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, 1999
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 10, 1999, 2,366,478 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, 1999
and June 30, 1999 3
Consolidated Statements of Income - Three Months Ended
September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity - Three Months Ended September 30, 1999 and
1998 5
Consolidated Statements of Cash Flows - Three Months
Ended September 30, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements -
September 30, 1999 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 21
PART II OTHER INFORMATION
-----------------
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
----------
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 7,297 $ 6,442
Federal funds sold 12,108 11,674
Short-term investments 308 605
----------------------------
Total cash and cash equivalents 19,713 18,721
Securities available for sale, at fair value 31,111 31,772
Securities held to maturity, at amortized cost - 1,500
Federal Home Loan Bank stock, at cost 1,299 1,080
Loans, net of allowance for loan losses of $1,383
and $1,348, respectively 165,078 154,689
Mortgage loans held for sale, net 469 406
Bank premises and equipment, net 2,600 2,657
Real estate held for investment, net 1,715 1,730
Accrued interest receivable 1,223 1,265
Due from Co-operative Central Bank 929 929
Other assets 833 465
----------------------------
$224,970 $215,214
============================
Liabilities and Stockholders' Equity
Deposits $164,322 $160,867
Federal Home Loan Bank borrowings 25,971 18,978
Mortgagors' escrow accounts 651 547
Accrued interest payable 338 334
Accrued expenses and other liabilities 564 436
----------------------------
Total liabilities 191,846 181,162
----------------------------
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 issued 27 27
Additional paid-in capital 25,674 25,688
Retained earnings 14,481 14,128
Treasury stock, at cost - 266,247 shares at
September 30, 1999 and June 30, 1999 (3,485) (3,485)
Accumulated other comprehensive income 160 394
Unearned ESOP shares (2,608) (2,700)
Unearned RRP stock (1,125) --
----------------------------
Total stockholders' equity 33,124 34,052
----------------------------
$224,970 $215,214
============================
</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, 1999 September 30, 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $3,123 $2,773
Interest and dividends on investment securities 475 348
Other interest 126 204
----------------------------
Total interest and dividend income 3,724 3,325
----------------------------
Interest expense
Deposits 1,292 1,229
Federal Home Loan Bank borrowings 311 253
----------------------------
Total interest expense 1,603 1,482
----------------------------
Net interest income 2,121 1,843
Provision for loan losses 40 60
----------------------------
Net interest income, after provision for loan losses 2,081 1,783
----------------------------
Other income:
Customer service fees 141 135
Gain on sale of mortgage loans -- 9
Gain on sale of securities available for sale, net 31 61
Miscellaneous 44 38
----------------------------
Total other income 216 243
----------------------------
Operating expenses:
Salaries and employee benefits 936 836
Occupancy and equipment expenses 164 115
Data processing expenses 66 71
Other general and administrative expenses 327 319
----------------------------
Total operating expenses 1,493 1,341
----------------------------
Income before income taxes 804 685
Provision for income taxes 317 270
----------------------------
Net income $ 487 $ 415
============================
Earnings per share basic and diluted $ 0.22 $ 0.16
============================
Weighted average shares outstanding - basic 2,216 2,630
============================
Weighted average shares outstanding - diluted 2,218 2,630
============================
</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 Changes in Stockholders' Equity
Three Months Ended September 30, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned Total
Common Paid-In Retained Treasury Comprehensive ESOP RRP Stockholders'
Stock Capital Earnings Stock Income Shares Stock Equity
------ ---------- -------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $27 $25,688 $14,128 $(3,485) $ 394 $(2,700) $ - $34,052
Comprehensive income:
Net income - - 487 - - - 487
Change in net unrealized gain
on securities available for
sale, net of tax effects (234) (234)
-------
Total comprehensive income 253
-------
Dividend paid ($0.06 per share) (134) (134)
Decrease in unearned ESOP shares (14) 92 78
Purchase of RRP stock (1,295) (1,295)
Decrease in unearned RRP stock 170 170
