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, 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 November 9, 1998, 2,573,555 shares of the registrant's common stock
were outstanding.
MYSTIC FINANCIAL, INC. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Financial Statements:
Consolidated Balance Sheets - September 30, 1998
and June 30, 1998 1
Consolidated Statements of Income - Three
Months Ended September 30, 1998 and 1997 2
Consolidated Statement of Changes in Stockholders'
Equity-Three Months Ended September 30, 1998
and 1997 3
Consolidated Statements of Cash Flows - Three Months
Ended September 30, 1998 and 1997 4
Notes to Unaudited Consolidated Financial Statements -
September 30, 1998 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 22
PART II OTHER INFORMATION
-----------------
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
----------
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
<S> <C> <C>
Assets (Unaudited)
Cash and due from banks $ 6,913 $ 7,626
Federal funds sold 12,399 16,773
Short-term investments 169 1,580
-------- --------
Total cash and cash equivalents 19,481 25,979
Securities available for sale, at fair value 13,994 14,749
Securities held to maturity, at amortized cost 8,506 12,006
Federal Home Loan Bank stock, at cost 997 997
Loans, net of allowance for loan losses of $1,282
and $1,236, respectively 143,675 138,593
Mortgage loans held for sale 180 80
Bank premises and equipment, net 2,540 2,559
Real estate held for investment, net 1,771 1,785
Accrued interest receivable 1,038 1,099
Due from Co-operative Central Bank 929 929
Other assets 329 273
-------- --------
$193,440 $199,049
======== ========
Liabilities and Stockholders' Equity
Deposits $139,880 $144,766
Federal Home Loan Bank borrowings 17,598 16,505
Mortgagors' escrow accounts 590 481
Accrued interest payable 289 288
Accrued expenses and other liabilities 781 882
-------- --------
Total liabilities 159,138 162,922
-------- --------
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 27 27
Additional paid-in capital 25,710 25,710
Retained earnings 13,452 13,173
-------- --------
39,189 38,910
Treasury Stock, at cost - 137,570 and 2,120 shares at
September 30, 1998 and June 30, 1998, respectively (1,988) (21)
Net unrealized gain on securities available for sale, net
of tax of effects 295 432
Loan due from ESOP (3,194) (3,194)
-------- --------
Total stockholders' equity 34,302 36,127
-------- --------
$193,440 $199,049
======== ========
</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 Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
September 30, 1998 September 30, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $2,773 $2,395
Interest and dividends on investment securities 348 294
Other interest 204 96
------ ------
Total interest and dividend income 3,325 2,785
------ ------
Interest expense:
Deposits 1,229 1,235
Federal Home Loan Bank borrowings 253 156
------ ------
Total interest expense 1,482 1,391
------ ------
Net interest income 1,843 1,394
Provision for loan losses 60 70
------ ------
Net interest income, after provision for loan losses 1,783 1,324
------ ------
Other income:
Customer service fees 135 127
Gain on sales of mortgage loans 9 7
Gain on sales of securities available for sale, net 61 141
Miscellaneous 38 70
------ ------
Total other income 243 345
------ ------
Operating expenses:
Salaries and employee benefits 836 657
Occupancy and equipment expenses 115 151
Data processing expenses 71 59
Other general and administrative expenses 319 203
------ ------
Total operating expenses 1,341 1,070
------ ------
Income before income taxes 685 599
Provision for income taxes 270 244
------ ------
Net income $ 415 $ 355
====== ======
Earnings per share - basic and diluted $ .16 N/A
======
Weighted average shares outstanding 2,630 N/A
======
</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
Three Months Ended September 30, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Comprehensive Common Paid-in Retained Treasury Comprehensive Loan Due Stockholders'
Income Stock Capital Earnings Stock Income From ESOP Equity
------------- ------ ---------- -------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 - $ 27 $25,710 $13,173 $ (21) $ 432 $(3,194) $36,127
Net income $ 415 - - 415 - - - 415
Change in net unrealized
gain on securities
available for sale, net
of tax effects (137) - - - - (137) - (137)
--------
Comprehensive income $ 278
========
Dividend paid ($.05 per share) - - (136) - - - (136)
Purchase of treasury stock - - - (1,967) - - (1,967)
---- ------- ------- ------- -------- ------- -------
