program is
proceeding satisfactorily.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since June 30, 1997.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-34447)
(the "Registration Statement") was declared effective by the United States
Securities and Exchange Commission (the "SEC") on November 14, 1998. All
2,711,125 shares of common stock, par value of $.01 per share (the "Common
Stock"), registered in the Registration Statement and offered in the
Company's Subscription Offering (the "Offering") were sold at a price of
$10.00 per share. The Offering closed on January 8, 1998 and raised gross
proceeds of $27,111,250 for the Company. Trident Securities, Inc. of Raleigh,
North Carolina served as Sales Agent for the Offering.
No Offering expenses were paid, either directly or indirectly, to
directors or officers of the Company or their associates, to persons owning
ten percent or more of the Company's Common Stock or to any other affiliates
of the Company.
The net proceeds of the Offering for the Company, after deducting the
expenses of the Offering (including sales agency commissions and expenses)
were $25,760,000. Of such proceeds, $12,904,000 were distributed to the
Bank, which used the proceeds for purchases of U.S. Treasury Notes and Federal
Agency obligations of varying maturities with final maturities all within five
years and funding of adjustable and fixed rate residential loans, consumer
loans, and commercial and commercial real estate loans. Of the proceeds
retained by the Company, $3,194,000 was loaned to the Company's Employee
Stock Ownership Plan to fund its purchase of 216,890 shares of Common Stock
in open-market purchases. Proceeds were also invested in U.S. Treasury
Notes maturing within two years and Federal Agency obligations of varying
maturities with final maturities all within five years. No Offering
proceeds were paid, either directly or indirectly, to directors or officers
of the Company or their associates, to persons owning ten percent or more of
the Company's Common Stock or to any other affiliates of the Company. The
use of proceeds does not represent a material change from the use of
proceeds described in the Company's prospectus.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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: May 13, 1998 By: /s/ Robert H. Surabian
----------------------------- ---------------------------------
Robert H. Surabian
President and Chief Executive Officer
Date: May 13, 1998 By: /s/ Ralph W. Dunham
----------------------------- ---------------------------------
Ralph W. Dunham
Executive Vice-President, Chief
Financial Officer, and Treasurer
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