-------------------------------------------------------------------------------------------
Balance at September 30, 1999 $27 $25,674 $14,481 $(3,485) $ 160 $(2,608) $(1,125) $33,124
===========================================================================================
Balance at June 30, 1998 $27 $25,710 $13,173 $ (21) $ 432 $(3,194) $ - $36,127
-------
Comprehensive income:
Net income - - 415 - - - 415
Change in net unrealized gain
on securities available for
sale, net of tax effects (137) (137)
-------
Total comprehensive income 278
-------
Dividend paid ($.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
===========================================================================================
</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 Ended
----------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 487 $ 415
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 40 60
Net amortization (accretion) of securities (10) -
Gain on sales of securities available for sale (31) (61)
Gain on sale of loans - (9)
Amortization of unearned ESOP shares 78 -
Amortization of unearned RRP stock 170 -
Depreciation expense 95 82
Net change in mortgage loans held for sale (63) -
Decrease in accrued interest receivable 42 61
(Increase) decrease in other assets (241) 18
Increase (decrease) in accrued expenses and other liabilities 132 (100)
-----------------------------
Net cash provided by operating activities 699 466
-----------------------------
Cash flows from investing activities:
Maturities of securities held to maturity 1,500 3,500
Sales of securities available for sale 2,264 105
Maturity of securities available for sale - 500
Principal paydowns on mortgage-backed securities 41 -
Purchase of securities available for sale (1,964) -
Purchase of Federal Home Loan Bank Stock (219) -
Loans originated, net of payments received (10,429) (6,811)
Proceeds from sale of loans - 1,578
Purchases of banking premises and equipment (23) (49)
-----------------------------
Net cash used by investing activities (8,830) (1,177)
-----------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 3,455 (4,886)
Proceeds from borrowings 9,002 1,100
Repayment of borrowings (2,009) (7)
Net increase in mortgagors' escrow accounts 104 109
Dividends paid (134) (136)
Purchase of treasury stock - (1,967)
Purchase of RRP stock (1,295) -
-----------------------------
Net cash provided (used) by financing activities 9,123 (5,787)
-----------------------------
Net change in cash and cash equivalents 992 (6,498)
Cash and cash equivalents at beginning of period 18,721 25,979
-----------------------------
Cash and cash equivalents at end of period $ 19,713 $19,481
=============================
Supplemental cash flow information:
Interest paid $ 1,599 $ 1,481
Income taxes paid 295 287
Transfer from loans to loans held for sale - 100
</TABLE>
Mystic Financial, Inc. and Subsidiary
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
September 30, 1999
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, 1999, included in the Annual Report on Form 10-
K of Mystic Financial, Inc., the holding company for Medford Co-operative
Bank (the "Bank").
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 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, 1999, the Bank had outstanding commitments to originate
loans amounting to approximately $9.7 million, and unadvanced funds on
construction loans and lines of credit amounting to approximately $2.9 and
$8.4 million, respectively.
3) Earnings Per Share
Basic earnings per share represents income available to common stock
divided by the weighted-average number of common shares outstanding during
the period. In calculating earnings per share, the number of shares of
common stock outstanding is reduced by the number of shares held by the
ESOP that have not been allocated or are not committed for release to
participants' individual accounts. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed conversion. Potential common
shares that may be issued by the Company relate solely to outstanding stock
options and unearned RRP shares and are determined using the treasury stock
method.
4) Book Value Per Share
Book value per share was $15.21 as of September 30, 1999. In calculating
book value per share, the number of shares of common stock outstanding is
reduced by the number of shares held by the ESOP that have not been
allocated or are not committed to be released to participants' individual
accounts, unearned RRP shares and treasury stock. There were 2,178,296
shares of common stock outstanding as of September 30, 1999 for purposes of
calculating the Company's book value per share.