Balance at September 30, 1998 $ 27 $25,710 $13,452 $(1,988) $ 295 $(3,194) $34,302
==== ======= ======= ======= ======== ======= =======
Balance at June 30, 1997 $ - $ - $11,761 - $ 179 - $11,940
Net income $ 355 - - 355 - - - 355
Change in net unrealized
gain on securities available
for sale, net of tax effects 9 - - - - 9 - 9
--------
Comprehensive income $ 364
========
---- ------- ------- ------- -------- -------
Balance at September 30, 1997 $ - $ - $12,116 $ - $ 188 $ - $12,304
==== ======= ======= ======= ======== ======= =======
</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>
Three months Three months
ended ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 415 $ 355
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 60 70
Gain on sales of securities available for sale (61) (141)
Gain on sale of loans (9) -
Depreciation expense 82 85
Mortgage loans originated for sale - (2,042)
Principal balance of mortgage loans sold - 857
(Increase) decrease in accrued interest receivable 61 (29)
(Increase) decrease in other assets 18 (37)
Increase in accrued interest payable 1 15
Increase (decrease) in accrued expenses and
other liabilities (101) 141
------- -------
Net cash provided (used) by operating
activities 466 (726)
------- -------
Cash flows from investing activities:
Proceeds from maturities of securities held to
maturity 3,500 2
Proceeds from maturities of securities available
for sale 500 -
Purchase of securities available for sale - (743)
Proceeds from sales of securities available for sale 105 2,299
Loans originated, net of payments received (6,811) (5,152)
Proceeds from sale of loans 1,578 -
Purchases of banking premises and equipment (49) (71)
------- -------
Net cash used by investing activities (1,177) (3,665)
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits (4,886) 3,823
Proceeds from borrowings 1,100 12,000
Repayment of borrowings (7) (8,008)
Net increase in mortgagors' escrow accounts 109 87
Dividends paid (136) -
Purchase of treasury stock (1,967) -
------- -------
Net cash provided by financing activities (5,787) 7,902
------- -------
Net change in cash and cash equivalents (6,498) 3,511
Cash and cash equivalents at beginning of period 25,979 6,225
------- -------
Cash and cash equivalents at end of period $19,481 $ 9,736
======= =======
Supplemental cash flow information:
Interest paid on deposits $ 1,231 $ 1,237
Interest paid on Federal Home Loan Bank
borrowings $ 250 $ 139
Income taxes paid $ 287 $ 30
Transfer from loans to loans held for sale $ 100 $ -
</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
September 30, 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 for the year
ended June 30, 1998, included in the annual report on Form 10-K of Mystic
Financial, Inc., the holding company for Medford Co-operative Bank (the
"Bank"). The operating results for the period ended September 30, 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 September 30, 1998, the Bank had outstanding commitments to originate
loans amounting to approximately $9.4 million, and unadvanced funds on
construction loans and lines of credit amounting to approximately $393,000
and $3.5 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
$25.7 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 for the three months ended September 30, 1998 was $.16 on
a basic and diluted basis. Earnings per share data is not presented for the
three months ended September 30, 1997 since there were no outstanding shares
of common stock until the Conversion on January 8, 1998.
5) Stock Repurchase
On July 30, 1998, the Company's Board of Directors adopted a stock
repurchase program authorizing the Company to repurchase up to 135,450 or 5%
of its outstanding shares of common stock. On August 6, 1998, the Company
completed the repurchase program acquiring 135,450 shares at a cost of
approximately $1,967,000.
6) Recent Accounting Pronouncement
On June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain FASB statements, however,
require entities to report specific changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale securities, as a
separate component of the equity section of the consolidated balance sheet.
Such items, along with net income, are components of comprehensive income.
SFAS No. 130 requires that all items of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Additionally, SFAS No. 130 requires that the
accumulated balance of other comprehensive income be displayed separately
from retained earnings and additional paid-in capital in the equity section
of the consolidated balance sheet. The Company adopted these disclosure
requirements in the quarter ending September 30, 1998.
