<PAGE> 1
As filed with the Securities and Exchange Commission on February 5, 1998
Registration No. 333-40115
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BAY STATE BANCORP, INC.
BAY STATE FEDERAL SAVINGS BANK
EMPLOYEE SAVINGS AND PROFIT-SHARING PLAN AND TRUST
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE
(State or Other Jurisdiction of Incorporation or
Organization)
6035
(Primary Standard Industrial
Classification Code Number)
04-3398630
(IRS Employer Identification No.)
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BAY STATE FEDERAL SAVINGS BANK
1299 BEACON STREET 1299 BEACON STREET
BROOKLINE, MASSACHUSETTS 02146 BROOKLINE, MASSACHUSETTS 02146
(617) 739-9500 (617) 739-9500
(Address and Telephone Number of Principal Executive Offices) (Address of Principal Place of Business or
Intended Principal Place of Business)
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JOHN F. MURPHY
PRESIDENT, CHIEF EXECUTIVE OFFICER, TREASURER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
BAY STATE FEDERAL SAVINGS BANK
1299 BEACON STREET
BROOKLINE, MASSACHUSETTS 02146
(617) 739-9500
(Name, Address and Telephone Number of Agent for Service)
Copies to:
DOUGLAS P. FAUCETTE, ESQUIRE
LAWRENCE M.F. SPACCASI, ESQUIRE
KENT M. KRUDYS, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. /___/
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. /___/
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. /___/
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /___/
CALCULATION OF REGISTRATION FEE
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Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration Fee
Per Unit Price (1)
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Common Stock 2,535,232
$.01 par Value Shares (2) $20.00 $50,704,640 (3)
Participation (5)
Interests $814,573(4)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares to be issued to The Bay State Federal Savings Charitable
Foundation, a privately-formed charitable foundation.
(3) Registration Fee of $13,633 previously paid with Form SB-2 filed on
November 13, 1997. An additional registration fee of $1,686 was paid upon
filing of Pre-Effective Amendment No. 1 to the Form SB-2 on January 22,
1998.
(4) Pursuant to Rule 416(c) under the Securities Act, this registration
statement also covers an indeterminate amount of interests to be offered or
sold pursuant to the employment benefit plan described herein.
(5) The securities of Bay State Bancorp, Inc. to be purchased by the Bay State
Federal Savings Bank Employee Savings and Profit-Sharing Plan and Trust are
included in the amount shown for Common Stock. Accordingly, no separate fee
is required for the participation interests. In accordance with Rule 457(h)
of the Securities Act of 1933, as amended, the registration fee has been
calculated on the basis of the number of shares of Common Stock that may be
purchased with the current assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE> 2
PROSPECTUS
BAY STATE BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR BAY STATE FEDERAL SAVINGS BANK)
2,041,250 SHARES OF COMMON STOCK
Bay State Bancorp, Inc. (the "Company" or "Bay State Bancorp"), a
Delaware corporation, is offering up to 2,041,250 shares of its common stock,
par value $.01 per share (the "Common Stock"), in connection with the conversion
of Bay State Federal Savings Bank (the "Bank" or "Bay State") from a
federally-chartered mutual savings bank to a federally-chartered capital stock
savings bank pursuant to the Bank's plan of conversion, as amended (the "Plan"
or "Plan of Conversion"). 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." In
certain circumstances, the Company may increase the amount of Common Stock
offered hereby to 2,347,437 shares. See Footnote 4 to the table below.
(continued on following page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC"), THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE
FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY NOR ARE THEY INSURED OR
GUARANTEED BY THE BANK OR THE COMPANY. THE COMMON STOCK IS SUBJECT
TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL INVESTED.
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ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES AND ESTIMATED
SUBSCRIPTION PRICE(1) EXPENSES(2) NET PROCEEDS(3)
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Minimum Per Share...................... $20.00 $0.84 $19.16
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Midpoint Per Share..................... $20.00 $0.75 $19.25
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Maximum Per Share...................... $20.00 $0.70 $19.30
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Total Minimum(1)....................... $30,175,000 $1,268,000 $28,907,000
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Total Midpoint(1)...................... $35,500,000 $1,344,000 $34,156,000
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Total Maximum(1)....................... $40,825,000 $1,419,000 $39,406,000
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Total Maximum, as adjusted(4).......... $46,948,750 $1,506,000 $45,442,750
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(1) Determined in accordance with an independent appraisal prepared by Keller
& Company, Inc. ("Keller") dated October 17, 1997 and updated as of
January 13, 1998, which states that the aggregate estimated pro forma
market value of the Company, inclusive of shares issued to the charitable
foundation (as defined herein) to be established by the Bank in connection
with the Conversion, ranged from $30.2 million to $40.8 million, with a
midpoint of $35.5 million (the "Valuation Range"). Based on the Valuation
Range, the Board of Directors established the estimated price range of
$30.2 million to $40.8 million (the "Estimated Price Range"), or between
1,508,750 and 2,041,250 shares of Common Stock at the $20.00 price per
share (the "Purchase Price") to be paid for each share of Common Stock
subscribed for or purchased in the Offerings (as defined herein). The
independent appraisal of Keller is based upon estimates and projections
that are subject to change and the valuation must not be construed as a
recommendation as to the advisability of purchasing such shares nor an
assurance that a purchaser will thereafter be able to sell such shares at
the Purchase Price. See "The Conversion -- Stock Pricing" and "-- Number
of Shares to be Issued."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of $860,000 and
marketing fees to be paid to Sandler O'Neill & Partners, L.P. ("Sandler
O'Neill") estimated to be $408,000 and $559,000 at the minimum and the
maximum of the Estimated Price Range, respectively. See "The Conversion --
Marketing and Underwriting Arrangements." See "Pro Forma Data" for the
assumptions used to arrive at these estimates. The actual fees and
expenses may vary from the estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending on the number of shares sold in each of the Offerings and other
factors. Includes the purchase of shares of Common Stock by the Bay State
Federal Savings Bank Employee Stock Ownership Plan and related trust (the
"ESOP") and funded by a loan to the ESOP, by a wholly-owned subsidiary of
the Company or from a third party, which will be deducted from the
Company's stockholders' equity. See "Use of Proceeds" and "Pro Forma
Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations, changes in market conditions or general financial and
economic conditions. See "Pro Forma Data" and "The Conversion -- Stock
Pricing." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Conversion -- Subscription Offering
and Subscription Rights," "-- Community Offering" and "-- Limitation on
Common Stock Purchases."
Sandler O'Neill & Partners, L.P.
The date of this Prospectus is February ___, 1998.
<PAGE> 3
AS SET FORTH IN THE PLAN OF CONVERSION AND PURSUANT TO ITS
REGULATIONS, NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A
SUBSCRIPTION OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE
FOLLOWING ORDER OF PRIORITY: (1) HOLDER OF DEPOSITS ACCOUNTS (AS MORE
PARTICULARLY DESCRIBED HEREIN) OF THE BANK OR UNION FEDERAL SAVINGS BANK,
BOSTON, MASSACHUSETTS ("UNION FEDERAL") TOTALLED $50 OR MORE ON AUGUST 31, 1996
("ELIGIBLE ACCOUNT HOLDERS"); (2) THE EMPLOYEE PLANS, INCLUDING THE ESOP WHICH
INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE COMMON STOCK ISSUED IN CONNECTION WITH
THE CONVERSION (INCLUDING SHARES ISSUED TO THE BAY STATE FEDERAL SAVINGS
CHARITABLE FOUNDATION (THE "FOUNDATION")); (3) DEPOSITORS WHOSE ACCOUNTS IN THE
BANK TOTALLED $50 OR MORE ON DECEMBER 31, 1997 ("SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS"); AND (4) MEMBERS OF THE BANK CONSISTING OF DEPOSITORS OF THE BANK AS
OF __________, 199 , THE VOTING RECORD DATE ("VOTING RECORD DATE") FOR THE
SPECIAL MEETING (AS DEFINED HEREIN), AND BORROWERS WITH LOANS OUTSTANDING AS OF
OCTOBER 9, 1997 WHICH CONTINUE TO BE OUTSTANDING AS OF THE VOTING RECORD DATE,
OTHER THAN THOSE MEMBERS WHO OTHERWISE QUALIFY AS ELIGIBLE ACCOUNT HOLDERS OR
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS ("OTHER MEMBERS"). SUBSCRIPTION RIGHTS
ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL
BE SUBJECT TO THE FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS"). Subject to the
prior rights of holders of subscription rights and subsequent to the
Subscription Offering, the Company will offer shares of Common Stock not
subscribed for in the Subscription Offering for sale in a community offering to
certain members of the general public with preference given to natural persons
residing in the Massachusetts counties of Norfolk and Suffolk (the Bank's
"Local Community") (the "Community Offering") (such natural persons herein
referred to as "Preferred Subscribers"). It is anticipated that shares not
subscribed for in the Subscription and Community Offerings, if any, will be
offered to certain members of the general public in a syndicated community
offering (the "Syndicated Community Offering") (the Subscription and Community
Offerings and the Syndicated Community Offering are referred to collectively as
the "Offerings").
Except for the ESOP, which intends to subscribe for up to 8% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation, no Eligible Account Holder or Supplemental Eligible Account
Holder or Other Member may, in their respective capacities as such, purchase in
the Subscription Offering more than $225,000 of Common Stock; no person,
together with associates and persons acting in concert with such person, may
purchase in the Community Offering and Syndicated Community Offering more than
$225,000 of Common Stock; and no person, together with associates of and persons
acting in concert with such person, may purchase in the aggregate more than the
overall maximum purchase limitation of 1% of the total number of shares of
Common Stock offered in the Conversion (the "overall maximum purchase
limitation"); provided, however, that the overall maximum purchase limitations
may be increased and the amount that may be subscribed for may be increased or
decreased at the sole discretion of the Bank or the Company without further
approval of the Bank's members. See "The Conversion Subscription Offering and
Subscription Rights," "-- Community Offering" and "-- Limitations on Common
Stock Purchases." The minimum purchase is 25 shares.
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create the Foundation, which will be incorporated under
Delaware law as a non-stock corporation and will be funded with shares of Common
Stock contributed by the Company in an amount equal to 8% of the number of
shares of Common Stock sold in the Conversion. The Foundation will be dedicated
to charitable purposes within the communities in which the Bank operates. The
establishment of the Foundation is subject to the approval of the Bank's members
at the special meeting being held to consider the Plan of Conversion. For a
discussion of the Foundation and the effects on the Conversion, including if the
members do not approve the establishment of the Foundation, see "Risk Factors --
Establishment of the Charitable Foundation," "Pro Forma Data," and "The
Conversion -- Establishment of the Charitable Foundation."
THE SUBSCRIPTION OFFERING WILL TERMINATE AT __________, EASTERN TIME,
ON ________, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE BANK AND THE
COMPANY, WITH THE APPROVAL OF THE OTS, IF NECESSARY. The Community Offering and
Syndicated Community Offering, if any, must be completed within 45 days after
the close of the Subscription Offering, or __________, 1998, unless extended by
the Bank and the Company with the approval of the OTS. Orders submitted are
irrevocable until the completion of the Conversion; provided, that, if the
Conversion is not completed within the 45 day period referenced to above, unless
such period has been extended with the consent of the OTS, if necessary, all
subscribers will have their funds returned promptly with interest and all
withdrawal authorizations will be canceled. Such extensions may not go
beyond , 2000. See "The Conversion -- Subscription Offering and
Subscription Rights," "-- Procedure for Purchasing Shares in Subscription and
Community Offerings."
The Company has applied to have its Common Stock listed on the American
Stock Exchange ("AMEX") under the symbol "BYS" upon completion of the
Conversion. Prior to this offering there has not been a public market for the
Common Stock and there can be no assurance that an active and liquid trading
market for the Common Stock will develop or that the Common Stock will trade at
or above the Purchase Price. The absence or discontinuance of a market may have
an adverse impact on both the price and liquidity of the Common Stock. See "Risk
Factors -- Absence of Market for Common Stock."
2
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INSERT MAP PAGE HERE
3
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SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is
qualified in its entirety by the more detailed information appearing
elsewhere in this Prospectus and in the Consolidated Financial Statements
and Notes thereto.
Risk Factors........................ The purchase of Common Stock involves
a substantial degree of risk.
Prospective investors should carefully
consider the matters set forth under
"Risk Factors." THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT INSURED
OR GUARANTEED BY THE FDIC, BIF OR SAIF
OR ANY OTHER GOVERNMENT AGENCY AND ARE
NOT GUARANTEED BY THE COMPANY OR BANK.
Bay State Bancorp, Inc.............. The Company is a Delaware corporation
organized at the direction of the Bank
to become a savings and loan holding
company and own all of the Bank's
capital stock to be issued upon its
conversion from mutual form to stock
form. To date, the Company has not
engaged in any business. Its executive
office is located at 1299 Beacon
Street, Brookline, Massachusetts 02146
and its telephone number is (617)
739-9500.
Bay State Federal Savings Bank...... The Bank is a federally-chartered
mutual savings bank and the resulting
entity of the February 1997 merger of
Bay State Federal Savings Bank and
Union Federal Savings Bank. At
September 30, 1997, the Bank had total
assets of $247.8 million, total
deposits of $202.2 million and
retained earnings of $19.8 million.
The Bank's main office is located at
1299 Beacon Street, Brookline,
Massachusetts 02146 and its telephone
number is (617) 739-9500. The Bank has
five banking offices located in the
greater Boston metropolitan area.
The Conversion and
Reasons for Conversion............ The Board of Directors of the Bank has
adopted a Plan of Conversion pursuant
to which the Bank intends to convert
to a federally-chartered stock savings
bank and issue all of its stock to the
Company. The Company is offering
shares of its Common Stock in the
Offerings in connection with the
Bank's Conversion. Management believes
the Conversion offers the Bank a
number of advantages, including: (i)
providing enhanced ability to increase
the Bank's presence in the communities
it serves through the acquisition or
establishment of branch offices or the
acquisition of other financial
institutions; (ii) providing a larger
capital base with which to operate;
(iii) providing enhanced ability to
diversify into other financial
services related activities; and (iv)
providing enhanced future access to
capital markets. The Conversion and
the Offerings are subject to approval
by the OTS and approval of members of
the Bank eligible to vote at a special
meeting to be held on __________, 1998
(the "Special Meeting"). The OTS
issued an approval letter on _______,
1997. See "The Conversion--General."
The Bay State Federal Savings
Charitable Foundation............... The Bank's Plan of Conversion provides
for the establishment of a charitable
foundation in connection with the
Conversion. The Foundation, which will
be incorporated under Delaware law as
a non-stock corporation, will be
funded with a contribution by the
Company equal to 8% of the Common
Stock sold in the Conversion. The
authority for the affairs of the
Foundation will be vested in the Board
of Directors of the Foundation, all of
whom are existing Directors or
officers of the Company or the Bank.
See "The Conversion -- Establishment
of the Charitable Foundation."
4
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Terms of the Offering............... The shares of Common Stock to be sold
in connection with the Conversion are
being offered at a fixed price of
$20.00 per share in the Subscription
Offering pursuant to subscription
rights in the following order of
priority to: (i) Eligible Account
Holders; (ii) the Employee Plans,
including the ESOP; (iii) Supplemental
Eligible Account Holders; and (iv)
Other Members. Subject to the prior
rights of holders of subscription
rights and subsequent to the
Subscription Offering, any shares of
Common Stock not subscribed for in the
Subscription Offering will be offered
in the Community Offering at $20.00
per share to certain members of the
general public with a preference given
to Preferred Subscribers. Subscription
rights will expire if not exercised by
_______, Eastern time, on __________,
1998, unless extended by the Bank and
the Company, with the approval of the
OTS, if necessary. Deposit accounts
which will provide subscription
consist of any "savings account," as
defined by the Plan of Conversion
consistent with OTS regulations.
Pursuant to the Plan, savings
accounts do not include any
non-interest-bearing deposit accounts
maintained at the Bank or Union
Federal, as the case may be.
See "The Conversion -- Subscription
Offering and Subscription Rights" and
"-- Community Offering."
Procedure for Ordering Shares
and Prospectus Delivery............ Forms to order Common Stock will only
be distributed with or preceded by a
Prospectus. Any person receiving a
stock order and certification form who
desires to subscribe for shares must
do so prior to the Expiration Date by
delivering to the Bank a properly
executed stock order and certification
form together with full payment. ONCE
TENDERED, SUBSCRIPTION ORDERS CANNOT
BE REVOKED OR MODIFIED WITHOUT THE
CONSENT OF THE COMPANY AND BANK. To
ensure that each purchaser receives a
prospectus at least 48 hours prior to
the Expiration Date in accordance with
Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange
Act"), no prospectus will be mailed
any later than five days prior to the
Expiration Date or hand delivered any
later than two days prior to such
date. The Bank is not obligated to
accept subscriptions not submitted on
an original stock order form. See "The
Conversion -- Procedure for Purchasing
Shares in Subscription and Community
Offerings."
Form of Payment for Shares.......... Payment for subscriptions may be made:
(i) in cash (if delivered in person);
(ii) by check, bank draft or money
order; or (iii) by authorization of
withdrawal from deposit accounts
maintained at the Bank. Orders for
Common Stock submitted by subscribers
in the Subscription Offering which
aggregate $50,000 or more must be paid
by official bank or certified check or
by withdrawal authorization from a
deposit account of the Bank. No wire
transfers will be accepted. See
"Conversion -- Procedure for
Purchasing Shares in Subscription and
Community Offerings."
Nontransferability of
Subscription Rights............... The subscription rights of Eligible
Account Holders, Supplemental Eligible
Account Holders, Other Members and the
Employee Plans, including the ESOP,
are nontransferable. Certificates
representing shares of Common
Stock purchased in the Subscription
Offering must be registered in the
name of the Eligible Account Holder or
Supplemental Eligible Account Holder,
as the case may be. Joint stock
registration will be allowed only if
the qualifying deposit account is held
by multiple parties as reflected in
the Bank's records as of the
appropriate record date. See "The
Conversion -- Restrictions on
Transfer of Subscription Rights and
Shares."
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Purchase Limitations................ No Eligible Account Holder,
Supplemental Eligible Account Holder
or Other Voting Member may purchase in
the Subscription Offering more than
$225,000 of Common Stock. No person,
together with associates or persons
acting in concert with such person,
may purchase in the Community Offering
and the Syndicated Community Offering
more than $225,000 of Common Stock. No
person, together with associates or
persons acting in concert with such
person, may purchase in the aggregate
more than 1% of the Common Stock
offered. However, the Employee Plans,
including the ESOP, may purchase up to
10% of the Common Stock issued,
including shares issued to the
Foundation. Pursuant to the Plan of
Conversion, it is the intent of the
ESOP to purchase 8% of the Common
Stock issued, including shares issued
to the Foundation. The minimum
purchase is 25 shares of Common Stock.
At any time during the Conversion and
without approval of the Bank's
depositors or a resolicitation of
subscribers, the Bank and the Company
may, in their sole discretion,
decrease the maximum purchase
limitation below $225,000 of Common
Stock; however, such amount may not be
reduced to less than 0.10% of the
Common Stock offered. Additionally, at
any time during the Conversion, the
Bank and the Company may, in their
sole discretion, increase the maximum
purchase limitation to an amount in
excess of $225,000 up to a maximum of
5% of the shares to be issued in the
Conversion. Similarly, the 1% overall
maximum purchase limitation may be
increased up to 5% of the total shares
of Common Stock offered in the
Conversion.
Securities Offered and Purchase
Price............................... The Company is offering between
1,508,750 and 2,041,250 shares of
Common Stock at a Purchase Price of
$20.00 per share. The maximum of the
Estimated Price Range may be increased
by up to 15% and the maximum number of
shares of Common Stock to be issued
may be increased up to 2,347,437
shares due to regulatory
considerations and changes in market
or general financial or economic
conditions. See "The Conversion --
Stock Pricing" and "-- Number of
Shares to be Issued."
Appraisal........................... The Purchase Price per share has been
fixed at $20.00. The total number of
shares to be issued in the Conversion
is based upon an independent appraisal
prepared by Keller, dated as of
October 17, 1997, and updated as of
January 13, 1998, which states that
the estimated pro forma market value
of the Common Stock ranged from $30.2
million to $40.8 million. The final
aggregate value will be determined at
the time of closing of the Offerings
and is subject to change due to
changing market conditions and other
factors. See "The Conversion -- Stock
Pricing."
Use of Proceeds..................... The Company will use 50% of the net
proceeds of the Offerings to purchase
all of the outstanding common stock of
the Bank to be issued in the
Conversion. A portion of net proceeds
retained by the Company will be used
for general business activities
including the formation and
capitalization of a wholly-owned
subsidiary of the Company, organized
under the laws of Massachusetts (the
"ESOP Loan Subsidiary") which intends
to loan funds to the ESOP, to enable
the ESOP to purchase up to 8% of the
stock issued in connection with
the Conversion, including shares
issued to the Foundation. Based on
certain regulatory and market
conditions, the Company and the Bank
may alternatively choose to fund the
ESOP's stock purchases through a loan
by a third-party financial
institution. The Company intends to
initially invest the remaining net
proceeds in securities, primarily
federal funds and short-term
mortgage-backed and mortgage-related
securities. The Bank intends to
utilize net proceeds for general
business purposes, including
investments in federal funds, loans,
mortgage-backed and mortgage-related
securities and the repayment of
Federal Home Loan Bank ("FHLB")
advances. See "Use of Proceeds."
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<PAGE> 8
Dividend Policy..................... Upon Conversion, the Board of
Directors of the Company will have the
authority to declare dividends on the
Common Stock, subject to statutory and
regulatory requirements. In the
future, the Board of Directors of the
Company may consider a policy of
paying cash dividends on the Common
Stock. However, no decision has been
made with respect to such dividends,
if any. Additionally, in connection
with the Conversion, the Company and
the Bank have committed to the OTS
that during the one-year period
following the consummation of the
Conversion, the Company will not
declare an extraordinary dividend to
stockholders which would be treated
by recipient stockholders as a
tax-free return of capital for
federal income tax purposes without
prior approval of the OTS. See
"Dividend Policy."
Benefits of the Conversion to
Management........................ Among the benefits to the Bank and the
Company anticipated from the
Conversion is the ability to attract
and retain personnel through the use
of stock options and other stock
related benefit programs. Subsequent
to the Conversion, the Company intends
to adopt a Stock Program (as defined
herein) and Stock Option Plan (as
defined herein) for the benefit of
directors, officers and employees. If
such benefit plans are adopted within
one year after the Conversion, such
plans will be subject to stockholders'
approval at a meeting of stockholders
which may not be held earlier than six
months after the Conversion. The
Company intends to adopt a stock
benefit plan which would provide for
the granting of Common Stock to
officers, directors and employees of
the Bank and Company in an amount
equal to 4% of the Common Stock issued
in the Conversion, including shares
issued to the Foundation (the "Stock
Program"). (or shares with a value of
$1.3 million or $1.8 million, based
on the minimum and maximum of the
Estimated Price Range, respectively.)
Any Common Stock awarded under the
Stock Program will be awarded at no
cost to the recipients. The Company
also intends to adopt a stock option
plan which would provide the Company
with the ability to grant options to
officers, directors and employees of
the Bank and Company to purchase
Common Stock equal to 10% of the
number of shares of Common Stock
issued in the Conversion, including
shares issued to the Foundation (the
"Stock Option Plan"). (or options
with an aggregate exercise price of
$3.3 million or $4.4 million, based
on the exercise price of $10.00 per
share at the minimum and maximum of
the Estimated Price Range,
respectively) See "Management
of the Bank-- Benefits."
Additionally, certain officers of the
Company and the Bank will be provided
with employment agreements or change
in control agreements which provide
such officers with employment rights
and/or payments upon their termination
of service following a change in
control. For a further description of
the Stock Program and Stock Option
Plan, see "Risk Factors -- Stock-Based
Benefits to Management and Directors
and Change in Control Payments" and
"Management of the Bank -- Employment
Agreements," "-- Change in Control
Agreements" and "-- Employee Severance
Compensation Plan." See "Management of
the Bank -- Subscriptions by Executive
Officers and Directors," "Restrictions
on Acquisition of the Company and the
Bank -- Restrictions in the Company's
Certificate of Incorporation and
Bylaws," and "The Conversion --
Establishment of the Charitable
Foundation."
Voting Control of Officers
and Directors.................... Directors and executive officers of
the Bank and the Company expect to
purchase approximately 3.6% or 2.7% of
shares of Common Stock to be issued,
based upon the minimum and the maximum
of the Estimated Price Range,
including shares issued to the
Foundation, respectively.
Additionally, assuming the
implementation of the ESOP, Stock
Program and Stock Option Plan,
directors, executive officers and
employees have the potential to
control the voting of approximately
25.6% or 24.7% of the Common Stock at
the minimum and the maximum of the
Estimated Price Range, including
shares issued to the Foundation,
respectively. See "Management of the
Bank -- Subscriptions by Executive
Officers and Directors" and
"Restrictions on Acquisition of the
Company and the Bank -- Restrictions
in the Company's Certificate of
Incorporation and Bylaws."
7
<PAGE> 9
Expiration Date for the
Subscription Offering............. The Expiration Date for the
Subscription Offering is ________
Eastern time on _______________, 1998
unless extended by the Bank and the
Company. See "The Conversion --
Subscription Offering and Subscription
Rights."
Market for Stock.................... As a mutual institution, the Bank has
never issued capital stock and,
consequently, there is no existing
market for the Common Stock. The
Company has applied to have its Common
Stock listed on the AMEX under the
symbol "BYS" subject to the completion
of the Conversion and compliance with
certain conditions. See "Market for
the Common Stock."
No Board Recommendations............ The Bank's Board of Directors and the
Company's Board of Directors are not
making any recommendations to
depositors or other potential
investors regarding whether such
persons should purchase the Common
Stock. An investment in the Common
Stock must be made pursuant to each
investor's evaluation of his or her
best interests.
Conversion Center................... If you have any questions regarding
the Conversion, call the Conversion
Center at (617) _____.
8
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
In February 1997, the Bank merged with Union Federal Savings Bank
which at the time of the merger had $38.2 million of total assets, $27.2 million
of loans, net, $35.5 million of deposits and $2.7 million of retained earnings.
Such transaction has been accounted for as a pooling of interests. The following
presentation represents the financial condition and results of operations for
the Bank and Union Federal as a consolidated entity for all periods presented.
The selected consolidated financial and other data of the Bank and Union Federal
set forth below is derived in part from, and should be read in conjunction with,
the Consolidated Restated Financial Statements of the Bank and Notes thereto
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT
SEPTEMBER 30, AT MARCH 31,
-------- --------------------------------------------------------
1997(1) 1997(2) 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Assets............................ $247,763 $233,074 $219,850 $204,386 $202,627 $196,852
Loans, net(3)..................... 219,370 207,063 186,534 184,531 181,325 167,686
Securities(4)..................... 16,408 16,456 19,467 7,613 7,058 8,266
Mortgage loans held-for-sale...... -- -- 47 -- -- --
Deposits.......................... 202,161 197,059 187,933 178,337 179,655 178,306
FHLB advances..................... 22,500 14,500 11,650 8,000 7,000 4,000
Retained earnings................. 19,789 19,091 17,962 16,278 14,514 13,530
Allowance for possible loan losses 2,133 1,687 1,774 1,825 2,480 1,792
Non-performing loans.............. 1,269 1,546 1,150 1,172 3,055 4,546
Non-performing assets............. 1,269 1,619 1,215 1,242 3,567 7,037
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
SEPTEMBER 30, FOR THE YEAR ENDED MARCH 31,
------------------ ---------------------------------------------------
1997(1) 1996(1)(2) 1997(2) 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.................. $ 9,274 $ 8,597 $17,476 $16,548 $14,950 $13,849 $15,113
Interest expense................. 4,910 4,482 9,218 8,423 6,506 5,919 7,496
------- ------- ------- ------- ------- ------- -------
Net interest income.......... 4,364 4,115 8,258 8,125 8,444 7,930 7,617
Provision for loan losses........ 444 5 117 1 6 837 1,550
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses.. 3,920 4,110 8,141 8,124 8,438 7,093 6,067
Total noninterest income......... 140 205 407 366 420 554 484
Total noninterest expense........ 2,870 3,932 7,409 5,537 5,994 5,730 5,950
------- ------- ------- ------- ------- ------- -------
Income before income tax
expense and cumulative effect
of change in accounting for
income taxes................... 1,190 383 1,139 2,953 2,864 1,917 601
Income tax expense............... 492 167 10 1,269 1,163 933 433
------- ------- ------- ------- ------- ------- -------
Income before cumulative
effect of change in
accounting for income taxes 698 216 1,129 1,684 1,701 984 168
Cumulative effect of change in
accounting for income taxes.... -- -- -- -- -- -- 714
------- ------- ------- ------- ------- ------- -------
Net income................... $ 698 $ 216 $ 1,129 $ 1,684 $ 1,701 $ 984 $ 882
======= ======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED MARCH 31,
----------------- --------------------------------------------------
1997(1) 1996(1)(2) 1997(2) 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(5):
PERFORMANCE RATIOS:
Return on average assets......................... 0.59% 0.19% 0.50% 0.84% 0.85% 0.51% 0.35%
Return on average retained earnings.............. 7.17 2.31 6.00 10.17 10.72 7.25 5.45
Average retained earnings to average assets...... 8.28 8.42 8.30 8.30 7.94 7.06 6.49
Retained earnings to total assets at end
of period.................................... 7.99 7.98 8.19 8.17 7.96 7.19 6.69
Average interest rate spread(6).................. 3.52 3.54 3.48 3.90 4.04 4.10 3.93
Net interest margin (7).......................... 3.81 3.81 3.76 4.20 4.31 4.24 4.05
Average interest-earning assets to average
interest-bearing liabilities................... 106.91 106.86 106.56 106.89 107.81 104.48 103.02
Total noninterest expense to average assets...... 2.44 3.54 3.27 2.77 3.00 2.90 2.92
Efficiency ratio(8).............................. 63.72 91.02 85.50 65.21 67.62 67.27 64.10
REGULATORY CAPITAL RATIOS(9):
Tangible capital................................. 8.01 7.98 8.20 8.20 7.92 7.13 6.76
Core capital..................................... 8.01 7.98 8.20 8.20 7.92 7.13 6.76
Risk-based capital............................... 15.28 15.77 16.02 16.86 15.93 14.23 13.26
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of loans(10)(11)............................... 0.57 0.84 0.74 0.61 0.63 1.66 2.68
Non-performing assets as a percent of
total assets................................... 0.51 0.76 0.69 0.55 0.61 1.76 3.57
Allowance for loan losses as a percent
of loans(10)................................... 0.96 0.86 0.81 0.94 0.98 1.35 1.06
Allowance for loan losses as a percent of non-
performing loans(11)........................... 168.09 102.29 109.12 154.26 155.72 81.18 39.42
NUMBER OF FULL-SERVICE BANKING FACILITIES........... 5 5 5 5 5 5 5
</TABLE>
- ----------
(1) The data presented for the six months ended September 30, 1997 and 1996
was derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the six months ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ended March 31, 1998.
(2) Includes effect of the one-time special assessment of $1.2 million, on a
pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
late 1996.
(3) Loans, net, consist of loans receivable minus the allowance for loan
losses, deferred loan fees and unadvanced loan funds. The allowance for
loan losses at September 30, 1997 and March 31, 1997, 1996, 1995, 1994 and
1993 was $2.1 million, $1.7 million, $1.8 million, $1.8 million, $2.5
million and $1.8 million, respectively.
(4) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as of April 1, 1994. On April 1, 1994, a portion of the
Bank's portfolio was classified as "available-for-sale." Securities do not
include Federal Home Loan Bank of Boston ("FHLB-Boston") stock of $1.7
million, $1.7 million, $1.7 million, $1.7 million, $1.5 million and $1.5
million at September 30, 1997 and March 31, 1997, 1996, 1995, 1994 and
1993, respectively.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets (which includes
FHLB-Boston stock and other equity securities) and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(9) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation -- Federal Savings
Institution Regulation -- Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(10) Loans include total loans before the allowance for loan losses.
(11) Non-performing assets consist of non-performing loans and real estate
owned ("REO"). Non-performing loans consist of all loans 90 days or more
past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest or
principal. It is the Bank's policy to cease accruing interest on all such
loans. See "Business of the Bank."
10
<PAGE> 12
RECENT DEVELOPMENTS
The selected financial and other data presented below at December
31, 1997 and for the nine month periods ended December 31, 1997 and 1996 are
derived from unaudited financial data, but, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments)
which are necessary to present fairly the results for such interim periods. The
results of operations for the nine months ended December 31, 1997 are not
necessarily indicative of the results of operations that may be expected for
the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, MARCH 31,
1997 (1) 1997 (2)
------------- -----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL DATA:
Assets......................................... $249,858 $233,074
Loans, net(3).................................. 224,301 207,063
Securities(4).................................. 12,611 16,456
Deposits....................................... 203,770 197,059
FHLB advances.................................. 22,500 14,500
Retained earnings.............................. 20,184 19,091
Allowance for loan losses...................... 2,131 1,687
Non-performing loans........................... 2,009 1,546
Non-performing assets.......................... 2,009 1,619
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
----------------------------
1997 (1) 1996 (1)(2)
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income................................ $14,122 $12,975
Interest expense............................... 7,521 6,860
-------- --------
Net interest income....................... 6,601 6,115
Provision for loan losses...................... 474 42
-------- --------
Net interest income after
provision for loan losses............... 6,127 6,073
Total noninterest income....................... 214 276
Total noninterest expense...................... 4,472 5,538
-------- --------
Income before income tax expense............... 1,869 811
Income tax expense............................. 776 323
-------- --------
Net income................................ $ 1,093 $ 488
======== ========
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
---------------------------------
1997 (1) 1996 (1)(2)
------------- -------------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(5):
PERFORMANCE RATIOS:
Return on average assets............................................... 0.60% 0.28%
Return on average retained earnings.................................... 7.42 3.59
Average retained earnings to average assets............................ 8.13 8.55
Retained earnings to total assets at end of period..................... 8.08 7.65
Average interest rate spread(6)........................................ 3.53 3.48
Net interest margin (7)................................................ 3.83 3.77
Average interest-earning assets to average
interest-bearing liabilities......................................... 106.89 106.78
Total noninterest expense to average assets............................ 2.47 3.22
Efficiency ratio(8).................................................... 65.62 86.65
REGULATORY CAPITAL RATIOS(9):
Tangible capital....................................................... 8.11 7.66
Core capital........................................................... 8.11 7.66
Risk-based capital..................................................... 15.20 15.26
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans(10)(11)..................... 0.89 1.01
Non-performing assets as a percent of total assets..................... 0.80 0.90
Allowance for loan losses as a percent of loans(10).................... 0.94 0.82
Allowance for loan losses as a percent of non-
performing loans(11)................................................. 106.07 81.45
NUMBER OF FULL-SERVICE BANKING FACILITIES................................... 5 5
</TABLE>
- -----------------
(1) The data presented for the nine months ended December 31, 1997 and 1996
was derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the nine months ended
December 31, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ended March 31, 1998.
(2) Includes effect of the one-time special assessment of $1.2 million, on a
pre-tax basis, to recapitalize the SAIF, which was recorded by the Bank in
late 1996.
(3) Loans, net, consist of loans receivable minus the allowance for loan
losses, deferred loan fees and unadvanced loan funds. The allowance for
loan losses at December 31, 1997 and March 31, 1997 was $2.1 million and
$1.7 million, respectively.
(4) The Bank adopted SFAS No. 115 as of April 1, 1994. On April 1, 1994, a
portion of the Bank's portfolio was classified as "available-for-sale."
Securities do not include FHLB-Boston stock of $1.7 million at both
December 31, 1997 and March 31, 1997.
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets (which includes
FHLB-Boston stock and other equity securities) and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(8) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(9) For definitions and further information relating to the Bank's regulatory
capital compliance requirements, see "Regulation Federal Savings
Institution Regulation-Capital Requirements." See "Regulatory Capital
Compliance" for the Bank's pro forma capital levels as a result of the
Offerings.
(10) Loans include total loans before the allowance for loan losses.
(11) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due
and other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or
principal. It is the Bank's policy to cease accruing interest on all
such loans. See "Business of the Bank."
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND MARCH 31, 1997
Total assets at December 31, 1997 totalled $249.9 million, an
increase of $16.8 million, or 7.2%, as compared to $233.1 million at March 31,
1997. The increase in assets is primarily due to an increase of $17.2 million,
or 8.3%, in loans, net. The increase in loans, net, is mainly due to a $2.7
million, or 1.7%, increase in one- to four-family loans, a $3.4 million, or
23.1%, increase in multi-family loans, a $4.8 million, or 19.0%, increase in
commercial real estate loans, a $4.7 million, or 315%, increase in construction
and development loans and a $1.8 million, or 35.9% increase in consumer loans.
The increase in loans was funded primarily by an increase in FHLB advances and,
to a lesser extent, an increase in deposits. The increase in loans was offset,
in part, by a $3.8 million, or 23.4% decrease in securities, primarily due to
the call of $3.7 million of FHLB debentures. In addition, federal funds sold
increased $1.8 million, or 100%, premises and equipment increased $500,000, or
27.7%, and other assets increased $1.4 million, or 60.0%. FHLB advances
increased by $8.0 million, or 55.2%, to $22.5 million at December 31, 1997 as
compared to $14.5 million at March 31, 1997. Deposit accounts increased $6.7
million, or 3.4%, from $197.1 million at March 31, 1997 to $203.8 million at
December 31, 1997. The deposit growth occurred primarily in certificate
accounts which increased $3.4 million, or 3.2%, and savings and NOW accounts
which increased $3.2 million, or 3.5%. Non-performing loans totalled $2.0
million at December 31, 1997 as compared to $1.5 million at March 31, 1997, an
increase of $500,000, or 30.0%. The increase is mainly due to an increase of
$735,000 in commercial real estate loans offset by a decrease of $241,000 in
one- to four-family loans. Non-performing assets totalled $2.0 million at
December 31, 1997 as compared to $1.6 million at March 31, 1997, an increase of
$400,000, or 24.1%. The increase is mainly due to the aforementioned changes to
non-performing loans and a decrease of $73,000 in REO. Retained earnings
increased from $19.1 million at March 31, 1997 to $20.2 million at December 31,
1997, an increase of $1.1 million, or 5.7%. The increase in retained earnings
is a result of net income for the nine months ended December 31, 1997 of $1.1
million.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL
The Bank's net income for the nine months ended December 31, 1997
increased $605,000, or 124%, from $488,000 for the nine months ended December
31, 1996, to $1.1 million for the same period in 1997. The change is mainly
due to an increase in net interest income of $486,000, or 8.0%, a decrease in
noninterest expense of $1.1 million, or 19.3%, offset by an increase in the
provision for loan losses of $432,000 and an increase in income taxes of
$453,000, or 140%. The net interest spread for the nine months ended December
31, 1997 increased 5 basis points to 3.53% and the net interest margin for the
nine months ended December 31, 1997 increased 6 basis points to 3.83%. The
decrease in noninterest expense is primarily due to the absence of the one-time
special assessment to recapitalize the SAIF (the "SAIF Special Assessment").
The increase in income taxes is also due to the absence of the SAIF Special
Assessment.
INTEREST INCOME
Interest income for the nine months ended December 31, 1997 was
$14.1 million, compared to $13.0 million for the nine months ended December 31,
1996, an increase of $1.1 million, or 8.8%. The increase in interest income was
primarily due to an increase in the average balance of interest-earning assets
and an increase in the yield on interest-earning assets. The average balance of
interest-earning assets increased from $217.5 million for the nine months ended
December 31, 1996 to $231.2 million for the nine months ended December 31,
1997, an increase of $13.7 million, or 6.3%. The increase in the average
13
<PAGE> 15
balance of interest-earning assets is primarily a result of an increase in the
average balance of loans, net, of $20.0 million, or 10.4%,
offset by a decrease in the average balance of federal funds sold of $4.6
million, or 76.9%, and a decrease of $1.7 million, or 8.9%, in the average
balance of investment securities and mortgage-backed and mortgage-related
securities. The yield on average interest-earning assets increased 20 basis
points to 8.15% due to an increase on the yield on loans, net.
INTEREST EXPENSE
Interest expense for the nine months ended December 31, 1997 was
$7.5 million compared to $6.9 million for the same period in 1996, an increase
of $661,000, or 9.6%. The increase in interest expense is primarily due to an
increase in the average balance of interest-bearing liabilities coupled with an
increase in the cost of interest-bearing liabilities. The average balance of
interest-bearing liabilities for the nine months ended December 31, 1997
increased to $216.3 million from $203.7 million for the same period in 1996, an
increase of $12.6 million, or 6.2% due to an increase in the balance on deposit
accounts and an increase in rates on certificate accounts. The cost of
interest-bearing liabilities for the nine months ended December 31, 1997
increased 15 basis points to 4.62%.
PROVISION FOR LOAN LOSSES
The Banks' provision for loan losses increased by $432,000, or
1,029%, to $474,000 for the nine months ended December 31, 1997 from $42,000
for the nine months ended December 31, 1996. The increase in the provision for
loan losses resulted from management's review and evaluation of the risks
inherent in its loan portfolio. In particular, management considered increased
delinquencies in four pools of purchased one- to four-family loans which were
internally classified by the Bank. See "Business of the Bank--Lending
Activities" and "--Delinquent Loans, Classified Assets and Real Estate Owned."
As a result of the increased provision, the Bank's ratio of allowance for loan
losses as a percent of loans equaled 0.94% at December 31, 1997 as compared to
0.82% at December 31, 1996. Management believes that the provision for loan
losses and the allowance for loan losses are currently reasonable and adequate
to cover any losses reasonably expected in the existing loan portfolio. While
management estimates loan losses using the best available information, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
NONINTEREST INCOME
Total noninterest income decreased $62,000, or 22.3%, from $276,000
for the nine months ended December 31, 1996 to $214,000 for the nine months
ended December 31, 1997. The decrease is primarily due to a decrease of $48,000
in gain on sale of available-for-sale securities and a decrease of $14,000 in
other noninterest income.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended December 31, 1997
decreased $1.1 million, or 19.3%, from $5.5 million for the nine months ended
December 31, 1996 to $4.5 million for the same period in 1997. The decrease
consisted primarily of the following: compensation and employee benefits
increased $401,000, or 16.3%, due to normal salary increases and merger-related
compensation and additional board of directors meetings held during the nine
month period. In addition, office occupancy and equipment expense increased
$61,000, or 10.0%, FDIC insurance premium expense decreased $1.1 million, or
92.4%, due to the payment of $1.2 million in late 1996 for the SAIF Special
Assessment and due to a decrease in the Bank's assessment
14
<PAGE> 16
rate from 23 basis points to 6.48 basis points, advertising expense
increased $26,000, or 23.0%, data processing expense increased $13,000, or 8.5%,
and other noninterest expense decreased $432,000, or 44.0%. Management
attempts to control costs on an ongoing basis; however, the Bank expects that
compensation and employee benefits may increase after the Conversion, primarily
as a result of the adoption of various stock-based employee benefit plans and
compensation adjustments contemplated in connection with the Conversion. See
"Management of the Bank--Benefits."