5) 1999 Recognition and Retention Plan
On March 24, 1999, the Company's stockholders approved the Company's
adoption of the 1999 Recognition and Retention Plan (the "RRP"), which
allows the Company to grant restricted stock awards ("Awards") to certain
officers, employees and outside directors. As of September 30, 1999 the
Company's RRP Trust had completed the purchase of the authorized 102,942
shares in the open market at a cost of $1,295,000. Shares vest at a rate
of 20% per year with the first vesting period ending December 31, 1999. At
September 30, 1999, Awards were granted with respect to 96,342 shares. The
aggregate purchase price of all shares acquired by the RRP will be
reflected as a reduction of stockholders' equity and amortized to
compensation expense as the Company's employees and directors become vested
in their stock awards.
6) Investment Securities
The following table sets forth the Company's investment securities at the
dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
-------------------- --------------------
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 $22,831 $22,430 $24,323 $24,027
Mortgage-backed securities 1,539 1,544 - -
Other bonds & obligations 3,868 3,787 4,556 4,498
Marketable equity securities 2,627 3,350 2,287 3,247
-------------------------------------------
Total $30,865 $31,111 $31,166 $31,772
===========================================
Securities held to maturity:
U.S. Government & Federal
Agency Obligations $ 0 $ 0 $ 500 $ 501
Other bonds & obligations 0 0 1,000 1,001
-------------------------------------------
Total $ 0 $ 0 $ 1,500 $ 1,502
===========================================
</TABLE>
7) 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, 1999 June 30, 1999
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential mortgage loans $115,323 69.8% $107,216 69.3%
Commercial real estate loans 35,332 21.4% 33,980 22.0%
Commercial loans 6,715 4.1% 7,109 4.6%
Consumer loans 1,549 0.9% 1,546 1.0%
Home equity loans 2,445 1.5% 2,076 1.3%
Construction loans 8,073 4.9% 7,021 4.5%
----------------------------------------
Total loans 169,437 102.6% 158,948 102.7%
Less:
Deferred loan origination fees 28 0.0% 12 0.0%
Unadvanced principal 2,948 1.8% 2,899 1.8%
Allowance for loan losses 1,383 0.8% 1,348 0.9%
----------------------------------------
Loans, net $165,078 100.0% $154,689 100.0%
========================================
</TABLE>
8) Allowance for Loan Losses
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $159,003 $139,812
==============================
Period-end net loans $165,078 $143,675
==============================
Allowance for loan losses at beginning of period $ 1,348 $ 1,236
Provision for loan losses 40 60
Plus recoveries 1 1
Loans charged-off (6) (15)
------------------------------
Allowance for loan losses at end of period $ 1,383 $ 1,282
==============================
Non-performing loans $ 122 $ 237
==============================
Ratios:
Allowance for loan losses to period-end net loans 0.84% 0.89%
Allowance for loan losses to non-performing loans 1,133.61% 540.93%
Net charge-off to average loans, net 0.01% 0.04%
</TABLE>
9) 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, 1999 June 30, 1999
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Deposits:
Savings deposits $ 40,915 24.9% $ 40,903 25.4%
NOW accounts 30,533 18.6% 29,361 18.3%
Money market deposits 6,253 3.8% 7,020 4.4%
Demand deposits 10,786 6.6% 8,556 5.3%
Certificates of deposit 75,835 46.1% 75,027 46.6%
-----------------------------------------
Total deposits $164,322 100.0% $160,867 100.0%
=========================================
Borrowed funds:
Advances from Federal Home Loan Bank of Boston:
Maturities less than one year $ 5,400 20.8% $ 2,400 12.6%
Maturities greater than one year 20,571 79.2% 16,578 87.4%
-----------------------------------------
Total borrowed funds $ 25,971 100.0% $ 18,978 100.0%
=========================================
</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, 1999
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 Financial, Inc.