7) Investment Securities
The following table sets forth the Company's investment securities at the
dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------- ------------------
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 $11,033 $11,177 $11,540 $11,527
Marketable equity securities 2,507 2,817 2,544 3,222
------- ------- ------- -------
Total $13,540 $13,994 $14,084 $14,749
======= ======= ======= =======
Securities held to maturity:
U.S. Government & Federal Agency Obligations $ 6,000 $ 6,026 $ 9,498 $ 9,510
Other bonds & obligations 2,506 2,526 2,508 2,520
------- ------- ------- -------
Total $ 8,506 $ 8,552 $12,006 $12,030
======= ======= ======= =======
</TABLE>
8) 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>
September 30, 1998 June 30, 1998
------------------ ------------------
Amount Percent Amount Percent
----------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential mortgage loans $108,289 75.4% $106,412 76.8%
Commercial real estate loans 26,974 18.8 24,475 17.7
Commercial loans 5,299 3.7 4,579 3.3
Consumer loans 1,717 1.2 1,787 1.3
Home equity loans 1,622 1.1 1,716 1.2
Construction loans 1,487 1.0 1,260 0.9
-------- ----- -------- -----
Total loans 145,388 101.2 140,229 101.2
Less:
Deferred loan origination fees 38 - 17 -
Unadvanced principal 393 0.3 383 0.3
Allowance for loan losses 1,282 0.9 1,236 0.9
-------- ----- -------- -----
$143,675 100.0% $138,593 100.0%
======== ===== ======== =====
</TABLE>
9) Allowance for Loan Losses
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $139,812 $117,306
======== ========
Period-end net loans $143,675 $119,650
======== ========
Allowance for loan losses at beginning of period $ 1,236 $ 977
Provision for loan losses 60 70
Plus recoveries 1 2
Loans charged-off (15) 0
-------- --------
Allowance for loan losses at end of period $ 1,282 $ 1,049
======== ========
Non-performing loans $ 237 $ 342
======== ========
Ratios:
Allowance for loan losses to period end net loans 0.89% 0.87%
Allowance for loan losses to non-performing loans 540.93% 306.73%
Net charge-offs (recoveries) to average loans, net 0.04% (.01)%
</TABLE>
10) 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>
September 30, 1998 June 30, 1998
------------------ ------------------
Deposits: Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Savings deposits $ 41,226 29.5% $ 40,460 28.0%
NOW accounts 25,525 18.2 34,208 23.6
Money market deposits 6,171 4.4 6,256 4.3
Demand deposits 7,293 5.2 6,603 4.6
Certificates of deposits 59,665 42.7 57,239 39.5
-------- ----- -------- -----
Total deposits $139,880 100.0% $144,766 100.0%
======== ===== ======== =====
Borrowed Funds:
Advances from Federal Home Loan Bank of Boston:
Maturities less than one year $ 1,100 6.3% 1,125 6.8%
Maturities greater than one year 16,498 93.7% 15,380 93.2%
-------- ----- -------- -----
Total borrowed funds $ 17,598 100.0% $ 16,505 100.0%
======== ===== ======== =====
</TABLE>
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 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 Annual Report on Form 10-K 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 SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 Three Months Ended September 30, 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 $139,812 $2,773 7.93% $117,306 $2,395 8.17%
Investments 25,113 348 5.54% 20,228 294 5.81%
Other earning assets 15,363 204 5.31% 7,059 96 5.44%
-------- ------ -------- ------
Total interest-earning assets 180,288 3,325 7.38% 144,593 2,785 7.70%
------ ------
Cash and due from banks 3,599 3,214
Other assets 6,182 5,784
-------- --------
Total assets $190,069 $153,591
======== ========
INTEREST-BEARING LIABILITIES:
Regular and other deposits $ 41,280 275 2.66% $ 41,217 280 2.72%
Now accounts 22,678 90 1.59% 19,094 86 1.80%
Money market deposits 6,471 42 2.60% 6,520 43 2.64%
Certificates of deposit 59,500 822 5.53% 59,003 826 5.60%
-------- ------ -------- ------
Total interest-bearing deposits 129,929 1,229 3.78% 125,834 1,235 3.93%
FHLB borrowings 16,600 253 6.10% 9,887 156 6.31%
-------- ------ -------- ------