INCOME TAXES
Income tax expense for the nine months ended December 31, 1997 was
$776,000, compared to $323,000 for the same period in 1996, an increase of
$453,000, or 140%, primarily due to an increase in before tax income of $1.1
million, or 130%, as a result of the absence of the SAIF Special Assessment in
1997. The effective tax rate for the nine months ended December 31, 1997 was
41.5% as compared to 39.8% for the same period in 1996.
15
<PAGE> 17
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere
in this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock offered hereby.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION
At September 30, 1997, the Bank's ratio of retained earnings to
total assets was 8.01%. The Company's equity position will be significantly
increased as a result of the Conversion. On a pro forma basis as of September
30, 1997, assuming the sale of Common Stock at the midpoint of the Estimated
Price Range, the Company's ratio of stockholders' equity to total assets would
be 17.22%. The Company's ability to deploy this new capital through investments
in interest-earning assets, such as loans and securities, which bear rates of
return comparable to its current investments, will be significantly affected by
industry competition for such investments. The Company currently anticipates
that it will take time to prudently deploy such capital. As a result, the
Company's return on equity initially is expected to be below its historical
return on equity and may be below peer group institutions after the Conversion.
Additionally, due to the implementation of stock-based benefit plans such as the
ESOP, Stock Program and the Stock Option Plan, the Company's future compensation
expense will be increased, thereby, adversely affecting its net income and
return on equity.
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as
government policies and regulations concerning, among other things, monetary and
fiscal affairs, significantly affect the operations of financial institutions
such as the Bank. The New England region of the United States, including the
greater Boston metropolitan area (the Bank's primary market area) experienced a
significant economic decline beginning approximately in 1988. This decline
adversely affected employment levels, the real estate markets and the financial
services industry in the Bank's market area. Over the past decade, due primarily
to the reduction in manufacturing jobs in Eastern Massachusetts, the Bank's
primary market area has generally experienced higher unemployment rates than
national averages and the levels experienced by the Commonwealth of
Massachusetts as a whole. As a result of the decline in the regional economy,
delinquencies increased and the underlying values of properties located in the
Bank's primary market area declined from the values experienced in the late
1980s. The effects of the economic downturn were especially pronounced in the
commercial real estate and condominium markets, where prices declined
substantially in many cases. The declining rental market and decrease in market
values of properties in turn adversely affected the ability of some real estate
developers and borrowers to repay or refinance their commercial real estate and
construction loans. Additionally, numerous failures of financial institutions
operating in the New England region resulted in the placement of commercial and
residential properties into the hands of federal liquidators, contributing to
the oversupply of properties available-for-sale and also contributed to a
further decline of real estate prices. The economic conditions affecting the
Bank's primary market area also resulted in reduced loan demand and increased
competition for the existing lower level of loan demand.
While there have been signs of improvement in the economies and real
estate markets of some New England areas, particularly in and around the greater
Boston metropolitan area, and there are signs that the market values of
residential and commercial properties in those areas have stabilized since the
sharp declines experienced in the late 1980s and early 1990s, the economies and
real estate markets in the Bank's primary market area have not recovered to the
levels experienced in the late 1980s. While the Bank has not, in recent years,
suffered the same detrimental impact as other financial institutions, a slowdown
in the recovery of the Bank's primary market area or downturn in the local and
regional economy or real estate market could adversely affect the financial
condition and results of operations of the Company and Bank in the future.
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SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions,
is dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets in response to such movements.
At September 30, 1997, the Bank's total interest-bearing liabilities
maturing or repricing within one year exceeded its total interest-earning assets
maturing or repricing in the same time period by $96.0 million, representing a
cumulative one-year interest sensitivity gap as a percentage of total assets of
negative 17.2%. Accordingly, in a rapidly rising interest rate environment, the
cost of the Bank's interest-bearing liabilities will generally increase at a
rate faster than the yield on its interest-earning assets thereby adversely
affecting the Bank's net interest income. Increases in interest rates also could
adversely affect the type (fixed-rate or adjustable-rate) and amount of loans
originated by the Bank and the average life of loans and securities which, in
turn, could adversely impact the yields earned on the Bank's loan and securities
portfolios as well as the amount of secondary market activity in which the Bank
engages. The Bank attempts to manage its interest rate risk by primarily selling
all longer-term, fixed-rate one- to four-family loans, emphasizing the
origination and retaining of adjustable-rate and shorter-term fixed-rate loans,
purchasing adjustable-rate loans and investing in securities with shorter stated
or estimated maturities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Management of Interest Rate Risk."
Increases in market interest rates would result in an increase in
the interest rates on the Bank's adjustable-rate loans, thereby causing higher
loan payment amounts by the borrowers which, in turn, may result in elevated
delinquencies on such loans. Increases in the level of interest rates may also
adversely affect the value of the Bank's investment and mortgage-backed
securities and other interest-earning assets and, in turn, its results of
operations or retained earnings. At September 30, 1997, the Bank's securities
available-for-sale had an estimated fair value of $3.3 million, which was
greater than the amortized cost of $2.3 million. At the same date, the Bank's
securities held-to-maturity had an estimated fair value of $13.2 million, which
was $30,000 greater than their amortized cost. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk," "Business of Bank -- Lending Activities -- One- to Four-
Family Lending" and " -- Investment Activities."
INCREASED LENDING RISKS ASSOCIATED WITH MULTI-FAMILY, COMMERCIAL REAL ESTATE,
AND CONSTRUCTION AND DEVELOPMENT LOANS
At September 30, 1997, the Bank's multi-family, commercial real
estate and construction and development loan portfolios totalled $53.8 million,
or 24.0%, of total loans. Of this amount, $17.3 million, or 7.7%, consisted of
multi-family loans, $29.3 million, or 13.0%, consisted of commercial real estate
loans and $7.3 million, or 3.2%, consisted of construction and development
loans. Multi-family and commercial real estate loans are generally viewed as
exposing the lender to greater credit risk than one- to four-family residential
loans and typically involve higher loan principal amounts. Repayment of
multi-family and commercial real estate loans generally is dependent, in large
part, on sufficient income from the property to cover operating expenses and
debt service. The Bank attempts to offset the risks associated with multi-family
and commercial real estate lending primarily by lending to individuals who will
be actively involved in the management of the property or who have proven
management experience, or by making such loans with lower loan-to value ratios
than one- to four-family loans. Additionally, the Bank generally requires
personal guarantees from the borrowers of its multi-family and commercial real
estate loans. Economic events and government regulations, which are outside the
control of the borrower or lender, could impact the value of the property
securing the loan or the future cash flow of the affected properties.
Additionally, the
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<PAGE> 19
decline in real estate values experienced in the Bank's lending area was more
pronounced with respect to commercial, multi-family and condominium properties
as compared to owner-occupied one- to four-family properties. See " -- Weakness
of Regional and Local Economy" and "Business of the Bank -- Lending Activities."
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved,
owner-occupied real estate, and is generally considered to be the riskiest form
of real estate lending. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development compared to the estimated cost (including
interest) of construction and other assumptions, including the estimated time to
sell residential properties. Unforeseen problems may occur during the
construction and development which may increase the cost to the borrower and,
thus, result in the borrower's inability to complete construction. Additionally,
unanticipated delays may jeopardize the availability or terms of permanent
financing and may also affect the ability of the Bank to realize an acceptable
return on the investment as a result of changed economic conditions and lowered
demand for the completed property. Moreover, if the estimated value of the
property proves to be inaccurate, the Bank may be confronted with having a loan
secured by a property, when completed, which has a value insufficient to assure
full repayment.
ESTABLISHMENT OF THE FOUNDATION
The Plan of Conversion provides that the Bank and the Company will
establish The Bay State Federal Savings Charitable Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. Establishment of the
Foundation is subject to the approval of the Bank's members at the Special
Meeting. If approved by members, the establishment of the Foundation will be
dilutive to the voting and ownership interests of stockholders and will have an
adverse impact on the operating results of the Company in fiscal 1998, possibly
resulting in an operating loss in fiscal 1998, the fiscal year in which the
Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to
establish the Foundation with Company Common Stock in an amount equal to 8% of
the Common Stock sold in the Conversion. At the minimum, midpoint and maximum of
the Estimated Price Range, the contribution to the Foundation would be 120,700,
142,000 and 163,300 shares, with a value of $2.4 million, $2.8 million and $3.3
million, respectively, based on the Purchase Price of $20.00 per share. Upon
completion of the Conversion and establishment of the Foundation, the Company
will have 2,204,550 shares issued and outstanding at the maximum of the
Estimated Price Range, of which the Foundation will own 163,300 shares, or 7.4%.
AS A RESULT, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 7.4%. SEE "PRO FORMA
DATA."
Negative Impact on Earnings. Assuming receipt of approval of the
Bank's members, establishment of the Foundation will have an adverse impact on
the Company's and the Bank's earnings in the year in which the contribution is
made. The Company will recognize an expense in the amount of the contribution to
the Foundation in the quarter in which it occurs, which is expected to be the
fourth quarter of fiscal 1998. Such expense will reduce earnings and have a
material adverse impact on the Company's earnings for the year. The amount of
the contribution will range from $2.4 million to $3.3 million, depending on the
amount of Common Stock sold in the Conversion. The contribution expense will be
partially offset by the tax deductibility of the expense. The Company and Bank
have been advised by their independent accountants that the contribution to the
Foundation will be tax deductible, subject to a limitation based on 10% of the
Company's annual taxable income. Assuming a contribution of $3.3 million in
Common Stock, based on the maximum of the Estimated Price Range, the Company
estimates a net tax effected expense of $2.2 million based on an effective tax
rate of 34%. If the Conversion had been completed at the maximum of the
Estimated Price Range and the Foundation had been established at March 31, 1997,
the Bank would have
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reported a loss of $1.1 million for fiscal 1997 rather than reporting
net income of $1.1 million. In addition to the contribution to the Foundation,
the Bank expects in the future to continue making ordinary charitable
contributions within its community. Such additional contributions are expected
to range from $20,000 to $30,000 per year.
Possible Nondeductibility of the Contribution. The Company and the
Bank have been advised by their independent accountants that an organization
created for charitable purposes will qualify as a Section 501(c)(3) exempt
organization under the Code and will be classified as a private foundation. In
this regard, the Foundation will submit a request to the Internal Revenue
Service ("IRS") to be recognized as a tax-exempt organization. The Company and
the Bank have received an opinion of their independent accountants that the
Foundation will qualify as a Section 501(c)(3) exempt organization under the
Code, except that such opinion does not consider the impact of the regulatory
condition on the gift imposed by the OTS which requires the shares of Common
Stock of the Company held by the Foundation to be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Conversion -- Establishment of the
Charitable Foundation" and "-- Regulatory Conditions Imposed on the Foundation."
In the event that the Company or the Foundation receives an opinion of their tax
counsel satisfactory to OTS that compliance with the voting restriction would
have the effect of causing the Foundation to lose its tax exempt status,
otherwise have material adverse tax consequences on the Foundation or subject
the Foundation to an excise tax under Section 4941 of the Code, the OTS will
waive such voting restriction upon submission of such opinion(s) by the Company
or the Foundation. The independent accountants' opinion further provides that
the Company's contribution of its own stock to the Foundation will not
constitute an act of self-dealing and that the Company will be entitled to a
deduction in the amount of the fair market value of the stock at the time of the
contribution less the nominal par value that the Foundation is required to pay
to the Company for such stock, subject to an annual limitation based on 10% of
the Company's annual taxable income. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution for federal tax purposes. Thus, while the Company expects to
receive a charitable contribution deduction of approximately $300,000 in
fiscal 1998, assuming the midpoint, the Company is permitted under the Code to
carryover the excess contribution over a five-year period following the year in
which the contribution is initially made for federal tax purposes. The Company
will not be able to carry forward the unused portion of the deduction for
Massachusetts state income tax purposes. Assuming the sale of Common Stock at
the midpoint of the Estimated Price Range, the Company estimates that
substantially all of the contribution should be deductible for federal tax
purposes over the six-year period. However, no assurances can be made that the
Company will have sufficient pre-tax income over the five-year period following
the year in which the contribution is initially made to fully utilize the
carryover related to the excess contribution. Although the Company and the Bank
have received an opinion of their independent accountants that the Company will
be entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event,
there would be no tax benefit related to the Foundation.
Comparison of Valuation and Other Factors Assuming the Foundation is
Not Established as Part of the Conversion. The establishment of the Foundation
was taken into account by Keller in determining the estimated pro forma market
value of the Company. The aggregate price of the shares of Common Stock being
offered in the Offerings is based upon the independent appraisal conducted by
Keller of the estimated pro forma market value of the Company. The pro forma
aggregate price of the shares being offered for sale in the Conversion is
currently estimated to be between $30.2 million and $40.8 million, with a
midpoint of $35.5 million. Based on the appraisal, the pro forma market
capitalization of the Bank at the midpoint, including shares contributed to the
Foundation, is $38.3 million. The pro forma price to book ratio and the pro
forma price to earnings ratio are 75.39% and 16.31x, respectively, at the
midpoint of the Estimated Price Range. In the event that the Conversion did not
include the Foundation, Keller has estimated that the
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estimated pro forma market capitalization of the Bank would be approximately
$42.0 million at the midpoint based on a pro forma price to book ratio and the
pro forma price to earnings ratio that are approximately the same as the
independent appraisal at 75.19% and 16.37x, respectively. If the Foundation was
not part of the Conversion, the pro forma market value of the shares being
offered is estimated to be between $35.7 million and $48.3 million. See
"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that if the
Foundation is not approved the appraisal prepared at that time would conclude
that the pro forma market value of the Company would be the same as the amount
estimated herein. Any appraisal prepared at that time would be based on the
facts and circumstances existing at that time, including, among other things,
market and economic conditions.
The Bank believes that the establishment of the Foundation is in the
best interests of the Bank, its depositors, its prospective stockholders and the
communities in which it operates. The Foundation is integrally tied to the
Bank's business of operating a community banking institution and the Bank
believes that, based upon the additional goodwill and visibility expected to be
generated by the Foundation and the expected benefits it will provide the
communities in which the Bank's customers reside, the Foundation will have a
positive impact on the Bank's long-term franchise value. The amount of Common
Stock being offered in the Conversion at the midpoint of the Estimated Price
Range is approximately $6.5 million less than the estimated amount of Common
Stock that would be offered in the Conversion without the Foundation based on
the estimate provided by Keller. Accordingly, certain members of the Bank who
subscribe to purchase Common Stock in the Subscription Offering may receive
fewer shares depending on the appraisal valuation at that time, the number of
shares sold based on that appraisal, the size of a depositor's stock order, the
amount of his or her qualifying deposits in the Bank and the overall level of
subscriptions. The decrease in the amount of Common Stock being offered will
not have a significant effect on the Company or the Bank's capital position.
The Bank's regulatory capital is significantly in excess of its regulatory
capital requirements and will further exceed such requirements following the
Conversion. The Bank's tangible, core and risk-based capital ratios at
September 30, 1997 were 8.0%, 8.0% and 15.3%, respectively. Assuming the sale
of shares at the midpoint of the Estimated Price Range, the Bank's pro forma
tangible, core and risk-based capital ratios at September 30, 1997 would be
12.2%, 12.2% and 22.8%, respectively. On a consolidated basis, the Company's
pro forma stockholders' equity would be $50.9 million or approximately 18.28%
of pro forma consolidated assets, assuming the sale of shares at the midpoint
of the Estimated Price Range. Pro forma stockholders' equity per share and pro
forma net earnings per share would be $26.53 and $0.61, respectively. If the
Foundation was not being established in the Conversion, based on the Keller
estimate, the Company's pro forma stockholders' equity would be approximately
$55.9 million or approximately 19.72% of pro forma consolidated assets at the
midpoint of the estimate and pro forma stockholders' equity per share, and pro
forma net earnings per share would be approximately the same with the
Foundation as without the establishment of the Foundation. See "Comparison of
Valuation and Pro Forma Information with No Foundation."
Potential Anti-Takeover Effect. If approved by the Bank's members,
upon completion of the Conversion, the Foundation will own 7.4% of the total
shares of the Company's Common Stock outstanding. Such shares will be owned
solely by the Foundation; however, pursuant to the terms of the contribution as
mandated by the OTS, the shares of Common Stock held by the Foundation must be
voted in the same ratio as all other shares of the Company's Common Stock on all
proposals considered by the stockholders of the Company. See "The Conversion-
Establishment of the Charitable Foundation" and "Regulatory Conditions Imposed
on the Foundation." The Company and the Foundation will take the necessary steps
to provide such requirement in the Foundation's corporate governance documents.
As such, the Company does not believe the Foundation will have an anti-takeover
effect on the Company. In the event that the OTS were to waive this voting
restriction, the Foundation's board of directors would exercise sole voting
power over such shares and would no longer be subject to the restriction.
However, the OTS could impose additional conditions at that time on the
composition of the board of directors of the Foundation or which otherwise
relate to control
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<PAGE> 22
of the Common Stock of the Company held by the Foundation. See "The Conversion -
Establishment of the Charitable Foundation - Regulatory Conditions Imposed on
the Foundation." If a waiver of the voting restriction were granted by the OTS
and no further conditions were imposed on the Foundation at that time,
management of the Company and the Bank may benefit to the extent that the board
of directors of the Foundation determines to vote the shares of Common Stock
held by the Foundation in favor of proposals supported by the Company and the
Bank. Furthermore, when the Foundation's shares are combined with shares
purchased directly by officers and directors of the Company, shares held by
proposed stock benefit plans, if approved by stockholders, and shares held in
the Bank's ESOP, the aggregate of such shares could exceed 20% of the Company's
outstanding Common Stock, which could enable management to defeat stockholder
proposals requiring 80% approval. Consequently, this potential voting control
might preclude takeover attempts that certain stockholders deem to be in their
best interest and might tend to perpetuate management. Since the ESOP shares are
allocated to all eligible employees of the Bank and any unallocated shares will
be voted by an independent trustee and because awards under the proposed stock
benefit plans may be granted to employees other than executive officers and
directors, management of the Company does not expect to have voting control of
all shares held or allocated by the ESOP or other stock benefit plans. See " --
Certain Anti-Takeover Provisions Which May Discourage Takeover Attempts --
Voting Control of Officers and Directors."
Further, there will be no agreements or understandings, written or
tacit, with respect to the exercise of either direct or indirect control over
the management or policies of the Company by the Foundation which may discourage
takeover attempts, including agreements related to voting, acquisition or
disposition of the Company's Common Stock. Finally, as the Foundation sells its
shares of Common Stock over time, its ownership interest and voting power in the
Company is expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion is innovative and has been done in a limited
number of instances in connection with a conversion. As such, the Foundation may
be subject to potential challenges notwithstanding that the Board of Directors
of the Company and the Bank have carefully considered the various factors
involved in the establishment of the Foundation in reaching its determination to
establish the Foundation as part of the Conversion. See "The Conversion --
Establishment of the Charitable Foundation -- Purpose of the Foundation." In
conjunction with its approval of the Conversion, the Bank determined to submit
the Foundation for a vote of members so that members have a right to vote on
whether the Foundation should be established as part of the Conversion. If
certain parties were to institute an action seeking to require the Bank to
eliminate establishment of the Foundation in connection with the Conversion, no
assurances can be made that the resolution of such action would not result in a
delay in the consummation of the Conversion or that any objecting persons would
not be ultimately successful in obtaining such removal or other equitable relief
or monetary damages against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings.
Approval of Members. Establishment of the Foundation is subject to
the approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the establishment of the Foundation, the
Bank intends to complete the Conversion without the establishment of the
Foundation. Failure to approve the Foundation may materially increase the pro
forma market value of the Common Stock being offered for sale in the Offerings
since the Valuation Range, as set forth herein, takes into account the dilutive
impact of the issuance of shares to the Foundation. If the pro forma market
value of the Common Stock without the Foundation is either greater than $40.8
million or less than $30.2 million, the Bank will establish a new Estimated
Price Range and commence a resolicitation of subscribers (i.e., subscribers will
be permitted to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
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resolicitation offering or their subscriptions funds will be promptly refunded
with interest at the Bank's passbook rate of interest, or be permitted to
increase, decrease, or cancel their subscriptions). Any change in the Estimated
Price Range must be approved by the OTS. See "The Conversion - Stock Pricing." A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the OTS
for periods of up to 90 days not to extend beyond _______________, 2000.
DEPENDENCE ON KEY PERSONNEL
The successful operation of the Bank depends heavily upon the active
involvement of the Bank's President and Chief Executive Officer, John F. Murphy
and the Chief Operating Officer, Denise M. Renaghan. The loss of either of these
officers could materially affect the financial condition of the Bank. As an
incentive to retain such officers, the Bank intends to enter into employment
agreements with each of them upon completion of the Conversion. The Bank
currently retains "key-man" life insurance with respect to Mr. Murphy and
Ms. Renaghan.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Bank's primary market area,
the greater Boston metropolitan area, is a highly competitive market for
financial services. The Bank faces direct competition from a significant number
of financial institutions operating in its market area, many with a state-wide
or regional presence and, in some cases, a national presence. This competition
arises from commercial banks, savings banks, cooperative banks, mortgage
brokers, mortgage banking companies, credit unions and other providers of
financial services, many of which are significantly larger than the Bank and,
therefore, have greater financial and marketing resources than those of the
Bank. In addition, the Bank has experienced significant competition from credit
unions in all areas within its primary market area, some of which are
significant in asset size. Federal and state credit unions have a significant
competitive advantage over banks and savings institutions as they do not pay
income taxes. This advantage, which is unique to credit unions, places
significant competitive pressure on the Bank's loan and deposit pricing
policies, which directly affects the Bank's profitability. See "Business of the
Bank -- Market Area and Competition."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a
federal savings association. In addition, the Company, as a savings and loan
holding company, is subject to extensive regulation and supervision. Such
regulations, which affect the Bank on a daily basis, may be changed at any time,
and the interpretation of the relevant law and regulations is also subject to
change by the authorities who examine the Bank and interpret those laws and
regulations. Any change in the regulatory structure or the applicable statutes
or regulations, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Company, the Bank, its operations or the Bank's
Conversion. See "Regulation."
Recently enacted legislation provides that the BIF and SAIF will
merge on January 1, 1999 if there are no more savings associations as of that
date. Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill recently reported by
the House Banking Committee would require federal thrifts to become national
banks or state chartered commercial banks or savings banks within two years
after enactment or they would, by operation of law, become national banks. A
national bank resulting from a converted federal thrift could continue to engage
in activities, including holding any assets, in which it was lawfully engaged on
the day before the date of enactment. Branches operated on the day before
enactment could be retained regardless of their permissibility for national
banks.
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Subject to a grandfathering provision, all savings and loan holding companies
would become subject to the same regulation and activities restrictions as bank
holding companies. The grandfathering could be lost under certain circumstances,
such as a change in control of the holding company. The legislative proposal
would also abolish the OTS and transfer its functions to the federal bank
regulators with respect to the institutions and to the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") with respect to the regulation
of holding companies. The Bank is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF will eventually be merged.
Legislation regarding bad debt recapture was signed into law in
August 1996 effective for tax years beginning on or after January 1, 1996. The
legislation requires recapture of reserves accumulated after 1987. The recapture
tax on post-1987 reserves must be paid over a six-year period starting in 1996.
The payment of the tax can be deferred in each of 1996 and 1997 if an
institution originates at least the same average annual principal amount of
purchased mortgage loans that it originated in the six years prior to 1996. The
Bank has previously recorded a deferred tax liability related to such
legislation; therefore, such recapture is expected to have no effect on net
income or federal income tax expense. See "Federal and State Taxation -- Federal
Taxation -- Bad Debt Reserve."
STOCK-BASED BENEFITS TO MANAGEMENT AND DIRECTORS AND CHANGE IN CONTROL PAYMENTS
Stock Program. The Company intends to adopt the Stock Program which
would provide for the granting of Common Stock to directors, officers and
employees of the Company and its affiliates and seek stockholder approval of
such plans at a meeting of stockholders following the Conversion which, under
current OTS regulations, may be held no earlier than six months after completion
of the Conversion. Assuming the receipt of stockholder approval, the Company
expects to acquire Common Stock on behalf of the Stock Program in an amount
equal to 4% of the Common Stock issued in the Conversion, including shares
issued to the Foundation, or 65,178 shares and 88,182 shares at the minimum and
maximum of the Estimated Price Range, respectively. These shares will be
acquired either through open market purchases by a trust established for the
Stock Program or contributed by the Company from authorized but unissued Common
Stock. See "-- Possible Dilutive Effect of Stock Program and Stock Options."
Although no specific award determinations have been made, the
Company anticipates that it will provide awards to the directors, officers and
employees to the extent permitted by applicable regulations. Current OTS
regulations provide that, with respect to any such benefit plan which is
implemented within one year after consummation of the Conversion, no individual
may receive more than 25% of the shares of any such plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the shares awarded under any such plan. Common Stock awarded under the Stock
Program will be awarded at no cost to the recipients. Under the terms of the
Stock Program, an independent trustee will vote unallocated shares in the same
proportion as it receives instructions from recipients with respect to allocated
shares which have not been earned and distributed. The trustee will not vote
allocated shares which have not been distributed if it does not receive
instructions from the recipient. The specific terms of the Stock Program
intended to be adopted and the amounts of awards thereunder have not yet been
determined by the Board of Directors and any such determination will consider
various factors, including but not limited to, the financial condition of the
Company, current and past performance of plan participants and tax and
securities law and regulation requirements. The stock-based benefits provided
under the Stock Program and Stock Option Plan discussed below, may be provided
under separate stock program plans and stock option plans for officers,
employees and directors or such benefits may be provided for under a single
master stock-based benefit plan adopted by the Company which would incorporate
the benefits and features in the separate plans (the "Master Stock-Based Benefit
Plan"). The award of Common Stock under the Stock Program will be an additional
compensation expense to the Company and, accordingly, may result in an increase
in the
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overall compensation expense in future periods. See "Management of the Bank --
Benefits -- Stock Program."
Stock Option Plan. The Company also intends to adopt the Stock
Option Plan which would provide to officers, employees and directors of the
Company and its affiliates options to purchase Common Stock. The Company intends
to seek stockholder approval of such plan at a meeting of stockholders following
the Conversion, which under current OTS regulations may be held no earlier than
six months after completion of the Conversion. Although no specific
determinations have been made, assuming the receipt of stockholder approval, the
Company expects that employees, officers and directors will be granted options
to purchase an amount of authorized but unissued Common Stock or treasury stock,
if any, equal to 10% of the Common Stock issued in the Conversion, including
shares issued to the Foundation, or 162,945 shares and 220,455 shares at the
minimum and maximum of the Estimated Price Range. Under the Stock Option Plan,
the exercise price of options will be at least equal to the fair market value of
the underlying Common Stock on the date of grant. Such options will permit such
officers, employees and directors to benefit from any increase in the market
value of the shares in excess of the exercise price at the time of exercise.
Officers, employees and directors receiving such options will not be required to
pay for the shares until the date of exercise. The specific terms of the Stock
Option Plan intended to be adopted and amounts and awards thereunder have not
yet been determined by the Board of Directors and any such determination will
consider various factors, including but not limited to, the financial condition
of the Company, current and past performance of award recipients and tax and
securities law and regulation requirements. The Stock Options discussed above
may be provided under the Stock Option Plan, may be provided under separate
plans for officers, employees and directors or under the Master Stock-Based
Benefit Plan which would incorporate the features and benefits of the separate
plans. Although no specific award determinations have been made, the Company
anticipates that it will provide awards to the directors, officers and employees
to the extent permitted by applicable regulations. Current OTS regulations
provide that, with respect to any such benefit plan which is implemented within
one year after consummation of the Conversion, no individual may receive more
than 25% of the shares of any such plan and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the shares
awarded under any such plan. The award and exercise of stock options will result
in additional compensation expense to the Company and, accordingly, may result
in an increase in the overall compensation expense in future periods. See
"Management of the Bank -- Benefits -- Stock Option Plan."
Employment Contracts and Change in Control Provisions. Employment
and change in control agreements with certain officers and the employee
severance compensation plan provide for benefits and cash payments subsequent to
a change in control of the Company or the Bank. The provisions in such
agreements and plan would provide the recipient with a change in control payment
in the event of the recipient's involuntary or, in certain circumstances,
voluntary termination of employment or service subsequent to a change in control
of the Company or the Bank. These provisions may have the effect of increasing
the cost of acquiring the Company, thereby discouraging future attempts to take
over the Company or the Bank. Based on salaries agreed to under the Employment
and Change in Control Agreements (as defined herein) and on current salaries for
individuals not covered by such agreements, cash payments to be paid in the
event of a change in control pursuant to the terms of the employment agreements,
change in control agreements and an employee severance compensation plan would
be approximately $2.9 million. However, the actual amount to be paid in the
event of a change in control of the Company or Bank cannot be estimated at this
time because the actual amount is based on the average salary of the employee
and other factors existing at the time of the change in control. See
"Restrictions on Acquisition of the Company and the Bank -- Restrictions in the
Company's Certificate of Incorporation and Bylaws," "Management of the Bank -
Employment Agreements," "-- Change in Control Agreements," "-- Employee
Severance Compensation Plan," "-- Benefits - Stock Option Plan" and "-- Benefits
Stock Program."
24
<PAGE> 26
POSSIBLE DILUTIVE EFFECT OF ESOP, STOCK PROGRAM AND STOCK OPTION PLAN
Following the Conversion, the Stock Program will acquire an amount
of shares equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, either through open market purchases
or the issuance of authorized but unissued shares of Common Stock from the
Company. If the Stock Program is funded by the issuance of authorized but
unissued shares, the voting interests of existing stockholders at that time will
be diluted by 3.8%. Additionally, the ESOP, which will be funded with an amount
of Common Stock issued in the Conversion, may be unable to purchase shares in
the Conversion in the event of an oversubscription. In such case, the ESOP may
be funded with shares purchased in open market transactions by the ESOP Trustee
or funded with authorized but unissued shares of Common Stock. If authorized but
unissued shares are used to fund the ESOP, stockholders' interests will be
diluted by 7.4%. Also following the Conversion, directors, officers and
employees will be granted options under the Stock Option Plan. Although no
specific determinations have been made, the Company expects that employees,
officers and directors will be granted options to purchase authorized but
unissued shares in an amount equal to 10% of the Common Stock issued in the
Conversion, including shares issued to the Foundation. Under certain
circumstances, such options may be exercised and sold on the same day, thereby
eliminating any risk to employees, officers and directors in exercising options
in the event that the market price exceeds the exercise price. If all of the
options were to be exercised using authorized but unissued Common Stock and the
ESOP and Stock Program were funded with authorized but unissued shares, the
voting interests of existing stockholders at that time would be diluted by
18.0%.
CERTAIN ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions in the Company's and the Bank's Governing Instruments.
Certain provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Stock Charter
and Bylaws, as well as certain federal regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting on certain
matters, staggered boards of directors, non-cumulative voting for directors,
limits on the calling of special meetings, limits on voting shares in excess of
10% of outstanding shares and certain uniform price provisions for certain
business combinations. The Bank's Stock Charter also prohibits, for five years,
the acquisition or offer to acquire, directly or indirectly, the beneficial
ownership of more than 10% of the Bank's equity securities. Any person violating
this restriction may not vote the Bank's securities in excess of 10%. These
provisions in the Bank's and the Company's governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors and thus,
generally may serve to perpetuate existing management. Also, provisions in the
Employment and Change in Control Agreements (as defined herein) which require
payments to certain officers and employees of the Bank and/or the Company in the
event of a change in control may have the effect of discouraging takeover
attempts of the Bank or the Company. For a more detailed discussion of these
provisions, see "Restrictions on Acquisitions of the Company and the Bank."
Voting Control of Officers and Directors. Directors and executive
officers of the Bank and the Company expect to purchase approximately 3.6% or
2.7% of the shares of Common Stock to be issued in the Conversion, based upon
the minimum and the maximum of the Estimated Price Range, respectively,
exclusive of shares that may be attributable to directors and officers through
the Stock Program, the Stock Option Plan and the ESOP, which such plans may give
directors, officers and employees the potential to control the voting of an
additional 22.0% of the Company's Common Stock assuming all such plans were
funded with authorized but unissued shares. In addition, the Foundation will be
funded with a contribution by the Company equal to 8% of the Common Stock issued
in the Conversion which, if a waiver of the voting restriction imposed on such
Common Stock is obtained from the OTS, may be voted as determined by the
directors of the Foundation who also will be directors or officers of the
Company or the Bank. Management's
25
<PAGE> 27
potential voting control could, together with additional stockholder support,
defeat stockholder proposals requiring 80% approval of stockholders. As a
result, this potential voting control may preclude takeover attempts that
certain stockholders deem to be in their best interest and may tend to
perpetuate existing management. See "Restrictions on Acquisition of the Company
and the Bank -- Restrictions in the Company's Certificate of Incorporation and
Bylaws."
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Bank have never issued capital stock. The
Company has applied to have its Common Stock listed on the AMEX under the symbol
"BYS" upon completion of the Conversion. However, there can be no assurance that
an active and liquid trading market for the Common Stock will develop or, once
developed, will continue, nor can there be any assurances that purchasers of the
Common Stock will be able to sell their shares at or above the Purchase Price.
The absence or discontinuance of a market for the Common Stock would have an
adverse impact on both the price and liquidity of the Common Stock. See "Market
for the Common Stock."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be issued in the Conversion, including
shares issued to the Foundation may be increased as a result of an increase in
the Estimated Price Range of up to 15% to reflect changes in market and
financial conditions following the commencement of the Subscription and
Community Offerings. In the event that the Estimated Price Range is so
increased, it is expected that the Company will issue up to 2,347,437 shares of
Common Stock at the Purchase Price for an aggregate purchase price of up to
$46,948,750. An increase in the number of shares issued will decrease a
subscriber's pro forma net earnings per share and stockholders' equity per share
and will increase the Company's pro forma consolidated stockholders' equity and
retained earnings. Such an increase will also increase the Purchase Price as a
percentage of pro forma stockholders' equity per share and net earnings per
share.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of Keller that, pursuant to
Keller's Valuation, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members, have no value. However,
such valuation is not binding on the IRS. If the subscription rights granted to
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are deemed to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members who receive and/or exercise the subscription
rights in an amount equal to such value. Additionally, the Bank could recognize
a gain for tax purposes on such distribution. Whether subscription rights are
considered to have ascertainable value is an inherently factual determination.
See "The Conversion -- Effects of Conversion" and "-- Tax Effects."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Bank's, were designed to accommodate a two-digit year. For
example, "96" is stored on the system and represents 1996. The Bank primarily
utilizes a third-party vendor for processing the primary banking applications.
In addition, the Bank also uses third-party vendor application software for all
ancillary computer applications. The third-party vendor for the Bank's banking
applications is in the process of modifying, upgrading or replacing its
computer applications to insure Year 2000 compliance. To assist in this
effort, the Bank has been advised by such vendor that the vendor has hired the
services of a consultant to review the plan and assist such vendor in achieving
Year 2000 compliance by December 31, 1998. In addition, the Bank has instituted
a Year 2000 compliance program whereby the Bank is reviewing the Year 2000
compliance issues that may be faced by its other third-party vendors. Under
such program, the Bank will examine the need for modifications or replacement
of all non-Year 2000 compliant pieces of software. The Bank does not currently
expect that the cost of its Year 2000 compliance program will be material to
its financial condition and believes that it will satisfy such compliance
program by the end of 1998 without material disruption of its operations. In
the event that the Bank's significant suppliers do not successfully and timely
achieve Year 2000 compliance, the Bank's business or operations could be
adversely affected. However, management believes that the Bank's own internal
system, networks and resources would allow the Bank to effectively operate and
service its customers in the event its significant vendors do not achieve
satisfactory Year 2000 compliance. In addition, if significant vendors failed
to meet Year 2000 operating requirements, the Bank intends to engage
alternative vendors and suppliers. While the Bank cannot estimate the costs and
expenses associated with hiring new vendors and suppliers, management believes
that such costs would not have a material impact in the Bank's earnings or
results of operations.
BAY STATE BANCORP, INC.
The Company was organized in October 1997 at the direction of the
Board of Directors of the Bank for the purpose of acquiring all of the capital
stock to be issued by the Bank in the Conversion. The Company has applied to the
OTS to become a savings and loan holding company and, upon approval, will be
subject to regulation by the OTS. Upon consummation of the Conversion, the
Company will conduct business initially as a unitary savings and loan holding
company. See "Regulation - Holding Company Regulation." After completion of the
Conversion, the Company's assets will consist of all of the outstanding shares
of the Bank's capital stock issued to the Company in the Conversion and that
portion of the net
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<PAGE> 28
proceeds of the Offerings retained by the Company. The Company intends to use
part of the net proceeds it retains to form and capitalize the ESOP Loan
Subsidiary which subsidiary will loan funds to the ESOP to enable the
ESOP to purchase 8% of the Common Stock issued in the Conversion, including
shares issued to the Foundation. Based on certain regulatory and market
conditions, the Company and Bank may, however, alternatively choose to fund the
ESOP's stock purchases through a loan by a third-party financial institution.
The Company intends to initially invest any remaining proceeds in federal funds
and short-term mortgage-backed and mortgage-related securities. See "Use of
Proceeds." Immediately after the Conversion, the Company will have no
significant liabilities. The management of the Company is set forth under
"Management of the Company." Initially, the Company will neither own nor lease
any property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than officers of the Company who are also officers of the Bank, but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Management believes that the holding company structure will provide
the Company with additional flexibility to diversify, should it decide to do so,
its business activities through existing or newly-formed subsidiaries, or
through acquisitions of other financial institutions and financial services
related companies. In addition, management believes that the Company will be in
a position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any acquisition and expansion
opportunities that may arise. There are no current arrangements, understandings
or agreements, written or oral, regarding any such opportunities or
transactions. The initial activities of the Company are anticipated to be funded
by the net proceeds retained by the Company and earnings thereon or,
alternatively, through dividends from the Bank.
The Company's executive offices are located at 1299 Beacon Street,
Brookline, Massachusetts 02146 and the telephone number is (617) 739-9500.
BAY STATE FEDERAL SAVINGS BANK
The Bank was originally organized in 1920 as a state-chartered
mutual cooperative bank under the name Coolidge Corner Cooperative Bank. In
1936, the Bank converted to a federally-chartered mutual savings and loan
association and changed its name to Brookline Federal Savings and Loan
Association. In 1960, the Bank changed its name to Bay State Federal Savings and
Loan Association and, in 1983, changed its name again to Bay State Federal
Savings Bank. In February 1997, the Bank merged with Union Federal Savings Bank
which, at the time of the merger, had $38.2 million of total assets, $35.5
million of deposits and $2.7 million of retained earnings and operated two
banking offices, one located in Boston and one located in Westwood,
Massachusetts. The Bank currently maintains five banking offices located in the
greater Boston metropolitan area, in the municipalities of Boston, Brookline,
Norwood, Dedham and Westwood. The Bank maintains an inactive subsidiary which
was formed for the purpose of real estate development activities.
The Bank's merger with Union Federal Savings Bank, a mutual
institution, was accounted for as a pooling-of-interests. The merger met all
of the conditions specified by APB 16 to be accounted for by the
pooling-of-interests method. The two banks were independent of each other and
combined in their entirety to continue previously separate operations. Upon
consummation of the merger, depositors of Union Federal became depositors of
Bay State. There were no transactions after the merger that were inconsistent
with the combining of the interests of the depositors.
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences. To
a lesser extent, the Bank invests in multi-family, commercial real estate,
construction and development, consumer and commercial loans. The Bank originates
one- to four-family loans primarily for investment and, to a lesser extent, for
sale in the secondary market, generally selling longer-term fixed-rate loans on
a servicing retained basis and retaining for its portfolio all adjustable-rate
mortgage loans and shorter-term fixed-rate mortgage loans. At September 30,
1997, the Bank's loans, net, totalled $219.4 million, or 88.5% of total assets.
At such date, the Bank was servicing $15.0 million of loans for others which
servicing rights were primarily derived from loans sold by the Bank. To a
significantly lesser extent,
27
<PAGE> 29
the Bank also invests in securities, primarily consisting of U.S. Government and
agency obligations, and mortgage-backed and mortgage-related securities,
generally consisting of those guaranteed by governmental agencies such as the
Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National
Mortgage Association ("GNMA"). At September 30, 1997, the Bank's securities
portfolio totalled $16.4 million, or 6.6% of total assets, of which $13.2
million, or 5.3%, were classified as held-to-maturity. At September 30, 1997,
the Bank's deposit accounts totalled $202.2 million, or 88.9% of total
liabilities, of which $92.9 million, or 40.9%, were savings, money market and
negotiable order of withdrawal ("NOW") accounts (collectively, "core deposits").
The Bank also uses advances from the FHLB-Boston as a source of funds. At
September 30, 1997, such advances totalled $22.5 million, or 9.9% of total
liabilities. See "Business of the Bank."
The Bank's executive offices are located at 1299 Beacon Street,
Brookline, Massachusetts 02146 and the telephone number is (617) 739-9500.
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<PAGE> 30
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded all regulatory capital
requirements. See "Regulation -- Federal Savings Institution Regulation --
Capital Requirements." Set forth below is a summary of the Bank's compliance
with the regulatory capital standards as of September 30, 1997, on a historical
and pro forma basis assuming that the indicated number of shares were sold as of
such date and receipt by the Bank of 50% of the net proceeds. For purposes of
the table below, the amount expected to be borrowed by the ESOP and the cost of
the shares expected to be acquired by the Stock Program are deducted from pro
forma regulatory capital.
