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 September 30, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
60 HIGH STREET 02155
MEDFORD, MASSACHUSETTS
(Address of principal executive officers) (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.)
<PAGE>
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page
Item 1 Financial Statements:
Consolidated Balance Sheets - September 30, 1997
and June 30, 1997 1
Consolidated Statements of Income - Three months
ended September 30, 1997 and 1996 2
Consolidated Statement of Changes in Surplus -
Three months ended September 30, 1997 3
Consolidated Statements of Cash Flows - Three months
ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements -
September 30, 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 18
SIGNATURES 19
<PAGE>
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------- --------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 4,615 $ 3,953
Federal funds sold 4,780 2,075
Short-term investments 341 197
----------------------
Total cash and cash equivalents 9,736 6,225
Securities available for sale, at fair value 2,395 3,819
Securities held to maturity, at amortized cost 17,502 17,504
Federal Home Loan Bank stock, at cost 858 858
Loans, net of allowance for loan losses of $1,049
and $977, respectively 119,650 114,568
Mortgage loans held for sale, net 1,395 210
Bank premises and equipment, net 2,696 2,697
Real estate held for investment, net 1,827 1,840
Accrued interest receivable 899 870
Due from Co-operative Central Bank 669 669
Other assets 448 393
----------------------
$158,075 $149,653
======================
Liabilities and Surplus
Deposits $133,126 $129,303
Federal Home Loan Bank borrowings 11,524 7,532
Mortgagors' escrow accounts 473 386
Accrued interest payable 264 249
Accrued expenses and other liabilities 384 243
----------------------
Total liabilities 145,771 137,713
----------------------
Surplus 12,116 11,761
Net unrealized gain on securities available for
sale, net of tax effects 188 179
----------------------
Total surplus 12,304 11,940
----------------------
$158,075 $149,653
======================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> -1-
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Income
(In Thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $2,395 $1,950
Interest and dividends on investment
securities 294 263
Other interest 96 119
--------------------------
Total interest and dividend income 2,785 2,332
--------------------------
Interest expense:
Deposits 1,235 1,153
Federal Home Loan Bank borrowings 156 9
--------------------------
Total interest expense 1,391 1,162
--------------------------
Net interest income 1,394 1,170
Provision for loan losses 70 25
--------------------------
Net interest income, after provision for loan
losses 1,324 1,145
--------------------------
Other income:
Customer service fees 127 124
Gain on sales of mortgage loans 7 22
Gain on sales of securities available for
sale, net 141 2
Miscellaneous 70 81
--------------------------
Total other income 345 229
--------------------------
Operating expenses:
Salaries and employee benefits 657 631
Occupancy and equipment expenses 151 115
Data processing expenses 59 40
Other general and administrative expenses 203 250
--------------------------
Total operating expenses 1,070 1,036
--------------------------
Income before income taxes 599 338
Provision for income taxes 244 139
--------------------------
Net income $ 355 $ 199
==========================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> -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 355 0 355
Change in net unrealized gain on
securities available for sale, net
of tax effects 0 9 9
----------------------------------------
Balance at September 30, 1997 $12,116 $188 $12,304
========================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE> -3-
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 355 $ 199
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Provision for loan losses 70 25
Gain on sales of securities available
for sale, net (141) (2)
Depreciation expense 85 79
Mortgage loans originated for sale (2,042) 0
Principal balance of mortgage loans sold 857 829
(Increase) decrease in accrued interest
receivable (29) 22
Increase in other assets (37) (6)
Increase in accrued interest payable 15 19
Increase in accrued expenses and other
liabilities 141 42
-----------------------------
Net cash provided (used) by operating
activities (726) (1,207)
-----------------------------
Cash flows from investing activities:
Proceeds from maturities of securities
held to maturity 2 4,005
Purchase of securities held to maturity - (5,000)
Purchase of securities available for sale (743) (1,569)
Proceeds from sales of securities
available for sale 2,299 48
Loans originated, net of payments
received (5,152) (4,831)
Purchases of banking premises and
equipment (71) (30)
-----------------------------
Net cash used by investing activities (3,665) (7,377)
-----------------------------
Cash flows from financing activities:
Net increase in deposits 3,823 717
Proceeds from borrowings 12,000 1,663
Repayment of borrowings (8,008) (665)
Net increase in mortgagors' escrow
accounts 87 35
-----------------------------
Net cash provided by financing
activities 7,902 1,750
-----------------------------
Net change in cash and cash equivalents 3,511 (4,420)
Cash and cash equivalents at beginning
of period 6,225 8,771
-----------------------------
Cash and cash equivalents at end of period $ 9,736 $ 4,351
=============================
Supplemental cash flow information:
Interest paid on deposits $ 1,237 $ 1,146
Interest paid on Federal Home Loan Bank
borrowings 139 -
Income taxes paid 30 86
</TABLE>
<PAGE> -4-
See accompanying notes to unaudited consolidated financial statements.