Total interest-bearing liabilities 146,529 1,482 4.05% 135,721 1,391 4.10%
------ ------
Demand deposit accounts 7,095 5,509
Other liabilities 1,250 464
-------- --------
Total liabilities 154,874 141,694
Stockholders' equity 35,195 11,897
-------- --------
Total liabilities and stockholders' equity $190,069 $153,591
======== ========
Net interest income $1,843 $1,394
====== ======
Interest rate spread 3.33% 3.60%
Net interest margin 4.09% 3.86%
Interest earning assets/interest-bearing liabilities 1.23x 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>
Three Months Ended September 30,
1998 vs. 1997
Increase (decrease)
--------------------------------
Due to
--------------
Rate Volume Total
---- ------ -----
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans, net $(72) $450 $378
Investments (14) 68 54
Other earning assets (2) 110 108
---- ---- ----
Total (88) 628 540
---- ---- ----
Interest expense:
Deposits (46) 40 (6)
Borrowed funds (5) 102 97
---- ---- ----
Total (51) 142 91
---- ---- ----
Change in net interest income $(37) $486 $449
==== ==== ====
</TABLE>
Financial Condition and Results of Operations
Comparison of Financial Condition at September 30, 1998 and June 30, 1998
The Company's total assets amounted to $193.4 million at September 30,
1998 compared to $199.0 million at June 30, 1998, a decrease of $5.6 million
or 2.8%. The decrease in total assets is a result of a reduction in cash
and cash equivalents principally due to a decrease in deposit accounts.
Cash and cash equivalents decreased to $19. 5 million at September 30, 1998
from $26.0 million at June 30, 1998, a decrease of $6.5 million or 25.0%.
Cash and cash equivalents are volatile due to the Company's 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 $5.1 million or 3.7% to $143.7 million or 74.3%
of total assets at September 30, 1998 as compared to $138.6 million or
69.6% of total assets at June 30, 1998 as the Company continued its
emphasis on originating and retaining residential mortgage loans and
commercial and commercial real estate loans. Investment securities held by
the Company decreased by $4.3 million or 15.9% to $22.5 million at September
30, 1998 from $26.8 million at June 30, 1998 as a result of the repurchase
of common stock held in treasury and deployment of funds into loans.
Total deposits decreased by $4.9 million or 3.4% to $139.9 million at
September 30, 1998 from $144.8 million at June 30, 1998 as a result of a
decrease in NOW accounts attributable to volatile balances in mortgage
conveyancing escrow accounts maintained by law firms. Total borrowings
increased by $1.1 million to $17.6 million at September 30, 1998 from $16.5
million at June 30, 1998. The Company's continued use of borrowed funds
reflects additional funding used to fund larger commercial real estate
loans, generally those exceeding $1.0 million, with matching funds from the
Federal Home Loan Bank of Boston ("FHLBB") to reduce interest rate risk. In
addition, the Company has match-funded $5.0 million of 30-year fixed-rate
residential mortgage loans held for portfolio. The retention of these loans
is helping the Company leverage the capital it raised in the conversion.
Stockholders' equity decreased by $1.8 million to $34.3 million at
September 30, 1998 from $36.1 million at June 30, 1998 as a result of the
repurchase of 135,450 shares of common stock held in treasury at a cost of
$2.0 million, a decrease in the net unrealized gain on securities available
for sale of $137,000, and dividends paid of $136,000, offset by net income
of $415,000.
Comparison of the Operating Results for the Three Months Ended
September 30, 1998 and 1997
Net Income. Net income was $415,000 for the three months ended
September 30, 1998, compared to $355,000 for the three months ended
September 30, 1997. Return on average assets was .87% for the three months
ended September 30, 1998, compared to .92% for the three months ended
September 30, 1997 while return on average equity was 4.72% for the three
months ended September 30, 1998, compared to 11.94% for the three months
ended September 30, 1997.