<TABLE>
<CAPTION>
BAY STATE FEDERAL SAVINGS BANK
PRO FORMA AT SEPTEMBER 30, 1997 BASED UPON THE SALE AT $20.00 PER SHARE
----------------------------------------------------------------------------------------------------------
2,347,437 SHARES
(15% ABOVE
1,508,750 SHARES 1,775,000 SHARES 2,041,250 SHARES MAXIMUM OF
HISTORICAL AT (MINIMUM OF ESTIMATED (MIDPOINT OF ESTIMATED (MAXIMUM OF ESTIMATED ESTIMATED
SEPTEMBER 30, 1997 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
----------------- ----------------- ----------------- ------------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital.......... $20,336 8.21% $30,879 11.78% $32,813 12.39% $34,748 12.99% $36,974 13.67%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital:
Capital Level...... $19,789 8.01% $30,332 11.60% $32,266 12.22% $34,201 12.83% $36,427 13.51%
Requirement........ 3,704 1.50 3,921 1.50 3,960 1.50 4,000 1.50 4,045 1.50
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $16,085 6.51% $26,411 10.10% $28,306 10.72% $30,201 11.33% $32,382 12.01%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tier I Capital:
Capital Level...... $19,789 8.01% $30,332 11.60% $32,266 12.22% $34,201 12.83% $36,427 13.51%
Requirement(3)..... 9,878 4.00 10,456 4.00 10,561 4.00 10,666 4.00 10,787 4.00
------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Excess............. $ 9,911 4.01% $19,876 7.60% $21,705 8.22% $23,535 8.83% $25,640 9.51%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital:
Capital Level(4)(5) $21,555 15.28% $32,187 21.70% $34,138 22.81 $36,090 23.90% $38,334 25.13%
Requirement........ 11,282 8.00 11,867 8.00 11,974 8.00 12,080 8.00 12,202 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $10,273 7.28% $20,320 13.70% $22,164 14.81% $24,010 15.90% $26,132 17.13%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets. Tier
I capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighed
assets.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements
which would require a core capital ratio of 3% of total adjusted assets
for thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation -- Federal Savings Institution Regulation --
Capital Requirements."
(4) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
(5) The difference between equity under generally accepted accounting
principles ("GAAP") and regulatory risk-based capital is attributable to a
portion of the general valuation allowance of $1.8 million and any
unrealized gains on available-for-sale securities at September 30, 1997.
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<PAGE> 31
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $28.9 million and $39.4 million (or $45.4 million if the Estimated Price
Range is increased by 15%). See "Pro Forma Data" and "The Conversion -- Stock
Pricing" as to the assumptions used to arrive at such amounts. The Company will
be unable to utilize any of the net proceeds of the Offerings until the
consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of
the Bank to be issued upon Conversion in exchange for 50% of the net proceeds of
the Offerings, with the remaining net proceeds to be retained by the Company.
Based on net proceeds of $39.4 million and the assets of the Bank as of
September 30, 1997, the Company expects to utilize $19.7 million of net proceeds
to purchase the common stock of the Bank. Such portion of net proceeds will be
added to the Bank's general funds which the Bank currently intends to utilize
for general corporate purposes, including: investment in loans, particularly
residential, commercial real estate and construction and development loans;
investment in federal funds; the repayment of FHLB advances; funding of
stock-based benefit plans; and, to a lesser extent, investment in short-term
mortgage-backed and mortgage related-securities. The Bank may also use such
funds for the expansion of its facilities and to expand operations through
acquisitions of other financial institutions, branch offices or other financial
services companies. The Bank has not yet determined the approximate amount of
net proceeds to be used for any of the purposes mentioned above.
The Company intends to use a portion of the net proceeds it retains
to capitalize the ESOP Loan Subsidiary which intends to loan funds to the ESOP
to enable the ESOP to purchase 8% of the Common Stock issued in the Conversion,
including shares issued to the Foundation. The Company and Bank may
alternatively choose to fund the ESOP's stock purchases through a loan by a
third-party financial institution. The remaining net proceeds retained by the
Company will initially be invested in short-term mortgage-backed and
mortgage-related securities. Based upon the sale of 1,508,750 shares or
2,041,250 shares at the minimum and maximum of the Estimated Price Range and the
issuance of shares to the Foundation, the amount of the loan to the ESOP would
be $2.6 million or $3.5 million, respectively (or $4.1 million if the Estimated
Price Range is increased by 15%) to be repaid approximately over a ten year
period at the prevailing prime rate of interest, which currently is 8.5%. See
"Management of the Bank -- Benefits -- Employee Stock Ownership Plan and Trust."
The net proceeds retained by the Company may also be used to support
the future expansion of operations through branch acquisitions, the
establishment of branch offices and the acquisition of smaller financial
institutions or their assets, including those located within the Bank's market
area or diversification into other banking related businesses. The Company has
no current arrangements, understandings or agreements regarding any such
opportunities or transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would
generally not be restricted as to the types of business activities in which it
may engage, provided that the Bank continues to be a qualified thrift lender
("QTL"). See "Regulation -- Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the
Company will have the authority to conduct stock repurchases, subject to
statutory and regulatory requirements. Unless approved by the OTS, the Company,
pursuant to OTS regulations, will be prohibited from repurchasing any shares of
the Common Stock for three years except (i) for an offer to all stockholders on
a pro rata basis, or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing and except as provided below, beginning one year
following completion of the Conversion, the OTS regulations permit the Company
to repurchase its Common Stock so long as: (i) the repurchases within the
following two years are part of an open-market
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<PAGE> 32
program not involving greater than 5% of its outstanding capital stock during a
12-month period; (ii) the repurchases do not cause the Bank to become
"undercapitalized" within the meaning of the OTS prompt corrective action
regulation; and (iii) the Company provides to the Regional Director of the OTS
no later than 10 days prior to the commencement of a repurchase program written
notice containing a full description of the program to be undertaken and such
program is not disapproved by the Regional Director. See "Regulation -- Prompt
Corrective Regulatory Action." In addition, under current OTS policies,
repurchases may be allowed in the first year following Conversion and in amounts
greater than 5% in the second and third years following Conversion provided
there are valid and compelling business reasons for such repurchases and the OTS
does not object to such repurchases.
Based upon facts and circumstances following the Conversion and
subject to applicable regulatory requirements, the Board of Directors may
determine to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the price
at which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. Although the Company has no current plans to
repurchase stock, in the event the Company does determines to repurchase stock,
such repurchases may be made at market prices which may be in excess of
the Purchase Price in the Conversion.
Any stock repurchases will be subject to the determination of the
Board of Directors that both the Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that such capital will be adequate, taking into account, among other things, the
level of non-performing and other risk assets, the Company's and the Bank's
current and projected results of operations and asset/liability structure, the
economic environment, tax and other considerations. See "The Conversion --
Certain Restrictions on Purchase or Transfer of Shares after Conversion."
While the Company's Board of Directors intends to consider a policy
of paying cash dividends in the future, the Board has not currently formulated a
policy with respect to the payment of dividends. The payment of dividends or
repurchase of stock, however, would be prohibited if stockholders' equity would
be reduced below the amount required to maintain the Bank's liquidation account.
See "Dividend Policy" and "The Conversion -- Liquidation Rights" and "-- Certain
Restrictions on Purchase or Transfer of Shares After Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. In the future, the Board of Directors intends to
consider a policy of paying cash or stock dividends on the Common Stock.
However, no decision has been made with respect to the payment of dividends.
Declarations of dividends by the Board of Directors, if any, will depend upon a
number of factors, including the amount of net proceeds retained by the Company
in the Conversion, investment opportunities available to the Company or the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. No assurances can be given, however, that any dividends
will be paid or, if commenced, will continue to be paid.
31
<PAGE> 33
The Bank will not be permitted to pay dividends to the Company on
its capital stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Conversion -- Liquidation
Rights." For information concerning federal regulations which apply to the Bank
in determining the amount of proceeds which may be retained by the Company and
regarding a savings institution's ability to make capital distributions,
including payment of dividends to its holding company, see "Federal and State
Taxation -- Federal Taxation -- Distributions" and "Regulation -- Federal
Savings Institution Regulation -- Limitation on Capital Distributions."
Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be dependent on the net proceeds retained by the
Company and earnings thereon and may be dependent, in part, upon dividends from
the Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital (generally defined as the aggregate par
value of the outstanding shares of the Company's capital stock having a par
value plus the amount of the consideration paid for shares of the Company's
capital stock without par value) or, if there is no such excess, to its net
profits for the current and/or immediately preceding fiscal year.
Additionally, in connection with the Conversion, the Company and
Bank have committed to the OTS that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without the prior
approval of the OTS.
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock and,
consequently, there is no established market for the Common Stock. The Company
has received conditional approval to have its Common Stock listed on the AMEX
under the symbol "BYS" upon completion of the Conversion. Such approval is
subject to various conditions, including completion of the Conversion and the
satisfaction of applicable listing criteria. There can be no assurance that the
Common Stock will be able to meet the applicable listing criteria in order to
maintain its listing on the AMEX or that an active and liquid trading market
will develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however, depends
upon the presence in the marketplace of both willing buyers and sellers of
Common Stock at any given time, which is not within the control of the Company.
No assurance can be given that an investor will be able to resell the Common
Stock at or above the purchase price of the Common Stock after the Conversion.
32
<PAGE> 34
CAPITALIZATION
The following table presents the unaudited historical consolidated
capitalization of the Bank at September 30, 1997 and the pro forma consolidated
capitalization of the Company after giving effect to the Conversion, including
the issuance of shares to the Foundation, based upon the sale of the number of
shares indicated in the table and the other assumptions set forth under "Pro
Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $20.00 PER SHARE
------------------------------------------------------
2,347,437
1,508,750 1,775,000 2,041,250 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
BANK PRICE PRICE PRICE PRICE
HISTORICAL RANGE) RANGE) RANGE) RANGE)(1)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposit accounts(2).................................. $ 202,161 $ 202,161 $ 202,161 $ 202,161 $ 202,161
FHLB advances........................................ 22,500 22,500 22,500 22,500 22,500
--------- --------- --------- --------- ---------
Total deposit accounts and FHLB advances............. $ 224,661 $ 224,661 $ 224,661 $ 224,661 $ 224,661
========= ========= ========= ========= =========
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000,000
shares authorized; none to be issued............ $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 11,000,000 shares
authorized; shares to be issued as reflected... -- 16 19 22 25
Less: Expense of contribution to the Foundation,
net of taxes(3)......................... -- (1,593) (1,874) (2,156) (2,479)
Plus: Shares issued to the Foundation............ -- 2,414 2,840 3,266 3,756
Less: Common Stock acquired by the ESOP(4)....... -- (2,607) (3,067) (3,527) (4,056)
Additional paid-in capital(5)..................... -- 28,891 34,137 39,384 45,418
Retained earnings(6).............................. 19,789 19,789 19,789 19,789 19,789
Net unrealized gain on available-for-sale
securities...................................... 547 547 547 547 547
Less: Common Stock acquired by the Stock
Program(7).............................. -- (1,304) (1,534) (1,764) (2,028)
--------- --------- --------- --------- ---------
Total stockholders' equity........................... $ 20,336 $ 46,153 $ 50,857 $ 55,561 $ 60,972
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Represents the value of the contribution of Common Stock to the Foundation
at $20.00 per share reduced by the associated tax benefit of $821,000,
$966,000, $1.1 million and $1.3 million at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, based on an effective tax rate of 34%. The realization of
the federal tax benefit is limited annually to 10% of the Company's annual
taxable income, subject to the ability of the Company to carry forward any
unused portion of the deduction for five years following the year in which
the contribution is made. For state income tax purposes, the Bank will not
be able to utilize any such carry forward.
(4) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and that the funds used to acquire such shares will be borrowed from the
ESOP Loan Subsidiary, a wholly-owned subsidiary of the Company. See "Use
of Proceeds". The ESOP Loan Subsidiary will be formed and capitalized by
the Company in connection with the consummation of the Conversion. The
Common Stock acquired by the ESOP is reflected as a reduction of
stockholders' equity. See "Management of the Bank - Benefits -- Employee
Stock Ownership Plan and Trust."
(5) No effect has been given to the issuance of additional shares of Common
Stock to the Foundation at a value of $20.00 per share or to the issuance
of additional shares pursuant to the Company's Stock Option Plan intended
to be adopted by the Company. An amount equal to 10% of the shares of
Common Stock issued in the Conversion, including shares issued to the
Foundation, will be reserved for issuance upon the exercise of options to
be granted under the Stock Option Plan. See "Risk Factors -- Possible
Dilutive Effect of Stock Program and Stock Option Plan," Footnote 4 to the
tables under "Pro Forma Data" and "Management of the Bank -- Benefits --
Stock Option Plan."
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion -- Liquidation Rights" and
"Regulation -- Federal Savings Institution Regulation -- Limitations
on Capital Distributions."
(7) Assumes that subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued
to the Foundation, is purchased by the Stock Program through open market
purchases at the offering price of $20.00 per share. The Common Stock
purchased by the Stock Program is reflected as a reduction of
stockholders' equity. See "Risk Factors -- Possible Dilutive Effect of
Stock Program and Stock Options," Footnote 3 to the tables under "Pro
Forma Data" and "Management of the Bank -- Benefits -- Stock Program."
33
<PAGE> 35
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $28.9 million and $39.4 million (or $45.4
million in the event the Estimated Price Range is increased by 15%) based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription Offering to Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders; (ii) directors, officers and employees of
the Bank and members of their immediate families (collectively, "Insiders") will
purchase an aggregate of $1.2 million of Common Stock and the ESOP will purchase
8% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation; (iii) Sandler O'Neill will receive a fee equal
to 1.55% of the aggregate Purchase Price of shares sold in the Subscription and
Community Offerings, excluding shares purchased by directors, officers,
employees and immediate family members thereof and the ESOP for which Sandler
O'Neill will not receive a fee; and (iv) Conversion expenses, excluding the
marketing fees paid to Sandler O'Neill, will be approximately $860,000. Actual
Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the six months
ended September 30, 1997, and for the year ended March 31, 1997, have been
calculated as if the Common Stock had been sold at the beginning of the
respective periods and the net proceeds had been invested at 6.28% and 6.16%,
respectively, which is the arithmetic average of the weighted average yield
earned by the Bank on its interest-earning assets and the weighted average rate
paid on its deposits during such periods (as required by OTS regulations). The
tables below do not reflect the effect of withdrawals from deposit accounts for
the purchase of Common Stock or the effect of any possible use of the net
Conversion proceeds. The pro forma after-tax yields for the Company and the Bank
are assumed to be 3.93% and 3.85% for the six months ended September 30, 1997
and for the year ended March 31, 1997, respectively. With the exception of the
effect of the contribution of stock to the Foundation and corresponding tax
deductibility of such contribution which are based on an effective tax rate of
34%, all calculations were based on an effective tax rate of 37.5%. Historical
and pro forma net earnings per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock issued in the Conversion, including shares issued to the Foundation, as
adjusted to give effect to unallocated and uncommitted shares held by the ESOP.
Historical and pro forma stockholders' equity per share amounts have been
calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock issued in the Conversion, including the
issuance of shares to the Foundation.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be stated in an amount greater
than amounts that would be available for distribution to stockholders in the
event of liquidation.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the six months ended September 30, 1997 and
at or for the year ended March 31, 1997, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Conversion. The tables below give
effect to the Stock Program, which are expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a meeting
of stockholders. See Footnote 3 to the tables and "Management of the Bank--
Benefits--Stock Program." No effect has been given in the tables to the possible
issuance of additional shares reserved for future issuance pursuant to the Stock
Option Plan to be adopted by the Board of Directors of the Company and presented
to stockholders for approval at a meeting of stockholders, nor does book value
give any effect to the liquidation account to be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders or, in the
event of liquidation of the Bank, to the tax effect of the bad debt reserve and
other factors. See Footnote 3 to the tables below, "The Conversion--Liquidation
Rights" and "Management of the Bank--Benefits--Stock Option Plan." THE FOLLOWING
TABLE ASSUMES THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND
THEREFORE GIVES EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE
COMPANY'S COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE
CONVERSION. THE VALUATION RANGE, AS SET FORTH HEREIN AND IN THE TABLE BELOW,
TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE ISSUANCE OF SHARES TO THE
FOUNDATION.
34
<PAGE> 36
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------
2,347,437
SHARES SOLD
1,508,750 1,775,000 2,041,250 AT $20.00 PER
SHARES SOLD SHARES SOLD SHARES SOLD SHARE (15%
AT $20.00 AT $20.00 AT $20.00 ABOVE MAXIMUM
PER SHARE PER SHARE PER SHARE OF
(MINIMUM (MIDPOINT (MAXIMUM ESTIMATED
OF ESTIMATED OF ESTIMATED OF ESTIMATED PRICE
PRICE RANGE) PRICE RANGE) PRICE RANGE) RANGE)(6)
------------ ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $30,175 $35,500 $40,825 $46,949
Plus: Shares issued to Foundation (equal to 8% of
the stock sold in the Conversion) ............ 2,414 2,840 3,266 3,756
------- ------- ------- -------
Pro forma market capitalization .......................... $32,589 $38,340 $44,091 $50,705
======= ======= ======= =======
Gross proceeds ........................................... $30,175 $35,500 $40,825 $46,949
Less: Offering expenses and commission .................. (1,268) (1,344) (1,419) (1,506)
------- ------- ------- -------
Estimated net proceeds ................................... 28,907 34,156 39,406 45,443
Less: Common Stock acquired by the ESOP ................. (2,607) (3,067) (3,527) (4,056)
Common Stock acquired by Stock Program .......... (1,304) (1,534) (1,764) (2,028)
------- ------- ------- -------
Estimated net proceeds, as adjusted ................... $24,996 $29,555 $34,115 $39,359
======= ======= ======= =======
Consolidated net earnings(1):
Historical ............................................ $ 698 $ 698 $ 698 $ 698
Pro forma earnings on net proceeds .................... 491 580 670 772
Less: Pro forma ESOP adjustment(2) ................... (81) (96) (110) (127)
Pro forma Stock Program adjustment(3) ......... (81) (96) (110) (127)
------- ------- ------- -------
Pro forma net earnings .......................... $ 1,027 $ 1,086 $ 1,148 $ 1,216
======= ======= ======= =======
Per share net earnings(1)(4):
Historical ............................................ $ 0.46 $ 0.39 $ 0.34 $ 0.30
Pro forma earnings on net proceeds .................... 0.33 0.33 0.33 0.33
Less: Pro forma ESOP adjustment(2) ................... (0.05) (0.05) (0.05) (0.05)
Pro forma Stock Program adjustment(3) ......... (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net earnings per share ................ $ 0.69 $ 0.62 $ 0.57 $ 0.53
======= ======= ======= =======
Stockholders' equity:
Historical ............................................ $20,336 $20,336 $20,336 $20,336
Estimated net proceeds ................................ 28,907 34,156 39,406 45,443
Plus: Tax benefit of Foundation(1).................... 821 966 1,110 1,277
Less: Common Stock acquired by ESOP(2) ............... (2,607) (3,067) (3,527) (4,056)
Common Stock acquired by Stock Program(3) ..... (1,304) (1,534) (1,764) (2,028)
------- ------- ------- -------
Pro forma stockholders' equity(3)(5)(6) ......... $46,153 $50,857 $55,561 $60,972
======= ======= ======= =======
Stockholders' equity per share:(7)
Historical ............................................ $ 12.48 $ 10.61 $ 9.22 $ 8.02
Estimated net proceeds ................................ 17.74 17.82 17.87 17.92
Plus: Tax benefit of Foundation ...................... 0.50 0.50 0.50 0.50
Less: Common Stock acquired by ESOP(2) ............... (1.60) (1.60) (1.60) (1.60)
Common Stock acquired by Stock Program(3) ..... (0.80) (0.80) (0.80) (0.80)
------- ------- ------- -------
Pro forma stockholders' equity per share(3)(5)(6).. $ 28.32 $ 26.53 $ 25.19 $ 24.04
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share ....................................... 70.61% 75.39% 79.36% 83.16%
Offering price to pro forma net earnings
per share (annualized) ................................. 14.68x 16.31x 17.76x 19.25x
</TABLE>
(Footnotes on next page)
35
<PAGE> 37
- ----------
(1) Does not give effect to the non-recurring expense that is expected to be
recognized in the fourth quarter of fiscal 1998 if the establishment of
the Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $1.6 million, $1.9 million, $2.2 million and $2.5
million at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively, based on an effective tax rate of
34%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the ESOP Loan
Subsidiary, a wholly-owned subsidiary of the Company. See "Use of
Proceeds." The ESOP Loan Subsidiary will be formed and capitalized by
the Company in connection with the consummation of the Conversion. The
amount to be borrowed is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The Bank's total annual payment of the ESOP debt is based upon 10
equal annual installments of principal, with an assumed interest rate at
8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
to the ESOP is equivalent to the debt service requirement for the six
months ended September 30, 1997 and was made at the end of the period;
(ii) that 6,518, 7,668, 8,818 and 10,141 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, were committed to be released during the six months ended
September 30, 1997 at an average fair value of $20.00 per share in
accordance with Statement of Position ("SOP") 93-6; and (iii) only the
ESOP shares committed to be released were considered outstanding for
purposes of the net earnings per share calculations. A tax rate of 37.5%
was used for all calculations, except for the tax effect of the
Foundation, which was calculated at 34%. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion, and assumes any necessary stockholder or
regulatory approval of the Stock Program has been received. The Stock
Program intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued
to the Foundation, or 65,178, 76,680, 88,182 and 101,409 shares of Common
Stock at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of
Common stock or treasury stock of the Company, if any. Funds used by the
Stock Program to purchase the shares will be contributed to the Stock
Program by the Bank. In calculating the pro forma effect of the Stock
Program, it is assumed that the shares were acquired by the Stock Program
at the beginning of the period presented in open market purchases at the
Purchase Price and that 10% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued
shares of the Company's Common Stock to the Stock Program instead of open
market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per share
would be $0.67, $0.60, $0.56 and $0.51, at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
shareholders' equity per share would be $28.00, $26.28, $25.00 and $23.89
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of the
Stock Program will be obtained, or that the actual purchase price of the
shares will be equal to the Purchase Price. A tax rate of 37.5% was used
for all calculations, except for the tax effect of the Foundation, which
was calculated at 34%. See "Management of the Bank--Benefits--Stock
Program."
(4) The number of shares used in calculation of historical and pro forma
earnings per share was 1,505,612, 1,771,308, 2,037,004 and 2,342,555
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation,
or 162,945, 191,700, 220,445 and 253,523 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing stockholders' interests. Assuming all
options were exercised at the end of the period at an exercise price of
$20.00 per share, the pro forma net earnings per share would be $0.65,
$0.59, $0.55 and $0.51, respectively, and the pro forma stockholders'
equity per share would be $27.57, $25.94, $24.73 and $23.68, respectively.
See "Management of the Bank--Benefits--Stock Option Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion
--Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) The number of shares used in the calculation of historical and proforma
stockholder's equity per share was 1,629,450, 1,917,000, 2,204,550 and
2,535,232 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
36
<PAGE> 38
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31, 1997
----------------------------------------------------------------
1,508,750 1,775,000 2,041,250 2,347,437
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $20.00 AT $20.00 AT $20.00 AT $20.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(6)
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds ........................................... $30,175 $35,500 $40,825 $46,949
Plus: Shares issued to Foundation (equal to 8%
of the stock sold in the Conversion) ............. 2,414 2,840 3,266 3,756
------- ------- ------- -------
Pro forma market capitalization .......................... $32,589 $38,340 $44,091 $50,705
======= ======= ======= =======
Gross proceeds ........................................... $30,175 $35,500 $40,825 $46,949
Less: Offering expenses and commission ................... (1,268) (1,344) (1,419) (1,506)
------- ------- ------- -------
Estimated net proceeds ................................... 28,907 34,156 39,406 45,443
Less: Common Stock acquired by the ESOP .................. (2,607) (3,067) (3,527) (4,056)
Common Stock acquired by Stock Program ............. (1,304) (1,534) (1,764) (2,028)
------- ------- ------- -------
Estimated net proceeds, as adjusted ................... $24,996 $29,555 $34,115 $39,359
======= ======= ======= =======
Consolidated net earnings(1):
Historical ............................................ $ 1,129 $ 1,129 $ 1,129 $ 1,129
Pro forma earnings on net proceeds .................... 962 1,138 1,313 1,515
Less: Pro forma ESOP adjustment(2) .................... (163) (192) (220) (254)
Pro forma Stock Program adjustment(3) ........... (163) (192) (220) (254)
------- ------- ------- -------
Pro forma net earnings .......................... $ 1,765 $ 1,883 $ 2,002 $ 2,136
======= ======= ======= =======
Per share net earnings(1)(4):
Historical ............................................ $ 0.75 $ 0.63 $ 0.55 $ 0.48
Pro forma earnings on net proceeds .................... 0.64 0.64 0.64 0.64
Less: Pro forma ESOP adjustment(2) .................... (0.11) (0.11) (0.11) (0.11)
Pro forma Stock Program adjustment(3) ........... (0.11) (0.11) (0.11) (0.11)
------- ------- ------- -------
Pro forma net earnings per share ................ $ 1.17 $ 1.05 $ 0.97 $ 0.90
======= ======= ======= =======
Stockholders' equity:
Historical ............................................ $19,474 $19,474 $19,474 $19,474
Estimated net proceeds ................................ 28,907 34,156 39,406 45,443
Plus: Tax benefit of Foundation (1).................... 821 966 1,110 1,277
Less: Common Stock acquired by ESOP(2) ................ (2,607) (3,067) (3,527) (4,056)
Common Stock acquired by Stock Program(3) ....... (1,304) (1,534) (1,764) (2,028)
------- ------- ------- -------
Pro forma stockholders' equity(3)(5)(6) ......... $45,291 $49,995 $54,699 $60,110
======= ======= ======= =======
Stockholders' equity per share:(7)
Historical ............................................ 11.95 $ 10.16 $ 8.83 $ 7.68
Estimated net proceeds ................................ 17.74 17.82 17.87 17.92
Plus: Tax benefit of Foundation ....................... 0.50 0.50 0.50 0.50
Less: Common Stock acquired by ESOP(2) ................ (1.60) (1.60) (1.60) (1.60)
Common Stock acquired by Stock Program(3) ....... (0.80) (0.80) (0.80) (0.80)
------- ------- ------- -------
Pro forma stockholders' equity per share(3)(5)(6).. $ 27.79 $ 26.08 $ 24.80 $ 23.70
======= ======= ======= =======
Offering price as a percentage of pro forma stockholders'
equity per share ....................................... 71.96% 76.69% 80.61% 84.35%
Offering price to pro forma net earnings per share ....... 17.13x 18.89x 20.44x 22.02x
</TABLE>
(Footnotes on next page)
37
<PAGE> 39
- ----------
(1) Does not give effect to the non-recurring expense that will be recognized
in the fourth quarter of fiscal 1998 if the establishment of the
Foundation is approved. In that event, the Company will recognize an
after-tax expense for the amount of the contribution to the Foundation
which is expected to be $1.6 million, $1.9 million, $2.2 million and $2.5
million at the minimum, midpoint, maximum, and maximum as adjusted, of the
Estimated Price Range, respectively, based on an effective tax rate of
34%.
(2) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation, will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the ESOP Loan
Subsidiary, a wholly-owned subsidiary of the Company. See "Use of
Proceeds." The ESOP Loan Subsidiary will be formed and capitalized by
the Company in connection with consummation of the Conversion. The
amount to be borrowed is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP in an
amount at least equal to the principal and interest requirement of the
debt. The Bank's total annual payment of the ESOP debt is based upon 10
equal annual installments of principal, with an assumed interest rate at
8.5%. The pro forma net earnings assume: (i) that the Bank's contribution
to the ESOP is equivalent to the debt service requirement for the year
ended March 31, 1997 and was made at the end of the period; (ii) that
13,036, 15,336, 17,636 and 20,282 shares at the minimum, the midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, were committed to be released during the year ended March
31, 1997 at an average fair value of $20.00 per share in accordance with
Statement of Position ("SOP") 93-6; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of the
net earnings per share calculations. A tax rate of 37.5% was used for all
calculations, except for the tax effect of the Foundation which was
calculated at 34%. See "Management of the Bank--Benefits --Employee Stock
Ownership Plan and Trust."
(3) Gives effect to the Stock Program expected to be adopted by the Company
following the Conversion, and assumes any necessary stockholder or
regulatory approval of the Stock Program has been received. The Stock
Program intends to acquire an amount of Common Stock equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued
to the Foundation, or 65,178, 76,680, 88,182 and 101,409 shares of Common
Stock at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of
Common stock or treasury stock of the Company, if any. Funds used by the
Stock Program to purchase the shares will be contributed to the Stock
Program by the Bank. In calculating the pro forma effect of the Stock
Program, it is assumed that the shares were acquired by the Stock Program
at the beginning of the period presented in open market purchases at the
Purchase Price and that 20% of the amount contributed was an amortized
expense during such period. The issuance of authorized but unissued
shares of the Company's Common Stock to the Stock Program instead of open
market purchases would dilute the voting interests of existing
stockholders by approximately 3.8% and pro forma net earnings per share
would be $1.15, $1.05, $0.97 and $0.90 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, and pro forma
stockholders' equity per share would be $27.50, $25.85, $24.63 and $23.57
at the minimum, midpoint, maximum, and 15% above the maximum of the
range, respectively. There can be no assurance that stockholder approval
of the Stock Program will be obtained, or that the actual purchase price
of the shares will be equal to the Purchase Price. A tax rate of 37.5%
was used for all calculations, except for the tax effect of the
Foundation which was calculated at 34%. See "Management of the
Bank--Benefits--Stock Program."
(4) The number of shares used in the calculation of historical and pro forma
earnings per share was 1,512,130, 1,778,976, 2,045,822 and 2,352,696
shares at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Price Range, respectively.
(5) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Conversion. An amount equal to 10% of the Common
Stock issued in the Conversion, including shares issued to the Foundation,
or 162,945, 191,700, 220,455 and 253,523 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plan. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plan will
result in the dilution of existing stockholders' interests. Assuming all
options were exercised at the end of the period at an exercise price of
$20.00 per share, the pro forma net earnings per share would be $1.13,
$1.03, $0.96 and $0.89, respectively, and the pro forma stockholders'
equity per share would be $27.09, $25.53, $24.37 and $23.37, respectively.
See "Management of the Bank--Benefits--Stock Option Plan."
(6) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion
--Liquidation Rights" and "Regulation--Federal Savings Institution
Regulation--Limitation on Capital Distributions."
(7) The number of shares used in the calculation of historical and pro forma
stockholders' equity per share was 1,629,450, 1,917,000, 2,204,550 and
2,535,232 shares at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription Offering.
38
<PAGE> 40
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of
the Conversion, Keller has estimated that the pro forma market capitalization of
the Bank would be approximately $42.0 million, at the midpoint, which is
approximately $3.7 million greater than the pro forma market capitalization of
the Bank if the Foundation is approved by members of the Bank and would result
in approximately a $6.5 million increase, or 18.3%, in the amount of Common
Stock offered for sale in the Conversion. The pro forma price to book ratio and
pro forma price to earnings ratio would be approximately the same under both the
current appraisal and the estimate of the value of the Company without the
Foundation. Further, assuming the midpoint of the Estimated Price Range, pro
forma stockholders' equity per share and pro forma earnings per share would be
substantially the same with the Foundation as without the Foundation. In this
regard, pro forma stockholders' equity and pro forma net earnings per share
would be $26.60 and $0.62, respectively, at the midpoint of the estimate,
assuming no Foundation, and $26.53 and $0.62, respectively, with the Foundation.
The pro forma price to book ratio and the pro forma price to earnings ratio are
75.19% and 16.37x, respectively, at the midpoint of the estimate, assuming no
Foundation and are 75.39% and 16.31x, respectively, with the Foundation. This
estimate by Keller was prepared at the request of the OTS and is solely for
purposes of providing members with sufficient information with which to make an
informed decision on the Foundation. There is no assurance that in the event the
Foundation is not approved at the Special Meeting of Members that the appraisal
prepared at that time would conclude that the pro forma market value of the
Company would be the same as that estimated herein. Any appraisal prepared at
that time would be based on the facts and circumstances existing at that time,
including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at September 30, 1997.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT
------------------------------ ------------------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
-------------- --------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount......................... $ 30,175 $ 35,700 $ 35,500 $ 42,000
Pro forma market capitalization................... 32,589 35,700 38,340 42,000
Total assets...................................... 273,580 277,829 278,284 283,283
Total liabilities................................. 227,427 227,427 227,427 227,427
Pro forma stockholders' equity.................... 46,153 50,402 50,857 55,856
Pro forma consolidated net earnings............... 1,027 1,110 1,086 1,185
Pro forma stockholders' equity per share.......... 28.32 28.24 26.53 26.60
Pro forma consolidated net earnings per share..... 0.69 0.68 0.62 0.62
Pro Forma Pricing Ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............... 70.61% 70.83% 75.39% 75.19%
Offering price to pro forma net earnings
per share.................................... 14.68x 14.87x 16.31x 16.37x
Pro forma market capitalization to total
assets......................................... 11.91% 12.85% 13.78% 14.83%
Pro Forma Financial Ratios:
Return on total assets......................... 0.75% 0.80% 0.78% 0.84%
Return on stockholders' equity (annualized).... 4.44% 4.40% 4.27% 4.24%
Stockholders' equity to total assets........... 16.87% 18.14% 18.28% 19.72%
</TABLE>
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MAXIMUM AS ADJUSTED
--------------- ------------- -------------------------------
WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
--------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Estimated offering amount......................... $ 40,825 $ 48,300 $ 46,949 $ 55,545
Pro forma market capitalization................... 44,091 48,300 50,705 55,545
Total assets...................................... 282,988 288,737 288,399 295,009
Total liabilities................................. 227,427 227,427 227,427 227,427
Pro forma stockholders' equity.................... 55,561 61,310 60,972 67,582
Pro forma consolidated net earnings............... 1,148 1,260 1,216 1,347
Pro forma stockholders' equity per share.......... 25.19 25.39 24.04 24.33
Pro forma consolidated net earnings per share..... 0.57 0.57 0.53 0.53
Pro Forma Pricing Ratios:
Offering price as a percentage of pro forma
stockholders' equity per share............... 79.36% 78.78% 83.16% 82.19%
Offering price to pro forma net earnings
per share.................................... 17.76x 17.70x 19.25x 19.04x
Pro forma market capitalization to total
assets......................................... 15.58% 16.73% 17.58% 18.83%
Pro Forma Financial Ratios:
Return on total assets......................... 0.81% 0.87% 0.84% 0.91%
Return on stockholders' equity (annualized).... 4.13% 4.11% 3.99% 3.99%
Stockholders' equity to total assets........... 19.63% 21.23% 21.14% 22.91%
</TABLE>
39
<PAGE> 41
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
In February 1997, the Bank merged with Union Federal Savings Bank
which at the time of the merger had $38.2 million of total assets, $27.2 million
of loans, net, $35.5 million of deposits and $2.7 million of retained earnings.
Such transaction has been accounted for as a pooling of interests and,
accordingly, the following presentation represents the financial condition and
results of operations for the Bank and Union Federal as a consolidated entity
for all periods presented.
The following Consolidated Statements of Income for each of the years
in the three-year period ended March 31, 1997 have been audited by Shatswell,
MacLeod & Company, P.C., independent certified public accountants, whose report
thereon is included elsewhere in this Prospectus. With respect to the
information for the six months ended September 30, 1997 and 1996, which is
unaudited, in the opinion of management, all adjustments necessary for a fair
presentation of such interim periods have been included and are of a normal
recurring nature. Results for the six months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1998. These Consolidated Statements of Income should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS RESTATED
---------------------------------------
FOR THE SIX MONTHS FOR THE YEAR
ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------- ---------------------------------------
1997 1996 1997 1996 1995
-------- -------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans(1)............................................. $8,685 $7,816 $15,958 $15,414 $14,161
Securities........................................... 552 592 1,197 711 543
Other interest....................................... 37 189 321 423 246
-------- -------- ---------- ---------- ----------
Total interest and dividend income.............. 9,274 8,597 17,476 16,548 14,950
------ -------- -------- -------- --------
Interest expense:
Deposit accounts..................................... 4,366 4,080 8,272 7,936 6,031
FHLB advances........................................ 544 402 946 487 475
------- -------- ---------- ---------- ----------
Total interest expense.......................... 4,910 4,482 9,218 8,423 6,506
------ ------- --------- --------- ---------
Net interest and dividend income before
provision for loan losses..................... 4,364 4,115 8,258 8,125 8,444
Provision for loan losses................................ 444 5 117 1 6
------- ---------- ---------- ------------ ------------
Net interest and dividend income after
provision for loan losses..................... 3,920 4,110 8,141 8,124 8,438
------- ------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts.................. 85 90 163 182 182
Securities gains (losses), net....................... - 48 123 - (18)
Gain on sale of mortgage loans....................... 5 4 6 2 7
Other income......................................... 50 63 115 182 249
------- --------- ---------- ---------- ----------
Total noninterest income........................ 140 205 407 366 420
------ -------- ---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits....................... 1,781 1,611 3,879 3,271 3,370
Occupancy expense.................................... 392 309 611 605 581
Equipment expense.................................... 48 100 238 213 257
Federal deposit insurance premiums................... 62 1,120 1,432 319 386
Advertising.......................................... 88 84 144 164 83
Data processing...................................... 110 102 164 202 196
Other expense........................................ 389 606 941 763 1,121
------ -------- ---------- ---------- ---------
Total noninterest expense....................... 2,870 3,932 7,409 5,537 5,994
------ ------- --------- --------- ---------
Income before income tax expense................ 1,190 383 1,139 2,953 2,864
Income tax expense ...................................... 492 167 10 1,269 1,163
------- -------- ----------- --------- ---------
Net income...................................... $ 698 $ 216 $ 1,129 $ 1,684 $ 1,701
======= ======= ======== ======== ========
</TABLE>
- --------------------
(1) Includes fees on loans.
40
<PAGE> 42
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no
results of operations. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan sale activities and loan servicing. The
Bank's noninterest expense principally consists of compensation and employee
benefits, office occupancy and equipment expense, federal deposit insurance
premiums, data processing, advertising and business promotion and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. Future changes in
applicable law, regulations or government policies may materially impact the
Bank.
In February 1997, the Bank merged with Union Federal Savings Bank
which at the time of the merger had $38.2 million of total assets, $27.2 million
of loans, net, $35.5 million of deposits and $2.7 million of retained earnings.
Such transaction has been accounted for as a pooling of interests and,
accordingly, the following presentation represents the financial condition and
results of operations for the Bank and Union Federal as a consolidated entity
for all periods presented.
MANAGEMENT STRATEGY
Management's primary goal has been to maintain the Bank's
profitability, asset quality and its capital position by: (i) investing
primarily in one- to four-family loans secured by properties located in its
primary market area; (ii) investing in multi-family, commercial real estate and
construction and development loans secured by properties located in the Bank's
primary market area, to the extent that such loans meet the Bank's general
underwriting criteria including, but not limited to, satisfaction of certain
loan-to-value ("LTV") and debt service coverage ratios and satisfaction that
the borrower is experienced in these types of real estate projects; (iii)
investing funds not utilized for loan investments in short-term U.S. Treasury
and mortgage-backed and mortgage-related securities; and (iv) managing interest
rate risk by emphasizing the origination of adjustable-rate loans and
short-term fixed-rate loans and investing in short-term securities and
generally selling longer-term fixed-rate loans that the Bank originates. See
"Business of the Bank-Lending Activities" and "--Securities Investment
Activities." The Bank intends to continue this operating strategy in an effort
to enhance its long-term profitability while maintaining a reasonable level of
interest rate risk and enhance such strategy by expanding the products and
services it offers, as necessary, in order to improve its market share in its
primary market area. In this regard, the Bank has begun to offer business
checking accounts and, in the future, may expand its consumer retail products
to include 24 hour banking by telephone, debit card services and in-home
banking.
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management
function is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given the Bank's business
strategy, operating environment, capital and liquidity requirements and
performance objectives and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Bank seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Bank monitors its interest rate risk as such risk relates to its operating
strategies. The Bank's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a quarterly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Bank. See "Risk Factors--Sensitivity to
Increase in Interest Rates."
41
<PAGE> 43
In recent years, the Bank has primarily utilized the following
strategies to manage interest rate risk: (i) emphasizing the origination and
purchase of adjustable-rate loans; (ii) investing primarily in short-term U.S.
Government securities or mortgage-backed and mortgage-related securities with
shorter estimated maturities; (iii) utilizing FHLB advances to better structure
the maturities of its interest rate sensitive liabilities; and (iv) to a
substantially lesser extent, selling in the secondary market longer-term
fixed-rate mortgage loans originated while generally retaining the servicing
rights on such loans.
Gap Analysis. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
and liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At September 30, 1997, the Bank's cumulative one year interest
rate gap (which is the difference between the amount of interest-earning assets
maturing or repricing within one year and interest-bearing liabilities maturing
or repricing within one year) as a percentage of total assets, was a negative
17.2%. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Accordingly, during a
period of rising interest rates, an institution with a negative gap position
would be in a worse position to invest in higher yielding assets as compared to
an institution with a positive gap position which, consequently, may result in
the cost of its interest-bearing liabilities increasing at a rate faster than
its yield on interest-earning assets than if it had a positive gap. During a
period of falling interest rates, an institution with a negative gap position
would tend to have its interest-earning liabilities repricing downward at a
faster rate than its interest-earning assets as compared to an institution with
a positive gap which, consequently, may tend to positively affect the growth of
its net interest income.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
September 30, 1997, on the basis of contractual maturities, and scheduled rate
adjustments within a three month period and subsequent selected time intervals.
The loan amounts in the table reflect principal balances expected to be
redeployed and/or repriced as a result of contractual amortization of
adjustable-rate loans and fixed-rate loans, and as a result of contractual rate
adjustments on adjustable-rate loans. Money Market accounts, Regular Savings
accounts and NOW accounts are assumed to have annual decay rates of 80%, 15%
and 5%, respectively. Deposit decay rates can have a significant impact on the
Bank's estimated gap. While the Bank believes such assumptions to reasonable,
there can be no assurance that assumed decay rates will approximate future
withdrawal activity. See "Business of the Bank--Lending Activities" and
"--Sources of Funds."