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 level of other income and operating expenses also affects the
Company's profitability. 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, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ending September 30, 1999 Three Months Ending September 30, 1998
-------------------------------------- --------------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Income/Expense Rate Balance Income/Expense Rate
------- -------------- ------ ------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net $159,003 $3,123 7.86% $139,812 $2,773 7.93%
Investments 32,653 475 5.82% 25,113 348 5.54%
Other earning assets 9,692 126 5.20% 15,363 204 5.31%
---------------------- ----------------------
Total interest-earning assets 201,348 3,724 7.40% 180,288 3,325 7.38%
------ ------
Cash and due from banks 4,292 3,599
Other assets 6,353 6,182
-------- --------
Total assets $211,993 $190,069
======== ========
INTEREST-BEARING LIABILITES:
Regular and other deposits $ 41,449 237 2.29% $ 41,280 275 2.66%
NOW accounts 24,037 89 1.48% 22,678 90 1.59%
Money market deposits 6,531 37 2.27% 6,471 42 2.60%
Certificates of deposit 74,380 929 5.00% 59,500 822 5.53%
---------------------- ----------------------
Total interest-bearing deposits 146,397 1,292 3.53% 129,929 1,229 3.78%
FHLB borrowings 21,158 311 5.88% 16,600 253 6.10%
---------------------- ----------------------
Total interest-bearing liabilities 167,555 1,603 3.83% 146,529 1,482 4.05%
------ ------
Demand deposit accounts 9,730 7,095
Other liabilities 1,194 1,250
-------- --------
Total liabilities 178,479 154,874
Stockholders' equity 33,514 35,195
-------- --------
Total liabilities and stockholders' equity $211,993 $190,069
======== ========
Net interest income $2,121 $1,843
====== ======
Interest rate spread 3.57% 3.33%
Net interest margin 4.21% 4.09%
Interest earning assets/interest-bearing
liabilities 1.20x 1.23x
</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,
1999 vs 1998
Increase (decrease)
--------------------------------
Due To
-------------------
Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest and dividend income:
Loans, net $(27) $377 $350
Investments 18 109 127
Other earning assets (4) (74) (78)
-------------------------------
Total (13) 412 399
-------------------------------
Interest expense:
Deposits (86) 149 63
Borrowed funds (10) 68 58
-------------------------------
Total (96) 217 121
-------------------------------
Change in net interest income $ 83 $195 $278
===============================
</TABLE>
Financial Condition and Results of Operations
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
The Company's total assets amounted to $225.0 million at September
30, 1999 compared to $215.2 million at June 30, 1999, an increase of $9.8
million or 4.5%. The increase in total assets is principally due to
continued loan growth.
Cash and cash equivalents increased to $19.7 million at September 30,
1999 from $18.7 million at June 30, 1999, an increase of $1.0 million or
5.3%. 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. Investment securities decreased to $32.4
million at September 30, 1999 from $34.4 million at June 30, 1999, a
decrease of $1.9 million or 5.7%. Cash and cash equivalents and investment
securities have remained stable due to the Company's efforts to maintain
liquidity and to improve its interest rate sensitivity.
Net loans increased by $10.4 million or 6.7% to $165.1 million or
73.4% of total assets at September 30, 1999 as compared to $154.7 million
or 71.9% of total assets at June 30, 1999 as the Company continued its
emphasis on originating and retaining residential mortgage loans and
commercial and commercial real estate loans.
Total deposits increased by $3.5 million or 2.2% to $164.3 million at
September 30, 1999 from $160.9 million at June 30, 1999. The increase in
deposits is due to the combination of a deposit promotion in the
certificates of deposit category, an increase to the IOLTA accounts which
are included in the NOW accounts category, and an increase in demand
deposits.
Total borrowings increased by $7.0 million to $26.0 million at
September 30, 1999 from $19.0 million at June 30, 1999. 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 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 $928,000 to $33.1 million at
September 30, 1999 from $34.1 million at June 30, 1999 as a result of the
repurchase of 102,942 shares of common stock purchased by the Company's RRP
Trust at a cost of $1.3 million, dividends paid of $134,000, a decrease in
the net unrealized gain on securities available for sale of $234,000,
offset by net income of $487,000, and amortization of unearned ESOP and RRP
shares of $248,000.