The increase in net income for the three months ended September 30,
1998 compared to the three months ended September 30, 1997 was attributable
to an increase in net interest income of $449,000 and a decrease of $10,000
in provision for loan losses, which were partially offset by a decrease in
other income of $102,000 and an increase in operating expenses of $271,000.
Interest Income. Total interest and dividend income increased by
$540,000 or 19.4% to $3.3 million for the three months ended September 30,
1998 from $2.8 million for the three months ended September 30, 1997. The
increase in interest income was a result of a higher level of loans,
investment securities, and other earning assets resulting from the
deployment of proceeds of the Conversion. The average balance of net loans
for the three months ended September 30, 1998 was $139.8 million compared to
$117.3 million for the three months ended September 30, 1997. The average
yield on net loans was 7.93% for the three months ended September 30, 1998
compared to 8.17% for the three months ended September 30, 1997.
The average balance of investment securities for the three months
ended September 30, 1998 was $25.1 million compared to $20.2 million for the
three months ended September 30, 1997. The average yield on investment
securities was 5.54% for the three months ended September 30, 1998 compared
to 5.81% for the three months ended September 30, 1997. The average
balance of other earning assets for the three months ended September 30,
1998 was $15.4 million compared to $7.1 million for the three months ended
September 30, 1997. The average yield on other earning assets was 5.31% for
the three months ended September 30, 1998 compared to 5.44% for the three
months ended September 30, 1997. The decrease in the average yield on net
loans, investment securities, and other earning assets reflects the general
decline in market interest rates since the prior period.
Interest Expense. Total interest expense increased by $91,000 or 6.5%
to $1.5 million for the three months ended September 30, 1998 from $1.4
million for the three months ended September 30, 1997. Interest expense
increased primarily due to the increase in FHLBB borrowings. The Company's
continued use of borrowed funds reflects additional funding used to fund
larger commercial real estate loans, generally those exceeding $1.0 million,
with matching funds from the FHLBB to reduce interest rate risk. In
addition, the Company has match-funded $5.0 million of 30-year fixed-rate
residential mortgage loans held for portfolio with borrowings of various
maturities. Average interest-bearing deposits increased by $4.1 million or
3.3% to $129.9 million while the average rate decreased 15 basis points to
3.78% from 3.93% for the three months ended September 30, 1998. Average
borrowings increased by $6.7 million to $16.6 million for the three months
ended September 30, 1998 from $9.9 million while the average rate decreased
21 basis points to 6.10% from 6.31% for the three months ended September 30,
1997.
Net Interest Income. Net interest income for the three months ended
September 30, 1998 was $1.8 million as compared to $1.4 million for the
three months ended September 30, 1997. The $449,000 or 32.2% increase can
be attributed to a combination of the $540,000 increase in interest and
dividend income and the $91,000 increase in interest expense on deposits and
borrowed funds. The average yield on interest earning assets decreased 32
basis points to 7.38% for the three months ended September 30, 1998 from
7.70% for the three months ended September 30, 1997, while the average cost
on interest-bearing liabilities decreased by 5 basis points to 4.05% for the
three months ended September 30, 1998 from 4.10% for the three months ended
September 30, 1997. As a result, the interest rate spread decreased to
3.33% for the three months ended September 30, 1998 from 3.60% for the three
months ended September 30, 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 average balance of net loans to average total assets ratio
declined to 73.6% at September 30, 1998 from 76.4% at September 30, 1997 as
a result of the conversion proceeds being invested in federal funds sold,
short-term investments and investment securities.
Provision for Loan Losses. The provision for loan losses for the
three months ended September 30, 1998 was $60,000 compared to $70,000 for
the three months ended September 30, 1997. This decrease reflects the
$105,000 decrease in non-performing loans to $237,000 or 0.17% of net loans
at September 30, 1998 from $342,000 or 0.30% of net loans at September 30,
1997. During the three months ended September 30, 1998, $15,000 was
charged against allowance for loan losses while $1,000 in recoveries was
credited to the allowance for loan losses. 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.
Other Income. Other income was $243,000 for the three months ended
September 30, 1998 compared to $345,000 for the three months ended September
30, 1997. The $102,000 decrease was primarily the result of an $80,000
decrease in the gain on the sale of securities available for sale and a
decrease in miscellaneous income of $32,000.