42
<PAGE> 44
<TABLE>
<CAPTION>
MORE MORE MORE MORE
THAN THAN THAN THAN
1 YEAR 2 YEARS 3 YEARS 4 YEARS MORE
1 YEAR TO TO TO TO THAN TOTAL FAIR
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS 5 YEARS AMOUNT VALUE(1)
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold ....... $ 1,000 $ -- $ -- $ -- $ -- $ -- $ 1,000 $ 1,000
Securities ............... 4,290 -- -- 7,300 -- 1,000 12,590 12,580
Mortgage-backed
securities ............... 63 -- -- -- -- 2,791 2,854 2,894
Stock in FHLB-Boston ..... 1,672 -- -- -- -- -- 1,672 1,672
Loans(2) ................. 104,803 33,283 24,033 8,201 7,056 42,858 220,234 218,044
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets ................ $111,828 $ 33,283 $ 24,033 $ 15,501 $ 7,056 $ 46,649 $238,350 $236,190
======== ======== ======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Money market accounts .... $ 34,143 $ 8,536 $ -- $ -- $ -- $ -- $ 42,679 $ 42,679
Regular savings accounts . 4,358 4,358 4,358 4,358 4,358 7,263 29,053 29,053
NOW accounts ............. 1,060 1,060 1,060 1,060 1,060 15,899 21,199 21,199
Certificate accounts ..... 92,435 10,022 4,214 624 1,675 7 108,977 109,145
FHLB advances ............ 22,500 -- -- -- -- -- 22,500 22,499
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ........ $154,496 $ 23,976 $ 9,632 $ 6,042 $ 7,093 $ 23,169 $224,408 $224,575
======== ======== ======== ======== ======== ======== ======== ========
Interest-earning assets less
interest-bearing liabilities.... $(42,668) $ 9,307 $14,401 $ 9,459 $ (37) $23,480 $13,942
======== ======== ======== ======== ======== ======== ========
Cumulative interest-rate
sensitivity gap................ $(42,668) $(33,361) $(18,960) $( 9,501) $ (9,538) $13,942
======== ======== ======== ======== ======== ========
Cumulative interest-rate gap as
a percentage of total assets.... (17.22)% (13.46)% (7.65)% (3.83)% (3.85)% 5.63%
======== ======== ======== ======== ======== ========
Cumulative interest-rate gap as
a percentage of total interest-
earning assets................. (17.90)% (14.00)% (7.95)% (3.99)% (4.00)% 5.85%
======== ======== ======== ======== ======== ========
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities.... 72.38% 81.31% 89.92% 95.11% 95.26% 106.21%
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) Fair value of securities, including mortgage-backed securities, is based
on quoted market prices, where available. If quoted market prices are
not available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan,
based on carrying values or estimates based on discounted cash flow
analyses. Fair value of deposit liabilities are either based on carrying
amounts or estimates based on a discounted cash flow calculation. Fair
values for FHLB advances are estimated using a discounted cash flow
analysis that applies interest rates concurrently being offered on
advances to a schedule of aggregated expected monthly maturities on FHLB
advances.
(2) Excludes nonaccrual loans.
43
<PAGE> 45
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react to different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Net Portfolio Value. As part of its interest rate risk analysis, the
Bank uses an interest rate sensitivity model which generates estimates of the
change in the Bank's net portfolio value ("NPV") over a range of interest rate
scenarios and which is prepared by the OTS on a quarterly basis. NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The NPV ratio, under any interest rate scenario, is defined as
the NPV in that scenario divided by the market value of assets in the same
scenario. The OTS produces such analysis using its own model, based upon data
submitted on the Bank's quarterly Thrift Financial Reports, including estimated
loan prepayment rates, reinvestment rates and deposit decay rates. See
"Regulation - Federal Savings Institution Regulation." The following table sets
forth the Bank's NPV as of June 30, 1997 (the latest NPV analysis prepared by
the OTS), as calculated by the OTS.
<TABLE>
<CAPTION>
NPV AS % OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES --------------------------------------------------- --------------------------------
IN BASIS POINTS % NPV
(RATE SHOCK) AMOUNT $ CHANGE CHANGE RATIO CHANGE(1)
- ------------------------ --------------- --------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400 $18,895 $(7,823) (29) 7.95% (280)
300 21,627 (5,091) (19) 8.96 (178)
200 23,997 (2,721) (10) 9.82 (93)
100 25,752 (966) (4) 10.43 (32)
Static 26,718 - - 10.75 -
(100) 26,691 (27) 0 10.70 (4)
(200) 25,897 (821) (3) 10.39 (36)
(300) 25,767 (951) (4) 10.31 (44)
(400) 26,381 (337) (1) 10.49 (26)
</TABLE>
- ----------
(1) Expressed in basis points.
44
<PAGE> 46
As is the case with the GAP Table, certain shortcomings are inherent
in the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Bank's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them.
45
<PAGE> 47
Average Balance Sheets. The following tables set forth certain
information relating to the Bank at and for the six months ended September 30,
1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields. Loan interest and yield data does not include any
accrued interest from non-accruing loans.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------
AT SEPTEMBER 30, 1997 1997
----------------------- --------------------------------------
AVERAGE
YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST
--------- -------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold.................................... $ 1,000 5.50% $ 1,358 $ 37 5.43%
Investment securities(1).............................. 15,226 6.24 14,036 447 6.35
Mortgage-backed and mortgage-related securities....... 2,854 7.23 3,011 105 6.95
Loans, net and mortgage loans held-for-sale(2)........ 219,370 8.09 210,062 8,685 8.25
------- -------- -----
Total interest-earning assets..................... 238,450 7.95 228,467 9,274 8.10
-----
Noninterest-earning assets............................... 9,313 6,826
----- --------
Total assets...................................... $247,763 $235,293
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.......................................... $ 21,199 1.76% $ 20,649 $ 190 1.84%
Regular savings accounts.............................. 29,053 2.47 29,273 367 2.50
Money market accounts................................. 42,679 4.04 39,523 803 4.05
Certificate accounts.................................. 108,977 5.63 105,715 3,006 5.67
------- ------- -------
Total interest-bearing deposits................... 201,908 4.43 195,160 4,366 4.46
FHLB advances......................................... 22,500 5.63 18,536 544 5.85
------ ------ -------
Total interest-bearing liabilities................ 224,408 4.55 213,696 4,910 4.58
-------
Demand deposits(3)....................................... 253 88
Other liabilities........................................ 2,766 2,037
----- -----
Total liabilities................................. 227,427 215,821
Equity................................................... 20,336 19,472
------ ------
Total liabilities and equity...................... $247,763 $235,293
======== ========
Net interest income/Net interest rate spread(4).......... 3.40% $ 4,364 3.52%
===== ======== ====
Net interest margin(5)................................... 3.81%
====
Ratio of interest-earning assets to interest-
bearing liabilities.................................... 106.26% 106.91%
======== ======
<CAPTION>
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1996
--------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold.................................... $ 6,152 $ 189 6.14%
Investment securities(1).............................. 15,378 461 6.00
Mortgage-backed and mortgage-related securities....... 3,349 131 7.82
Loans, net and mortgage loans held-for-sale(2)........ 190,381 7,816 8.21
-------- --------
Total interest-earning assets..................... 215,260 8,597 7.99
--------
Noninterest-earning assets............................... 6,883
--------
Total assets...................................... $222,143
========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.......................................... $ 20,602 $ 195 1.89%
Regular savings accounts.............................. 31,069 325 2.09
Money market accounts................................. 33,411 687 4.11
Certificate accounts.................................. 102,235 2,873 5.62
-------- --------
Total interest-bearing deposits................... 187,317 4,080 4.36
FHLB advances......................................... 14,133 402 5.69
-------- --------
Total interest-bearing liabilities................ 201,450 4,482 4.45
--------
Demand deposits(3)....................................... 136
Other liabilities........................................ 1,853
--------
Total liabilities................................. 203,439
Equity................................................... 18,704
--------
Total liabilities and equity...................... $222,143
========
Net interest income/Net interest rate spread(4).......... $4,115 3.54%
====== ====
Net interest margin(5)................................... 3.81%
====
Ratio of interest-earning assets to interest-
bearing liabilities.................................... 106.86%
========
</TABLE>
- -------------
(1) Includes investment securities available-for-sale and held-to-maturity and
stock in FHLB-Boston.
(2) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. The Bank records interest income in non-accruing
loans on a cash basis.
(3) Demand deposits primarily represent noninterest-bearing custodial
accounts.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
46
<PAGE> 48
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold.................... $ 5,985 $ 321 5.36% $ 6,759 $ 423 6.26%
Investment securities(1).............. 15,041 951 6.32 11,391 565 4.96
Mortgage-backed and mortgage-
related securities.................. 3,380 246 7.28 1,917 146 7.62
Loans, net and mortgage loans
held-for-sale(2).................... 195,471 15,958 8.16 173,285 15,414 8.90
--------- -------- -------- --------
Total interest-earning assets....... 219,877 17,476 7.95 193,352 16,548 8.56
-------- --------
Noninterest-earning assets............... 6,931 6,205
--------- --------
Total assets........................ $226,808 $199,557
========= ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.......................... $ 20,835 $ 386 1.85% $ 18,727 $ 384 2.05%
Regular savings accounts.............. 30,863 660 2.14 31,560 676 2.14
Money market accounts................. 34,839 1,436 4.12 29,972 1,284 4.28
Certificate accounts.................. 102,995 5,790 5.62 92,852 5,592 6.02
--------- -------- -------- --------
Total interest-bearing deposits..... 189,532 8,272 4.36 173,111 7,936 4.58
FHLB advances......................... 16,813 946 5.63 7,786 487 6.25
--------- -------- -------- --------
Total interest-bearing
liabilities....................... 206,345 9,218 4.47 180,897 8,423 4.66
-------- --------
Demand deposits(3)....................... 132 165
Other liabilities........................ 1,511 1,931
--------- --------
Total liabilities................... 207,988 182,993
Equity................................... 18,820 16,564
--------- --------
Total liabilities and equity........ $226,808 $199,557
========= ========
Net interest income/Net interest rate
spread(4).............................. $ 8,258 3.48% $ 8,125 3.90%
======= ===== ======= =====
Net interest margin(5)................... 3.76% 4.20%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities........... 106.56% 106.89%
========= ========
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------
1995
-----------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold.................... $ 4,740 $ 246 5.19%
Investment securities(1).............. 7,663 425 5.55
Mortgage-backed and mortgage-
related securities.................. 1,851 118 6.37
Loans, net and mortgage loans
held-for-sale(2).................... 181,853 14,161 7.79
---------- --------
Total interest-earning assets....... 196,107 14,950 7.62
--------
Noninterest-earning assets............... 3,608
----------
Total assets........................ $ 199,715
==========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW accounts.......................... $ 20,438 $ 427 2.09%
Regular savings accounts.............. 37,575 764 2.03
Money market accounts................. 39,603 1,468 3.71
Certificate accounts.................. 76,604 3,372 4.40
---------- --------
Total interest-bearing deposits..... 174,220 6,031 3.46
FHLB advances......................... 7,688 475 6.18
---------- --------
Total interest-bearing
liabilities....................... 181,908 6,506 3.58
--------
Demand deposits(3)....................... 229
Other liabilities........................ 1,717
----------
Total liabilities................... 183,854
Equity................................... 15,861
----------
Total liabilities and equity........ $ 199,715
==========
Net interest income/Net interest rate
spread(4).............................. $ 8,444 4.04%
======== =====
Net interest margin(5)................... 4.31%
=====
Ratio of interest-earning assets to
interest-bearing liabilities........... 107.81%
=========
</TABLE>
- --------------------
(1) Includes investment securities available-for-sale and held-to-maturity and
stock in FHLB-Boston.
(2) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction loans in process, allowance for loan losses and includes
non-accruing loans. The Bank records interest income on non-accruing
loans on a cash basis.
(3) Demand deposits primarily represent noninterest-bearing custodial
accounts.
(4) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
47
<PAGE> 49
Rate/Volume Analysis. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1997 MARCH 31, 1997 MARCH 31, 1996
COMPARED TO COMPARED TO COMPARED TO
SIX MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 MARCH 31, 1996 MARCH 31, 1995
--------------------------- --------------------------- ---------------------------
INCREASE
(DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
----------------- ----------------- -----------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold ................... $ (132) $ (20) $ (152) $ (45) $ (57) $ (102) $ 119 $ 58 $ 177
Investment securities ................ (44) 30 (14) 208 178 386 179 (39) 140
Mortgage-backed securities ........... (12) (14) (26) 106 (6) 100 4 24 28
Loans, net, and mortgage
loans held-for-sale ................ 834 35 869 1,520 (976) 544 (620) 1,873 1,253
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets .... 646 31 677 1,789 (861) 928 (318) 1,916 1,598
------- ------- ------- ------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
NOW accounts ......................... -- (5) (5) 14 (12) 2 (35) (8) (43)
Regular savings accounts ............. (18) 60 42 (16) -- (16) (132) 44 (88)
Money market accounts ................ 126 (10) 116 198 (46) 152 (512) 328 (184)
Certificate accounts ................. 105 28 133 504 (306) 198 811 1,409 2,220
------- ------- ------- ------- ------- ------- ------- ------- -------
Total deposits ................... 213 73 286 700 (364) 336 132 1,773 1,905
FHLB advances ........................ 130 12 142 503 (44) 459 7 5 12
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 343 85 428 1,203 (408) 795 139 1,778 1,917
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income ...... $ 303 $ (54) $ 249 $ 586 $ (453) $ 133 $ (457) $ 138 $ (319)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
48
<PAGE> 50
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND MARCH 31, 1997
Total assets increased by $14.7 million, or 6.3%, from $233.1 million
at March 31, 1997 to $247.8 million at September 30, 1997. The growth in assets
is primarily due to a $12.3 million, or 5.9%, increase in loans, net, due to
increased loan origination activity. The loan originations consisted of $21.8
million of one- to four-family loans, $3.0 million of multi-family loans, $7.9
million of commercial real estate loans, $2.9 million of construction and
development loans, $1.9 million of equity loans and $2.3 million of other
consumer loans. The loan originations were partially offset by $27.0 million in
principal pay-downs and payoffs and $510,000 of loan sales. As a result, during
such period, one- to four-family loans increased by $1.3 million, or 0.8%,
multi-family loans increased by $2.7 million, or 18.4%, commercial real estate
loans increased by $4.0 million, or 15.8%, construction and development loans
increased by $4.4 million, or 156%, and consumer loans increased by $1.8
million, or 36.4%. See "Risk Factors -- Increased Lending Risks Associated With
Multi-Family, Commercial Real Estate and Construction and Development Loans."
Cash and cash equivalents increased $1.1 million, or 29.1%, primarily due to a
$1.0 million increase in federal funds sold offset, in part, by the utilization
of $697,000 to fund a trust established for the benefit equalization plan.
Investment securities available-for-sale increased $349,000 primarily due to an
increase in the market value of the securities. Investment securities
held-to-maturity decreased $397,000 due to principal repayments on
mortgage-backed securities. Premises and equipment increased by $460,000, net of
depreciation and amortization of $107,000 primarily due to renovations of the
Bank's existing facilities. Other assets increased $905,000 primarily due to the
funding of the Bank's benefit equalization plan. See "Management of the Bank --
Benefits." The increase in assets was funded primarily by an increase in FHLB
advances, which increased $8.0 million, or 55.2%, from $14.5 million at March
31, 1997 to $22.5 million at September 30, 1997 and a $5.1 million, or 2.6%,
increase in deposits, primarily due to a $3.0 million, or 2.8%, increase in
certificate accounts and a $2.0 million, or 2.2%, increase in savings and NOW
accounts. Retained earnings increased $698,000 from $19.1 million, or 8.2% of
total assets, at March 31, 1997 to $19.8 million, or 8.0% of total assets, at
September 30, 1997. The increase in retained earnings was due to net income
during the six month period ended September 30, 1997.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND MARCH 31, 1996
Total assets increased $13.2 million, or 6.0%, from $219.9 million at
March 31, 1996 to $233.1 million at March 31, 1997. The growth in assets was
primarily due to a $20.5 million, or 11.0%, increase in loans, net. Cash and
cash equivalents, investment securities available-for-sale and investment
securities held-to-maturity decreased by a total of $7.9 million, or 28.2%, from
$28.0 million at March 31, 1996 to $20.1 million at March 31, 1997 primarily due
to a $4.9 million, or 17.6%, decrease in federal funds sold and a decrease of
$2.6 million, or 9.4%, in investment securities held-to-maturity due to
maturities and repayments which were primarily reinvested in loans. The increase
in loans, net, was due to a $12.9 million, or 8.6%, increase in one- to
four-family loans consisting primarily of adjustable rate loans, a $6.1 million,
or 32.1%, increase in commercial real estate loans, a $1.3 million, or 10.0%,
increase in multi-family loans and a $2.1 million increase in equity loans,
offset, in part, by a $2.5 million, or 47.2%, decrease in construction and
development loans. The increase in loans is primarily due to increased
origination activity which increased by $22.4 million from $34.9 million for
fiscal 1996 to $57.3 million for fiscal 1997. The increase in loan origination
volume is attributable to management's strategy to emphasize the origination of
adjustable-rate one-to four-family loans and commercial real estate loan
products the demand for which increased in fiscal 1997. The declining interest
rate environment during the year ended March 31, 1996 resulted in increased
demand for fixed-rate loans while demand for adjustable-rate loans diminished.
During the year ended March 31, 1997, as market interest rates increased, the
Bank was able to originate more adjustable-rate loans. The resulting growth in
assets was primarily funded by an increase in deposits of $9.1 million, or 4.9%,
to $197.1 million at March 31, 1997 as compared to $187.9 million at March 31,
1996. Deposit growth occurred in certificate accounts which increased 3.8%, from
$102.1 million at March 31,
49
<PAGE> 51
1996 to $106.0 million at March 31, 1997 and savings and NOW accounts which
increased by $5.3 million. The remaining growth in assets was funded by FHLB
advances, which increased by $2.9 million, or 24.5%, to $14.5 million at March
31, 1997, compared to $11.7 million at March 31, 1996. Retained earnings at
March 31, 1997 totalled $19.1 million, or 8.2% of total assets, compared to
$18.0 million, or 8.2% of total assets at March 31, 1996 due to net income
during fiscal 1997.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
GENERAL
The Bank's net income for the six months ended September 30, 1997 was
$698,000 as compared to $216,000 for the six months ended September 30, 1996.
The increase of $482,000, or 223.1%, in net income was primarily due to a
decrease in noninterest expense as a result of the absence of the one-time
special assessment to recapitalize the SAIF, as well as an increase in interest
income, which were partially offset by an increase in interest expense and an
increase in the provision for loan losses.
INTEREST INCOME
Interest income for the six months ended September 30, 1997 was $9.3
million as compared to $8.6 million for the six months ended September 30, 1996,
an increase of $677,000, or 7.9%. The increase in interest income was the result
of an increase in the average balance of interest-earning assets of $13.2
million, or 6.1%, from $215.3 million for the six months ended September 30,
1996 to $228.5 million for the six months ended September 30, 1997 and an
increase of 11 basis points in the average yield on interest-earning assets from
7.99% to 8.10%. The increase in the average balance of interest-earning assets
was due to a $19.7 million increase in the average balance of loans, net, offset
by a decrease of $6.5 million in the average balance of federal funds sold and
securities. The increase in the average balance of loans, net, was primarily due
to the increase in one- to four-family and commercial real estate loan
origination activity resulting in a corresponding increase in the average
balance of the loan portfolio. Market interest rates generally remained stable
during the six months ended September 30, 1997 and, as a result, the average
yield on loans, net, increased slightly to 8.25% for the six months ended
September 30, 1997 compared to 8.21% for the six months ended September 30,
1996.
INTEREST EXPENSE
Interest expense for the six months ended September 30, 1997 was $4.9
million compared to $4.5 million for the six months ended September 30, 1996, an
increase of $428,000, or 9.5%. The increase in interest expense was mainly due
to a $12.2 million, or 6.1%, increase in the average balance of interest-bearing
liabilities which increased from $201.5 million for the six months ended
September 30, 1996 to $213.7 million for the same period in 1997 and an increase
of 13 basis points in the weighted average cost of interest-bearing liabilities
from 4.45% to 4.58%. The increase in the average balance of interest-bearing
liabilities resulted from an increase in the average balance of total deposit
accounts of $7.8 million consisting primarily of an increase in the average
balance of money market accounts which increased by $6.1 million, or 18.3%, an
increase in the average balance of certificate accounts which increased by $3.5
million, or 3.4%, offset, in part, by a decrease in savings accounts of $1.8
million, or 5.8%. The average balance of money market accounts and certificate
accounts increased due to the offering of competitively priced deposit products
including certificate accounts with minimum denominations of $100,000. The
increase in the average balance of deposit accounts coupled with an increase in
the weighted average cost of interest-bearing deposits of 10 basis points
resulted in interest expense on deposits increasing $286,000 from $4.1 million
for the six months ended September 30, 1996 to $4.4 million for the same period
in 1997. The average
50
<PAGE> 52
balance of FHLB advances increased by $4.4 million resulting in interest expense
on average FHLB advances increasing $142,000 from $402,000 for the six months
ended September 30, 1996 to $544,000 for the same period in 1997, including the
effect of a 16 basis point increase in the weighted average cost of FHLB
advances. The average balance of FHLB advances increased due to the Bank's
determination to utilize FHLB advances to fund increased loan originations.
NET INTEREST INCOME
Net interest income before the provision for loan losses increased by
$249,000, or 6.1%, as the increase in the average balance of the Bank's
interest-earning assets offset a slight decrease in the Bank's net interest rate
spread, from 3.54% for the six months ended September 30, 1996 to 3.52% for the
six months ended September 30, 1997. The Bank's net interest margin remained the
same at 3.81% for both periods.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted to $444,000 for the six
months ended September 30, 1997, as compared to a provision of $5,000 for the
same period in 1996. The increase in the provision for loan losses resulted from
management's review and evaluation of the risks inherent in its loan portfolio.
In particular, management considered increased delinquencies in four pools of
purchased one- to four-family loans which were internally classified by the
Bank. See "Business of the Bank--Lending Activities" and "--Delinquent Loans,
Classified Assets and Real Estate Owned." As a result of the increased
provision, the Bank's ratio of allowance for loan losses as a percent of loans
equaled 0.96% at September 30, 1997 as compared to 0.86% at September 30, 1996.
The Bank evaluates the carrying value of loans on a regular basis and adjusts
the allowance for loan losses, with a charge to operations, as deemed necessary.
The adjustment is determined based upon management's assessment of the risk
characteristics of the loan portfolio currently known to management in light of
current economic conditions, actual loss experience, industry trends and other
factors which may affect the real estate values in the Bank's market area. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such agencies
may require that the Bank provide additions to the allowance based upon judgment
which may differ from those of management. While management of the Bank believes
that the allowance for loan losses is sufficient based on information currently
available to it, no assurances can be made that future events, conditions or
regulatory directives will not result in increased provisions for loan losses or
additions to the Bank's allowance for loan losses which may adversely affect net
income. See "Business of the Bank--Lending Activities--Delinquencies and
Classified Assets" and "Allowance for Loan Losses."
NONINTEREST INCOME
Total noninterest income for the six months ended September 30, 1997
decreased $65,000, or 31.7% to $140,000 from $205,000 for the six months ended
September 30, 1996. The primary reason for the decrease was the reporting of a
gain of $48,000 on the sale of securities during the six months ended September
30, 1996. During the six months ended September 30, 1997, the Bank did not sell
any securities. Also contributing to the decrease in noninterest income was a
decrease of $13,000 in other income, primarily attributable to an increase in
personal money order fees of $5,000, a decrease in miscellaneous income of
$10,000, a decrease in the gain on sale of fixed assets of $5,000 and a
decrease of $3,000 in service fees on loans and a decrease of $5,000 in service
charges on deposit accounts.
NONINTEREST EXPENSE
Total noninterest expense decreased by $1.1 million, or 27.0%, from
$3.9 million for the six months ended September 30, 1996 to $2.9 million for the
same period in 1997. The decrease was primarily due to a decrease in federal
deposit insurance premium expense of $1.1 million. This decrease is attributable
to the
51
<PAGE> 53
payment of the one time SAIF Special Assessment paid in late 1996 equal to 65.7
basis points of insured deposits to recapitalize the SAIF which, in the case of
the Bank, amounted to $1.2 million. Federal deposit insurance premiums also
decreased due to a lower premium assessment rate structure enacted in late
1996 in connection with the payment of the SAIF Special Assessment. As a
result, the Bank's deposit premium rate which was 23 basis points for fiscal
1996 and the first eight months of fiscal 1997, decreased to 6.48 basis points
for the last four months of fiscal 1997. See "Regulation --Insurance of Deposit
Accounts." Compensation and employee benefits expense increased $170,000, or
10.6%, due to normal salary increases and merger related compensation; office
occupancy expense increased $83,000, or 26.9%, due to an increased lease
expense; equipment expense decreased $52,000; and other expense decreased by
$217,000. Management attempts to control operating expenses and reduce costs on
an ongoing basis; however, the Bank expects that compensation and employee
benefits expense may increase after the Conversion, primarily as a result of
the adoption of various stock based employee benefit plans and compensation
adjustments contemplated in connection with the Conversion. See "Management of
the Bank --Benefits."
INCOME TAXES
Income tax expense was $492,000 for the six months ended September
30, 1997 (resulting in an effective tax rate of 41.3%), compared to $167,000 for
the six months ended September 30, 1996 (resulting in an effective tax rate of
43.6%). The increase in income tax expense was due to an increase in pre-tax
income of $807,000 for the six months ended September 30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND
1996
GENERAL
Net income for the fiscal year ended March 31, 1997 decreased by
$555,000, or 33.0%, from $1.7 million for fiscal 1996 to $1.1 million for fiscal
1997. The decrease was primarily attributable to an increase in total
noninterest expense of $1.9 million, primarily due to the payment of the
one-time SAIF Special Assessment of $1.2 million, a $608,000 net increase in
compensation expense primarily due to establishment of the Bank's benefit
equalization plan, higher noninterest expense and an increase in the provision
for loan losses. These items were partially offset by higher noninterest income.
INTEREST INCOME
Interest income for fiscal 1997 increased by $928,000, or 5.6%, to
$17.5 million as compared to $16.5 million for fiscal 1996. The increase in
interest income for fiscal 1997 was primarily attributable to an increase in the
average balance of interest-earning assets, due primarily to an increase in the
average balance of loans, net, which increased by $22.2 million, or 12.8%, from
$173.3 million for fiscal 1996 to $195.5 million for fiscal 1997 which was
offset by a 61 basis point decrease in the weighted average yield on
interest-earning assets from 8.56% for fiscal 1996 to 7.95% for fiscal 1997. The
increase in loans, net, primarily reflects an increase in one- to four-family
loans of $12.9 million, an increase of $1.3 million in multi-family loans, an
increase of $6.1 million in commercial real estate loans and an increase in
equity loans of $2.1 million. As a result, interest income on loans increased by
$544,000, or 3.5%, to $16.0 million for fiscal 1997 as compared to $15.4 million
for fiscal 1996, which was partially offset by a 74 basis point decline in the
average yield on loans. The decrease in yield was primarily due to principal
repayments and refinancing of higher yielding one- to four-family mortgage loans
and increased origination of lower yielding adjustable rate loans. The increase
in interest income was also due to an increase in the average balance of
securities which increased $5.1 million to $18.4 million for fiscal 1997.
52
<PAGE> 54
INTEREST EXPENSE
Interest expense increased by $795,000, or 9.4%, for fiscal 1997 to
$9.2 million as compared to $8.4 million for fiscal 1996 due, in part, to the
increased average balance of deposit accounts of $16.4 million, or 9.5%, to
$189.5 million, resulting from the growth in the Bank's deposit base and an
increase in the average balance of FHLB advances which were offset, in part, by
a 19 basis point decrease in the weighted average cost of interest-bearing
liabilities. The growth in the deposit base consisted of a $2.1 million increase
in average balances of NOW accounts, a $4.9 million increase in money market
accounts and a $10.1 million increase in certificate accounts. The average cost
of deposits decreased by 22 basis points from an average cost of 4.58% for
fiscal 1996 to an average cost of 4.36% for fiscal 1997 primarily due to a lower
interest rate environment. Interest expense on FHLB advances increased by
$459,000, or 94.3%, due to an increase in the average balance of FHLB advances
from $7.8 million for fiscal 1996 to $16.8 million for fiscal 1997 due to
increased utilization of FHLB advances to fund loan originations. The increase
in interest expense on FHLB advances was partially offset by a decrease of 62
basis points in the average cost of FHLB advances, from 6.25% for fiscal 1996 to
5.63% for fiscal 1997.
NET INTEREST INCOME
Net interest income before provision for loan losses increased by
$133,000, or 1.6%, from $8.1 million for fiscal 1996 to $8.3 million for fiscal
1997. Net interest income increased despite a decline in the net interest rate
spread from 3.90% for fiscal 1996 to 3.48% for fiscal 1997. The decrease in the
net interest rate spread was due primarily to a decrease in the average yield of
interest-earning assets of 61 basis points to 7.95% for fiscal 1997 from 8.56%
for fiscal 1996 offset, in part, by a decrease in the cost of interest-bearing
liabilities of 19 basis points from 4.66% for fiscal 1996 compared to 4.47% for
fiscal 1997. The net interest margin for fiscal 1997 decreased to 3.76% from
4.20% for fiscal 1996. The impact of the reduced net interest margin was offset
by an increase in the average balance of interest-earning assets in fiscal 1997
versus fiscal 1996 and, thus, net interest income improved for fiscal 1997.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was $117,000 for fiscal 1997,
compared to a provision of $1,000 for fiscal 1996. The increase in the provision
for loan losses was due primarily to management's review and evaluation and
subsequent charge-off of part of a number of loans purchased by Union Federal
and serviced by others. See "Business of the Bank -- Delinquent Loans,
Classified Assets and Real Estate Owned." As a result, the Bank's allowance for
loan losses as a percent of loans was 0.81% and the Bank's allowance for loan
losses as a percent of nonperforming loans was 109.12% at March 31, 1997 as
compared to 0.94% and 154.26%, respectively, at March 31, 1996.
NONINTEREST INCOME
Noninterest income increased by $41,000, or 11.2%, from $366,000 for
fiscal 1996 to $407,000 for fiscal 1997. The increase was primarily due to a
$123,000 gain on the sale of available-for-sale of securities and an increase of
$4,000 in the gain on sale of mortgage loans, partially offset by a decrease in
service charges on deposit accounts of $19,000 and a decrease of $67,000 in
other income.
NONINTEREST EXPENSE
Noninterest expense for fiscal 1997 increased by $1.9 million, or
33.8%, from $5.5 million for fiscal 1996 to $7.4 million for fiscal 1997. The
increase was primarily a result of an increase of $1.1 million, or 348.9%, in
federal deposit insurance premiums expense, resulting from the one-time SAIF
Special
53
<PAGE> 55
Assessment. Also contributing to the increase in noninterest expense was an
increase of $608,000, or 18.6%, in compensation and employee benefits expense
which included a $697,000 expense related to the establishment of the benefit
equalization plan, offset by a $115,000 credit to record the value of certain
split-dollar life insurance policies and an increase in other expense of
$178,000, or 23.3%, which was composed of merger related expenses and an
increase of $25,000, or 11.7%, in equipment expense. The increase in these items
was partially offset by a decrease in advertising expense of $20,000, or 12.2%,
and a decrease of $38,000, or 18.8%, in data processing expense.
INCOME TAXES
Income tax expense decreased by $1.3 million from $1.3 million to
$10,000 for fiscal 1997, resulting in an effective tax rate of 0.9% for fiscal
1997, compared to an effective tax rate of 43.0% for fiscal 1996. The decrease
in income tax expense is due to an adjustment of deferred taxes pertaining to
the provision for loan losses resulting from a change in federal tax law of
$339,000 and the elimination of the valuation allowance for deferred taxes of
$209,000, as well as decreased pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND
1995
GENERAL
Net income for fiscal 1996 remained relatively stable, decreasing by
$17,000, or 1.0%. The decrease resulted from an increase of $1.9 million in
interest expense, a decrease of $54,000 in noninterest income, and an increase
of $106,000 in income tax expense, partially offset by a $1.6 million increase
in interest income, a decrease of $457,000 in noninterest expense and a decrease
of $5,000 in the provision for loan losses.
INTEREST INCOME
Interest income for fiscal 1996 increased $1.6 million, or 10.7%, to
$16.5 million as compared to $15.0 million for fiscal 1995. The increase in
interest income was due primarily to an increase in the weighted average yield
on interest-earning assets offset, in part, by a slight decrease in the average
balance of interest-earning assets. Interest income on loans increased by $1.3
million, or 8.8%, to $15.4 million for fiscal 1996 as compared to $14.2 million
for fiscal 1995 due to an increase in the weighted average yield on loans from
7.79% for fiscal 1995 to 8.90% for fiscal 1996 partially offset by a decrease in
the average balance of loans, net, of $8.6 million. Interest income from
securities increased $168,000, or 30.9%, to $711,000 for fiscal 1996 from
$543,000 for fiscal 1995. The increase is due to an increase in the weighted
average balance of securities of $3.8 million offset, in part, by a decrease in
the weighted average yield on investment securities of 59 basis points from
5.55% for fiscal 1995 to 4.96% for fiscal 1996.
INTEREST EXPENSE
Interest expense increased by $1.9 million, or 29.5%, to $8.4 million
for fiscal 1996 as compared to $6.5 million for fiscal 1995 due to an increase
in the weighted average cost of interest-bearing liabilities of 108 basis
points, partially offset by a $1.0 million decline in the average balance of
interest-bearing liabilities. The increase in the weighted average cost of
interest-bearing liabilities was primarily due to an increase in the weighted
average cost of deposits from 3.46% for fiscal 1995 to 4.58% for fiscal 1996
primarily due to a 21.2% increase in the average balance of higher cost
certificate accounts and due to a higher interest rate environment during fiscal
1996. In addition to the increases in deposit interest expense, interest expense
on FHLB advances increased slightly from $475,000 for fiscal 1995 to $487,000
for fiscal
54
<PAGE> 56
1996, an increase of $12,000, or 2.5%, due to a higher average balance of FHLB
advances and a 7 basis point increase in the average cost of FHLB advances.
NET INTEREST INCOME
Net interest income decreased $319,000 from $8.4 million for fiscal
1995 to $8.1 million for fiscal 1996. The Bank's net interest spread decreased
from 4.04% for fiscal 1995 to 3.90% for fiscal 1996. The decrease in the net
interest spread primarily resulted from an increase in the average cost of
interest-bearing liabilities of 108 basis points to 4.66% for fiscal 1996 from
3.58% for fiscal 1995 compared to an increase in the average yield of
interest-earning assets of 94 basis points from 7.62% for fiscal 1995 to 8.56%
for fiscal 1996. Correspondingly, the net interest margin for fiscal 1996
decreased to 4.20% from 4.31% for fiscal 1995.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses amounted to $1,000 for fiscal 1996
as compared to a provision of $6,000 for fiscal 1995. The allowance for loan
losses as a percent of total loans was 0.94% at March 31, 1996 as compared to
0.98% at March 31, 1995. The allowance for loan losses as a percent of
nonperforming loans was 154.26% at March 31, 1996 as compared to 155.72% at
March 31, 1995.
NONINTEREST INCOME
Noninterest income decreased $54,000, or 12.9%, to $366,000 for fiscal
1996 from $420,000 for fiscal 1995. The difference between periods was mainly
due to a decrease in other income of $67,000 and a decrease in gain on sale of
mortgage loans of $5,000.
NONINTEREST EXPENSE
Noninterest expense decreased $457,000, or 7.6%, to $5.5 million for
fiscal 1996 from $6.0 million for fiscal 1995 due primarily to a decrease in
other expense. Compensation and employee benefits decreased $99,000, or 2.9%, to
$3.3 million for fiscal 1996 compared to $3.4 million for fiscal 1995. Occupancy
expense increased $24,000, or 4.1%, to $605,000 for fiscal 1996. Equipment
expense decreased $44,000, or 17.1%, to $213,000 for fiscal 1996. Federal
deposit insurance premiums expense decreased $67,000, or 17.4%, to $319,000 for
fiscal 1996 from $386,000 for fiscal 1995 due to the decrease in the average
balance of deposit accounts. Advertising expense increased $81,000 to $164,000
for fiscal 1996 from $83,000 for fiscal 1995 as the Bank began to more
aggressively advertise products in additional publications. Other expense
decreased $358,000, or 31.9% to $763,000 for fiscal 1996 from $1.1 million for
fiscal 1995. The decrease in other expense is attributable to management's
ongoing efforts to reduce expenses.
INCOME TAXES
Income tax expense was $1.3 million for fiscal 1996 (resulting in an
effective tax rate of 43.0%), compared to $1.2 million for fiscal 1995
(resulting in an effective tax rate of 40.6%). The increase in income tax
expense was due to increased pre-tax income as well as the higher effective tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans, mortgage-backed and investment securities and FHLB
advances. While maturities and scheduled amortization of loans are predictable
sources of funds, deposit flows and mortgage prepayments are greatly
55
<PAGE> 57
influenced by general interest rates, economic conditions and competition. The
Bank has continued to maintain the required levels of liquid assets as defined
by OTS regulations. This requirement of the OTS, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The Bank's
currently required liquidity ratio is 5%. At September 30, 1997 and March 31,
1997, the Bank's liquidity ratios were 6.36% and 6.87%, respectively.
Management's strategy is to maintain liquidity as close as possible to the
minimum regulatory requirement and to invest any excess liquidity in higher
yielding interest-earning assets. The Bank manages its liquidity position and
demands for funding primarily by investing excess funds in short-term
investments and utilizing FHLB advances in periods when the Bank's demands for
liquidity exceed funding from deposit inflows.
The Bank's most liquid assets are cash and cash equivalents and
securities. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At
September 30, 1997, cash and cash equivalents and securities totalled $21.0
million, or 8.5% of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At September 30, 1997, the Bank had $22.5
million in advances outstanding from the FHLB and, at September 30, 1997, had an
additional overall borrowing capacity from the FHLB of $116.0 million. Depending
on market conditions, the pricing of deposit products and FHLB advances, the
Bank may continue to rely on FHLB borrowings to fund asset growth.
At September 30, 1997, the Bank had commitments to fund loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $17.0 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, including IRA and Keogh accounts, which are scheduled to
mature in less than one year from September 30, 1997, totalled $92.4 million.
At September 30, 1997, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $19.8 million, or 8.01%, of total
adjusted assets, which is above the required level of $3.7 million, or 1.5%;
core capital of $19.8 million, or 8.01%, of total adjusted assets, which is
above the required level of $9.9 million, or 4.0%; and risk-based capital of
$21.6 million, or 15.3%, of risk-weighted assets, which is above the required
level of $11.3 million, or 8.0%. See "Regulatory Capital Compliance."
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Bank's, were designed to accommodate a two-digit year. For
example, "96" is stored on the system and represents 1996. The Bank primarily
utilizes a third-party vendor for processing the primary banking applications.
In addition, the Bank also uses third-party vendor application software for all
ancillary computer applications. The third-party vendor for the Bank's banking
applications is in the process of modifying, upgrading or replacing its
computer applications to insure Year 2000 compliance. To assist in this effort,
the Bank has been advised by such vendor that the vendor has hired the services
of a consultant to review the plan and assist such vendor in achieving Year
2000 compliance by December 31, 1998. In addition, the Bank has instituted a
Year 2000 compliance program whereby the Bank is reviewing the Year 2000
compliance issues that may be faced by its other third-party vendors. Under
such program, the Bank will examine the need for modifications or replacement
of all non-Year 2000 compliant pieces of software. The Bank does not currently
expect that the cost of its Year 2000 compliance program will be material to
its financial condition and believes that it will satisfy such compliance
program by the end of 1998 without material disruption of its operations. In
the event that the Bank's significant suppliers do not successfully and timely
achieve Year 2000 compliance, the Bank's business or operations could be
adversely affected. However, management believes that the Bank's own internal
system, networks and resources would allow the Bank to effectively operate and
service its customers in the event its significant vendors do not achieve
satisfactory Year 2000 compliance. In addition, if significant vendors failed
to meet Year 2000 operating requirements, the Bank intends to engage
alternative vendors and suppliers. While the Bank cannot estimate the costs and
expenses associated with hiring new vendors and suppliers, management believes
that such costs would not have a material impact in the Bank's earnings or
results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results generally in terms of historical
dollar amounts without considering the changes in the relative purchasing power
of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike industrial companies, nearly all
of the assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In March 1995, the FASB issued SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of" ("SFAS No. 121"). This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an institution be reviewed for
impairment whenever events
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<PAGE> 58
change and circumstances indicate the carrying amount of the asset may not be
recoverable. This Statement became effective for the Bank on April 1, 1996.
Adoption of this Statement did not have a material impact on the earnings or
financial position of the Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123").
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS No. 123 permits the Bank to choose either a
new fair value based method or the current Accounting Principles Board ("APB")
Opinion 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under APB Opinion 25. SFAS
No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock, (e.g., Stock Option Plan, stock purchase plans,
restricted stock plans and stock appreciation rights). The statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or to
acquire goods or services from outside suppliers or vendors. The recognition
provisions of SFAS No. 123 for companies choosing to adopt the new fair value
based method of accounting for stock-based compensation arrangements will apply
to all transactions entered into in fiscal years that begin after December 15,
1995. Any effect that this statement will have on the Bank will be applicable
upon the consummation of the Conversion. The Bank intends to follow the APB
Opinion 25 method upon adoption, but will provide pro forma disclosure as if the
fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, applied prospectively. Earlier or retroactive
application of this Statement is not permitted. The adoption of the non-deferred
provisions of this Statement as of January 1, 1997 did not have a material
impact on the Bank's consolidated financial statements. The Company and Bank
have not determined the impact that the adoption as of January 1, 1998 of the
deferred provisions of this Statement will have on their future consolidated
financial statements.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," ("SFAS No. 130"). This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement does
not require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS No. 130 requires that an enterprise
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. It does not address issues of
recognition or measurement for comprehensive income and its components. SFAS
No. 130 is effective for fiscal years beginning after December 31, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Bank does not expect that upon adoption,
this statement will have a material effect on its consolidated financial
statements.
Disclosures about Segments of an Enterprise and Related Information.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This Statement
establishes standards for the way public business enterprises report
information about operating segments in financial statements. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Bank does not expect that under this statement it will be required
to report additional information because its present organization consists of
only one operating segment as defined by the Statement.
Other New Accounting Standards. SFAS No. 128, "Earnings per Share"
("SFAS No. 128") is effective for periods ending after December 15, 1997. SFAS
No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129") is
effective for periods ending after December 15, 1997. The Company and Bank
expect that
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<PAGE> 59
the adoption of these standards will not have a material impact on the Company's
and Bank's consolidated financial statements.