Medford Co-Operative Bank and Subsidiaries
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
September 30, 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 of an organizational nature as of September 30, 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 to 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 accruals) 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 September 30, 1997, the Bank had outstanding commitments to originate
loans amounting to approximately $8.3 million, unadvanced funds on
construction loans and lines of credit amounting to approximately $263,000
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. 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."
<PAGE> -5-
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) Investment Securities
The following table sets forth the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
September 30, 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 $ 2,128 $ 2,395 $ 3,543 $ 3,819
===========================================
Securities held to maturity:
U.S. Government & Federal
Agency Obligations $14,982 $14,970 $14,976 $14,908
Other bonds & obligations 2,520 2,526 2,528 2,523
-------------------------------------------
Total $17,502 $17,496 $17,504 $17,431
===========================================
</TABLE>
<PAGE> -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>
September 30, 1997 June 30, 1997
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential mortgage loans $ 94,146 78.7% $ 90,203 78.7%
Commercial real estate loans 18,667 15.6 17,847 15.6
Commercial loans 4,114 3.4 3,677 3.2
Consumer loans 1,711 1.4 1,655 1.4
Home equity loans 1,562 1.3 1,564 1.4
Construction loans 786 0.7 976 0.9
----------------------------------------
Total loans 120,986 101.1 115,922 101.2
Less:
Deferred loan origination fees 24 0.0 37 0.0
Unadvanced principal 263 0.2 340 0.3
Allowance for loan losses 1,049 0.9 977 0.9
----------------------------------------
$119,650 100.0% $114,568 100.0%
========================================
</TABLE>
<PAGE> -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>
Three Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $117,306 $ 97,787
===============================
Period-end net loans $119,650 $ 99,859
===============================
Allowance for loan losses at
beginning of period 977 742
Provision for loan losses 70 25
Plus recoveries 2 5
Loans charged-off 0 (10)
-------------------------------
Allowance for loan losses at end
of period $ 1,049 $ 762
===============================
Non-performing loans $ 342 $ 545
===============================
Ratios:
Allowance for loan losses to period
end net loans 0.87% 0.76%
Allowance for loan losses to
non-performing loans 306.73% 139.82%
Net charge-offs (recoveries) to average
loans, net (0.01)% 0.02%
</TABLE>
<PAGE> -8-
7) Deposits and Borrowed Funds
The following tables set forth the various types of deposits accounts at the
Bank and the balances in these accounts as well as the borrowings of the
Bank at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
-------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits:
Savings deposits $ 40,802 30.7% $ 40,794 31.6%
NOW accounts 21,808 16.4 17,975 13.9
Money market deposits 6,643 5.0 6,489 5.0
Demand deposits 5,507 4.1 4,910 3.8
Certificates of deposits 58,366 43.8 59,135 45.7
-------------------------------------------
Total deposits $133,126 100.0% $129,303 100.0%
===========================================
Borrowed Funds:
Advances from Federal Home Loan
Bank of Boston:
Maturities less than one year $ 5,424 47.1% $ 2,100 27.9%
Maturities greater than one year 6,100 52.9% 5,432 72.1%
-------------------------------------------
Total borrowed funds $ 11,524 100.0% $ 7,532 100.0%
===========================================
</TABLE>
<PAGE> -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
September 30, 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 estates 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. Noninterest income or 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
<PAGE> -10-
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 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.