Operating Expenses. Operating expenses increased by $271,000 or 25.3%
to $1.3 million for the three months ended September 30, 1998 from $1.1
million for the three months ended September 30, 1997. Salaries and
employee benefits increased by $179,000, of which $81,000 is attributable to
the Company's adoption of an Employee Stock Ownership Plan ("ESOP").
Salaries and employee benefits also increased by $35,000 due to accruals for
supplemental retirement benefits and a Benefit Restoration Plan for the
Company's Chief Executive Officer. Salary and employee benefits also
increased because of higher commission payments to residential loan
originators as a result of higher volumes of lending activity. An increase
in other general and administrative expenses of $116,000 was caused by
higher professional fees and liability insurance costs from operating as a
publicly held stock institution. 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 Company is to produce stable
earnings by achieving a favorable interest rate spread that can be sustained
during fluctuations in prevailing interest rates. Since the Company'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 Company'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 Board of Directors
has established an Asset/Liability Management Committee ("ALCO") made up of
members of management to monitor the difference between the Company'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 Company's
asset/liability mix, recommend strategies to the Board that will enhance
income while managing the Company'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 Company has used borrowings from the Federal Home Loan Bank of
Boston ("FHLBB") 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 Company
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 Company'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 Company
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 Company 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 Company has historically maintained a level of liquid
assets in excess of regulatory requirements. The Company's liquidity ratio
at September 30, 1998 was 30.6%.
A major portion of the Company'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 Company'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 Company requires funds beyond its ability to generate
them internally, the Company believes it could borrow additional funds from
the FHLBB. At September 30, 1998, the Company had borrowings of $17.6
million from the FHLBB.
At September 30, 1998, the Company had $9.4 million in outstanding
commitments to originate loans. The Company 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 $40.6 million at September 30, 1998. Based upon historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
At September 30, 1998, the Company and the Bank exceeded all of their
regulatory capital requirements.
Year 2000
The "Year 2000 Problem" centers on the inability of computer systems
to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two
digits to identify the calendar year in the date field, without considering
the upcoming change in the century. With the impending millennium, these
programs and computers will recognize "00" as the year 1900 rather than the
year 2000. Like most financial service providers, the Bank and its
operations may be significantly affected by the Year 2000 Problem due to the
nature of financial information. Software, hardware, and equipment both
within and outside the Bank's direct control and with whom the Bank
electronically or operationally interfaces (e.g. third party vendors
providing data processing, information system management, maintenance of
computer systems, and credit bureau information) are likely to be affected.
Furthermore, if computer systems are not adequately changed to identify the
Year 2000, many computer applications could fail or create erroneous
results. As a result, many calculations which rely on the date field
information, such as interest, payment or due dates and other operating
functions, will generate results which could be significantly misstated, and
the Bank could experience a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
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 Company and 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.
The Company has spent approximately $30,000 on Year 2000 related costs to
date and estimates that it will spend an additional $120,000 for Year 2000
compliance. Both direct and indirect costs of addressing the Year 2000
Problem will be charged to earnings as incurred. The Company does not
believe that such costs will have a material effect on results of
operations. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company or a conversion that is
incompatible with the Company's systems, would not have material adverse effect
on the Company. Although no independent analysis of the Company's potential
exposure has been obtained, the Company believes it has no exposure to
contingencies related to the Year 2000 Problem for the products it has sold.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties. The Company has not
developed a contingency plan which would be implemented in the unlikely
event that it is not Year 2000 compliant. The Company will continue to
closely monitor the progress of its Year 2000 compliance plan and will
determine by December 31, 1998 if the need for a contingency plan exists.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since June 30, 1998.
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
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: November 12, 1998 By: /s/ Robert H. Surabian
--------------------------- -------------------------------
Robert H. Surabian
President and Chief Executive Officer
Date: November 12, 1998 By: /s/ Ralph W. Dunham
--------------------------- -------------------------------
Ralph W. Dunham
Executive Vice-President, Chief
Financial Officer, and Treasurer
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