BUSINESS OF THE BANK
GENERAL
The Bank was originally organized in 1920 as a state-chartered mutual
cooperative bank with the name Coolidge Corner Cooperative Bank. In 1936, the
Bank converted to a federally-chartered mutual savings and loan association and
changed its name to Brookline Federal Savings and Loan Association. In 1960, the
Bank changed its name to Bay State Federal Savings and Loan Association and, in
1983, changed its name again to Bay State Federal Savings Bank. In February
1997, the Bank merged with Union Federal Savings Bank, which at the time of the
merger had $38.2 million of total assets, $35.5 million of deposits and $2.7
million of retained earnings and operated two branches located in Boston and
Westwood, Massachusetts. The Bank currently maintains five banking offices
located in the greater Boston metropolitan area.
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in adjustable-rate and shorter-term
fixed-rate one- to four-family residential mortgage loans. To a lesser extent,
the Bank invests in multi-family, commercial real estate, construction and
development, commercial and consumer loans. The Bank operates through its five
full service banking offices and one administrative office, all of which are
located in the greater Boston metropolitan area. The Bank originates loans for
investment and loans for sale in the secondary market, generally retaining the
servicing rights to all loans sold. The Bank's revenues are derived principally
from interest on its mortgage loans and, to a lesser extent, interest on its
investment and mortgage-backed and mortgage-related securities and loan
servicing income. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and securities and FHLB advances.
MARKET AREA AND COMPETITION
The Bank is headquartered in Brookline, Massachusetts and is a
community-oriented savings institution offering a variety of financial products
and services to meet the needs of the communities it serves. The Bank's primary
deposit gathering area is concentrated in the communities surrounding its five
full-service banking offices located in Brookline, Boston, Dedham, Norwood and
Westwood, Massachusetts. All of the Bank's branch offices are located within 15
miles of Brookline. The Bank's primary lending area is significantly broader
than its deposit gathering area and includes all of Massachusetts, with a
concentration in the greater Boston metropolitan area.
Brookline, Massachusetts is a fully-developed and densely populated
town located west of and adjacent to Boston. Brookline is surrounded by three
major U.S. Interstate Highways: Interstate 93, Interstate 90 and Interstate 95.
The major traffic roadways running through Brookline are heavily traveled and
lined with commercial and retail business operations and Brookline's 1990 census
population was approximately 54,000. The residents of Brookline are generally
comprised of white- and blue-collar workers and college students. The towns of
Dedham, Norwood and Westwood are situated southwest of Boston. These towns are
primarily residential communities consisting of single-family residences and are
populated by middle- to high-income individuals employed in the greater Boston
metropolitan area.
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<PAGE> 60
New England has generally lagged behind the rest of the nation in
coming out of the recession of the late 1980s and early 1990s. During this time,
the market values of many one- to four-family residences declined throughout the
region. Loan demand diminished and competition for such loans increased.
However, over the past few years, the regional economy in the Bank's primary
market area, based on economic indicators such as unemployment rates,
residential and commercial real estate values and vacancy rates and household
income trends, has stabilized and begun to strengthen. See "Risk Factors --
Weakness of Regional and Local Economy." Small business, technology and service
firms, higher education and tourism form the backbone of the economy of the
greater Boston metropolitan area.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Bank. The Bank's competition for
loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings, cooperative
and commercial banks and credit unions. In addition, the Bank faces significant
competition for deposits from non-bank institutions such as brokerage firms and
insurance companies in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions. The Bank has also experienced
significant competition from credit unions which have a competitive advantage as
they do not pay state or federal income taxes. Such competitive advantage has
placed increased pressure on the Bank with respect to its loan and deposit
pricing. See "Risk Factors -- Highly Competitive Industry and Geographic Area."
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences. At
September 30, 1997, gross loans totalled $224.7 million, of which $164.1 million
were one- to four-family, residential mortgage loans, or 73.0% of the Bank's
total loans. At such date, the remainder of the loan portfolio consisted of:
$17.3 million of multi-family residential loans, or 7.7% of total loans; $29.3
million of commercial real estate loans, or 13.0% of total loans; $7.3 million
of construction and development loans, including unadvanced loan amounts, or
3.2% of total loans; $13,000 of commercial loans, or 0.01% of total loans; and
$6.8 million of consumer loans, or 3.0% of total loans, consisting of $3.1
million of equity lines of credit, and $3.7 million of other consumer loans. At
that same date, 78.2% of the Bank's residential mortgage loans and construction
and development loans had adjustable interest rates.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board ("FRB") and
legislative tax policies.
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<PAGE> 61
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------
AT SEPTEMBER 30,
1997 1997 1996
------------------------- ------------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family ............ $ 164,135 73.03% $ 162,837 77.34% $ 149,941 78.74%
Multi-family ................... 17,314 7.70 14,624 6.95 13,294 6.98
Commercial real estate ............. 29,256 13.02 25,260 12.00 19,129 10.05
Construction and development(1) .... 7,257 3.23 2,831 1.34 5,359 2.81
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage loans ...... 217,962 96.98 205,552 97.63 187,723 98.58
----------- ----------- ----------- ----------- ----------- -----------
Commercial ............................ 13 0.01 31 0.02 -- --
----------- ----------- ----------- ----------- ----------- -----------
Consumer loans:
Equity lines ....................... 3,055 1.36 2,359 1.12 268 0.14
Other consumer loans ............... 3,699 1.65 2,594 1.23 2,434 1.28
----------- ----------- ----------- ----------- ----------- -----------
Total consumer loans ...... 6,754 3.01 4,953 2.35 2,702 1.42
----------- ----------- ----------- ----------- ----------- -----------
Total loans ........................... 224,729 100.00% 210,536 100.00% 190,425 100.00%
=========== =========== ===========
Allowance for possible loan losses . (2,133) (1,687) (1,774)
Undisbursed proceeds of construction
and development loans in process . (2,784) (1,349) (1,622)
Deferred loan origination fees, net ... (442) (437) (495)
----------- ----------- -----------
Loans, net ................ 219,370 207,063 186,534
Mortgage loans held-for-sale .......... -- -- 47
----------- ----------- -----------
Loans, net and mortgage
loans held-for-sale ............. $ 219,370 $ 207,063 $ 186,581
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- -------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential:
One- to four-family ............ $ 152,025 80.93% $ 148,613 80.21% $ 135,582 79.09%
Multi-family ................... 12,505 6.65 10,519 5.68 8,569 5.00
Commercial real estate ............. 17,820 9.49 21,120 11.40 20,314 11.85
Construction and development(1) .... 3,393 1.81 3,078 1.66 4,679 2.73
----------- ----------- ----------- ----------- ----------- -----------
Total mortgage loans ...... 185,743 98.88 183,330 98.95 169,144 98.67
----------- ----------- ----------- ----------- ----------- -----------
Commercial ............................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Consumer loans:
Equity lines ....................... -- -- -- -- -- --
Other consumer loans ............... 2,110 1.12 1,951 1.05 2,284 1.33
----------- ----------- ----------- ----------- ----------- -----------
Total consumer loans ...... 2,110 1.12 1,951 1.05 2,284 1.33
----------- ----------- ----------- ----------- ----------- -----------
Total loans ........................... 187,853 100.00% 185,281 100.00% 171,428 100.00%
=========== =========== ===========
Allowance for possible loan losses . (1,825) (2,480) (1,792)
Undisbursed proceeds of construction
and development loans in process . (909) (903) (1,573)
Deferred loan origination fees, net ... (588) (573) (377)
----------- ----------- -----------
Loans, net ................ 184,531 181,325 167,686
Mortgage loans held-for-sale .......... -- -- --
----------- ----------- -----------
Loans, net and mortgage
loans held-for-sale ............. $ 184,531 $ 181,325 $ 167,686
=========== =========== ===========
</TABLE>
- -----------------------------------------
(1) Includes committed but unadvanced loan amounts.
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<PAGE> 62
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at March 31, 1997. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
--------------------------------------------------------------------------------------
ONE- TO CONSTRUCTION
FOUR- MULTI- COMMERCIAL AND TOTAL
FAMILY FAMILY REAL ESTATE DEVELOPMENT COMMERCIAL CONSUMER LOANS
----------- --------- ----------- ------------ ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less ....................... $ 198 $ 505 $ 700 $ 966 $ - $ 772 $ 3,140
--------- --------- --------- --------- --------- --------- ---------
After one year:
More than one year to three years ......... 782 827 531 700 - 362 3,203
More than three years to five years ....... 1,562 1,207 131 - 31 302 3,233
More than five years to ten years ......... 7,319 1,074 1,635 14 - 501 10,543
More than ten years to twenty years ....... 46,721 4,601 13,232 46 - 435 65,035
More than twenty years .................... 108,615 6,409 9,031 1,105(1) - 223 125,383
--------- --------- --------- --------- --------- -------- --------
Total due after one year ......... 164,999 14,118 24,560 1,865 31 1,822 207,396
--------- --------- --------- --------- --------- -------- --------
Total amount due .................$ 165,196 $ 14,624 $ 25,260 $ 2,831 $ 31 $ 2,594 210,536
========= ========= ========= ========= ========= ========
Less:
Allowance for loan losses ........................................................................................ (1,687)
Undisbursed proceeds of construction and development loans in process (1,349)
Deferred loan origination fees, net .............................................................................. (437)
--------
Loans, net .............................................................................................................. $207,063
========
</TABLE>
- -------------------
(1) Includes construction and development loans which will convert to one- to
four-family mortgage loans upon the completion of the construction.
The following table shows the remaining contractual maturity of the
Bank's loans at September 30, 1997. The table does not include the effect of
future principal prepayments.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------
ONE- TO CONSTRUCTION
FOUR- MULTI- COMMERCIAL AND
FAMILY FAMILY REAL ESTATE DEVELOPMENT
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Amounts due:
One year or less ........................................................ $ 395 $ 86 $ 337 $ 4,472
--------- --------- --------- ---------
After one year:
More than one year to three years ................................... 874 724 2,244 625
More than three years to five years ................................. 1,694 1,111 840 --
More than five years to ten years ................................... 8,562 1,594 756 13
More than ten years to twenty years ................................. 47,443 5,932 16,677 45
More than twenty years .............................................. 108,222 7,867 8,402 2,102(1)
--------- --------- --------- ---------
Total due after one year ................................... 166,795 17,228 28,919 2,785
--------- --------- --------- ---------
Total amount due ........................................... $ 167,190 $ 17,314 $ 29,256 $ 7,257
========= ========= ========= =========
Less:
Allowance for loan losses ...........................................
Undisbursed proceeds of construction and development loans in process
Deferred loan origination fees, net .................................
Loans, net .................................................................
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------
TOTAL
COMMERCIAL CONSUMER LOANS
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Amounts due:
One year or less ........................................................ $ -- $ 1,652 $ 6,942
--------- --------- ---------
After one year:
More than one year to three years ................................... -- 340 4,807
More than three years to five years ................................. 13 455 4,113
More than five years to ten years ................................... -- 380 11,305
More than ten years to twenty years ................................. -- 660 70,757
More than twenty years .............................................. -- 212 126,805
--------- --------- ---------
Total due after one year ................................... 13 2,047 217,787
--------- --------- ---------
Total amount due ........................................... $ 13 $ 3,699 224,729
========= =========
Less:
Allowance for loan losses ........................................... (2,133)
Undisbursed proceeds of construction and development loans in process (2,784)
Deferred loan origination fees, net ................................. (442)
---------
Loans, net ................................................................. $ 219,370
=========
</TABLE>
- -------------------
(1) Includes construction and development loans which will convert to one-
to four-family mortgage loans upon the completion of the construction.
61
<PAGE> 63
The following tables sets forth, at March 31, 1997 and September 30,
1997, the dollar amount of loans, excluding mortgage loans held for sale,
contractually due after March 31, 1998 and September 30, 1998 and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family ..................... $33,337 $129,303 $162,639
Multi-family ............................ 2,437 11,683 14,120
Commercial real estate .................. 546 24,013 24,559
Construction and development ............ 700 1,165 1,865
------- -------- --------
Total mortgage loans ............. 37,019 166,164 203,183
------- -------- --------
Commercial loans .............................. - 31 31
------- -------- --------
Consumer loans:
Equity lines ............................ - 2,359 2,359
Other consumer loans .................... 607 1,216 1,823
------- -------- --------
Total consumer loans ............. 607 3,575 4,182
------- -------- --------
Total loans ................................... $37,626 $169,770 $207,396
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family ..................... $ 36,518 $127,222 $163,740
Multi-family ............................ 2,851 14,377 17,228
Commercial real estate .................. 2,546 26,373 28,919
Construction and development ............ 625 2,160 2,785
-------- -------- --------
Total mortgage loans ............. 42,540 170,132 212,672
-------- -------- --------
Commercial loans .............................. -- 13 13
-------- -------- --------
Consumer loans:
Equity lines ............................ -- 3,055 3,055
Other consumer loans .................... 589 1,458 2,047
-------- -------- --------
Total consumer loans ............. 589 4,513 5,102
-------- -------- --------
Total loans ................................... $ 43,129 $174,658 $217,787
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its five
branch offices and one administrative office and through a network of loan
correspondents, wholesale loan brokers and other financial institutions approved
by the Bank. All loans originated by the Bank, either through internal sources
or through loan correspondents are underwritten by the Bank pursuant to the
Bank's policies and procedures. The Bank originates both adjustable-rate and
fixed-rate loans. The Bank's ability to originate fixed- or adjustable-rate
loans is dependent upon the relative customer demand for such loans, which is
affected by the current and expected future level of interest rates.
Generally, all adjustable-rate mortgage loans originated by the Bank
are originated for investment. While the Bank has in the past, from
time-to-time, retained fixed-rate one- to four-family loans, it is currently the
general policy of the Bank to sell substantially all one- to four-family
fixed-rate mortgage loans with periods to repricing of greater than 15 years.
The one- to four-family mortgage loan products currently originated for sale by
the Bank include a variety of loans which conform to the underwriting standards
specified by the FHLMC ("conforming loans") and, to a lesser extent, loans which
do not conform to FHLMC standards due to loan amounts ("jumbo loans"). While the
Bank generally does not originate mortgage loans insured by the FHA and VA, the
Bank has, from time-to-time, purchased such loans for its own portfolio. All
one- to four-family mortgage loans sold by the Bank are sold pursuant to master
commitments negotiated with FHLMC and other investors to purchase loans meeting
such investors' defined criteria. Although the Bank has entered into such master
commitment contracts, such contracts generally do not require the purchasers to
buy or the Bank to deliver a specific amount of mortgage loans. All conforming
loans currently sold by the Bank are sold to FHLMC and all non-conforming loans
which are sold are generally sold to private investors. Sales of loans are made
without recourse to the Bank in the event of default by the borrower. The Bank
generally retains the servicing rights on the mortgage loans sold to FHLMC.
62
<PAGE> 64
At September 30, 1997, the Bank was servicing in its portfolio $219.4
million of loans, net, and $15.0 million of loans for others, primarily
consisting of conforming fixed-rate mortgage loans sold by the Bank. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
making certain insurance and tax payments on behalf of the borrowers and
generally administering the loans. Substantially all of the loans currently
being serviced for others are loans which have been sold by the Bank. The gross
servicing fee income from loans sold is generally 24 to 48 basis points of the
total balance of the loan serviced.
During the fiscal years ended March 31, 1997 and March 31, 1996, the
Bank originated $38.1 million and $21.4 million of fixed-rate and
adjustable-rate one- to four-family loans, respectively, of which $37.1 million
and $21.2 million, respectively, were retained by the Bank. The Bank recognizes,
at the time of sale, the cash gain or loss on the sale of the loans based on the
difference between the net cash proceeds received and the carrying value of the
loans sold. On April 1, 1996, the Bank implemented SFAS No. 122 pursuant to
which the value of servicing rights may be recognized as an asset of the Bank.
In the six months ended September 30, 1997 and in the fiscal year ended March
31, 1997, the fair value of servicing rights under SFAS No. 122 and SFAS No. 125
were not material and were not recognized in the consolidated financial
statements for those periods. The Bank has, in the past, from time-to-time,
purchased loans, primarily one-to four-family mortgage loans or participations
in loans, primarily multi-family and commercial real estate loans and, at
September 30, 1997, had $22.5 million of purchased loans and $1.5 million in
loan participation interests. Loans purchased from correspondent financial
institutions are underwritten pursuant to the Bank's policies and generally
closed in the name of the correspondent financial institution and then purchased
by the Bank.
63
<PAGE> 65
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED MARCH 31,
--------------------- ---------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance, loans, net(1) ........ $ 207,063 $ 186,581 $ 186,581 $ 184,531 $ 181,325
--------- --------- --------- --------- ---------
Loans originated:
Mortgage loans:
One- to four-family ........ 21,836 19,278 38,062 21,411 20,149
Multi-family ............... 2,989 260 1,129 2,025 240
Commercial real estate ..... 7,850 4,994 9,262 3,082 2,192
Construction and
development .............. 2,922 1,350 3,750 6,147 6,202
--------- --------- --------- --------- ---------
Total mortgage loans .. 35,597 25,882 52,203 32,665 28,783
--------- --------- --------- --------- ---------
Commercial ..................... -- 38 38 -- --
--------- --------- --------- --------- ---------
Consumer:
Equity lines ............... 1,923 1,254 3,737 517 --
Other consumer loans ....... 2,248 921 1,312 1,689 1,013
--------- --------- --------- --------- ---------
Total consumer loans .. 4,171 2,175 5,049 2,206 1,013
--------- --------- --------- --------- ---------
Total loans ............. 39,768 28,095 57,290 34,871 29,796
--------- --------- --------- --------- ---------
Total ............................... 246,831 214,676 243,871 219,402 211,121
Principal repayments and other, net ..... (26,953) (18,463) (35,765) (32,049) (24,728)
Loan charge-offs, net ................... 2 (80) (204) (52) (661)
Sale of mortgage loans, principal balance (510) (175) (530) (673) (483)
Transfer of mortgage loans to REO ....... -- -- (309) -- (718)
--------- --------- --------- --------- ---------
Loans, net and mortgage loans
held-for-sale .................... 219,370 195,958 207,063 186,628 184,531
Mortgage loans held-for-sale ............ -- -- -- (47) --
--------- --------- --------- --------- ---------
Ending balance, loans, net ......... $ 219,370 $ 195,958 $ 207,063 $ 186,581 $ 184,531
========= ========= ========= ========= =========
</TABLE>
- -------------------------
(1) Includes mortgage loans held-for-sale.
64
<PAGE> 66
One-to Four-Family Lending. The Bank currently offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years
secured by one- to four-family residences. Most of such loans are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives, from existing
or past customers, from mortgage brokers and through referrals from members of
the Bank's local communities. At September 30, 1997, the Bank's one- to
four-family mortgage loans totalled $164.1 million, or 73.0%, of total loans. Of
the one-to four-family mortgage loans outstanding at that date, 26.0% were
fixed-rate mortgage loans and 74.0% were ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from ten
to 30 years. The Bank sells substantially all of the fixed-rate residential
loans with periods to repricing of greater than 15 years that it originates and
retains the servicing on all loans sold to FHLMC. The Bank generally retains for
its portfolio all adjustable-rate one- to four-family loans. From time-to-time,
the Bank will purchase one- to four-family mortgage loans. Such purchased loans
may be secured by real estate located outside the Bank's primary market area and
outside of Massachusetts. Such loans are generally purchased with servicing
retained by the seller.
The Bank currently offers a number of ARM loans with terms of up to 30
years and interest rates which adjust every one, three or five years from the
outset of the loan and which adjust annually after a three or five year initial
fixed period. The interest rates for the Bank's ARM loans are indexed to either
the one, three or five year Constant Maturity Treasury ("CMT") Index. The Bank
originates ARM loans with initially discounted rates, often known as "teaser
rates." The Bank's ARM loans generally provide for periodic (not more than 2%)
and overall (not more than 6%) caps on the increase or decrease in the interest
rate at any adjustment date and over the life of the loan.
The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Bank's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. Periodic and lifetime caps on interest
rate increases help to reduce the risks associated with adjustable-rate loans
but also limit the interest rate sensitivity of such loans.
All one- to four-family mortgage loans are underwritten according to
the Bank's policies and guidelines. Generally, the Bank originates one- to
four-family residential mortgage loans in amounts up to 80% of the lower of the
appraised value or the selling price of the property securing the loan and up to
95% of the appraised value or selling price if private mortgage insurance
("PMI") is obtained. Mortgage loans originated by the Bank generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Bank's consent. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate mortgage loan
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for first-time home buyers, the Bank
offers its own first-time home buyer loan program. This program offers one- to
four-family residential mortgage loans to qualified individuals. These loans are
offered with adjustable- and fixed-rates of interest and terms of up to 30
years. Pursuant to this program, borrowers receive reduced loan origination fees
and closing costs. Such loans must be secured by an owner-occupied residence.
These loans are originated using the same underwriting guidelines as are the
Bank's other one- to four-family mortgage loans. Such loans are originated in
amounts
65
<PAGE> 67
up to 95% of the lower of the property's appraised value or the sale price.
Private mortgage insurance is normally required for loans with loan-to-value
("LTV") ratios of over 80%.
Multi-Family and Commercial Real Estate Lending. The Bank originates
multi-family and commercial real estate loans that are generally secured by 5 or
more unit apartment buildings and properties used for business purposes such as
office buildings, industrial facilities or retail facilities located in the
Bank's primary market area. The Bank's multi-family and commercial real estate
underwriting policies provide that such real estate loans may be made in amounts
up to 80% of the appraised value of the property, subject to the Bank's current
loans-to-one-borrower limit, which at September 30, 1997 was $3.3 million. The
Bank's multi-family and commercial real estate loans may be made with terms up
to 30 years and are offered with interest rates that adjust periodically and are
generally indexed to the prime rate as reported in The Wall Street Journal. In
reaching its decision on whether to make a multi-family or commercial real
estate loan, the Bank considers the net operating income of the property, the
borrower's expertise, credit history and profitability and the value of the
underlying property. The Bank has generally required that the properties
securing these real estate loans have debt service coverage ratios (the ratio of
earnings before debt service to debt service) of at least 1.25x. In addition,
environmental impact surveys are generally required for most multi-family and
commercial real estate loans. Generally, all multi-family and commercial real
estate loans made to corporations, partnerships and other business entities
require personal guarantees by the principals. On an exception basis, the Bank
may not require a personal guarantee on such loans depending on the
creditworthiness of the borrower and the amount of the downpayment and other
mitigating circumstances. The Bank's multi-family real estate loan portfolio at
September 30, 1997 was $17.3 million, or 7.7%, of total loans and the Bank's
commercial real estate loan portfolio at such date was $29.3 million, or 13.0%,
of total loans. The largest multi-family or commercial real estate loan in the
Bank's portfolio at September 30, 1997 was a $2,750,000 real estate loan secured
by a golf and country club located in Watertown, Massachusetts.
The Bank also purchases up to 50% participation interests in
multi-family and commercial real estate loans. Most of these loans are secured
by real estate located in the Bank's primary market area. When determining
whether to participate in such loans, the Bank will underwrite its participation
interest according to its own underwriting standards. At September 30, 1997, the
Bank had $1.5 million in multi-family and commercial real estate loan
participation interests, or 0.7% of total loans.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards.
Construction and Development Lending. The Bank originates short-term
balloon fixed-rate construction loans for the development of residential and
commercial property. Construction and development loans are offered primarily to
experienced local developers operating in the Bank's market area. The Bank
currently does not originate loans secured by raw land. The majority of the
Bank's construction and development loans are originated to finance the
construction by developers of one- to four-family residential real estate and,
to a lesser extent, multi-family and commercial real estate properties located
in the Bank's primary market area. Construction loans are generally offered with
terms of up to 12 months and may be made in amounts up to 80% of the appraised
value of the property on multi-family and commercial real estate construction
and 85% on one- to four-family residential construction. Construction loan
proceeds are disbursed periodically in increments as construction progresses and
as inspections by the Bank's lending officers warrant. At September 30, 1997,
the Bank's largest construction and development loan was a
66
<PAGE> 68
performing loan with a $1.0 million outstanding principal balance secured by a
single-family residence located in Wellesley, Massachusetts. At September 30,
1997, construction and development loans totalled $7.3 million (including
unadvanced loan amounts), or 3.2%, of the Bank's total loans. At September 30,
1997, $2.8 million, or 38.2%, of construction and development loans had
permanent financing commitments by the Bank or third-parties or were secured by
properties which were pre-sold pending completion of the projects.
The Bank also originates construction and development loans to
individual borrowers for the construction of single-family owner-occupied
residential properties with permanent financing commitments by the Bank. The
Bank's underwriting standards and procedures for such loans are similar to those
applicable for one- to four-family residential mortgage lending. Proceeds for
such loans are disbursed as phases of the construction are completed. All such
loans are originated as one- to four-family interest-only adjustable-rate
mortgage loans. Upon completion of the construction, such loans convert to
principal and interest over the remaining term. At September 30, 1997, such
loans totalled $1.1 million, or 15.0%, of all of the $7.3 million of
construction and development loans and 0.4% of the Bank's total loans.
Construction and development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a property, when completed,
having a value which is insufficient to assure full repayment.
Consumer and Other Lending. Consumer loans at September 30, 1997
amounted to $6.8 million, or 3.0%, of the Bank's total loans and consisted
primarily of equity lines of credit and, to a significantly lesser extent,
secured and unsecured personal loans and new and used automobile loans. Such
loans are generally originated in the Bank's primary market area and generally
are secured by real estate, deposit accounts, personal property and automobiles.
These loans are typically shorter term and generally have higher interest rates
than one- to four-family mortgage loans.
The Bank has recently begun to offer equity lines of credit.
Substantially all of these loans are secured by second mortgages on residential
real estate located in the Bank's primary market area. At September 30, 1997,
these loans totalled $3.1 million, or 1.4%, of the Bank's total loans and 45.2%
of consumer loans. Equity lines of credit generally have fixed-rates of interest
for the initial six months of the loan and adjustable-rates of interest
thereafter which adjust on a monthly basis. The adjustable-rate of interest
charged on such loans is indexed to the prime rate as reported in The Wall
Street Journal. Equity lines of credit generally have an 18% lifetime cap on
interest rates and may never adjust to be less than the initial interest rate.
Generally, the combined LTV ratio on equity lines of credit is 80% where the
Bank possesses the first mortgage lien interest and 75% when another lender
possesses the first mortgage lien interest. However, exceptions may be made for
previous customers of the Bank. The underwriting standards employed by the Bank
for equity lines of credit include a determination of the applicant's credit
history and an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan and the value of the collateral
securing the loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment and,
additionally, from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration.
The Bank also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans may be secured by deposit accounts or
67
<PAGE> 69
other forms of collateral. At September 30, 1997, personal loans (both secured
and unsecured) totalled $3.7 million, or 1.7%, of the Bank's total loans.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than one- to four-family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At September 30, 1997, the
Bank had five consumer loans 90 days or more delinquent, whose balances totalled
$40,000.
At September 30, 1997, the Bank had one outstanding commercial loan
which was unsecured and had an outstanding principal balance of $13,000.
Loan Approval Procedures and Authority. The Board of Directors of the
Bank establishes the lending policies of the Bank. Such policies provide that
only the Bank's President and Executive Vice President may approve loans. Any
loans approved by the President or Executive Vice President are submitted to the
full Board of Directors or the Bank's Executive Committee for ratification on a
monthly basis.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all REO. The procedures taken by
the Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the Bank
takes a number of steps to have the borrower cure the delinquency and restore
the loan to current status. The Bank generally sends the borrower a written
notice of non-payment after the loan is first past due. The Bank's guidelines
provide that telephone, written correspondence and/or face-to-face contact will
be attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank usually attempts to obtain full payment, work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the Bank will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan generally
is sold at foreclosure and, if purchased by the Bank, becomes real estate owned.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not
68
<PAGE> 70
corrected. Assets classified as "Doubtful" have all of the weaknesses inherent
in those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank's Classification of Assets Committee reviews and classifies
the Bank's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Bank classifies assets in
accordance with the management guidelines described above. At September 30,
1997, the Bank had $2.2 million, or 0.89%, of total assets, designated as
Substandard consisting of six one- to four-family mortgage loans, two consumer
installment loans and one land loan. At such date, $84,000, or 0.03%, of total
assets were designated as Doubtful (in accordance with OTS regulations)
consisting of three one- to four-family mortgage loans and $146,000, or 0.1%,
of total assets were designated as Loss (in accordance with OTS regulations)
consisting of one one- to four-family mortgage loan and six consumer
installment loans. Included in total classified assets at September 30, 1997,
were $84,000 of assets classified as Doubtful and $903,000 of assets classified
as Substandard, which represent the outstanding balance of 104 second mortgage
loans purchased by Union Federal and secured by properties located outside the
Bank's primary market area, predominately in California and other southwestern
states. During early 1997, such second mortgage loans experienced increased
delinquencies which caused the Bank to adversely classify the entire pool of
such loans and increase its provision for loan losses. To the extent
delinquencies continue to increase in such portfolio of loans, the Bank may
establish additional reserves against such loans through provisions for loan
losses or charge-off portions of such loans which would adversely affect the
Company's net income. As of September 30, 1997, the Bank had a total of six
one- to four-family loans and one consumer installment loan, totaling $861,000,
designated as Special Mention. At September 30, 1997, the largest loan
designated as Special Mention had a carrying balance of $243,000 and was
secured by a single-family residence. At September 30, 1997, all of the Bank's
classified and special mention assets totalled $3.3 million, representing 1.5%
of loans.
69
<PAGE> 71
The following table sets forth the delinquencies in the Bank's loan
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997 AT MARCH 31, 1997
--------------------------------------------- ------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OF BALANCE NUMBER OF BALANCE NUMBER OF BALANCE NUMBER OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ..... 9 $ 952 8 $ 1,229 14 $ 1,622 12 $ 1,499
Commercial real estate .. 2 307 -- -- 1 530 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total mortgage loans 11 1,259 8 1,229 15 2,152 12 1,499
--------- --------- --------- --------- --------- --------- --------- ---------
Consumer loans:
Equity lines ............ 2 74 -- -- -- -- 1 40
Other consumer loans .... 4 9 5 40 3 13 2 7
--------- --------- --------- --------- --------- --------- --------- ---------
Total consumer loans 6 83 5 40 3 13 3 47
--------- --------- --------- --------- --------- --------- --------- ---------
Total loans ................ 17 $ 1,342 13 $ 1,269 18 $ 2,165 15 $ 1,546
========= ========= ========= ========= ========= ========= ========= =========
Delinquent loans to
loans, net ................. 0.61% 0.58% 1.04% 0.75%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT MARCH 31, 1995
--------------------------------------------- ------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------- --------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OF BALANCE NUMBER OF BALANCE NUMBER OF BALANCE NUMBER OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family ..... 16 $ 1,521 15 $ 1,128 17 $ 1,704 10 $ 996
Multi-family ............ -- -- -- -- 1 240 -- --
Commercial real estate .. 1 198 -- -- 1 70 -- --
Construction and
development ........... -- -- -- -- -- -- 1 158
--------- --------- --------- --------- --------- --------- --------- ---------
Total mortgage loans 17 1,719 15 1,128 19 2,014 11 1,154
--------- --------- --------- --------- --------- --------- --------- ---------
Other consumer loans ....... 1 35 3 22 3 77 1 18
--------- --------- --------- --------- --------- --------- --------- ---------
Total loans ................ 18 $ 1,754 18 $ 1,150 22 $ 2,091 12 $ 1,172
========= ========= ========= ========= ========= ========= ========= =========
Delinquent loans to
loans, net ................. 0.93% 0.62% 1.12% 0.64%
========= ========= ========= =========
</TABLE>
70
<PAGE> 72
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding non-accrual loans and REO. At September 30, 1997,
the Bank had no REO in its portfolio. It is the policy of the Bank to cease
accruing interest on loans 90 days or more past due and to charge off all
accrued interest. For six months ended September 30, 1997 and the fiscal years
ended March 31, 1997 and 1996, the amount of interest income that was recorded
on non-accrual loans was $34,000, $78,000 and $23,000, respectively.
For the six months ended September 30, 1997 and the fiscal years ended March
31, 1997 and 1996, the amount of additional interest income that would have
been recognized on non-accrual loans if such loans had continued to perform in
accordance with their contractual terms was $78,000, $79,000 and 56,000,
respectively. On April 1, 1995, the Bank adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by SFAS No.
118. There were no loans that met the definition of an impaired loan per SFAS
No. 114 at or during the six months ended September 30, 1997 and 1996, or the
fiscal years ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT MARCH 31,
--------------- ------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family .............. $1,229 $1,331 $1,499 $1,128 $ 996 $2,056 $2,424
Commercial real estate ........... -- -- -- -- -- 360 807
Construction and development ..... -- -- -- -- 158 632 1,225
------ ------ ------ ------ ------ ------ ------
Total mortgage loans ......... 1,229 1,331 1,499 1,128 1,154 3,048 4,456
------ ------ ------ ------ ------ ------ ------
Consumer loans:
Equity lines ....................... -- -- 40 -- -- -- --
Other consumer loans ............... 40 330 7 22 18 7 90
------ ------ ------ ------ ------ ------ ------
Total consumer loans ......... 40 330 47 22 18 7 90
------ ------ ------ ------ ------ ------ ------
Total nonaccrual loans ....... 1,269 1,661 1,546 1,150 1,172 3,055 4,546
Real estate owned, net ................... -- 65 73 65 70 512 2,491
------ ------ ------ ------ ------ ------ ------
Total non-performing assets(2) $1,269 $1,726 $1,619 $1,215 $1,242 $3,567 $7,037
====== ====== ====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(1) ............................ 0.96% 0.86% 0.81% 0.94% 0.98% 1.35% 1.06%
Allowance for loans losses as a percent
of non-performing loans(2) .............. 168.09 102.29 109.12 154.26 155.72 81.18 39.42
Non-performing loans as a percent of
loans(1)(2) ............................ 0.57 0.84 0.74 0.61 0.63 1.66 2.68
Non-performing assets as a percent of
total assets(3) ........................ 0.51 0.76 0.69 0.55 0.61 1.76 3.57
</TABLE>
- ---------------
(1) Loans are presented before allowance for loan losses.
(2) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or
principal.
(3) Non-performing assets consist of non-performing loans and REO.
71
<PAGE> 73
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses on loans which are deemed probable and estimable based on
information currently known to management. The allowance is based upon a number
of factors, including current economic conditions, actual loss experience and
industry trends. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to make additional provisions for
estimated loan losses based upon judgments different from those of management.
The economy in the Bank's primary market area suffered significantly in the
late 1980s and early 1990s. These adverse economic conditions negatively
affected the Bank's loan loss and delinquency activities and led to a
deterioration of the collateral values of the Bank's loans during those years.
In more recent years, the economy and real estate market in and around the
greater Boston metropolitan area has stabilized and begun to improve which has
had a positive impact on the Bank's loan loss and delinquency activities and
the value of properties securing the Bank's loans. See "Risk Factors--Weakness
of Regional and Local Economy." As of September 30, 1997, the Bank's allowance
for loan losses was 0.96% of total loans as compared to 0.81% as of March 31,
1997. The Bank had non-accrual loans of $1.3 million and $1.5 million at
September 30, 1997 and March 31, 1997, respectively. The Bank will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Bank's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Bank's level of allowance for loan losses will be sufficient to cover
loan losses incurred by the Bank or that future adjustments to the allowance
for loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
72
<PAGE> 74
The following table sets forth activity in the Bank's allowance for
loan losses for the periods as indicated.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED MARCH 31,
--------------- ------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ...... $1,687 $1,774 $1,774 $1,825 $2,480 $1,792 $2,368
------ ------ ------ ------ ------ ------ ------
Provision for loan losses ........... 444 5 117 1 6 862 1,550
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Mortgage loans:
One- to four-family ........ 16 80 225 94 241 219 1,091
Commercial real estate ..... -- -- -- -- 296 242 1,049
Construction and development -- -- -- -- 145 -- 55
Consumer loans .................. -- -- -- 55 9 -- 31
------ ------ ------ ------ ------ ------ ------
Total charge-offs ....... 16 80 225 149 691 461 2,226
------ ------ ------ ------ ------ ------ ------
Recoveries .......................... 18 -- 21 97 30 287 100
------ ------ ------ ------ ------ ------ ------
Balance at end of period ............ $2,133 $1,699 $1,687 $1,774 $1,825 $2,480 $1,792
====== ====== ====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period(1) .. 0.00% 0.08% 0.10% 0.03% 0.36% 0.10% 1.27%
====== ====== ====== ====== ====== ====== ======
Allowance for loan losses as a
percent of loans(2) ............... 0.96% 0.86% 0.81% 0.94% 0.98% 1.35% 1.06%
====== ====== ====== ====== ====== ====== ======
Allowance for loans losses as a
percent of non-performing loans(3). 168.09% 102.29% 109.12% 154.26% 155.72% 81.18% 39.42%
====== ====== ====== ====== ====== ====== ======
</TABLE>
- -------------
(1) Ratio is annualized for the six month periods.
(2) Loans are presented before deducting the allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or
principal.
73
<PAGE> 75
The following tables set forth the Bank's percent of allowance for loan
losses to total allowance for loans losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ....................... $ 960 45.01% 83.96% $ 748 44.03% 86.23%
Commercial real estate ............ 810 37.97 13.02 578 34.02 11.91
--------- --------- --------- --------- --------- ---------
Total ......................... 1,770 82.98 96.98 1,326 78.05 98.14
Commercial loans ..................... -- -- .01 -- -- .01
Consumer loans ....................... 43 2.02 3.01 34 2.00 1.85
Unallocated .......................... 320 15.00 -- 339 19.95 --
--------- --------- --------- --------- --------- ---------
Total allowance for loan losses $ 2,133 100.00% 100.00% $ 1,699 100.00% 100.00%
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ....... $ 793 47.00% 85.63% $ 781 44.03% 88.53% $ 1,022 56.00% 89.39%
Commercial real
estate .......... 523 31.00 12.00 514 28.97 10.05 420 23.01 9.49
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total ......... 1,316 78.00 97.63 1,295 73.00 98.58 1,442 79.01 98.88
Commercial loans ..... -- -- 0.02 -- -- -- -- -- --
Consumer loans ....... 34 2.02 2.35 18 1.01 1.42 18 0.99 1.12
Unallocated .......... 337 19.98 -- 461 25.99 -- 365 20.00 --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total allowance for
loan losses .... $ 1,687 100.00% 100.00% $ 1,774 100.00% 100.00% $ 1,825 100.00% 100.00%
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------
1994 1993
-------------------------------- --------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ....... $ 992 40.00% 87.55% $ 1,380 77.01% 86.82%
Commercial real
estate .......... 1,017 41.01 11.40 394 21.99 11.85
--------- --------- --------- --------- --------- ---------
Total ......... 2,009 81.01 98.95 1,774 99.00 98.67
Commercial loans ..... -- -- -- -- -- --
Consumer loans ....... 25 1.01 1.05 18 1.00 1.33
Unallocated .......... 446 17.98 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total allowance for
loan losses .... $ 2,480 100.00% 100.00% $ 1,792 100.00% 100.00%
========= ========= ========= ========= ========= =========
</TABLE>
74
<PAGE> 76
Real Estate Owned. At March 31, 1997 and September 30, 1997, the
Bank had $73,000 an $0 REO, respectively. When the Bank acquires property
through foreclosure or deed in lieu of foreclosure, it is initially recorded at
the lower of the recorded investment in the corresponding loan or the fair
value of the related assets at the date of foreclosure, less costs to sell.
Thereafter, if there is a further deterioration in value, the Bank provides for
a specific valuation allowance and charges operations for the diminution in
value. It is the policy of the Bank to have obtained an appraisal on all real
estate subject to foreclosure proceedings prior to the time of foreclosure. It
is the Bank's policy to require appraisals on a periodic basis on foreclosed
properties and conduct inspections on foreclosed properties.
SECURITIES INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to
invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certificates of deposit of
insured banks and savings institutions, bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally-
chartered savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations. See
"Regulation-Federal Savings Institution Regulation- Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and at
a level considered to be adequate to meet its normal daily activities.
The investment policy of the Bank, as approved by the Board of
Directors, requires management to maintain adequate liquidity and a high quality
investment portfolio. The Bank primarily utilizes investments in securities for
liquidity management and as a method of deploying excess funds not utilized for
investment in loans. Generally, the Bank's investment policy is more restrictive
than the OTS regulations allow and, accordingly, the Bank has invested primarily
in U.S. Government and agency securities, which qualify as liquid assets under
the OTS regulations, federal funds and U.S. Government sponsored agency issued
mortgage-backed securities. The Bank is required by SFAS No. 115 to categorize
its securities as held to maturity, available-for-sale or held for trading. As
of September 30, 1997, the Bank's securities portfolio consisted of investment
securities, marketable equity securities and mortgage-backed and
mortgage-related securities. At such date, the substantial majority of the
Bank's securities were categorized as held-to-maturity. Such portfolio totalled
$13.2 million, or 5.3% of total assets, and the available-for-sale securities
portfolio totalled $3.3 million, or 1.3% of total assets
As of September 30, 1997, $12.6 million, or 5.1% of total assets, of
the Bank's securities portfolio consisted of investment securities, primarily
debt securities issued by the U. S. Government or government sponsored agencies
(such as the FHLB) and marketable equity securities, primarily consisting of
mutual fund securities and common stock issued by government-sponsored agencies.
The Bank generally invests in U.S. Treasury and agency obligations with
maturities of 24 to 60 months. The weighted average maturities of the Bank's
investment securities portfolio, excluding any equity securities, was 39 months
as of September 30, 1997.
At September 30, 1997, the Bank had $2.9 million of mortgage-backed
and mortgage-related securities, or 1.2% of total assets, substantially all of
which were backed by fixed-rate mortgages and which consisted of
mortgage-backed securities and collateralized mortgage obligations ("CMOs")
insured or issued by GNMA, FHLMC, Fannie Mae or private issuers, such as
Countrywide Management Corp., GE Capital Mortgage Services, Inc. and
Independent Mortgage Corp. The Bank generally invests in mortgage-backed or
mortgage-related securities with estimated maturities of 24 to 42 months. At
September 30, 1997, the weighted average estimated maturity of its
mortgage-backed and mortgage-related securities portfolio was 29 months.