<PAGE> -11-
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997 Three Months Ended September 30, 1996
------------------------------------- -------------------------------------
Average Interest Average Interest
Balance Income/Expense Yield/Rate Balance Income/Expense Yield/Rate
------- -------------- ---------- ------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net $117,306 $2,395 8.17% $ 97,787 $1,950 7.98%
Investments 20,228 294 5.81% 18,611 263 5.65%
Other earning assets 7,059 96 5.44% 7,423 119 6.41%
-------------------- --------------------
Total interest-earning assets 144,593 2,785 7.70% 123,821 2,332 7.53%
------ ------
Cash and due from banks 3,214 2,054
Other assets 5,784 5,587
-------- --------
Total assets $153,591 $131,462
======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 41,217 280 2.72% $ 40,552 285 2.81%
Now accounts 19,094 86 1.80% 14,000 76 2.17%
Money market deposits 6,520 43 2.64% 5,994 39 2.60%
Certificates of deposit 59,003 826 5.60% 54,735 753 5.50%
-------------------- --------------------
Total interest-bearing
deposits 125,834 1,235 3.93% 115,281 1,153 4.00%
FHLB borrowings 9,887 156 6.31% 522 9 6.90%
-------------------- --------------------
Total interest-bearing
liabilities 135,721 1,391 4.10% 115,803 1,162 4.01%
------ ------
Demand deposit accounts 5,509 4,059
Other liabilities 464 463
-------- --------
Total liabilities 141,694 120,325
Surplus 11,897 11,137
-------- --------
Total liabilities and surplus $153,591 $131,462
======== ========
Net interest income $1,394 $1,170
====== ======
Interest rate spread 3.60% 3.52%
Net interest margin 3.86% 3.78%
Interest earning assets/
interest-bearing liabilities: 1.07x 1.07x
</TABLE>
<PAGE> -12-
Rate/Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (changes
in rate multiplied by the changes in volume) are allocated between changes
in rate and changes in volume.
<TABLE>
<CAPTION>
Three Months Ended September 30,
1997 vs 1996
Increase (decrease)
--------------------------------
Due to
---------------
Rate Volume Total
---- ------ -----
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans, net $ 47 $398 $445
Investments 8 23 31
Other earning assets (5) (18) (23)
------------------------
Total 50 403 453
------------------------
Interest expense:
Deposits (20) 102 82
Borrowed funds (2) 149 147
------------------------
Total (22) 251 229
------------------------
Change in net interest income $ 72 $152 $224
========================
</TABLE>
Financial Condition and Results of Operation
Comparison of Financial Condition at September 30, 1997
and June 30, 1997.
The Bank's total assets increased by $8.4 million or 5.6% to $158.1 million
at September 30, 1997 from $149.7 at June 30, 1997. The increase in total
assets is primarily attributable to a $5.1 million increase in net loans and
a $2.8 million increase in federal funds sold and short-term investments.
Total net loans increased by $5.1 million or 4.4% to $119.7 million or 75.7%
of total assets at September 30, 1997 as compared to $114.6 million or 76.6%
of total assets at June 30, 1997. Investment securities held by the Bank
<PAGE> -13-
decreased by $1.4 million or 6.7% to $19.9 million at September 30, 1997
from $21.3 million in June 30, 1997. Federal Funds sold and short-term
investments increased by $2.8 million to $5.1 million at September 30, 1997
from $2.3 million at June 30, 1997.
Total deposits increased by $3.8 million or 3.0% to $133.1 million at
September 30, 1997 from $129.3 million at June 30, 1997. Total borrowings
increased by $4.0 million to $11.5 million at September 30, 1997 from $7.5
million at June 30, 1997. The Bank's continued use of borrowed funds
reflects additional funding needed to support its continued growth in net
loans. Surplus increased by $364,000 or 3.0% to $12.3 million at September
30, 1997 from $11.9 million at June 30, 1997 as a result of net income of
$355,000 and an increase in the net unrealized gain on securities available
for sale of $9,000.
Comparison of the Operating Results for the Three Months Ended September 30,
1997 and 1996.
Net Income. The Bank's net income for the three months ended September 30,
1997 was $355,000 as compared to $199,000 for the three months ended
September 30, 1996. This $156,000 or 78.4% increase in net income during
the period was the result of an increase of $224,000 in net interest income
and an increase of $116,000 in other income, offset by an increase of
$45,000 in provision for loan losses, an increase of $34,000 in operating
expenses, and an increase in provision for income taxes of $105,000. The
Bank's continued expansion of its lending activities accounted for the
increase in net interest income, while its other income increased due to
gain on sales of investment securities. The return on average assets for
the three months ended September 30, 1997 was .92% compared to .61% for the
three months ended September 30, 1996.