Comparison of the Operating Results for the Three Months Ended
September 30, 1999 and 1998
Net Income. Net income was $487,000 for the three months ended
September 30, 1999, compared to $415,000 for the three months ended
September 30, 1998. Return on average assets was .92% for the three months
ended September 30, 1999, compared to .87% for the three months ended
September 30, 1998. Return on average equity was 5.81% for the three
months ended September 30, 1999, compared to 4.72% for the three months
ended September 30, 1998.
The increase in income before income taxes for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998
was attributable to an increase in net interest income of $278,000 and a
decrease of $20,000 in provision for loan losses, which were partially
offset by a decrease in other income of $27,000, and an increase in
operating expenses of $152,000.
Interest and Dividend Income. Total interest and dividend income
increased by $399,000 or 12.0% to $3.7 million for the three months ended
September 30, 1999 from $3.3 million for the three months ended September
30, 1998. The increase in interest income was a result of a higher level
of loans and investment securities resulting from general asset growth.
The average balance of net loans for the three months ended September 30,
1999 was $159.0 million compared to $139.8 million for the three months
ended September 30, 1998. The average yield on net loans was 7.86% for the
three months ended September 30, 1999 compared to 7.93% for the three
months ended September 30, 1998.
The average balance of investment securities for the three months
ended September 30, 1999 was $32.7 million compared to $25.1 million for
the three months ended September 30, 1998. The average yield on investment
securities was 5.82% for the three months ended September 30, 1999 compared
to 5.54% for the three months ended September 30, 1998. The average balance
of other earning assets for the three months ended September 30, 1999 was
$9.7 million compared to $15.4 million for the three months ended September
30, 1998. The average yield on other earning assets was 5.20% for the
three months ended September 30, 1999 compared to 5.31% for the three
months ended September 30, 1998.
Interest Expense. Total interest expense increased by $121,000 or
8.2% to $1.6 million for the three months ended September 30, 1999 from
$1.5 million for the three months ended September 30, 1998. Interest
expense increased due to an increase in deposits and 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 30-year fixed-rate residential
mortgage loans held for portfolio with borrowings of various maturities.
Average interest-bearing deposits increased by $16.5 million or 12.7%
to $146.4 million while the average rate decreased 25 basis points to 3.53%
from 3.78% for the three months ended September 30, 1999. Average
borrowings increased by $4.6 million to $21.2 million for the three months
ended September 30, 1999 from $16.6 million while the average rate
decreased 22 basis points to 5.88% from 6.10% for the three months ended
September 30, 1998.
Net Interest Income. Net interest income for the three months ended
September 30, 1999 was $2.1 million as compared to $1.8 million for the
three months ended September 30, 1998. The $278,000 or 15.1% increase can
be attributed to a combination of the $399,000 increase in interest and
dividend income and the $121,000 increase in interest expense on deposits
and borrowed funds. The average yield on interest earning assets increased
2 basis points to 7.40% for the three months ended September 30, 1999 from
7.38% for the three months ended September 30, 1998, while the average cost
on interest-bearing liabilities decreased by 22 basis points to 3.83% for
the three months ended September 30, 1999 from 4.05% for the three months
ended September 30, 1998. As a result, the interest rate spread increased
to 3.57% for the three months ended September 30, 1999 from 3.33% for the
three months ended September 30, 1998.
Provision for Loan Losses. The provision for loan losses for the
three months ended September 30, 1999 was $40,000, compared to $60,000 for
the three months ended September 30, 1998. This decrease reflects the
decrease in non-performing loans at September 30, 1999 compared to
September 30, 1998. At September 30, 1999, the balance of the allowance
for loan losses was $1,383,000 or .84% of net loans. At September 30,
1998, the balance of the allowance for loan losses was $1,282,000 or .89%
of net loans.
Other Income. Other income was $216,000 for the three months ended
September 30, 1999 compared to $243,000 for the three months ended
September 30, 1998. The $27,000 decrease was primarily the result of a
decrease in the gain on the sales of investment securities of $30,000.