Investments in mortgage-backed and mortgage-related securities involve a risk
that actual
75
<PAGE> 77
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates. While investments in privately issued
mortgage-backed securities generally bear yields higher than mortgage-backed
securities insured by government sponsored agencies, they involve a greater
degree of risk than those issued by government sponsored agencies as such
securities are not insured or guaranteed by such government sponsored agencies.
CMOs are a type of debt security issued by a special purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest, with each class, or "tranche,"
possessing different risk characteristics. A particular tranche of CMOs may,
therefore, carry prepayment risk that differs from that of both the underlying
collateral and other tranches. CMO tranches purchased by the Bank attempt to
moderate reinvestment risk associated with mortgage-backed securities resulting
from unexpected prepayment activities. All of the Bank's investment in
mortgage-backed and mortgage-related securities at September 30, 1997 were
categorized as held-to-maturity.
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
AT SEPTEMBER 30, -----------------------------------------------
1997 1997 1996
-------------------- --------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Investment securities........................ $10,302 $10,292 $10,303 $10,129 $12,304 $12,152
Mortgage-backed and mortgage-
related securities......................... 2,854 2,894 3,250 3,177 3,877 3,866
------- ------- ------- ------- ------- -------
Total held-to-maturity................. 13,156 13,186 13,553 13,306 16,181 16,018
Available-for-sale(1).............................. 2,319 3,252 2,250 2,903 2,639 3,286
------- ------- ------- ------- ------- -------
Total securities....................... $15,475 $16,438 $15,803 $16,209 $18,820 $19,304
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------
1995
-------------------
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Held-to-maturity:
Investment securities........................ $4,010 $3,859
Mortgage-backed and mortgage-
related securities......................... 1,703 1,695
------ -------
Total held-to-maturity................. 5,713 5,554
Available-for-sale(1).............................. 1,556 1,900
------ -------
Total securities....................... $7,269 $7,454
====== ======
</TABLE>
- ----------------------
(1) Consists of marketable equity securities.
76
<PAGE> 78
The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's mortgage-backed and
mortgage-related securities, all of which were classified as held-to-maturity at
the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------
AT SEPTEMBER 30, 1997 1997
--------------------------------- -------------------------------------
AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE
---- -------- ----- ---- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
Fixed rate:
GNMA ................................... $ 446 15.63% $ 464 $ 529 16.28% $ 529
FHLMC .................................. 214 7.50 225 239 7.35 239
CMOs ................................... 2,131 74.67 2,140 2,419 74.43 2,345
------ ------ ------ ------ ------ ------
Total fixed rate ................... 2,791 97.80 2,829 3,187 98.06 3,113
Adjustable rate:
FNMA ................................... 63 2.20 65 63 1.94 64
------ ------ ------ ------ ------ ------
Total mortgage-backed and
mortgage-related securities.................... $2,854 100.00% $2,894 $3,250 100.00% $3,177
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE
---- -------- ----- ---- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities:
Fixed rate:
GNMA ................................... $ 717 18.49% $ 732 $ 842 49.44% $ 835
FHLMC .................................. 303 7.82 315 367 21.55 369
CMOs ................................... 2,793 72.04 2,756 429 25.19 426
------ ------ ------ ------ ------- ------
Total fixed rate ................... 3,813 98.35 3,803 1,638 96.18 1,630
Adjustable rate:
FNMA ................................... 64 1.65 63 65 3.82 65
------ ------ ------ ------ ------- ------
Total mortgage-backed and
mortgage-related securities ................... $3,877 100.00% $3,866 $1,703 100.00% $1,696
====== ====== ====== ====== ======= ======
</TABLE>
- -----------------
(1) Based on amortized cost.
The following table sets forth the Bank's mortgage-backed and
mortgage-related securities activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED MARCH 31,
------------------- ----------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance................................. $3,250 $1,551 $3,877 $1,703 $1,558
Principal repayments.......................... (396) (537) (631) (355) (316)
Purchases..................................... - 2,522 - 2,522 458
Accretion of discount......................... -- 7 4 7 3
------ ------ ------ ------ ------
Ending balance.................................... $2,854 $3,543 $3,250 $3,877 $1,703
====== ====== ====== ====== ======
</TABLE>
77
<PAGE> 79
The table below sets forth certain information regarding the
carrying amount, weighted average yields and contractual maturities of the
Bank's debt securities, all of which were classified as held-to-maturity as of
September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN 10 YEARS
-------------------- --------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
Investment securities(1) .... $2,002 5.12% $7,300 6.51% $1,000 7.04% $ -- --%
Mortgage-backed and mortgage-
related securities:
Adjustable rate:
FNMA .................. -- -- -- -- -- -- 63 7.75
Fixed-rate:
GNMA .................. -- -- -- -- 446 8.00 -- --
FHLMC ................. -- -- 61 9.50 77 8.00 76 8.50
CMOs .................. -- -- -- -- -- -- 2,131 6.93
------ ------ ------ ------
Total debt securities ........ $2,002 5.12% $7,361 6.52% $1,523 7.48% $2,270 6.97%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------
TOTAL
---------------------
WEIGHTED
CARRYING AVERAGE
AMOUNT YIELD
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt securities:
Investment securities(1) .... $10,302 6.53%
Mortgage-backed and mortgage-
related securities:
Adjustable rate:
FNMA .................. 63 7.75
Fixed-rate:
GNMA .................. 446 8.00
FHLMC ................. 214 8.00
CMOs .................. 2,131 6.93
-------
Total debt securities ........ $13,156 6.87%
======= ====
</TABLE>
- ----------------
(1) Consists of U.S. Treasury and government agency obligations.
78
<PAGE> 80
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from
sales of loans, cash flows generated from operations and FHLB advances are the
primary sources of the Bank's funds for use in lending, investing and for other
general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the six months ended
September 30, 1997, the average balance of core deposits represented 45.8% of
total average deposits. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Bank's deposits are obtained predominantly from the
areas surrounding its branch offices. The Bank has historically relied primarily
on providing a higher level of customer service and long-standing relationships
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits. The Bank uses traditional
means of advertising its deposit products, including print media, and generally
does not solicit deposits from outside its market area. While the Bank does not
actively solicit certificate accounts in excess of $100,000 or use brokers to
obtain deposits, the Bank may solicit, from time-to-time, such deposits
depending upon market conditions. The Bank offers negotiated rates on some of
its certificate accounts. At September 30, 1997, $109.0 million, or 53.9%, of
total deposits were certificate accounts with a weighted average remaining
maturity of 8.1 months. The Bank has experienced an increase in certificate
accounts since 1995, from an average balance of $76.6 million, or 43.9%, of
average deposits, for 1995 to $105.7 million, or 54.1%, of average deposits, for
the six months ended September 30, 1997. Such increase in certificate accounts
is due to offering new competitively priced certificate account products which,
in part, resulted in an increase in the average cost of deposits from 3.46% for
fiscal 1995 to 4.46% for the six months ended September 30, 1997. For the six
months ended September 30, 1997, certificate accounts in excess of $100,000
increased $2.1 million, or 15.8%, from $13.2 million to $15.3 million. Further
increases in certificate accounts, which tend to be more sensitive to movements
in market interest rates than core deposits, may result in the Bank's deposit
base being less stable than if it had a larger amount of core deposits which, in
turn, may result in further increases in the Bank's cost of deposits and may
adversely affect net interest income in future periods.
79
<PAGE> 81
The following table presents the deposit activity of the Bank for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, MARCH 31,
------------------ ---------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals) .................. $ 736 $(2,694) $ 854 $1,660 $(7,349)
Interest credited on deposit accounts ....... 4,366 4,080 8,272 7,936 6,031
------ ------- ------ ------ -------
Total increase (decrease) in deposit accounts $5,102 $ 1,386 $9,126 $9,596 $(1,318)
====== ======= ====== ====== =======
</TABLE>
At September 30, 1997, the Bank had $15.3 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
Maturity Period AMOUNT RATE
- --------------------------- -------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
3 months or less..................................... $ 5,316 5.50%
Over 3 through 6 months.............................. 2,182 5.64
Over 6 through 12 months............................. 6,050 5.65
Over 12 months....................................... 1,727 6.67
--------
Total.................................... $ 15,275 5.71%
========
</TABLE>
80
<PAGE> 82
The following table sets forth the distribution of the Bank's
average deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented. Averages for the periods
presented utilize month-end balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
FOR THE SIX MONTHS ENDED ----------------------------------------
SEPTEMBER 30, 1997 1997
------------------------------------- ----------------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ............ $ 88 0.05% -% $ 132 0.07% --%
Money market accounts ...... 39,523 20.24 4.05 34,839 18.37 4.12
Regular savings accounts ... 29,273 14.99 2.50 30,863 16.27 2.14
NOW accounts ............... 20,649 10.58 1.84 20,835 10.99 1.85
-------- ------ -------- ------
Total ................ 89,533 45.86 3.03 86,669 45.70 2.86
-------- ------ -------- ------
Certificate accounts(1)(2):
Less than 6 months ...... 20,635 10.57 5.16 24,744 13.05 5.13
Over 6 through
12 months ............. 54,233 27.78 5.53 48,117 25.37 5.54
Over 12 through
36 months ............. 24,817 12.71 5.87 25,360 13.36 5.95
Over 36 months .......... 6,030 3.08 6.74 4,774 2.52 6.85
-------- ------ -------- ------
Total certificate
accounts ........... 105,715 54.14 5.67 102,995 54.30 5.62
-------- ------ -------- ------
Total average deposits $195,248 100.00% 4.46 $189,664 100.00% 4.36
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits ............ $ 165 0.10% --% $ 229 0.13% --%
Money market accounts ...... 29,972 17.30 4.28 39,603 22.70 3.71
Regular savings accounts ... 31,560 18.20 2.14 37,575 21.54 2.03
NOW accounts ............... 18,727 10.81 2.05 20,438 11.72 2.09
------- ------- -------- -------
Total ................ 80,424 46.41 2.91 97,845 56.09 2.72
------- ------- -------- -------
Certificate accounts(1)(2):
Less than 6 months ...... 24,448 14.11 5.39 24,624 14.12 3.84
Over 6 through
12 months ............. 40,997 23.66 5.88 32,927 18.87 4.62
Over 12 through
36 months ............. 23,615 13.63 5.73 17,969 10.30 4.55
Over 36 months .......... 3,792 2.19 7.05 1,084 0.62 6.41
------- ------- -------- -------
Total certificate
accounts ........... 92,852 53.59 6.02 76,604 43.91 4.40
------- ------- -------- -------
Total average deposits $173,276 100.00% 4.58 $174,449 100.00% 3.46
======== ====== ======== ======
</TABLE>
- --------------------
(1) Based on remaining maturity of certificates.
(2) Includes retirement accounts such as IRA and Keogh accounts.
81
<PAGE> 83
The following table presents by various rate categories, the amount
of certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at September 30, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM SEPTEMBER 30, 1997
---------------------------------------------------------------------
LESS ONE TWO THREE FOUR AT
THAN TO TO TO TO SEPTEMBER
ONE TWO THREE FOUR FIVE MORE THAN 30,
YEAR YEARS YEARS YEARS YEARS FIVE YEARS 1997
---- ----- ----- ----- ----- ---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate
accounts:
0 to 4.00% ... $ 166 $ -- $ -- $ -- $ -- $- $ 166
4.01% to 5.00% 46 26 1 -- -- - 73
5.01% to 6.00% 87,881 8,318 1,013 354 112 7 97,685
6.01% to 7.00% 3,717 1,603 285 270 1,529 - 7,404
7.01% to 8.00% 625 74 2,915 -- 34 - 3,648
8.01% to 9.00% -- 1 -- -- -- - 1
Over 9.01% ... -- -- -- -- -- - --
------- ------- ------ ---- ------ -- --------
Total .... $92,435 $10,022 $4,214 $624 $1,675 $7 $108,977
======= ======= ====== ==== ====== == ========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Certificate
accounts:
0 to 4.00% ... $ 197 $ 790 $10,749
4.01% to 5.00% 1,912 12,400 32,206
5.01% to 6.00% 93,782 64,157 26,323
6.01% to 7.00% 6,520 20,883 15,479
7.01% to 8.00% 3,611 3,893 2,452
8.01% to 9.00% 1 1 1
Over 9.01% ... -- -- 2
-------- -------- -------
Total .... $106,023 $102,124 $87,212
======== ======== =======
</TABLE>
Borrowings. As part of its operating strategy, the Bank utilizes
advances from the FHLB as an alternative to retail deposits to fund its
operations. The Bank has recently increased its emphasis on the utilization of
FHLB borrowings to fund its asset growth, primarily its origination of
adjustable-rate one- to four-family loans. By utilizing FHLB advances, which
possess varying stated maturities, the Bank can meet its liquidity needs without
otherwise being dependent upon retail deposits and revising its deposit rates to
attract retail deposits, which have no stated maturities (except for
certificates of deposit), which are interest rate sensitive and which are
subject to withdrawal from the Bank at any time. These FHLB advances are
collateralized primarily by certain of the Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank's investment in capital
stock of the FHLB. FHLB advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, fluctuates from time-to-time in accordance with the policies of the FHLB.
See "Regulation -- Federal Home Loan Bank System." At September 30, 1997, the
Bank had $22.5 million in outstanding advances from the FHLB and $1.5 million in
other borrowings as compared to $14.5 million and $1.1 million at March 31,
1997, respectively.
82
<PAGE> 84
The following table sets forth certain information regarding the
Bank's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, MARCH 31,
--------------------- ------------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding ............ $18,536 $14,133 $16,813 $ 7,786 $7,688
Maximum amount outstanding at any
month-end during the period ......... 22,500 17,650 25,500 11,650 9,000
Balance outstanding at end of period ... 22,500 17,650 14,500 11,650 8,000
Weighted average interest rate during
the period ...................... 5.85% 5.69% 5.63% 6.25% 6.18%
Weighted average interest rate at end of
period .......................... 5.63% 5.51% 5.46% 5.36% 6.34%
Other borrowed funds(1):
Average balance outstanding ............ $ 1,188 $ 998 $ 926 $ 743 $ 848
Maximum amount outstanding at any
month-end during the period .......... 3,179 1,834 2,214 1,313 1,576
Balance outstanding at end of period ... 1,486 721 1,065 1,048 663
</TABLE>
- -------------------
(1) Represents noninterest-bearing credit balance on the FHLB-Boston
account.
83
<PAGE> 85
PROPERTIES
The Bank currently conducts its business through its administrative
and full service banking offices.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL LEASEHOLD
LEASED OR YEAR LEASED DATE OF LEASE IMPROVEMENTS
LOCATION OWNED OR ACQUIRED EXPIRATION AT SEPTEMBER 30, 1997
-------- ----- ----------- ---------- ---------------------
<S> <C> <C> <C> <C>
EXECUTIVE/BRANCH OFFICE: (DOLLARS IN THOUSANDS)
1299 Beacon Street Owned 1950 - $988
Brookline, MA 02146
ADMINISTRATIVE OFFICE:
1309 Beacon Street Leased 1987 February 2002(1) 38
Brookline, MA 02146
BRANCH OFFICES:
184 Massachusetts Avenue Leased 1973 December 1998(2) 2
Boston, MA 02123
Dedham Mall Leased 1982 February 2000 12
Dedham, MA 02026
61 Lenox Street Owned 1975 - 319
Norwood, MA 02062
705 High Street Owned 1977 - 279
Westwood, MA 02090 -----
$1,638
======
</TABLE>
- ---------------
(1) The Bank has an option to renew this lease for one additional five-year
period.
(2) The Bank has an option to renew this lease for one additional two-year
period.
84
<PAGE> 86
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
PERSONNEL
As of September 30, 1997, the Bank had 66 full-time employees and 14
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good. See "Management of the Bank-Benefits" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. The Bank has not been audited by the IRS or the
Massachusetts Department of Revenue ("DOR") in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the
Bank which met certain definitional tests primarily related to their assets and
the nature of their business ("qualifying thrifts") were permitted to establish
a reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interests in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount of
any permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996 adjusted for inflation. For this purpose, only home purchase and
home improvement loans are included and the institution can elect to have the
tax years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve recapture,
it must begin its six year recapture no later than the 1998 tax year. The
unrecaptured base year reserves will not be subject to recapture as long as the
institution continues to carry on the business of
85
<PAGE> 87
banking. In addition, the balance of the pre-1988 bad debt reserves continues to
be subject to provision of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created by an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, presumably taxed at a 34%
corporate income tax rate (exclusive of state and local taxes). See "Regulation"
and "Dividend Policy" for limits on the payment of dividends of the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its bad debt reserve.
Corporate Alternative Minimum Tax ("AMT"). The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carryovers of which the Bank currently has
none. AMTI is increased by an amount equal to 75% of the amount by which the
Bank's adjusted current earnings exceeds its AMTI (determined without regard to
this preference and prior to reduction for net operating losses). The Bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend then 80% of any dividends
received may be deducted.
STATE AND LOCAL TAXATION
Commonwealth of Massachusetts. On July 27, 1995, the Governor of
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net income
to 10.50% on their net income apportioned to Massachusetts. The reduced rate is
to be phased-in over a five-year period whereby the rate was 12.13% for 1995 and
11.72% for 1996, and will be 11.32% for 1997, 10.91% for 1998 and 10.50% for
1999. Net income for years beginning before January 1, 1999 includes gross
income as defined under the provisions of the Code, plus interest from bonds,
notes and evidences of indebtedness of any state, including Massachusetts, less
the deductions, excluding the deductions for dividends received, state taxes and
net operating losses, as defined under the provisions of the Code. For taxable
years beginning on or after January 1, 1999, the definition of state taxable
income is modified to allow a deduction for 95% of dividends received from stock
where the Bank owns 15% or more of the voting stock of the institution paying
the dividend and to allow deductions from certain expenses allocated to
federally tax exempt obligations. Subsidiary corporations of the Bank conducting
business in
86
<PAGE> 88
Massachusetts must file separate Massachusetts state tax returns and are taxed
as financial institutions, with certain modifications and grandfathering for
taxable years before 1996. The net worth or tangible property of such
subsidiaries is taxed at a rate of 0.26%. Such subsidiaries may file
consolidated tax returns on the net earnings portion of the corporate tax.
Corporations which qualify as "securities corporations," as defined
by the Massachusetts tax code, are taxed at a special rate of 0.33% of their
gross income if they qualify as a "bank-holding company" under the Massachusetts
tax code. The Company is expected to qualify for this reduced tax rate provided
that it is exclusively engaged in activities of a "securities corporation." The
Bank has received an opinion from Shatswell, MacLeod & Company, P.C. that the
Company will qualify as a securities corporation, provided that if called upon
by the Bank to make a loan to the ESOP, the Company will create a separate
subsidiary for that purpose and provided that all of the Company's other
activities qualify as activities permissible for a securities corporation. If
the Company fails to so qualify, however, it will be taxed as a financial
institution at a rate of 10.50% beginning in 1996 rather than at the phased-in
rates.
Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System. The Bank's deposit accounts
are insured up to applicable limits by the SAIF managed by the FDIC. The Bank
must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS to test
the Bank's compliance with various regulatory requirements. In addition, the
FDIC may also conduct examinations of the Bank, at the FDIC's discretion. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with and otherwise comply with the
rules and regulations of the OTS and of the Securities and Exchange Commission
(the "SEC") under the federal securities laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress has been considering in 1997 the elimination of the federal thrift
charter and abolishment of the OTS. The results of such consideration, including
possible enactment of legislation is uncertain. Therefore, the Bank is unable to
determine the extent to which the results of consideration or possible
legislation, if enacted, would affect its business. See "Risk Factors -
Financial Institution Regulation and Possible Legislation."
87
<PAGE> 89
Certain of the regulatory requirements applicable to the Bank and to
the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings associations set
forth in this Prospectus do not purport to be complete descriptions of such
statutes and regulations and their effects on the Bank and the Company and is
qualified in its entirety by reference to such statutes and regulations.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings institutions
are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in
certain respects, the Federal Deposit Insurance Act ("FDI Act") and the
regulations issued by the agencies to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. In particular, certain lending authority for
federal savings associations, e.g., commercial, non-residential real property
loans and consumer loans, is limited to a specified percentage of the
institution's capital or assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
an additional 10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. At September 30, 1997, the Bank's general limit on
loans-to-one borrower was $3.3 million. At September 30, 1997, the Bank's
largest aggregate amount of loans-to-one borrower consisted of three loans with
a combined carrying balance of $2.5 million, of which $2.2 million was secured
by real estate and of which $360,000 was unsecured. Management believes that the
Bank is in compliance with all applicable loans-to-one borrower limitations.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to either qualify as a
"domestic building and loan association," as defined in the Code, or maintain
at least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed and related securities) in at least 9 months
out of each 12 month period. A savings association that fails the QTL test must
either convert to a bank charter or operate under certain restrictions. As of
September 30, 1997, the Bank maintained 84.1% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, such as
cash dividends, payments to repurchase or otherwise acquire its shares, payments
to shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
institutions, which are based primarily on an institution's capital level. An
institution that exceeds all fully phased-in regulatory capital requirements
before and after a proposed capital distribution ("Tier 1 Institution") and has
not been advised by the OTS that it is in need of more than normal supervision,
could, after prior notice to, but without the approval of the OTS, make capital
distributions during a calendar year equal to the greater of: (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar year; or (ii)
75% of its net earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In the event the Bank's capital
fell below its capital requirements or the OTS notified it that it was in need
of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution,
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which would otherwise be permitted by the regulation, if the OTS determines that
such distribution would constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage (recently lowered to 4%) of its net withdrawable deposit
accounts plus short-term borrowings. OTS regulations formerly required each
savings institution to maintain an average daily balance of short-term liquid
assets at 1% of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. However, this requirement was recently
eliminated. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity ratio for the six months
ended September 30, 1997 was 6.50%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the year
ended March 31, 1997 totalled $68,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations. For a discussion of the impact of proposed legislation, see "Risk
Factors - Financial Institution Regulation and Possible Legislation."
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
The Bank's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Section 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans to insiders made pursuant to a benefit or compensation
program that are widely available to all employees of the institution and do not
give preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amounts of loans the Bank may make to
insiders based, in part, on the Bank's capital position and requires that
certain board approval procedures be followed.
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Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each
federal banking agency to prescribe for all insured depository institutions
standards relating to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth and compensation, fees and benefits and such
other operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is generally defined as common stockholder's equity (including retained
earnings), certain non-cumulative perpetual preferred stock and related surplus,
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights ("MSRs") and certain
purchased credit card relationships. The OTS regulations require that, in
meeting the leverage ratio, tangible and risk-based capital standards
institutions generally must deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national bank.
In addition, the OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires
the maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 8%. In determining
the amount of risk-weighted assets, all assets, including certain off-balance
sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the
OTS capital regulation based on the risks OTS believes are inherent in the type
of asset. The components of core capital are equivalent to those discussed
above. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and, within
specified limits, the allowance for loan and lease losses. Overall, the amount
of supplementary capital included as part of total capital cannot exceed 100% of
core capital.
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The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed indefinitely the date that the
component will first be deducted from an institution's total capital.
At September 30, 1997, the Bank met each of its capital
requirements, in each case on a fully phased-in basis. See "Regulatory Capital
Compliance" for a table which sets forth in terms of dollars and percentages the
OTS tangible, leverage and risk-based capital requirements, the Bank's
historical amounts and percentages at September 30, 1997 and pro forma amounts
and percentages based upon the issuance of the shares within the Estimated Price
Range and assuming that a portion of the net proceeds are retained by the
Company.
THRIFT RECHARTERING
Recently enacted legislation provides that the BIF (the deposit
insurance fund that covers most commercial bank deposits) and the SAIF will
merge on January 1, 1999 if there are no more savings associations as of that
date. Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and the OTS. A bill reported by the House
Banking Committee in 1997 would require federal thrifts to become national
banks or state banks or savings banks within two years after enactment or they
would, by operation of law, become national banks. A national bank resulting
from a converted federal thrift could continue to engage in activities,
including holding any assets, in which it was lawfully engaged on the day
before the date of enactment. Branches operated on the day before enactment
could be retained regardless of their permissibility for national banks.
Subject to a grandfathering provision, all savings and loan holding companies
would become subject to the same regulation and activities restrictions as bank
holding companies. The grandfathering could be lost under certain
circumstances, such as a change in control of the holding company. The
legislative proposal would also abolish the OTS and transfer its functions to
the federal bank regulators with respect to the institutions and to the Board
of Governors of the Federal Reserve Board with respect to the regulation of
holding companies. The Bank is unable to predict whether the legislation will
be enacted or, given such uncertainty, determine the extent to which the
legislation, if enacted, would affect its business. The Bank is also unable to
predict whether the SAIF and BIF will eventually be merged.
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PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is
required to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. Generally, a savings institution that has a total risk-based
capital ratio of less than 8.0% or a leverage ratio or a Tier 1 capital to
risk-based assets ratio that is less than 4.0% is considered to be
undercapitalized. A savings institution that has a total risk-based capital
ratio less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a
leverage ratio that is less than 3.0% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The
FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period. The capital categories are (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized. An institution
is also placed in one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned with the most well capitalized,
healthy institutions receiving the lowest rates.
Deposits of the Bank are presently insured by the SAIF. Both the
SAIF and the BIF are statutorily required to be recapitalized to a 1.25% of
insured reserve deposits ratio. Until recently, members of the SAIF and BIF were
paying average deposit insurance assessments of between 24 and 25 basis points.
The BIF met the required reserve in 1995, whereas the SAIF was not expected to
meet or exceed the required level until 2002 at the earliest. This situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of from 0 to 27 basis points under which
92% of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
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On September 30, 1996, the President of the United States signed
into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among
other things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and is generally tax deductible.
The SAIF Special Assessment recorded by the Bank amounted to $1.2 million on a
pre-tax basis and $715,000 on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO
bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of 1.3 basis points, while SAIF
deposits pay 6.48 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged.
As a result of the Funds Act, the FDIC voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the federal thrift charter will be eliminated or whether the BIF and
SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6.48 to 23
basis points, excluding the SAIF Special Assessment rate of 65.7 basis points,
and the regular premium paid for this period was $269,000.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at September 30, 1997 of $1.7
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 1997, the Bank had $22.5 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended March 31, 1997, 1996 and 1995,
dividends from the FHLB
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to the Bank amounted to approximately $111,000, $107,000 and $95,000,
respectively. If dividends were reduced, the Bank's net interest income would
likely also be reduced. Further, there can be no assurance that the impact of
recent or future legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions
to maintain non-interest-earning reserves against their transaction accounts.
The Federal Reserve Board regulations generally require that reserves be
maintained against aggregate transaction accounts as follows: for accounts
aggregating $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $47.8
million, the reserve requirement is $1.43 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $47.8 million. The first
$4.7 million of otherwise reservable balances (subject to adjustment by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve "discount window," but Federal Reserve Board regulations
require institutions to exhaust all FHLB sources before borrowing from a
Federal Reserve Bank.
HOLDING COMPANY REGULATION
The Company, if utilized, will be a non-diversified unitary savings
and loan holding company within the meaning of the HOLA. As such, the Company
will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
See "-- Federal Savings Institution Regulation -- QTL Test" for a discussion of
the QTL requirements. Upon any non-supervisory acquisition by the Company of
another savings association, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities authorized for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC Act"),
subject to the prior approval of the OTS, and to other activities authorized by
OTS regulation. No multiple savings and loan holding company may acquire more
than 5% of the voting stock of a company engaged in impermissible activities.
Proposed legislation would have treated all savings and loan holding companies
as bank holding companies and, subject to certain grandfathering, limit the
activities of such companies to those permissible for bank holding companies.
See "Risk Factors -- Financial Institution Regulation and Possible Legislation."
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS, and from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
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institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings
institutions in more than one state, except: (i) interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, HOLA does prescribe such restrictions
on subsidiary savings institutions as described above. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. Upon completion of the Conversion, the Company's
Common Stock will be registered with the SEC under the Exchange Act. The Company
will then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common
Stock to be issued in the Conversion does not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
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MANAGEMENT OF THE COMPANY
The Board of Directors' of the Company currently consists of eight
members each of whom is also a director of the Bank. The Board of Directors is
divided into three classes, each of which contains approximately one-third of
the Board. The directors shall be elected by the stockholders of the Company for
staggered three year terms, or until their successors are elected and qualified.
One class of directors, consisting of Messrs. Robert B. Cleary, Jerome R. Dangel
and Kent T. Spellman, has a term of office expiring at the first annual meeting
of stockholders, a second class, consisting of Messrs. Leo F. Grace, H. Chester
Webster and Richard F. Hughes, has a term of office expiring at the second
annual meeting of stockholders and a third class, consisting of Messrs. John F.
Murphy and Richard F. McBride, has a term of office expiring at the third annual
meeting of stockholders. Their names and biographical information are set forth
under "Management of the Bank -- Directors."
The following individuals are the executive officers of the Company
and hold the offices set forth below opposite their names.
NAME POSITION(S) HELD WITH COMPANY
- ------------------------------- -----------------------------------------
John F. Murphy President, Chief Executive Officer,
Treasurer and Chairman of the Board
Denise M. Renaghan Executive Vice President and Chief
Operating Officer
Barbara L. Olafsson Corporate Secretary
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal at the discretion of the Board of Directors.
Except for directors' meeting fees, since the formation of the
Company, none of the executive officers, directors or other personnel has
received remuneration from the Company. Information concerning the principal
occupations, employment and other information concerning the directors and
officers of the Company during the past five years is set forth under
"Management of the Bank -- Biographical Information."
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MANAGEMENT OF THE BANK
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
Board of Directors and Executive Officers of the Bank.
<TABLE>
<CAPTION>
TERM
NAME AGE(1) POSITION(S) HELD WITH THE BANK DIRECTOR SINCE EXPIRES
- ------------------------------------- -------------- ------------------------------------ ---------------- ---------
<S> <C> <C> <C> <C>
John F. Murphy 57 President, Chief Executive 1975 1998
Officer, Treasurer and Chairman
of the Board of Directors
Robert B. Cleary 61 Director 1987 2000
Jerome R. Dangel 53 Director 1996 2000
Leo F. Grace 66 Director 1997 (2) 2000
Richard F. Hughes 65 Director 1997 (2) 1998
Richard F. McBride 68 Director 1994 1998
C. Brendan Noonan (4) 56 Director 1992 1999
Kent T. Spellman 48 Director 1988 1999
H. Chester Webster 86 Director 1959 1999
Denise M. Renaghan 41 Director, Executive Vice President 1997 (3) 1998
and Chief Operating Officer
</TABLE>
- ----------------
(1) As of September 30, 1997.
(2) Former director of Union Federal Savings Bank who was named to the
Bank's Board of Directors effective the date of the merger of the Bank
and Union Federal.
(3) Ms. Renaghan was elected as a Director in December 1997 to serve until
the next election of directors by members, or 1999, whichever is
earlier.
(4) Mr. Noonan passed away on February 1, 1998. Until the time of his
death, Mr. Noonan was a director of both the Bank and the Company.
Each of the executive officers of the Bank will retain his or her
office after the Conversion until his or her re-election at the annual meeting
of the Board of Directors of the Bank, held immediately after the first annual
meeting of stockholders subsequent to the Conversion, and until their successors
are elected and qualified or until they are removed or replaced. Officers are
subject to re-election by the Board of Directors annually.
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BIOGRAPHICAL INFORMATION
DIRECTORS
John F. Murphy joined the Bank in 1961 and served in various
positions until 1976, when he was named President and Chief Executive Officer of
the Bank. In 1994, he was also named treasurer of the Bank. In 1996, Mr. Murphy
was elected Chairman of the Board of Directors. He has been a member of the
Board of Directors since 1975. Mr. Murphy is a director of Connecticut On-Line
Computer Center Trust and is a member of the Legislative, Secondary Market and
Federal Home Loan Bank System Committees and the Government Affairs Council of
the America's Community Bankers. He is a past president of the New England
League of Savings Institutions and a former director of the Federal Home Loan
Bank of Boston. Mr. Murphy received a Bachelor of Science from Northeastern
University.
Robert B. Cleary has been principal of the Robert Cleary Insurance
Group, a provider of life, property and casualty insurance and financial
planning, located in Boston, for approximately forty years. He has been a member
of the Board of Directors since 1987.
Jerome R. Dangel is President of Investment Properties LTD, a real
estate investment firm located in Newton, Massachusetts. He has been a member of
the Board of Directors since October 1996.
Leo F. Grace was President, Chief Executive Officer and Chairman of
the Board of Directors of Union Federal Savings Bank of Boston from 1968 until
the merger of Union Federal with the Bank in February 1997. He joined Union
Federal Savings Bank in 1956 and was a director of Union Federal from 1957 until
the merger, when he joined the Board of Directors of the Bank. He currently
serves as a consultant to the Bank.
Richard F. Hughes is the founder and President of Hughes &
Associates, Inc., an organizational and management consulting firm located in
Quincy, Massachusetts. Mr. Hughes was a director of Union Federal from 1993
until the merger with the Bank, when he became a director of the Bank.
Richard F. McBride is the owner of R.F. McBride Insurance Agency and
H. R. McBride Realtor, both of which are located in Watertown, Massachusetts.
Mr. McBride has been a director of the Bank since 1994.
Kent T. Spellman is founder and President of Telluride Clothing Co.,
Inc., a branded clothing wholesaler, located in Needham, Massachusetts. He is
also a general partner of several partnerships holding commercial real estate.
Mr. Spellman has been a director of the Bank since 1988.
H. Chester Webster was President of the Bank from 1959 until his
retirement in 1976. He has served on the Bank's Board of Directors since 1959
and served as Chairman of the Board from 1988 to 1996.
Denise M. Renaghan joined the Bank in 1974 and has served in various
positions since that time. In 1994, she was promoted to Senior Vice President
and Chief Operating Officer and, in January 1997, she was named Executive Vice
President and Chief Operating Officer. Ms. Renaghan became a member of the
Board of Directors of the Bank in December 1997. Ms. Renaghan is a member of
the
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Education Committee of America's Community Bankers, the Board of Directors of
the Brookline Chamber of Commerce, the Loan Committee of the Connecticut On-Line
Computer Center, and the Massachusetts Mortgage Bankers Association. She is a
past president and currently a member of the Financial Managers Society and is a
past president of the Brookline Consortium for Community Housing.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK AND COMPANY
The Bank's Board of Directors meets once per month and may have
additional special meetings called in the manner specified in the Bylaws. During
fiscal year 1997, no current Director attended less than 75% of the aggregate of
the total number of Board meetings and the total number of committee meetings of
the Board of Directors on which they served.
The Board of Directors of the Bank has established the following
committees:
The Executive Committee consists of Messrs. Murphy, Cleary, Dangel,
McBride and Webster and Ms. Renaghan. The purposes of this committee are to
review and approve loans and to evaluate issues of major importance to the
Bank between regularly scheduled Board meetings. The committee meets on a
monthly basis and met 13 times in fiscal 1997.
The Bay State Federal Savings Bank Advisory Committee consists of
Messrs. Murphy, Cleary, Spellman and Webster. This committee is responsible for
all matters regarding compensation and fringe benefits. The committee meets on
an as-needed basis and met one time in fiscal 1997.
Additionally, the Bank has a number of other management committees
including the Classification of Assets Committee, Asset/Liability Committee and
Nominating Committee.
The Board of Directors of the Company has established the following
committees: the Audit and Compliance Committee consisting of Messrs. Cleary,
Spellman and Webster; the Pricing Committee consisting of Messrs. Cleary,
Dangel, Grace, Hughes and Murphy; and the Compensation Committee consisting of
Messrs. Cleary, Dangel, McBride and Murphy.
COMPENSATION OF DIRECTORS OF THE BANK AND COMPANY
All directors of the Bank are currently paid an annual retainer of
$3,000 and receive a fee of $500 for each regularly scheduled monthly and
special Board meeting attended. Members of the Executive Committee of the Bank
additionally receive an annual retainer of $3,000 and a fee of $500 for each
meeting attended. For fiscal 1997, there was one special meeting of the Board of
Directors and 13 meetings of the Executive Committee. All directors of the
Company will, upon consummation of the Conversion, be paid an annual retainer
fee of $4,000 and will not receive any additional fees for meetings attended.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank as well as other compensation paid or accrued for
services rendered in all capacities during the fiscal year ended March 31, 1997,
to the Chief Executive Officer and the highest paid executive officer of the
Bank who received salary and bonus in excess of $100,000 ("Named Executive
Officers").
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
----------------------------------
------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS (2) YEAR SALARY($) BONUS($) ($)(2) ($)(3) ($)(4) ($)(5) ($)(6)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John F. Murphy 1997 $227,313 $82,145 - - - - $29,093
President, Chief Executive
Officer and Treasurer
Denise M. Renaghan 1997 $116,640 $58,325 - - - - $7,206
Executive Vice President and
Chief Operating Officer
</TABLE>
- -----------------------
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees for the named President and Chief Executive Officer.
(2) For fiscal year 1997, there were no (a) perquisites over the lesser of
$50,000 or 10% of the individual's total salary and bonus for the year; (b)
payments of above-market preferential earnings on deferred compensation; (c)
payments of earnings with respect to long-term incentive plans prior to
settlement or maturation; (d) tax payment reimbursements; or (e)
preferential discounts on stock. For fiscal year 1997, the Bank had no
restricted stock or stock related plans in existence.
(3) Does not include awards pursuant to the Stock Program, which may be granted
in conjunction with a meeting of stockholders of the Company to be held no
sooner than six months after the Conversion, subject to OTS and stockholder
approval, as such awards were not earned, vested or granted in fiscal year
1997. For a discussion of the terms of the Stock Program, see "- Benefits -
Stock Program." For fiscal year 1997, the Bank had no restricted stock plans
in existence.
(4) No stock options or SARs were earned or granted in fiscal year 1997. For a
discussion of the Stock Option Plan which is intended to be adopted by the
Company, see "-- Benefits -- Stock Option Plan."
(5) For fiscal year 1997, there were no payouts or awards under any long-term
incentive plan.
(6) Other Compensation includes for Mr. Murphy and Ms. Renaghan, respectively,
matching contributions under the Bank's 401(a) Plan of $6,093 and $3,306 and
life insurance premiums of $23,000 and $3,900. Such life insurance policies
provide that Mr. Murphy and Ms. Renaghan may receive a benefit, if any,
equal to the difference between the cash surrender value of the policy and
the premiums paid by the Bank.
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EMPLOYMENT AGREEMENTS
Upon consummation of the Conversion, the Bank and the Company intend
to enter into employment agreements (collectively, the "Employment Agreements")
with Mr. Murphy and Ms. Renaghan (individually, the "Executive"). The Employment
Agreements are subject to the review and approval of the OTS and may be amended
as a result of such OTS review. Review of compensation arrangements by the OTS
does not indicate, and should not be construed to indicate, that the OTS has
passed upon the merits of such arrangements. The Employment Agreements are
intended to ensure that the Bank and the Company will be able to maintain a
stable and competent management base after the Conversion. The continued success
of the Bank and the Company depends to a significant degree on the skills and
competence of Mr. Murphy and Ms. Renaghan.
The Employment Agreements provide for a three-year term for each
Executive and shall become effective upon consummation of the Conversion. The
Bank Employment Agreements provide that, commencing on the first anniversary
date and continuing each anniversary date thereafter, the Board of Directors may
extend each of the agreements for an additional year so that the remaining term
shall be three years unless written notice of non-renewal is given by the Board
of Directors after conducting a performance evaluation of the Executive. The
terms of the Company Employment Agreements shall be extended on a daily basis
unless written notice of non-renewal is given by the Board of the Company. The
Bank and the Company Employment Agreements provide that the Executive's base
salary will be reviewed annually. The base salaries, which will be effective for
such Employment Agreements for Mr. Murphy and Ms. Renaghan will be $250,000 and
$150,000, respectively. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to similarly situated executive
personnel. The Employment Agreements provide for termination by the Bank or the
Company for cause (as defined in the agreements) at any time. In the event the
Bank or the Company chooses to terminate the Executive's employment for reasons
other than for cause, or in the event of the Executive's resignation from the
Bank and the Company upon (i) the failure to re-elect the Executive to his/her
current offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) liquidation or dissolution of the Bank or
the Company; or (v) a breach of the Employment Agreements by the Bank or the
Company; the Executive or, in the event of death, the Executive's beneficiary
would be entitled to receive an amount equal to the remaining base salary
payments due to the Executive and the contributions that would have been made on
the Executive's behalf to any employee benefit plans of the Bank or the Company
during the remaining term of the Employment Agreements. The Bank and the Company
would also continue and pay for the Executive's life, health and disability
coverage for the remaining term of the Employment Agreement. Upon any
termination of the Executive, the Executive is subject to a covenant not to
compete with the Company or the Bank for one year.
Under the agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, the Executive's beneficiary would be entitled to
a severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for
thirty-six months. Notwithstanding that both Employment Agreements provide for a
severance payment in the event of a change in control, the Executive would only
be entitled to receive a severance payment under one agreement. In the event of
a change in control of the Bank or Company, the total amount of payments due
under the Agreements, based solely on the base salaries to be paid Mr. Murphy
and Ms. Renaghan effective upon the consummation of the Conversion and excluding
any benefits under any employee benefit plan which may be payable, would be
approximately $1.2 million.
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Payments to the Executive under the Bank employment agreement will
be guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company Employment Agreements would be made by
the Company. All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to the
Employment Agreements shall be paid by the Bank or Company, respectively, if the
Executive is successful on the merits pursuant to a legal judgment, arbitration
or settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under federal and
Delaware law, respectively.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into two-year term Change
in Control Agreements (the "CIC Agreements") with six of the Bank's officers,
none of whom will be covered by an Employment Agreement. Commencing on the first
anniversary date and continuing on each anniversary thereafter, the Bank CIC
Agreements may be renewed by the Board of Directors of the Bank for an
additional year. The Bank CIC Agreements will provide that in the event
voluntary or involuntary termination follows a change in control of the Bank or
the Company, the officer would be entitled to receive a severance payment equal
to two times the officer's compensation for the twelve months preceding
termination. The Bank would also continue and pay for the officer's life, health
and disability coverage for 24 months following termination. Payments to the
officer under the Bank's CIC Agreements will be guaranteed by the Company in the
event that payments or benefits are not paid by the Bank. In the event of a
change in control of the Bank or Company, the total payments that would be due
under the CIC Agreement, based solely on the current annual compensation paid to
the six officers covered by the CIC Agreement and excluding any benefits under
any employee benefit plan which may be payable, would be approximately $682,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon consummation of the
Conversion, establish the Bay State Federal Savings Bank Employee Severance
Compensation Plan ("Severance Plan") which will provide eligible employees with
severance pay benefits in the event of a change in control of the Bank or the
Company. Management personnel with employment or CIC agreements are not eligible
to participate in the Severance Plan. Generally, employees are eligible to
participate in the Severance Plan if they have completed at least one year of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or the
Company, eligible employees who are terminated from or terminate their
employment within one year after the change in control (for reasons specified
under the Severance Plan), will be entitled to receive a severance payment. A
participant, whose employment has terminated, will be entitled to a cash
severance payment equal to one-twelfth of annual compensation for each year of
service up to a maximum of 199% of annual compensation. Such payments may tend
to discourage takeover attempts by increasing costs to be incurred by the Bank
in the event of a takeover. In the event the provisions of the Severance Plan
were triggered, the total amount of payments that would be due thereunder, based
solely upon current salary levels, would be approximately $1.0 million.