Interest Income. Total interest and dividend income increased by $453,000
or 19.4% to $2.8 million for the three months ended September 30, 1997 from
$2.3 million for the three months ended September 30, 1996. The increase in
interest income was a result of a higher level of loans and a greater mix of
higher yielding commercial and commercial real estate loans funded by
maturing lower yield investment securities and other earning assets. The
average balance of net loans for the three months ended September 30, 1997
was $117.3 million compared to $97.8 million for the three months ended
September 30, 1996. The average yield on net loans was 8.17% for the three
months ended September 30, 1997 compared to 7.98% for the three months ended
September 30, 1996.
Interest Expense. Interest expense increased by $229,000 or 19.7% to $1.4
million for the three months ended September 30, 1997 from $1.2 million for
the three months ended September 30, 1996. The reason for the increase in
interest expense was the increase in the overall deposit balances as well as
an increase in Federal Home Loan Bank of Boston borrowings. Average
interest-bearing deposits increased by $10.6 million or 9.2% to $125.8
million for the three months ended September 30, 1997 from $115.3 million
for the three months ended September 30, 1996. Average borrowings increased
<PAGE> -14-
by $9.4 million to $9.9 million for the three months ended September 30,
1997 from $522,000 for the three months ended September 30, 1996.
Net Interest Income. The net interest income for the three months ended
September 30, 1997 was $1.4 million as compared to $1.2 million for the
three months ended September 30, 1996. The $224,000 or 19.1% increase can
be attributed to a combination of the $453,000 increase in interest and
dividend income and the $229,000 increase in interest expense on deposits
and borrowed funds. The average yield on interest earning assets increased
17 basis points to 7.70% for the three months ended September 30, 1997 from
7.53% for the three months ended September 30, 1996, while the average cost
on interest-bearing liabilities increased by 9 basis points to 4.10% for the
three months ended September 30, 1997 from 4.01% for the three months ended
September 30, 1996. As a result, the interest rate spread increased to
3.60% for the three months ended September 30, 1997 from 3.52% for the three
months ended September 30, 1996.
Provision for Loan Losses. The provision for loan losses was $70,000 for
the three months ended September 30, 1997 as compared to $25,000 for the
three months ended September 30, 1996. At September 30, 1997, the balance
of the allowance for loan losses was $1,049,000 or .87% of total loans.
During the three months ended September 30, 1997, no amount was charged
against allowance for loan losses while $2,000 in recoveries was credited to
the allowance for loan losses. At September 30, 1996, the balance of the
allowance for loan losses was $762,000 or .76% of total loans. During the
three months ended September 30, 1996, $10,000 was charged against allowance
for loan losses while $5,000 in recoveries was credited to the allowance for
loan losses. Non-performing loans at September 30, 1997 and 1996 were
$342,000 and $545,000, respectively.
Other Income. Other income was $345,000 for the three months ended
September 30, 1997 compared to $229,000 for the three months ended September
30, 1996. The $116,000 or 50.7% increase was primarily the result of a
$139,000 increase in gain on sales of investment securities and a decrease
in the gain on the sale of mortgage loans held for sale of $15,000.
Operating Expenses. Operating expenses increased to $1.1 million for the
three months ended September 30, 1997 from $1.0 million for the three months
ended September 30, 1996. The increase of $34,000 or 3.3% mainly resulted
from a general increase in operating expenses. Annual operating expenses
are also expected to increase in future periods due to the increased cost of
operating as a stock institution.
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
fluctuation 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
<PAGE> -15-
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.
<PAGE> -16-
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
September 30, 1997 was 19.0%.
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, 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 from the Federal Home
Loan Bank of Boston. At September 30, 1997, the Bank had borrowings of
$11.5 million from the FHLB of Boston.
At September 30, 1997, the Bank had $8.3 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 $44.5
million at September 30, 1997. Based upon historical experience, management
believes that a significant portion of such deposits will remain with the
Bank.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements.
Year 2000
The Company and the Bank are aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "year 2000" problem is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the
two digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company and the Bank are utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. To
date, confirmations have been received from the Company's 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.
<PAGE> -17-
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
<PAGE> -18-
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
<PAGE> -19-
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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0
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