Operating Expenses. Operating expenses increased by $152,000 or
11.3% to $1.5 million for the three months ended September 30, 1999 from
$1.3 million for the three months ended September 30, 1998. Salaries and
employee benefits increased by $100,000 due to staff hired for the opening
of a new branch office in Lexington, Massachusetts, in November 1998,
expense recorded for the Company's RRP, and normal salary increases.
Occupancy and equipment expenses increased by $49,000, primarily due to the
opening of the Lexington branch. An increase in other general and
administrative expenses of $8,000 was caused by higher professional fees,
liability insurance costs, and additional operating costs from 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 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, 1999 was 31.4%.
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, 1999, the Company had borrowings of $26.0
million from the FHLBB.
At September 30, 1999, the Company had $9.7 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 $65.6 million at September 30, 1999. Based upon
historical experience, management believes that a significant portion of
such deposits will remain with the Bank.
At September 30, 1999, 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. All significant reprogramming efforts were complete
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 whose 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 $125,000 on Year 2000 related costs to date and
estimates that it will spend an additional $50,000 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
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.
Financial Services Modernization Bill
In October 1999, the U.S. Congress overwhelmingly passed the Gramm-
Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. The legislation has been forwarded to the President for
his approval. Generally, the legislation would (i) repeal the historical
restrictions and eliminate many federal and state law barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers, (ii) provide a uniform framework for the
functional regulation of the activities of banks, savings institutions and
their holding companies, (iii) broaden the activities that may be conducted
by national banks, banking subsidiaries of bank holding companies and their
financial subsidiaries, (iv) provide an enhanced framework for protecting
the privacy of consumer information, (v) adopt a number of provisions
related to the capitalization, membership, corporate governance and other
measure designed to modernize the Federal Home Loan Bank system, (vi)
modify the laws governing the implementation of the Community Reinvestment
act and (vii) address a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions.
In particular, the pending legislation would restrict the authority
of unitary savings and loan holding companies under current law to engage
in non-financially related activities. Unitary savings and loan holding
companies that are "grandfathered," i.e., became a unitary savings and loan
holding company pursuant to an application filed with the OTS before May 4,
1999, (such as the Company) would retain this authority. All other savings
and loan holding companies would be limited to financially related
activities permissible for financial holding companies, as defined under
the new law. The proposed legislation would also prohibit non-financial
companies from acquiring savings and loan holding companies.
Bank holding companies would be permitted to engage in a wider
variety of financial activities than permitted under current law,
particularly with respect to insurance and securities activities. In
addition, in a change from current law, bank holding companies will be in a
position to be owned, controlled or acquired by any company engaged in
financially related activities.
The Company does not believe that the proposed legislation, as
publicly reported, would have a material adverse effect on our operations
in the near term. However, to the extent the legislation permits banks,
securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation. This could result
in a growing number of larger financial institutions that offer a wider
variety of financial services than the Company currently offers and that
can aggressively compete in the markets currently served by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in market risk since June 30, 1999.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting")
on October 20, 1999. All of the proposals submitted to the stockholders
were approved. The proposals submitted to stockholders and the tabulation
of votes for each proposal is as follows:
1. For the election of each of the nominees for director:
Nominee For Withheld
------- --- --------
Frederick N. Dello Russo 2,056,252 31,484
Richard M. Kazanjian 2,056,872 30,864
John W. Maloney 2,063,897 23,839
There were no broker held non-voted shares represented at the Meeting
with respect to this matter.
2. For the ratification of the appointment of Wolf & Company, P.C.
to act as independent auditors for the Company for the fiscal
year ending June 30, 2000.
For: 2,061,146
Against: 10,549
Abstained: 16,041
There were no broker held non-voted shares represented at the Meeting
with respect to this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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 10, 1999 By: /s/ Robert H. Surabian
------------------- -----------------------------------
Robert H. Surabian
President and Chief Executive
Officer
Date: November 10, 1999 By: /s/ Ralph W. Dunham
------------------- -----------------------------------
Ralph W. Dunham
Executive Vice-President, Chief
Financial Officer, and Treasurer
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