CONSULTING AGREEMENT
Pursuant to the Bank's merger with Union Federal in February 1997,
the Bank entered into a consulting agreement (the "Consulting Agreement") with
Mr. Grace, who at the time of the merger was Union Federal's President and Chief
Executive Officer. The agreement, which is for a three-year term, commenced on
February 21, 1997 and provides that Mr. Grace be paid an annual amount of
$127,000 for consulting services to the Bank. The Consulting Agreement also
provides for his termination for cause (as
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<PAGE> 104
defined in the consulting agreement) or without cause upon a vote of the Board
of Directors. During the term of the Consulting Agreement and for a period of 12
months after the termination of the agreement, Mr. Grace is subject to a
covenant not to compete, either directly or indirectly, with the Bank.
INSURANCE PLANS
All full-time employees of the Bank, upon completion of the
applicable introductory period, may elect coverage for comprehensive
hospitalization, including major medical, and are covered with long-term
disability insurance.
BENEFITS
THRIFT PLAN/SAVINGS PLAN. The Bank maintains the Financial
Institutions Thrift Plan (the "Thrift Plan") to encourage eligible employees to
save and invest on a regular, long term basis. The Thrift Plan permits eligible
employees to make monthly contributions of 1% - 15% of their base monthly salary
on an after-tax basis to the Thrift Plan. The Bank makes monthly employer
contributions to each participant's account in the Thrift Plan equal to 50% of
the participant's contribution up to 6% of the participant's annual base salary.
Participants are 100% vested in the amounts credited to their Thrift Plan
accounts. During fiscal 1997, the Bank contributed $34,000 to the Thrift Plan.
Employees are eligible to participate in the Thrift Plan upon the
completion of 12 months of continuous employment with the Bank (during which
period they complete at least 1,000 hours of service) and the attainment of age
21. Employees paid on an hourly basis are not eligible for participation
Currently, participants in the Thrift Plan may direct the investment
of their accounts in several types of investment funds. In connection with the
Conversion, the Bank has amended and restated the Thrift Plan as the Bay State
Federal Savings Bank Employee Savings and Profit-sharing Plan and Trust
("Savings Plan"), to permit plan participants to invest their account balances
in Company Common Stock through an Employer Stock Fund. However, no participant
may purchase more than $225,000 in aggregate value of the Common Stock in the
Conversion (subject to the overall purchase limitations) through Thrift
Plan/Savings Plan subscription rights. A participant's ability to direct all or
some of his vested account to purchase Common Stock in the Offering will be
dependent upon such individual being an Eligible Account Holder, Supplemental
Eligible Account Holder or Other member. A participant may directly vote shares
of Common Stock held in his or her Thrift Plan account.
The Savings Plan is a tax-qualified retirement plan. Participants in
the Savings Plan do not recognize taxable income on Bank contributions or
investment income credited to their accounts under the Thrift Plan until such
amounts are distributed to them.
RETIREMENT PLAN. The Bank maintains the Financial Institutions
Retirement Fund (the "Retirement Plan") to provide retirement benefits for
eligible employees. Employees are eligible to participate in the Retirement Plan
after the completion of 12 consecutive months of employment with the Bank and
the attainment of age 21. Hourly paid employees are excluded from participation
in the Retirement Plan. Benefits payable to a participant under the Retirement
Plan are based on the participant's years of service and salary. The formula for
normal retirement benefits payable annually under the Retirement Plan is 2%
multiplied by years of benefit service multiplied by the average of the
participant's highest three years of salary paid by the Bank. A participant may
elect early retirement as early as age 45. However, such participant's normal
retirement benefits will be reduced by an early retirement factor based on age
at early retirement.
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Participants generally have no vested interest in Retirement Plan
benefits prior to the completion of five years of service with the Bank.
Following the completion of five years of vesting service, or in the event of a
participant's attainment of age 65, death or termination of employment due to
disability, a participant will become 100% vested in the accrued benefit under
the Retirement Plan. The table below reflects the pension benefit payable and
any payment due under the Supplemental Retirement Plan, discussed below, to a
participant assuming various levels of earnings and years of service. The
amounts of benefits paid under the Retirement Plan are not reduced for any
social security benefit payable to participants. As of January 1, 1997, Mr.
Murphy and Ms. Renaghan had credited years of service of 31 years and 21 years,
respectively.
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE
------------------------------------------------------------------------------------
FINAL AVERAGE
EARNINGS 15 20 25 30 35
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 35,000
$ 75,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000 $ 70,000
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
$150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $105,000
$175,000(1) $ 52,500 $ 70,000 $ 87,500 $105,000 $122,500
$200,000(1) $ 60,000 $ 80,000 $100,000 $120,000 $140,000
$250,000(1) $ 75,000 $100,000 $125,000 $150,000 $175,000
$300,000(1) $ 90,000 $120,000 $150,000 $180,000 $210,000
$350,000(1) $105,000 $140,000 $175,000 $210,000 $245,000
$400,000(1) $120,000 $160,000 $200,000 $240,000 $280,000
</TABLE>
- ----------------
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Code is $160,000
for plan years beginning on or after January 1, 1997.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank intends
to implement a non-tax qualified Management Supplemental Executive Retirement
Plan ("SERP") to provide certain officers and highly compensated employees with
additional retirement benefits. The SERP benefit is intended to make up benefits
lost under the ESOP allocation procedures to participants who retire prior to
the complete repayment of the ESOP loan. At the retirement of a participant, the
benefits under the SERP are determined by first: (i) projecting the number of
shares that would have been allocated to the participant under the ESOP if they
had been employed throughout the period of the ESOP loan (measured from the
participant's first date of ESOP participation); and (ii) reducing the number
determined by (i) above by the number of shares actually allocated to the
Participant's account under the ESOP; and second, by multiplying the number of
shares that represent the difference between such figures by the average fair
market value of the Common Stock over the preceding five years. Benefits under
the SERP vest in 20% annual increments over a five year period commencing as of
the date of a Participant's participation in the SERP. The vested portion of the
SERP Participant's benefits are payable upon the retirement of the Participant
upon or after the attainment of age 65 or in accordance with the requirements of
early retirement under the Retirement Plan. A separate trust may be established
to hold assets of the Bank for the purpose of paying benefits under the SERP or
the
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Bank may hold assets for SERP payments through a common trust established for
the Retirement Benefit Equalization Plan discussed below.
BENEFIT EQUALIZATION PLAN. The Bank has implemented a retirement
benefit equalization plan to provide selected employees with retirement benefits
which would have been payable under the Retirement Plan and Thrift Plan (the
"Benefit Equalization Plan" or "BEP"), but for the limits imposed by the Code on
the amount of compensation that may be considered when determining benefits that
are payable under tax-qualified plans ("Compensation Code Limit"). In connection
with the Conversion, the Bank amended the Benefit Equalization Plan to provide
participants with benefits which would be payable under the ESOP but for such
limits imposed by the Code discussed above.
A participant's annual benefit under the BEP equals the excess of
the annual benefit that would otherwise be payable to or on account of the
participant, but for the limitations imposed by the Code over the annual benefit
that is payable to or on account of the participant after giving effect to any
reduction of such benefit by the limitations imposed by the Code. The Bank has
established a grantor trust (also known as a "rabbi trust") to hold assets of
the Bank for the purpose of paying benefits under the BEP, provided that, in the
event of the insolvency of the Bank, the assets of the trust are subject to the
claims of the Bank's creditors. The assets of this trust may be used to acquire
shares of Common Stock to be used to satisfy the obligations of the Bank for the
payment of benefits under the BEP.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank has established
for eligible employees an ESOP and related trust to become effective upon
Conversion. Employees employed with the Bank as of the effective date of the
Conversion and employees of the Company or the Bank employed after such date,
who have been credited with at least 1,000 hours during a twelve month period
and who have attained the age of 21 may become participants. The ESOP intends
to purchase 8% of the Common Stock issued in the Conversion, including the
issuance of shares to the Foundation. As part of the Conversion and in order to
fund the ESOP's purchase of the Common Stock to be issued in the Conversion,
the ESOP intends to borrow funds either from the ESOP Loan Subsidiary (formed
and capitalized by the Company in connection with the Conversion) or, based on
certain regulatory and market conditions, a third party lender, equal to 100%
of the aggregate purchase price of the Common Stock. See "Use of Proceeds." In
either case, the loan will be repaid principally from the Company's or the
Bank's contributions to the ESOP over an expected period of 10 years and the
collateral for the loan will be the Common Stock purchased by the ESOP. Subject
to receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since the participants are
all employees of the Bank or to reimburse the Company for contributions made by
it. Contributions to the ESOP will be discretionary; however, the Company or
the Bank intend to make annual contributions to the ESOP in an aggregate amount
at least equal to the principal and interest requirement on the debt. The
interest rate for the loan is expected to be the prime rate.
Shares purchased by the ESOP will initially be pledged as collateral
for the loan and will be held in a suspense account until released for
allocation among participants as the loan is repaid. The pledged shares will be
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares will be
allocated among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Participants will vest in their ESOP
account at a rate of 20% annually commencing after the completion of one year of
credited service, with credit for prior service, or completely if their service
was terminated due to death, early retirement, permanent disability or a change
in control. Prior to the completion of one year of credited service, a
participant who terminates employment for reasons other than death, retirement,
disability, or change in control of the Bank or Company will not receive any
benefit. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable upon
death, retirement, early retirement, disability or separation from service. The
contributions to the ESOP are not fixed and the market value of
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the released shares cannot be determined in advance, so benefits payable under
the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a Committee of the
Board of Directors was appointed to administer the ESOP (the "ESOP Committee").
An unrelated corporate trustee for the ESOP will be appointed prior to the
Conversion and continuing thereafter. The ESOP Committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of the participating employees. Under the
ESOP, unallocated shares and allocated shares for which no instructions are
given will be voted by the trustee in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock provided that such vote is in accordance with the provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
STOCK OPTION PLAN. Following the Conversion, the Board of Directors
of the Company intends to adopt stock-based benefit plans which would provide
for the granting of stock options to officers, directors and employees.
Currently, the Company anticipates granting stock options under a single
stock-based incentive plan which will combine the features of the Stock Program
and the Stock Option Plan (the "Master Stock-based Benefit Plan") covering
full-time employees and outside directors of the Company and its affiliates.
However, it is possible that the Company may establish a separate option plan
solely for outside directors. At a meeting of stockholders of the Company
following the Conversion, which under applicable OTS regulations may be held no
earlier than six months after the completion of the Conversion, the Board of
Directors intends to present the Master Stock-Based Benefit Plan or the Stock
Option Plan to stockholders for approval. The Company anticipates reserving an
amount equal to 10% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation (or 220,455 shares based upon the
issuance of 2,204,550 shares at the maximum of the Estimated Price Range), for
issuance under the Stock Option Plan or Master Stock-Based Benefit Plan. If the
Company implements a stock option plan within one year following completion of
the Conversion, OTS regulations provide that no individual officer or employee
of the Bank may receive more than 25% of the options granted under the plan and
non-employee directors may not receive more than 5% individually, or 30% in the
aggregate of the options granted under the plan.
The Company intends to design the stock option benefits provided
under the Stock Option Plan or Master Stock-Based Benefit Plan to attract and
retain qualified personnel in key positions, provide officers and key employees
with a proprietary interest in the Company as an incentive to contribute to the
success of the Company and reward key employees for outstanding performance. The
Company may condition the granting or vesting of stock options on the
achievement of individual or Company-wide performance goals, including the
achievement by the Company or the Bank of specified levels of net income, asset
growth, return on equity or other specific financial goals. The Company
anticipates that the Stock Option Plan or the Master Stock-Based Benefit Plan
will provide for the grant of: (i) options to purchase the Company's Common
Stock intended to qualify as incentive stock options under Section 422 of the
Code ("Incentive Stock Options"); (ii) options that do not so qualify
("Non-Statutory Stock Options"); and (iii) Limited Option Rights (discussed
below) which participants may exercise only in the event of a change in control
of the Bank or the Company. Unless sooner terminated, the plan will be in effect
for a period of ten years from the earlier of adoption by the Board of Directors
or approval by the Company's stockholders. The Company intends to grant options
with Limited Rights at an exercise price equal to the fair market value of the
underlying Common Stock on the date of grant. Subject to any applicable OTS
regulations, upon exercise of "Limited Option Rights" in the event of a change
in control, the employee will be entitled to receive a lump sum cash payment
equal to the difference between the exercise price of all unexercised options,
whether then exercisable or not, and the fair market value of the shares of
common stock subject to the option on the date of exercise of the right in lieu
of purchasing the stock underlying the option. The Company anticipates that all
options granted contemporaneously with stockholder approval of the Stock Option
will
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qualify as Incentive Stock Options to the extent permitted under Section 422 of
the Code. It is anticipated that all options granted contemporaneously with
stockholder approval of the Incentive Option Plan will be intended to be
Incentive Stock Options to the extent permitted under Section 422 of the Code.
A committee of the Board or the full Board of Directors will
administer the Stock Option Plan or Master Stock-Based Benefit Plan and will
determine which officers and employees may receive options and Limited Rights,
whether such options will qualify as Incentive Stock Options, the number of
shares subject to each option, the exercise price of each non-statutory stock
option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable.
If the Company adopts the Stock Option Plan or Master Stock-Based
Benefit Plan in the form described above, an employee will not realize taxable
income upon grant or exercise of any Incentive Stock Option, provided that the
employee does not dispose of shares received through the exercise of such option
for at least one year after the date the employee receives the stock in
connection with the option exercise and two years after the date of grant of the
option ("disqualifying disposition"). The Company may not take a compensation
expense deduction with respect to the grant or exercise of Incentive Stock
Options, unless the employee disposes such shares before the expiration of the
period described above (a "disqualifying disposition"). In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an employee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which the
exercise price is exceeded by the fair market value of the Common Stock
purchased by exercising the option on the date of exercise. The amount of
taxable income realized by an optionee upon the exercise of a Non-Statutory
Stock Option or due to a disqualifying disposition of an Incentive Stock Option
is a deductible expense for tax purposes for the Company. Upon the exercise of a
Limited Right, the option holder realizes taxable income equal to the amount
paid to him or her upon exercise of the right and the Company receives a
deduction equal to that same amount.
Stock options under an option plan adopted by the Company would
become vested and exercisable in the manner specified by the Committee
responsible for administering the plan. The Company anticipates options granted
in connection with the Stock Option Plan or Master Stock-Based Benefit Plan will
remain exercisable for at least three months following the date on which an
employee ceases to perform services for the Bank or the Company, except in the
event of death or disability, in which case options accelerate and become fully
vested and remain exercisable for up to one year thereafter, or such longer
period as determined by the Company. However, any Incentive Stock Options
exercised more than three months following the date the employee ceases to
perform services as an employee, other than termination due to death or
disability, would be treated for tax purposes as a Non-Statutory Stock Option.
The Company also anticipates that in the event of retirement, if the optionee
continues to perform services as a director or consultant on behalf of the Bank,
the Company or an affiliate, unvested options would continue to vest in
accordance with their original vesting schedule until the optionee ceases to
serve as a consultant or director. If the Stock Option Plan or Master
Stock-Based Benefit Plan is adopted in the form described above, the Company, if
requested by the optionee, could elect, in exchange for vested options, to pay
the optionee, or beneficiary in the event of death, the amount by which the fair
market value of the Common Stock exceeds the exercise price of the options on
the date of the employee's termination of employment.
All options granted to outside directors under an option plan, by
law, must be Non-statutory Stock Options and would vest and become exercisable
in a manner specified by the Committee, subject to applicable OTS regulations.
Said options expire upon the earlier of ten years following the date of grant or
one year following the date the optionee ceases to be a director or consultant.
In the event of the death or disability of a participant, all previously granted
options immediately vest and become fully exercisable.
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OTS regulations currently do not permit accelerated vesting in the
event of a change in control of stock options granted under a plan adopted
within one year after Conversion. Subject to any applicable regulatory
requirements, the Stock Option Plan or Master Stock-Based Benefit Plan described
may be amended subsequent to the expiration of the one-year period following
Conversion to provide for accelerated vesting of previously granted options in
the event of a change in control of the Company or the Bank. A change in control
would be defined in the plan document and would generally occur when a person or
group of persons acting in concert acquires beneficial ownership of 20% or more
of any class of equity security of the Company or the Bank or in the event of a
tender or exchange offer, merger or other form of business combination, sale of
all or substantially all of the assets of the Company or the Bank or contested
election of directors which resulted in the replacement of a majority of the
Board of Directors by persons not nominated by the directors in office prior to
the contested election.
STOCK PROGRAM. Following the Conversion, the Company intends to
establish the Stock Program which would provide for the grant of awards of
Common Stock and Limited Stock Rights, discussed below, to officers, employees
and non-employee directors of the Bank and Company as a method of providing
these individuals with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Bank. The benefits under
the Stock Program may be provided for under either a separate plan for officers
and employees and a separate plan for outside directors or under the Master
Stock-Based Benefit Plan which would combine the features of the Stock Program
with the Stock Option Plan. The Company intends to present the Stock Program or
the Master Stock-Based Benefit Plan for stockholder approval at a meeting of
stockholders, which pursuant to applicable OTS regulations, may be held no
earlier than six months after the completion of the Conversion.
The Bank or Company expects to contribute funds to the Stock Program
or Master Stock-Based Benefit Plan to enable such plan or trust established for
such plan, to acquire, in the aggregate, an amount equal to 4% of the shares of
Common Stock issued in the Conversion, including shares issued to the Foundation
(or 88,182 shares based upon the issuance of 2,204,550 shares at the maximum of
the Estimated Price Range). The Company will acquire these shares through open
market purchases, if permitted, or from authorized but unissued shares. Although
no specific award determinations have been made, the Company anticipates that it
would provide awards to its directors and employees to the extent permitted by
applicable regulations. OTS regulations provide that no individual employee may
receive more than 25% of the shares of any plan and non-employee directors may
not receive more than 5% of any plan individually or 30% in the aggregate for
all directors.
The Stock Program may also provide for the granting of Limited Stock
Rights which would, upon a change in control of the Company or Bank, entitle the
recipient the option to receive a lump sum cash payment equal to the difference
of the fair market value of any unvested Stock Award. Upon the exercise of a
Limited Stock Right, all unvested Stock Awards would be cancelled.
A committee of the Board of Directors or the full Board will
administer the Stock Program or Master Stock-Based Benefit Plan. In general,
stock awards will not be transferable or assignable. The Board intends to
appoint an independent fiduciary to serve as trustee of the trust to be
established pursuant to the Stock Program or Master Stock-Based Benefit Plan.
The Company may make allocations and grants to officers and employees under the
Stock Program or Master Stock-Based Benefit Plan in the form of non
performance-based grants and/or performance-based grants. The Company may make
the granting or vesting of stock awards under the Stock Program or Master
Stock-Based Benefit Plan conditioned upon the achievement of individual or
Company-wide performance goals, including the Company's or Bank's achievement of
specified levels of net income, return on assets, return on equity or other
specified financial performance goals and will be subject to applicable OTS
regulations.
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In the event of death, awards of Common Stock will become 100%
vested. In the event of disability, stock awards would be 100% vested upon
termination of employment of an officer or employee, or upon termination of
service as a director. In the event of retirement, if the participant continues
to perform services as a Director or consultant on behalf of the Bank, the
Company or an affiliate or, in the case of a retiring Director, as a consulting
director, unvested stock awards would continue to vest in accordance with their
original vesting schedule until the recipient ceases to perform such services at
which time any unvested stock awards would lapse.
Applicable OTS regulations currently do not permit accelerated
vesting in the event of a change in control of shares granted under the Stock
Program or Master Stock-Based Benefit Plan described above. Subject to any
applicable regulatory requirements, the Stock Program or Master Stock-Based
Benefit Plan may be amended subsequent to the expiration of the one-year period
following Conversion to provide for accelerated vesting in the event of a change
in control of shares granted under the Stock Program or Master Stock-Based
Benefit Plan. A change in control is expected to be defined in the plan document
and would generally occur when a person or group of persons acting in concert
acquires beneficial ownership of 20% or more of a class of equity securities of
the Company or the Bank or in the event of a tender or exchange offer, merger or
other form of business combination, sale of all or substantially all of the
assets of the Company or the Bank or contested election of directors which
results in the replacement of a majority of the Board of Directors by persons
not nominated by the directors in office prior to the contested election.
When shares become vested in accordance with the Stock Program or
Master Stock-Based Benefit Plan described above, the participants will realize
taxable income equal to the fair market value of the Common Stock at that time.
The Company may take a deduction equal to the amount of income recognized by the
participants for the year in which it becomes taxable. When shares become vested
and are actually distributed in accordance with the Stock Program or Master
Stock-Based Benefit Plan, the participants also receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of stock
awards could direct the voting of the shares awarded to them. Shares not subject
to stock awards and shares allocated subject to the achievement of performance
goals will be voted by the trustee of the Stock Program or Master Stock-Based
Benefit Plan in proportion to the directions provided with respect to shares
subject to stock awards. Vested shares are distributed to recipients as soon as
practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are
acquired by the Stock Program or Master Stock-Based Benefit Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") requires that all loans or extensions of credit to executive officers
and directors must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
the Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
Prior to FIRREA, the Bank made loans to its executive officers and
Directors which were secured by their primary residences. The rates of interest
charged by the Bank on such loans were the Bank's cost of funds. Pursuant to
FIRREA, in 1989, the Bank discontinued its practice of making such preferential
loans to its officers and Directors. However, all such pre-FIRREA preferential
loans were "grandfathered" under
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FIRREA. Since the enactment of FIRREA, the Bank has not made any loans to its
executive officers or Directors. The Bank intends to implement a policy whereby
it will begin to again offer loans to executive officers and Directors. Such
loans, as well as loans currently made to Bank employees, will be made on the
same terms and conditions offered to the general public. If the Bank implements
a policy of extending credit to executive officers and Directors, such policy
will provide that all such loans will be made in the ordinary course of
business, on substantially the same terms, including collateral, as those
prevailing at the time for comparable transactions with other persons and may
not involve more than the normal risk of collectibility or present other
unfavorable features. As of September 30, 1997, the Bank had $4.4 million of
loans to executive officers or Directors. With the exception of loans to Messrs.
Cleary and Murphy, which are secured by mortgage liens on their primary
residences and, at September 30, 1997, had balances of $524,000 and $392,000,
respectively, all other of the Bank's loans to executive officers and Directors
had balances of less than $60,000 as of September 30, 1997 or were made by the
Bank in the ordinary course of business with no favorable terms and do not
involve more than the normal risk of collectibility or present unfavorable
features. Although such loans to Messrs. Cleary and Murphy were made prior to
the enactment of FIRREA and do not involve more than the normal risk of
collectibility or present unfavorable features, such loans were made with
interest rates which were below the interest rates otherwise available to the
Bank's customers at the time such loans were made.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it in
arm's length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Company not having any interest
in the transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock
the Bank's executive officers and directors propose to purchase, assuming shares
of Common Stock are issued at the minimum and maximum of the Estimated Price
Range, including the effect of shares issued to the Foundation, and that
sufficient shares will be available to satisfy their subscriptions. The table
also sets forth the total expected beneficial ownership of Common Stock as to
all directors and executive officers as a group.
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<TABLE>
<CAPTION>
AT THE MINIMUM OF THE AT THE MAXIMUM OF THE
ESTIMATED PRICE RANGE(1) ESTIMATED PRICE RANGE(1)
--------------------------- ---------------------------
AS A AS A PERCENT
NUMBER OF PERCENT OF NUMBER OF OF SHARES
NAME AMOUNT SHARES SHARES ISSUED SHARES ISSUED
- -------------------------------------- ------------- ---------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
John F. Murphy $225,000 11,250 0.69% 11,250 0.51%
Robert B. Cleary 25,000 1,250 0.08 1,250 0.06
Jerome R. Dangel 225,000 11,250 0.69 11,250 0.51
Leo F. Grace 100,000 5,000 0.31 5,000 0.23
Richard F. Hughes 40,000 2,000 0.12 2,000 0.09
Richard F. McBride 225,000 11,250 0.69 11,250 0.51
Kent T. Spellman 225,000 11,250 0.69 11,250 0.51
H. Chester Webster 10,000 500 0.03 500 0.02
Denise M. Renaghan 100,000 5,000 0.31 5,000 0.23
------- ----- ---- ----- ----
All Directors and Executive
Officers as a Group (9 persons)........ $1,175,000 58,750 3.61% 58,750 2.66%
========== ====== ==== ====== ====
</TABLE>
- ----------------
(1) Includes proposed subscriptions, if any, by associates. Also
includes purchases by individuals utilizing account balances from
the Bank's Thrift Plan which may be used to purchase shares of
Common Stock in the Conversion under such plan's new employer stock
fund investment option. See "-- Benefits -- Thrift Plan/Savings
Plan." Does not include subscription orders by the ESOP. Intended
purchases by the ESOP are expected to be 8% of the shares issued in
the Conversion, including shares issued to the Foundation.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE OTS HAVE APPROVED THE
PLAN OF CONVERSION, SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK ENTITLED TO
VOTE ON THE MATTER AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH OTS
APPROVAL, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN BY SUCH AGENCY. THE OTS NEITHER APPROVED NOR DISAPPROVED THE ESTABLISHMENT
OF THE FOUNDATION.
GENERAL
On September 9, 1997, the Bank's Board of Directors unanimously
adopted the Plan, as amended on January 20, 1998, pursuant to which the Bank
will be converted from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank. It is currently intended that
all of the outstanding capital stock of the Bank will be held by the Company,
which is incorporated under Delaware law. The Plan was approved by the OTS,
subject to, among other things, approval of the Plan by the Bank's members. A
special meeting of members has been called for this purpose to be held on
_______________, 1998.
The Company has applied to the OTS to become a savings and loan
holding company and to acquire all of the common stock of the Bank to be issued
in the Conversion. The Company plans to purchase the shares of issued and
outstanding capital stock of the Bank in exchange for up to 50% of the net
proceeds and retain the remaining net proceeds. The Conversion will be effected
only upon completion of the sale of all of the shares of Common Stock of the
Company or the Bank, if the holding company form of organization is not
utilized, to be issued pursuant to the Plan.
The Plan provides that the Board of Directors of the Bank may, at
any time prior to the issuance of the Common Stock and for any reason, decide
not to use a holding company form. Such reasons may include possible delays
resulting from overlapping regulatory processing or policies which could
adversely affect the Bank's or the Company's ability to consummate the
Conversion and transact its business as contemplated herein and in accordance
with the Bank's operating policies. In the event such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and take
steps necessary to complete the Conversion without the Company, including filing
any necessary documents with the OTS. In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, if permitted by the OTS, the Bank
will issue and sell the common stock of the Bank and subscribers will be
notified of the elimination of a holding company and resolicited (i.e., be
permitted to affirm their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their funds will be promptly refunded with interest at the Bank's
passbook rate of interest; or be permitted to modify or rescind their
subscriptions) and notified of the time period within which the subscriber must
affirmatively notify the Bank of his intention to affirm, modify or rescind his
subscription. The following description of the Plan assumes that a holding
company form of organization will be used in the Conversion. In the event that a
holding company form of organization is not used, all other pertinent terms of
the Plan as described below will apply to the conversion of the Bank from the
mutual to stock form of organization and the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Company will
offer shares of Common Stock for sale in the Subscription Offering to the Bank's
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders and
Other Members. Upon completion of the Subscription Offering, the Company will
offer any shares of Common Stock not subscribed for in the Subscription Offering
in a Community Offering with preference
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given to natural persons residing in the Bank's Local Community. It is
anticipated that shares not subscribed for in the Subscription and Community
Offerings will be offered for sale by the Company to the general public in a
Syndicated Community Offering. The Bank has the right to accept or reject, in
whole or in part, any orders to purchase shares of the Common Stock received in
the Community Offering or in the Syndicated Community Offering. See "--
Community Offering" and "-- Syndicated Community Offering."
The aggregate price of the shares of Common Stock to be issued in
the Conversion within the Estimated Price Range, currently estimated to be
between $30.2 million and $40.8 million, will be determined based upon an
independent appraisal, prepared by Keller of the estimated pro forma market
value of the Common Stock of the Company. All shares of Common Stock to be
issued and sold in the Conversion will be sold at the same price. The
independent appraisal will be affirmed or, if necessary, updated at the
completion of the Subscription Offering, if all shares are subscribed for, or at
the completion of the Community and/or the Syndicated Community Offerings. The
appraisal has been performed by Keller, a consulting firm experienced in the
valuation and appraisal of savings institutions. See "- Stock Pricing" for
additional information as to the determination of the estimated pro forma market
value of the Common Stock.
The following is a brief summary of the material aspects of the
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan. A copy of the Plan is available for inspection at each
office of the Bank and at the Northeast Region and Washington, D.C. offices of
the OTS.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's long-standing commitment to
its local community, the Bank's Plan of Conversion provides for the
establishment of a charitable foundation in connection with the Bank's
Conversion. The Plan provides that the Bank and the Company will establish the
Foundation, which will be incorporated under Delaware law as a non-stock
corporation, and will fund the Foundation with Common Stock of the Company, as
further described below. The Company and the Bank believe that the funding of
the Foundation with Common Stock of the Company is a means of establishing a
common bond between the Bank and the communities in which the Bank operates and
thereby enables such communities to share in the potential growth and success of
the Company and the Bank over the long term. By further enhancing the Bank's
visibility and reputation in the communities in which it operates, the Bank
believes that the Foundation will enhance the long-term value of the Bank's
community banking franchise.
The Foundation would be dedicated to the promotion of charitable
purposes within the communities in which the Bank operates, including, but not
limited to, providing grants or donations to support housing assistance,
not-for-profit medical facilities, community groups and other types of
organizations or projects. Establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the Special Meeting. The Foundation will be considered as
a separate matter from approval of the Plan of Conversion. If the Bank's members
approve the Plan of Conversion, but not the Foundation, the Bank intends to
complete the Conversion without the establishment of the Foundation. Failure to
approve the establishment of the Foundation may materially affect the pro forma
market value of the Common Stock. See "Comparison of Valuation and Pro Forma
Information With No Foundation." In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers. In the event
of a resolicitation, unless an affirmative response is received within a
specified period of time, all funds will be promptly returned to investors, as
described elsewhere herein. See "-- Stock Pricing."
Purpose of the Foundation. The purpose of the Foundation is to
provide funding to support charitable purposes within the communities in which
the Bank operates. The Bank has long emphasized community lending and community
development activities and currently has a "Satisfactory" Community
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Reinvestment Act ("CRA") rating. The Foundation is being formed as a complement
to the Bank's existing community activities, not as a replacement for such
activities. The Bank intends to continue to emphasize community lending and
community development activities following the Conversion. However, such
activities are not the Bank's sole corporate purpose. The Foundation,
conversely, will be completely dedicated to community activities and the
promotion of charitable causes and may be able to support such activities in
ways that are not presently available to the Bank. Since the Bank has a
"Satisfactory" record of serving its community under the CRA and already engages
in community development activities, the Bank believes that the Foundation will
enable the Company and the Bank to assist their local community in areas beyond
community development and lending. In this regard, the Board of Directors
believes the establishment of a charitable foundation is consistent with the
Bank's commitment to community service. The Boards of Directors of the Bank and
Company also believe that the funding of the Foundation with Common Stock of the
Company is a means of enabling the communities in which the Bank operates to
share in the potential growth and success of the Company long after completion
of the Conversion. The Foundation accomplishes that goal by providing for
continued ties between the Foundation and Bank, thereby forming a partnership
with the Bank's community. The establishment of the Foundation would also enable
the Company and the Bank to develop a unified charitable donation strategy and
would centralize the responsibility for administration and allocation of
corporate charitable funds. The Bank, however, does not expect the contribution
to the Foundation to take the place of the Bank's traditional community lending
and charitable activities. The Bank expects in future periods to continue making
its ordinary charitable contributions within its communities. Such ordinary
contributions typically range between $20,000 and $30,000 per year.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's bylaws,
the Foundation's board of directors will be comprised of four members, all of
whom must be officers of, or members of the Board of Directors of, the Company
or the Bank or an affiliate or subsidiary of the Company or the Bank. A person
who is a director, officer or employee of the Bank, or has the power to direct
its management policies, or otherwise owes a fiduciary duty to the Bank, and
who will also serve as a director or employee of the Foundation would be
subject to the requirements of the OTS Conflicts of Interests Regulations. The
initial board of directors of the Foundation will be comprised of Mr. Murphy,
Ms. Renaghan, Ms. Phyllis Penta, a Vice President of the Bank, and Mr. Anthony
F. Caruso, a Vice President of the Bank. Mr. Murphy, Ms. Renaghan, Ms. Penta
and Mr. Caruso intend to purchase 11,250, 5,000, 3,000 and 0 shares of Common
Stock in the Conversion, respectively. At the supermaximum of the Estimated
Price Range, such purchases equal 0.44%, 0.20%, 0.12% and 0%, respectively, or
0.76% in the aggregate, of the total number of shares to be issued in the
Conversion, including shares issued to the Foundation. On an on-going basis, a
Nominating Committee of the board of directors of the Foundation, will nominate
individuals eligible for election to the board of directors of the Foundation.
The members of the Foundation, who are comprised of its board members, will
elect the directors at the annual meeting of the Foundation from those
nominated by the Nominating Committee. Only persons serving as directors of the
Foundation qualify as members of the Foundation with voting authority.
Directors will be divided into three classes with each class appointed for
three-year terms. The certificate of incorporation of the Foundation provides
that the corporation is organized exclusively for charitable purposes as set
forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.
The authority for the affairs of the Foundation will be vested in
the board of directors of the Foundation. The directors of the Foundation will
be responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the stated purposes for
which the Foundation was established. Although no formal policy governing
Foundation grants exists at this time, the Foundation's board of directors will
adopt such a policy upon establishment of the Foundation. The directors will
also be responsible for directing the assets of the Foundation. Pursuant to the
terms of the contribution as mandated by the OTS, all shares of Common Stock
held by the Foundation must be voted in the same ratio as all other shares of
the Company's Common Stock on all proposals considered by stockholders of the
Company; provided, however, that the OTS will waive this voting restriction
under certain circumstances if compliance with the restriction would: (i) cause
a violation of the law of the State of Delaware and the OTS determines that
federal law would not preempt the application of the laws of the State of
Delaware to the Foundation; (ii) would cause the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation; or (iii) would cause the
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Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the OTS to waive such voting restriction, the Company's or the
Foundation's legal counsel must render an opinion satisfactory to OTS that
compliance with the voting restriction would have the effect described in
clauses (i), (ii) or (iii) above. Under those circumstances, the OTS will grant
a waiver of the voting restriction upon submission of such legal opinion(s) by
the Company or the Foundation. In the event that the OTS waived the voting
restriction, the directors would direct the voting of the Common Stock held by
the Foundation. However, a condition to the OTS approval of the Conversion
provides that in the event such voting restriction is waived or becomes
unenforceable, the Director of the OTS, or his designees, at that time may
impose conditions on the composition of the board of directors of the Foundation
or such other conditions or restrictions relating to the control of the Common
Stock held by the Foundation, any of which could limit the ability of the board
of directors of the Foundation to control the voting of the Common Stock held by
the Foundation. There will be no agreements or understandings with directors of
the Foundation regarding the exercise of control, directly or indirectly, over
the management or policies of the Company or the Bank, including agreements
related to voting, acquisition or disposition of the Company's stock. As
directors of a nonprofit corporation, directors of the Foundation will at all
times be bound by their fiduciary duty to advance the Foundation's charitable
goals, to protect the assets of the Foundation and to act in a manner consistent
with the charitable purpose for which the Foundation is established.
The Company will provide office space and administrative support
services to the Foundation. Initially, the Foundation is expected to have no
employees. The board of directors of the Foundation will appoint such officers
as may be necessary to manage the operations of the Foundation. It is
anticipated that initially such officers will be selected from the board of
directors of the Foundation. Any transaction between the Bank and the Foundation
will comply with the affiliate transaction restrictions set forth in Sections
23A and 23B of the Federal Reserve Act, as amended.
The Company and the Bank determined to fund the Foundation with
Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Company and the Bank over the long term. The funding
of the Foundation with stock also provides the Foundation with a potentially
larger endowment than if the Company contributed cash to the Foundation since,
as a shareholder, the Foundation will share in the potential growth and success
of the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock contribution,
would have to contribute to the Foundation in future years in order to maintain
a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that
may be paid on the Common Stock in the future and, subject to applicable federal
and state laws, loans collateralized by the Common Stock or from the proceeds of
the sale of any of the Common Stock in the open market from time-to-time as may
be permitted to provide the Foundation with additional liquidity. As a private
foundation under Section 501(c)(3) of the Code, the Foundation will be required
to distribute annually in grants or donations, a minimum of 5% of the average
fair market value of its net investment assets. One of the conditions imposed on
the gift of Common Stock by the Company is that the amount of Common Stock that
may be sold by the Foundation in any one year shall not exceed 5% of the average
market value of the assets held by the Foundation, except where the board of
directors of the Foundation, by three-fourths vote, determines that
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the failure to sell an amount of Common Stock greater than such amount would
result in a long-term reduction of the value of the Foundation's assets or would
otherwise jeopardize the Foundation's capacity to carry out its charitable
purposes. While there may be greater risk associated with a one-stock portfolio
in comparison to a diversified portfolio, the Company believes any such risk is
mitigated by the ability of the Foundation's directors to sell more than 5% of
its stock in such circumstances. Upon completion of the Conversion and the
contribution of shares to the Foundation immediately following the Conversion,
the Company would have 1,629,450, 1,917,000 and 2,204,550 shares issued and
outstanding at the minimum, midpoint and maximum, respectively, of the Estimated
Price Range. Because the Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Company's
common stock would be diluted by 7.4%, as compared to their interests in the
Company if the Foundation was not established. For additional discussion of the
dilutive effect, see "Comparison of Valuation and Pro Forma Information With No
Foundation" and "Pro Forma Data."
Comparison of Valuation and Other Factors Assuming the Foundation
is Not Established as Part of the Conversion. The Company proposes to
capitalize the Foundation with Common Stock in an amount equal to 8% of the
total amount of Common Stock sold in connection with the Conversion. At the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Price
Range, the contribution to the Foundation would equal 120,700, 142,000, 163,300
and 157,795 shares, respectively, which would have a market value of $2.4
million, $2.8 million, $3.3 million and $3.8 million, respectively, based on
the Purchase Price of $20.00 per share. Such contribution, once made, will not
be recoverable by the Company or the Bank. As a result of the establishment of
the Foundation, the Estimated Price Range, as estimated by Keller, has
decreased and the amount of stock available for sale in the Offerings has also
correspondingly decreased. The amount of the decrease is 276,250, 325,000,
373,750 and 429,800 shares, or $5.5 million, $6.5 million, $7.5 million and
$8.6 million, at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Price Range, respectively. See "Pro forma Data" and "Comparison
of Valuation and Pro Forma Data Information with No Foundation."
Tax Considerations. The Company and the Bank have been advised by
their independent accountants that an organization created for the above
purposes will qualify as a 501(c)(3) exempt organization under the Code and will
be classified as a private foundation rather than a public charity. A private
foundation typically receives its support from one person or one corporation
whereas a public charity receives its support from the public. The Foundation
will submit a request to the IRS to be recognized as an exempt organization
after approval of the Foundation by the Bank's members at the Special Meeting
being held to consider the Conversion. As long as the Foundation files its
application for tax-exempt status within 15 months from the date of its
organization and provided the IRS approves the application, the effective date
of the Foundation's status as a Section 501(c)(3) organization will be the date
of its organization. The Company's independent accountants, however, have not
rendered any advice on the condition of the gift which requires that all shares
of Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Company's Common Stock, on all proposals
considered by stockholders of the Company. In the event that the Company or the
Foundation receives an opinion of their tax counsel satisfactory to the OTS that
compliance with the voting restriction would cause the Foundation to lose its
tax-exempt status, otherwise have a material adverse tax consequence on the
Foundation or subject the Foundation to an excise tax under Section 4941 of the
Code, the OTS will waive such condition upon submission of such opinion(s) by
the Company or the Foundation. See "-- Regulatory Conditions Imposed on the
Foundation."
A legal opinion of the OTS which addresses the establishment of
charitable foundations by savings associations opines that as a general rule
funds contributed to a charitable foundation should not exceed the deductible
limitations set forth in the Code and if an association's contributions exceed
the deductible limit, such action must be justified by the board of directors.
In addition, under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must merely be within reasonable limits as to
amount and purpose to be valid. Under the Code, the Company may deduct up to 10%
of its taxable income in any one year and any contributions made by the Company
in excess of the deductible amount will be deductible for federal tax purposes
over each of the five succeeding taxable years. The Company and the Bank believe
that the Conversion presents a unique opportunity to establish and fund a
charitable foundation given the substantial amount of additional capital being
raised in the Conversion. In making such a determination, the Company and the
Bank considered the dilutive impact of the Foundation on the amount of Common
Stock available to be offered for sale in the Conversion. See "Comparison of
Valuation and Pro Forma Information with No Foundation." Based on such
consideration, the Company and Bank believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the Bank's
capital position and its earnings, the substantial additional capital being
raised in the Conversion and the potential benefits of the Foundation to the
Bank's community. In this regard, assuming the sale of the Common Stock at the
midpoint of the Estimated Price Range, the
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Company would have pro forma consolidated capital of $50.9 million, or 18.28%,
of consolidated assets and the Bank's pro forma tangible, core and risk-based
capital ratios would be 12.2%, 12.2% and 22.8%, respectively. See "Regulatory
Capital Compliance," "Capitalization" and "Comparison of Valuation and Pro Forma
Information with No Foundation." Thus, the amount of the contribution will not
adversely impact the financial condition of the Company and the Bank. The
Company and the Bank therefore believe that the amount of the charitable
contribution is reasonable given the Company's and the Bank's pro forma capital
positions. As such, the Company and the Bank believe that the contribution does
not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their
independent accountants that the Company's contribution of its own stock to the
Foundation will not constitute an act of self-dealing and that the Company will
be entitled to a deduction in the amount of the fair market value of the stock
at the time of the contribution less the nominal par value that the Foundation
is required to pay to the Company for such stock, subject to a limitation based
on 10% of the Company's annual taxable income. The Company, however, would be
able to carry forward any unused portion of the deduction for five years
following the year in which the contribution is made for federal tax purposes.
Thus, while the Company expects to receive a charitable contribution deduction
of approximately $300,000 in fiscal 1998, the Company is permitted under
the Code to carryover the excess contribution over a five-year period for
federal income tax purposes. The Company would not be able to utilize such
carryover for Massachusetts state income tax purposes. Assuming the close of
the Offerings at the midpoint of the Estimated Price Range, the Company
estimates that substantially all of the deduction should be deductible over the
six-year period. However, no assurances can be made that the Company will have
sufficient pre-tax income over the five year period following the year in which
the contribution is made to fully utilize the carryover related to the excess
contribution. Neither the Company nor the Bank expect to make any further
contributions to the Foundation within the first five years following the
initial contribution. After that time, the Company and the Bank may consider
future contributions to the Foundation. Any such decisions would be based on an
assessment of, among other factors, the financial condition of the Company and
the Bank at that time, the interests of shareholders and depositors of the
Company and the Bank and the financial condition and operations of the
Foundation.
Although the Company and the Bank have received an opinion of their
independent accountants that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will recognize
the Foundation as a Section 501(c)(3) exempt organization or that the deduction
will be permitted. In such event, the Company's contribution to the Foundation
would be expensed without tax benefit, resulting in a reduction in earnings in
the year in which the IRS makes such a determination. See "Risk Factors -
Establishment of the Charitable Foundation." In cases of willful, flagrant or
repeated acts or failures to act which result in violations of the IRS rules
governing private foundations, a private foundation's status as a private
foundation may be involuntarily terminated by the IRS. In such event, the
managers of a private foundation could be liable for excise taxes based on such
violations and the private foundation could be liable for a termination tax
under the Code. The Foundation's certificate of incorporation provides that it
shall have a perpetual existence. In the event, however, the Foundation were
subsequently dissolved as a result of a loss of its tax exempt status, the
Foundation would be required under the Code and its certificate of incorporation
to distribute any assets remaining in the Foundation at that time for one or
more exempt purposes within the meaning of Section 501(c)(3) of the Code, or to
distribute such assets to the federal government, or to a state or local
government, for a public purpose.
As a private foundation, earnings and gains, if any, from the sale
of Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the
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annual information return will be available for public inspection for a period
of 180 days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Foundation. Establishment of
the Foundation is subject to the following conditions imposed by the OTS: (i)
the Foundation will be subject to examination by the OTS, at the Foundation's
own expense; (ii) the Foundation must comply with supervisory directives imposed
by the OTS; (iii) the Foundation will provide annual reports to the OTS
describing grants made and grant recipients; (iv) the Foundation will operate in
accordance with written policies adopted by the board of directors, including a
conflict of interest policy; (v) the Foundation will not engage in self-dealing
and will comply with all laws necessary to maintain its tax-exempt status; (vi)
any purchases of Common Stock by the Foundation following the Conversion will
be subject to OTS regulations on stock repurchases; and (vii) any shares of
Common Stock of the Company held by the Foundation must be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company; provided, however, that the OTS will
waive this voting restriction under certain circumstances if compliance with
the voting restriction would: (a) cause a violation of the law of the State of
Delaware and the OTS determines the federal law does not preempt the
application of the laws of the State of Delaware to the Foundation; (b) cause
the Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation; or (c) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the OTS
to waive such voting restriction, the Company's or the Foundation's legal
counsel must render an opinion satisfactory to OTS that compliance with the
voting restriction would have the effect described in clauses (a), (b) or (c)
above. Under those circumstances, the OTS will grant a waiver of the voting
restriction upon submission of such opinion(s) by the Company or the
Foundation. There can be no assurances that either a legal or tax opinion
addressing these issues will be rendered, or if rendered, that the OTS will
grant an unconditional waiver of the voting restriction. In this regard, a
condition to the OTS approval of the Conversion provides that in the event such
voting restriction is waived or becomes unenforceable, the Director of the OTS,
or his designees, at that time may impose conditions on the composition of the
board of directors of the Foundation or such other conditions or restrictions
relating to the control of the Common Stock held by the Foundation, any of
which could limit the ability of the board of directors of the Foundation to
control the voting of Common Stock held by the Foundation. In no event will the
voting restriction survive the sale of shares of the Common Stock held by the
Foundation.
In addition, establishment of the Foundation is subject to the
approval of a majority of the total outstanding votes of the Bank's members
eligible to be cast at the special meeting being held to consider the
Conversion. The Foundation will be considered as a separate matter from approval
of the Plan of Conversion. If the Bank's members approve the Plan of Conversion,
but not the Foundation, the Bank intends to complete the Conversion without the
establishment of the Foundation. Failure to approve the Foundation may
materially increase the pro forma market value of the Common Stock being offered
for sale in the Offerings since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation.
See "Comparison of Valuation and Pro Forma Information With No Foundation."
PURPOSES OF CONVERSION
The Bank, as a federally-chartered mutual savings bank, does not
have shareholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, the Bank will be structured in the form
used by commercial banks, other business entities and a growing number of
savings institutions. The Conversion will enhance the Bank's ability to access
capital markets, expand its current
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operations, acquire other financial institutions or branch offices, provide
affordable home financing opportunities to the communities it serves or
diversify into other financial services to the extent allowable by applicable
law and regulation.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with both mutual and stock institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise.
The potential impact of the Conversion upon the Bank's capital base
is significant. At September 30, 1997, the Bank had retained earnings,
determined in accordance with GAAP, of $20.0 million, or 8.01% of total assets.
Assuming that the Company uses 50% of the net proceeds at the maximum of the
Estimated Price Range to purchase the capital stock of the Bank, the Bank's GAAP
capital will increase to $34.7 million or a ratio of GAAP capital to adjusted
assets, on a pro forma basis, of 13.0% after the Conversion. In the event that
the holding company form of organization is not utilized and all of the net
Conversion proceeds, at the midpoint of the Estimated Price Range, are retained
by the Bank, the Bank's ratios of tangible and core capital to adjusted assets,
on a pro forma basis, will both increase to 17.55% after the Conversion. The
investment of the net proceeds from the sale of the Common Stock is expected to
provide the Bank with additional income to increase further its capital
position.
After completion of the Conversion, the unissued common and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions and regulatory approval of an
offering, to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares upon exercise of stock
options under the Stock Option Plan or the possible issuance of authorized but
unissued shares to fund the Stock Program. Following the Conversion, the Company
will also be able to use stock-based incentive programs to attract and retain
executive and other personnel for itself and its subsidiaries. See "Management
of the Bank- Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a mutual savings institution has both a
deposit account in the institution and a pro rata ownership interest in the net
worth of the institution based upon the balance in his or her account, which
interest may only be realized in the event of a liquidation of the institution
or in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. However, this ownership interest
is tied to the depositor's account and has no tangible market value separate
from such deposit account. Any depositor who opens a deposit account obtains a
pro rata ownership interest in the net worth of the institution without any
additional payment beyond the amount of the deposit. A depositor who reduces or
closes his account receives a portion or all of the balance in the account but
nothing for his ownership interest in the net worth of the institution, which is
lost to the extent that the balance in the account is reduced.
Consequently, mutual savings institution depositors normally have no
way to realize the value of their ownership interest, which has realizable value
only in the unlikely event that the mutual savings institution is liquidated or
in the event the institution declares a capital distribution to depositors,
subject to applicable regulations of the OTS. In such event, the depositors of
record at that time, as owners, would
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share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings institution converts to stock form, permanent
nonwithdrawable capital stock is created to represent the ownership of the
institution's net worth. THE COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT
ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
OTS and the FDIC. After the Conversion, the Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The Directors serving the Bank at the time of Conversion will serve
initially as Directors of the Bank after the Conversion. The Directors of the
Company will consist initially of individuals currently serving on the Board of
Directors of the Bank. All officers of the Bank at the time of Conversion will
retain their positions immediately after Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the
Bank at the time of Conversion will automatically continue as a depositor after
the Conversion and each such deposit account will remain the same with respect
to deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion (i.e., up to
$100,000 per depositor). Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from the Bank will be affected
by the Conversion and the amount, interest rate, maturity and security for each
loan will remain as they were contractually fixed prior to the Conversion.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Bank as to all matters requiring membership action. Upon Conversion, depositors
and borrowers will cease to be members and will no longer be entitled to vote at
meetings of the Bank. Upon Conversion, all voting rights in the Bank will be
vested in the Company as the sole stockholder of the Bank. Exclusive voting
rights with respect to the Company will be vested in the holders of Common
Stock. Depositors and borrowers of the Bank will not have voting rights after
the Conversion except to the extent that they become stockholders of the Company
through the purchase of Common Stock.
Tax Effects. The Bank has received an opinion of counsel with regard
to federal income taxation and an opinion from Shatswell, MacLeod & Company,
P.C. with regard to Massachusetts taxation which provide that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal or Massachusetts tax purposes to the Bank, its Eligible Account
Holders, or its Supplemental Eligible Account Holders or the Company, except as
discussed below. See "-- Tax Aspects."
Effect on Liquidation Rights. If a mutual savings institution were
to liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would be entitled to such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to the
extent of their
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deposit balances) would also be paid first, followed by distribution of the
"liquidation account" to certain depositors (see "-- Liquidation Rights"), with
any assets remaining thereafter distributed to the Company as the holder of the
Bank's capital stock. Pursuant to the rules and regulations of the OTS, a
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be assumed by the surviving institution.
STOCK PRICING
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent valuation. The Bank
and the Company have retained Keller to make such valuation. For its services in
making such appraisal, Keller will receive a fee of $20,000, plus reasonable
expenses not to exceed $1,500. The Bank and the Company have agreed to indemnify
Keller and its employees and affiliates against certain losses (including any
losses in connection with claims under the federal securities laws) arising out
of its services as appraiser, except where Keller's liability results from its
negligence or willful misconduct.
An appraisal has been made by Keller in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. Keller also considered the following factors, among others: the
present and projected operating results and financial condition of the Company
and the Bank and the economic and demographic conditions in the Bank's existing
marketing area; certain historical, financial and other information relating to
the Bank; a comparative evaluation of the operating and financial statistics of
the Bank with those of other similarly situated publicly-traded savings banks
and savings institutions located in the Bank's primary market area and New
England; the aggregate size of the offering of the Common Stock; the impact of
the Conversion on the Bank's net worth and earnings potential; the proposed
dividend policy of the Company and the Bank; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities.
On the basis of the foregoing, Keller has advised the Company and
the Bank that, in its opinion, dated October 17, 1997 and updated as of January
13, 1998, the estimated pro forma market value of the Common Stock being sold
in connection with the Conversion ranged from a minimum of $30.2 million to a
maximum of $40.8 million with a midpoint of $35.5 million. Based upon the
Valuation Range and the Purchase Price of $20.00 per share for the Common Stock
established by the Board of Directors, the Board of Directors has established
the Estimated Price Range of $30.2 million to $40.8 million, with a midpoint of
$35.5 million, based on the issuance of 1,629,450 to 2,204,550 shares of Common
Stock. The Board of Directors of the Company and the Bank have reviewed the
appraisal of Keller and in determining the reasonableness and adequacy of such
appraisal consistent with OTS regulations and policies, have reviewed the
methodology and reasonableness of the assumptions utilized by Keller in the
preparation of such appraisal. The Estimated Price Range may be amended with
the approval of the OTS (if required), if necessitated by subsequent
developments in the financial condition of the Company or the Bank or market
conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED,
AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON
STOCK IN THE OFFERINGS. KELLER DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID KELLER
VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL
CONSIDERS THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH
APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME-TO-TIME, NO ASSURANCE CAN
BE GIVEN THAT PERSONS PURCHASING COMMON STOCK IN THE CONVERSION WILL THEREAFTER
BE ABLE TO SELL COMMON
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STOCK AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. SEE "RISK FACTORS - ABSENCE OF
MARKET FOR COMMON STOCK."
Prior to the completion of the Conversion, the maximum of the
Estimated Price Range may be increased up to 15% and the number of shares of
Common Stock to be issued in the Conversion may be increased to 2,535,232 shares
due to regulatory considerations, changes in the market and general financial
and economic conditions, without the resolicitation of subscribers. See "--
Limitations on Common Stock Purchases" as to the method of distribution and
allocation of additional shares that may be issued in the event of an increase
in the Estimated Price Range to fill unfilled orders in the Subscription
Offering.
No sale of shares of Common Stock may be consummated unless, prior
to such consummation, Keller confirms to the Bank and the OTS that, to the best
of its knowledge, nothing of a material nature has occurred which, taking into
account all relevant factors, would cause Keller to conclude that the value of
the Common Stock at the price so determined is incompatible with its estimate of
the pro forma market value of the Common Stock at the conclusion of the
Conversion.
If the pro forma market value of the Common Stock is either more
than 15% above the maximum of the Estimated Price Range or less than the minimum
of the Estimated Price Range, the Bank and the Company, after consulting with
the OTS, may terminate the Plan and return all funds promptly with interest at
the Bank's passbook rate of interest on payments made by check, bank draft or
money order, extend or hold a new Subscription and/or Community Offering,
establish a new Estimated Price Range, commence a resolicitation of subscribers
or take such other actions as permitted by the OTS in order to complete the
Conversion. In the event that a resolicitation is commenced, unless an
affirmative response is received within a reasonable period of time, all funds
will be promptly returned to investors as described above. A resolicitation, if
any, following the conclusion of the Subscription Offering would not exceed 45
days unless further extended by the OTS for periods of up to 90 days not to
extend beyond _______________, 2000.
If all shares of Common Stock are not sold through the Subscription
Offering or Community Offering, then the Bank and the Company expect to offer
the remaining shares in a Syndicated Community Offering which would occur as
soon as practicable following the close of the Community Offering. All shares of
Common Stock will be sold at the same price per share in the Syndicated
Community Offering as in the Subscription and Community Offerings. See
"--Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior
to such consummation, Keller confirms to the Bank, the Company and the OTS that,
to the best of its knowledge, nothing of a material nature has occurred which,
taking into account all relevant factors, including those which would be
involved in a cancellation of the Syndicated Community Offering, would cause
Keller to conclude that the aggregate value of the Common Stock at the Purchase
Price is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the time of the Syndicated Community Offering.
Any change which would result in an aggregate purchase price which is below or
more than 15% above the Estimated Price Range would be subject to OTS approval.
If such confirmation is not received, the Bank may extend the Conversion,
extend, reopen or commence new Subscription Offering, Community Offering or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the OTS or
take such other actions as permitted by the OTS in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Price Range or more than 15%
above the maximum of such range and the Company and the Bank determine to
continue the Conversion, subscribers will be resolicited (i.e., be permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their
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subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
OTS. A resolicitation, if any, following the conclusion of the Subscription
Offering would not exceed 45 days, or if following the Syndicated Community
Offering, 90 days, unless further extended by the OTS for periods up to 90 days
not to extend beyond _______________, 2000. If such resolicitation is not
effected, the Bank will return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by check, bank draft or money order.
Copies of the appraisal report of Keller, including any amendments
thereto and the detailed memorandum of the appraiser setting forth the method
and assumptions for such appraisal are available for inspection at the main
office of the Bank and the other locations specified under "Additional
Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares to be
issued in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $20.00 per share and Keller's estimate of the pro forma market
value of the Common Stock ranging from a minimum of $30.2 million to a maximum,
as increased by 15%, of $46.9 million, the number of shares of Common Stock
expected to be issued in the Conversion is between a minimum of 1,629,450 shares
and a maximum, as adjusted by 15%, of 2,535,232 shares. The actual number of
shares issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to OTS approval, if necessary.
In the event market or financial conditions change so as to cause
the aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated Price
Range, if the Plan is not terminated by the Company and the Bank after
consultation with the OTS, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the OTS. If the number of shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Price Range to
reflect changes in market or financial condition, persons who subscribed for the
maximum number of shares will not be given the opportunity to subscribe for an
adjusted maximum number of shares, except for the ESOP which will be able to
subscribe for such adjusted amount. See "-- Limitations on Common Stock
Purchases."
In the event the members of the Bank approve the establishment of
the Foundation, the number of shares to be issued and outstanding following the
Conversion will be increased by a number of shares equal to 8% of the Common
Stock sold in the Conversion to fund the Foundation. Assuming the sale of shares
in the Offerings at the maximum of the Estimated Price Range, the Company will
issue 163,300 shares of its Common Stock from authorized but unissued shares to
the Foundation immediately following the completion of the Conversion. In that
event, the Company will have total shares of Common Stock outstanding of
2,204,550 shares. Of that amount, the Foundation will own 7.4%. Funding the
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
Conversion by 7.4% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
An increase in the number of shares to be issued in the Conversion
as a result of an increase in the estimated pro forma market value would
decrease both a subscriber's ownership interest and the Company's
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pro forma net earnings and stockholders' equity on a per share basis while
increasing pro forma net earnings and stockholders' equity on an aggregate
basis. A decrease in the number of shares to be issued in the Conversion would
increase both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while decreasing pro
forma net earnings and stockholder's equity on an aggregate basis. For a
presentation of the effects of such changes, see "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for
the purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority: (1) holders
of deposit accounts (as more particularly described herein) in the Bank or Union
Federal with a balance of $50 or more as of August 31, 1996 ("Eligible Account
Holders"); (2) the ESOP; (3) holders of deposit accounts with a balance of $50
or more as of December 31, 1997 ("Supplemental Eligible Account Holders"); and
(4) members of the Bank, consisting of depositors of the Bank as of __________,
199_, the Voting Record Date, and borrowers with loans outstanding as of October
9, 1997, which continue to be outstanding as of the Voting Record Date other
than Eligible Account Holders and Supplemental Eligible Account Holders ("Other
Members"). All subscriptions received will be subject to the availability of
Common Stock after satisfaction of all subscriptions of all persons having prior
rights in the Subscription Offering and to the maximum and minimum purchase
limitations set forth in the Plan of Conversion and as described below under
"-- Limitations on Common Stock Purchases."
Deposit accounts which will provide subscription rights to holders
thereof consist of any "savings account," as defined by the Plan of Conversion
consistent with OTS regulations. Pursuant to the Plan, savings accounts do not
include any non-interest-bearing deposit accounts maintained at the Bank or
Union Federal, as the case may be.
Priority 1: Eligible Account Holders. Each Eligible Account Holder
will receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of the amount permitted to be purchased in the Community Offering,
currently $225,000 of Common Stock, one-tenth of one percent (.10%) of the total
offering of shares of Common Stock or fifteen times the product (rounded down to
the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the Eligible Account Holder's Qualifying Deposit (defined by the Plan as any
deposit account in the Bank or Union Federal with a balance of $50 or more as of
August 31, 1996) and the denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders, in each case on the Eligibility Record Date,
subject to the overall purchase limitation and exclusive of an increase in the
shares issued pursuant to an increase in the Estimated Price Range of up to 15%.
See "-- Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Conversion Stock in excess of the total number
of such shares eligible for subscription, the shares of Conversion Stock shall
be allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each Eligible Account Holder whose subscription remains unsatisfied bears to
the total amount of the Qualifying Deposits of all Eligible Account Holders
whose subscriptions remain unsatisfied. If the amount so allocated exceeds the
amount subscribed for by any one or more Eligible Account Holders, the excess
shall be reallocated (one or more times as necessary) among those Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available shares have been allocated or all subscriptions
satisfied.
To ensure proper allocation of stock, each Eligible Account Holder
must list on his subscription order form all accounts in which he has an
ownership interest. Failure to list an account could result in less shares being
allocated than if all accounts had been disclosed. The subscription rights of
Eligible Account
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Holders who are also Directors or Officers of the Bank or their associates will
be subordinated to the subscription rights of other Eligible Account Holders to
the extent attributable to increased deposits in the 12 months preceding August
31, 1996.
Priority 2: Employee Stock Ownership Plan. To the extent that there
are sufficient shares remaining after satisfaction of the subscriptions by
Eligible Account Holders, the ESOP will receive, without payment therefor,
second priority, nontransferable subscription rights to purchase, in the
aggregate, up to 10% of Common Stock issued in the Conversion, including shares
issued to the Foundation, and any increase in the number of shares of Common
Stock to be issued in the Conversion after the date hereof as a result of an
increase of up to 15% in the maximum of the Estimated Price Range. The ESOP
intends to purchase 8% of the shares to be issued in the Conversion, including
shares issued to the Foundation, or 130,356 shares and 176,364 shares, based on
the issuance of 1,629,450 shares and 2,204,550 shares, respectively.
Subscriptions by the ESOP will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. See "Management of the Bank -- Benefits -- Employee Stock Ownership
Plan and Trust."
Priority 3: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder will receive, without payment therefor, third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of the amount permitted to be purchased in the
Community Offering, currently $225,000 of Common Stock, one-tenth of one percent
(.10%) of the total offering of shares of Common Stock or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Supplemental Eligible Account Holder's Qualifying
Deposit and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall purchase limitation and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Price Range of up to 15%. See "- Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
Supplemental Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Supplemental
Eligible Account Holders, the excess shall be reallocated (one or more times as
necessary) among those Supplemental Eligible Account Holders whose subscriptions
are still not fully satisfied on the same principle until all available shares
have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his subscription order form all accounts in which he
has an ownership interest. Failure to list an account could result in less
shares being allocated than if all accounts had been disclosed. The subscription
rights received by Eligible Account Holders will be applied in partial
satisfaction to the subscription rights to be received as a Supplemental
Eligible Account Holder.
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Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of subscriptions by the Eligible Account
Holders, the ESOP and the Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority nontransferable
subscription rights to subscribe for Common Stock in the Subscription Offering
up to the greater of the amount permitted to be purchased in the Community
Offering, currently $225,000 of Common Stock, or one-tenth of one percent (.10%)
of the total offering of shares of Common Stock, subject to the overall purchase
limitation and exclusive of an increase in shares issued pursuant to an increase
in the Estimated Price Range of up to 15%.
In the event that Other Members subscribe for a number of shares of
Conversion Stock which, when added to the shares of Conversion Stock subscribed
for by the Eligible Account Holders, the Employee Plans and the Supplemental
Eligible Account Holders is in excess of the total number of shares of
Conversion Stock being issued, the subscriptions of such Other Members will be
allocated among the subscribing Other Members so as to permit each subscribing
Other Member, to the extent possible, to purchase a number of shares sufficient
to make his or her total allocation of Conversion Stock equal to the lesser of
100 shares or the number of shares subscribed for by the Other Member. Any
shares remaining after that allocation will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied pro rata in the same
proportion that the number of votes of a subscribing Other Member on the Voting
Record Date bears to the total votes on the Voting Record Date of all
subscribing Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more remaining
Other Members, the excess shall be reallocated (one or more times as necessary)
among those remaining Other Members whose subscriptions are still not fully
satisfied on the same principle until all available shares have been allocated
or all subscriptions satisfied.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire on _______________, 1998, at ___________, Eastern time,
unless extended for up to 45 days by the Bank or such additional periods with
the approval of the OTS. Subscription rights which have not been exercised prior
to the Expiration Date will become void.
The Bank will not execute orders until all shares of Common Stock
have been subscribed for or otherwise sold. If all shares have not been
subscribed for or sold within 45 days after the Expiration Date, unless such
period is extended with the consent of the OTS, all funds delivered to the Bank
pursuant to the Subscription Offering will be returned promptly to the
subscribers with interest and all withdrawal authorizations will be canceled. If
an extension beyond the 45 day period following the Expiration Date is granted,
the Bank will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest and of the time period within which subscribers
must affirmatively notify the Bank of their intention to confirm, modify, or
rescind their subscription. If an affirmative response to any resolicitation is
not received by the Company from a subscriber, such order will be rescinded and
all subscription funds will be promptly returned with interest. Such extensions
may not go beyond _______________, 2000.
COMMUNITY OFFERING
Upon completion of the Subscription Offering, to the extent that
shares remain available for purchase after satisfaction of all subscriptions of
the Eligible Account Holders, the ESOP, the Supplemental Eligible Account
Holders and Other Members, the Bank has determined to offer shares pursuant to
the Plan to certain members of the general public and may reserve a number of
shares equal to the lesser of 25% of the Common Stock offered or the Common
Stock not subscribed for in the Subscription Offering for institutional
investors who need not be residents of any county in which the Bank maintains an
office. Any excess of shares available will be available for purchase by the
general public, with preference given to Preferred Subscribers, subject to the
right of the Company to accept or reject any such orders, in whole or in part,
in their sole
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discretion. Such persons, together with associates of and persons acting in
concert with such persons, may purchase up to $225,000 of Common Stock subject
to the maximum purchase limitation and exclusive of shares issued pursuant to an
increase in the Estimated Price Range by up to 15%. See "-- Limitations on
Common Stock Purchases." This amount may be increased to up to a maximum of 5%
or decreased to less than $225,000 at the sole discretion of the Company and the
Bank. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY
OFFERING CATEGORY IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS
SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER
AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE
EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of Preferred Subscribers after completion of the
Subscription Offering and Community Offering and the filling of institutional
orders, such stock will be allocated first to each Preferred Subscriber whose
order is accepted by the Bank, in an amount equal to the lesser of 100 shares or
the number of shares subscribed for by each such Preferred Subscriber, if
possible. Thereafter, unallocated shares will be allocated among the Preferred
Subscribers whose order remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Community Offering applying
the same allocation described above for Preferred Subscribers.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for stock pursuant to the Plan reside. However, the Plan provides
that the Bank and the Company are not required to offer stock in the
Subscription Offering to any person who resides in a foreign country or resides
in a state of the United States with respect to which both of the following
apply: (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state; and (ii) the Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request that the Company and the Bank or their officers, directors or trustees
register as a broker, dealer, salesman or selling agent, under the securities
laws of such state, or a request to register or otherwise qualify the
subscription rights or Common Stock for sale or submit any filing with respect
thereto in such state. Where the number of persons eligible to subscribe for
shares in one state is small, the Bank and the Company will base their decision
as to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of registering or qualifying the shares or the need to register the
Company, its officers, directors or employees as brokers, dealers, salesmen or
selling agents.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a
consultant and financial advisor in connection with the offering of the Common
Stock and Sandler O'Neill has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Based upon negotiations between the Bank and the Company concerning the fee
structure, Sandler O'Neill will receive a fee equal to 1.55% of the aggregate
Purchase Price of the shares sold in the Subscription Offering and Community
Offering, excluding shares purchased by directors, officers, employees and any
immediate family member thereof and any employee benefit plan of the Company or
Bank, including the ESOP, for which Sandler O'Neill will not receive a fee. In
the event that a selected dealers agreement is entered into in connection with a
Syndicated Community Offering, the Bank will pay a fee (to be negotiated at such
time under such agreement) to such selected dealers, any sponsoring dealers fees
and a management fee to Sandler O'Neill of 1.5% for shares sold by a National
Association of Securities Dealers, Inc. member firms pursuant
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to a selected dealers agreement; provided, however, that any fees payable to
Sandler O'Neill for Common Stock sold by them pursuant to such a selected
dealers agreement shall not exceed 1.55% of the Purchase Price and provided
further, however, that the aggregate fees payable to Sandler O'Neill and the
selected dealers will not exceed 7% of the aggregate purchase price of the
Common Stock sold by selected dealers. Fees to Sandler O'Neill and to any other
broker-dealer may be deemed to be underwriting fees and Sandler O'Neill and such
broker-dealers may be deemed to be underwriters. Sandler O'Neill will also be
reimbursed for its reasonable out-of-pocket expenses incurred in its capacity as
consultant and financial advisor, as well as conversion agent, including legal
fees, in an amount not to exceed $80,000. Notwithstanding the foregoing, in the
event the Offerings are not consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are commenced, to
provide assistance to the Company, Sandler O'Neill will be reimbursed for its
reasonable out-of-pocket expenses as described above. The Company and the Bank
have agreed to indemnify Sandler O'Neill for reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act. Sandler O'Neill has received advances towards its fees
totaling $25,000. Total marketing fees to Sandler O'Neill are expected to be
$408,000 and $559,000 at the minimum and the maximum of the Estimated Price
Range, respectively. See "Pro Forma Data" for the assumptions used to arrive at
these estimates.
Sandler O'Neill will perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $15,000.
Directors and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering in
ministerial capacities or provide clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase Common Stock or provide advice regarding the purchase of Common Stock.
The Company will rely on Rule 3a4-1 under the Exchange Act and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or the Bank will be compensated in
connection with his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION OFFERING
To ensure that each purchaser receives a prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
stock order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Offerings, an executed stock order form
and certification form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the stock order
form), must be received by the Bank at any of its offices by ____ _.m., Eastern
Time, on the Expiration Date, with respect to the Subscription Offering, or by
the date set for the termination of the Community Offering, which date shall be
within 45 days after the close of the Subscription Offering, or _______, 199_,
unless extended by the Bank and the Company with the approval of the OTS, if
necessary. Stock order forms which are not received by such time or are executed
defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. Certificates representing shares
of Common Stock purchased in the Subscription Offering must be registered in the
name of Eligible Account Holder or Supplemental Eligible Account Holder, as the
case may be. Joint Stock registration will be allowed only if the qualifying
deposit account is so registered. In addition, the Bank and Company are not
obligated to accept orders submitted on photocopied or facsimilied stock order
forms and will not accept stock order forms unaccompanied by an executed
certification form. Notwithstanding the foregoing, the
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Company shall have the right, in its sole discretion, to permit institutional
investors to submit irrevocable orders together with a legally binding
commitment for payment and to thereafter pay for the shares of Common Stock for
which they subscribe in the Community Offering at any time prior to 48 hours
before the completion of the Conversion. The Company and the Bank have the right
to waive or permit the correction of incomplete or improperly executed forms,
but do not represent that they will do so. Once received, an executed stock
order form may not be modified, amended or rescinded without the consent of the
Bank unless the Conversion has not been completed within 45 days after the end
of the Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly identified as to their
stock purchase priorities, depositors as of the Eligibility Record Date (August
31, 1996) and/or the Supplemental Eligibility Record Date (December 31, 1997)
and/or the Voting Record Date (_______, 199_) must list all accounts on the
stock order form giving all names in each account and the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Bank, (ii) by check, bank draft or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank. Orders for Common Stock submitted by subscribers in the
Subscription Offering which aggregate $50,000 or more must be paid by official
bank or certified check or by withdrawal authorization from a deposit account of
the Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the time
it subscribes, but rather, may pay for such shares of Common Stock subscribed
for at the Purchase Price upon consummation of the Subscription Offering, if all
shares are sold, or upon consummation of the Community Offering or Syndicated
Community Offering if shares remain to be sold in such offerings; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company or the ESOP
Loan Subsidiary to lend to the ESOP, at such time, the aggregate Purchase Price
of the shares for which it subscribed.
Owners of self-directed Individual Retirement Accounts ("IRAs") and
Qualified Plans may use the assets of such IRAs and Qualified Plans to purchase
shares of Common Stock in the Offerings, provided that such IRAs are not
maintained at the Bank. Persons with self-directed IRAs and Qualified Plans
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of Common Stock in the Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
directors and ten percent shareholders who use self-directed IRA funds and
Qualified Plans to purchase shares of Common Stock in the Offerings, make such
purchases for the exclusive benefit of the IRAs and Qualified Plans.
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Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, the ESOP, the Supplemental Eligible Account Holders and Other
Members of the Bank, from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they are
granted and only for his account. Each person exercising such subscription
rights will be required to certify that he is purchasing shares solely for his
own account and that he has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion. For a discussion on post-Conversion restrictions of directors
and executive officers of the Bank, see "--Certain Restrictions on Purchase or
Transfer of Shares After Conversion."
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if
feasible, all shares of Common Stock not purchased in the Subscription and
Community Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. The Company and
the Bank have the right to reject orders in whole or in part in their sole
discretion in the Syndicated Community Offering. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "- Stock Pricing." Subject
to overall purchase limitations, no person, together with any associate or group
of persons acting in concert, will be permitted to subscribe in the Syndicated
Community Offering for more than $225,000 of the Common Stock, exclusive of an
increase in shares issued pursuant to an increase in the Estimated Price Range
of up to 15%; provided, however, that shares of Common Stock purchased in the
Community Offering by any persons, together with associates of or persons acting
in concert with such persons, will be aggregated with purchases in the
Syndicated Community Offering and be subject to an overall maximum purchase
limitation of 1.0% of the shares offered, exclusive of an increase in shares
issued pursuant to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
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In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45
days following the Expiration Date, unless extended by the Company with the
approval of the OTS. Such extensions may not be beyond _______________, 2000.
See "-- Stock Pricing" above for a discussion of rights of subscribers, if any,
in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares
of Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in
the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$225,000 of Common Stock, one-tenth of one percent (.10%) of
the total offering of shares of Common Stock or fifteen times
the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to
be issued by a fraction of which the numerator is the amount
of the Qualifying Deposit of the Eligible Account Holder and
the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders in each case on the Eligibility
Record Date subject to the overall maximum purchase limitation
in (8) below and exclusive of an increase in the total number
of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(3) The ESOP is permitted to purchase in the aggregate up to 10%
of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation, including shares
issued in the event of an increase in the Estimated Price
Range of 15% and intends to
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purchase 8% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for
and purchase in the Subscription Offering up to the greater of
the amount permitted to be purchased in the Community
Offering, currently $225,000 of Common Stock, one-tenth of one
percent (.10%) of the total offering of shares of Common Stock
or fifteen times the product (rounded down to the next whole
number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator
is the amount of the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total
amount of Qualifying Deposits of all Supplemental Eligible
Account Holders in such case on the Supplemental Eligibility
Record Date subject to the overall maximum purchase limitation
in (8) below and exclusive of an increase in the total number
of shares issued due to an increase in the Estimated Price
Range of up to 15%;
(5) Each Other Member may subscribe for and purchase in the
Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently
$225,000 of Common Stock, or one-tenth of one percent (.10%)
of the total offering of shares of Common Stock subject to the
overall maximum purchase limitation in (8) below and exclusive
of an increase in the total number of shares issued due to an
increase in the Estimated Price Range of up to 15%;
(6) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of or groups of persons
acting in concert with such persons, may purchase in the
Community Offering up to $225,000 of Common Stock subject to
the overall maximum purchase limitation in (8) below and
exclusive of an increase in the total number of shares issued
due to an increase in the Estimated Price Range of up to 15%;
(7) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of or persons
acting in concert with such persons, may purchase in the
Syndicated Community Offering up to $225,000 of Common Stock
subject to the overall maximum purchase limitation in (8)
below and exclusive of an increase in the total number of
shares issued due to an increase in the Estimated Price Range
of up to 15% and, provided further that shares of Common Stock
purchased in the Community Offering by any persons, together
with associates of and persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated
Community Offering in applying the $225,000 purchase
limitation;
(8) Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members may purchase stock in the Community
Offering and Syndicated Community Offering subject to the
purchase limitations described in (6) and (7) above, provided
that, except for the ESOP, the overall maximum number of
shares of Common Stock subscribed for or purchased in all
categories of the Conversion by any person, together with
associates of or groups of persons acting in concert with such
persons, shall not exceed 1.0% of the shares of Common Stock
offered in the Conversion and exclusive of an increase in the
total number of shares issued due to an increase in the
Estimated Price Range of up to 15%; and
(9) No more than 30% of the total number of shares offered for
sale in the Conversion may be purchased by directors and
officers of the Bank and their associates in the aggregate,
excluding purchases by the ESOP.
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Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% at
the sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit. In addition, the Boards of
Directors of the Company and the Bank may, in their sole discretion, increase
the maximum purchase limitation referred to above up to 9.99%, provided that
orders for shares exceeding 5% of the shares being offering in the Subscription
Offering shall not exceed, in the aggregate, 10% of the shares being offered in
the Subscription Offering. Requests to purchase additional shares of Common
Stock under this provision will be determined by the Boards of Directors and, if
approved, allocated on a pro rata basis giving priority in accordance with the
priority rights set forth herein.
The overall maximum purchase limitation may not be reduced to less
than 1% but the individual amount permitted to be subscribed for may be reduced
by the Bank to less than $225,000, subject to paragraphs (2), (4) and (5) above
without the further approval of members or resolicitation of subscribers. An
individual Eligible Account Holder, Supplemental Eligible Account Holder or
Other Member may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make such
purchase, together with associates of and persons acting in concert with such
person, by also purchasing in other available categories of the Conversion,
subject to availability of shares and the overall maximum purchase limit for
purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Price Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) to fill the ESOP's
subscription of 8% of the amount of Common Stock issued in the Conversion at the
Adjusted Maximum number of shares, including shares issued to the Foundation;
(ii) in the event that there is an oversubscription by Eligible Account Holders,
to fill unsatisfied subscriptions of Eligible Account Holders, exclusive of the
Adjusted Maximum; (iii) in the event that there is an oversubscription by
Supplemental Eligible Account Holders, to fill unsatisfied subscriptions of
Supplemental Eligible Account Holders, exclusive of the Adjusted Maximum; (iv)
in the event that there is an oversubscription by Other Members, to fill
unsatisfied subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unsatisfied subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum, with preference to
institutional investors then a preference to Preferred Subscribers.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer, partner or directly or
indirectly a 10% stockholder; (ii) any trust or other estate in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; provided, however, such term shall not include any
employee stock benefit plan of the Bank in which such person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary capacity;
and (iii) any relative or spouse of such person, or any relative of such spouse,
who either has the same home as such person or who is a director or officer of
the Bank. Directors are not treated as associates of each other solely because
of their Board membership. For a further discussion of limitations on purchases
of a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank -- Subscriptions by Executive Officers
and Directors," "-- Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
The term "Acting in Concert" means: (i) knowing participation in a
joint activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; (ii) a combination or pooling
of voting or other interests in the securities of an issuer for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise; or (iii) a person or company which
acts in concert with another person or company ("other party") shall also be
deemed to be acting in concert with any person or company who is also acting in
concert with that other party, except that any tax-qualified employee stock
benefit plan will not be deemed to be acting in concert with its trustee or a
person who serves in a similar capacity solely for the purpose of determining
whether stock held by the trustee and stock held by the plan will be aggregated.
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LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would receive his pro rata share of any
assets of the Bank remaining after payment of claims of all creditors (including
the claims of all depositors to the withdrawal value of their accounts). Each
depositor's pro rata share of such remaining assets would be in the same
proportion as the value of his deposit account was to the total value of all
deposit accounts in the Bank at the time of liquidation. After the Conversion,
each depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, his claim would be
solely in the amount of the balance in his deposit account plus accrued
interest. He would not have an interest in the value or assets of the Bank above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder, if he were to
continue to maintain his deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
regular accounts, transaction accounts such as NOW accounts, money market
deposit accounts and certificates of deposit, with a balance of $50 or more held
in the Bank or Union Federal on August 31, 1996 and December 31, 1997,
respectively. Each Eligible Account Holder and Supplemental Eligible Account
Holder will have a pro rata interest in the total liquidation account based on
the proportion that the balance of his Qualifying Deposits on the Eligibility
Record Date or Supplemental Eligibility Record Date, respectively, bore to the
total amount of all Qualifying Deposits of all Eligible Account Holders and
Supplemental Eligible Account Holders in the Bank. For deposit accounts in
existence at both dates separate subaccounts shall be determined on the basis of
the Qualifying Deposits in such deposit accounts on such respective record
dates.
If, however, on any annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date, the amount of
the Qualifying Deposit of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the amount of the Qualifying Deposit of such
Eligible Account Holder or Supplemental Eligible Account Holder as of the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively,
or less than the amount of the Qualifying Deposits as of the previous annual
closing date, then the interest in the liquidation account relating to such
Qualifying Deposit would be reduced from time-to-time by the proportion of any
such reduction and such interest will cease to exist if such Qualifying Deposit
accounts are closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Qualifying
Deposit. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Bank of either a favorable ruling from the IRS or an opinion of
counsel with respect to federal income taxation and an opinion of an independent
accountant with respect to Massachusetts taxation, to the effect that the
Conversion will not be a taxable transaction to the Company, the Bank, Eligible
Account Holders, or Supplemental Eligible Account Holders except as noted below.
The federal and Massachusetts tax consequences will remain unchanged in the
event that a holding company form of organization is not utilized.
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No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, to the effect that for federal income tax purposes,
among other matters: (i) the Bank's change in form from mutual to stock
ownership will constitute a reorganization under section 368(a)(1)(F) of the
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized to the Bank or
the Company upon the purchase of the Bank's capital stock by the Company or to
the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of Deposit Accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' accounts in the Bank immediately after the Conversion will be the
same as the basis of their deposit accounts immediately prior to the Conversion;
(v) the tax basis of each Eligible Account Holder's and Supplemental Eligible
Account Holder's interest in the liquidation account will be zero; (vi) no gain
or loss will be recognized by Eligible Account Holders or Supplemental Eligible
Account Holders upon the distribution to them of nontransferable subscription
rights to purchase shares of the Common Stock, provided that the amount to be
paid for the Common Stock is equal to the fair market value of such stock; and
(vii) the tax basis to the stockholders of the Common Stock of the Company
purchased in the Conversion will be the amount paid therefor and the holding
period for the shares of Common Stock purchased by such persons will begin on
the date on which their subscription rights are exercised. Shatswell, MacLeod &
Company, P.C. has opined that the Conversion will not be a taxable transaction
to the Company, the Bank, Eligible Account Holders or Supplemental Eligible
Account Holders for Massachusetts income and/or franchise tax purposes. Certain
portions of both the federal and the state and local tax opinions are based upon
the assumption that the subscription rights issued in connection with the
Conversion will have no economic value at the time of distribution or at the
time the subscriptions are exercised.
Unlike private rulings, an opinion of counsel or an opinion of an
independent accountant is not binding on the IRS or DOR and the IRS or DOR could
disagree with conclusions reached therein. In the event of such disagreement,
there can be no assurance that the IRS or DOR would not prevail in a judicial or
administrative proceeding.
Keller has issued an opinion stating that, pursuant to its
valuation, Keller is of the opinion that the subscription rights do not have any
value, based on the fact that such rights are acquired by the recipients without
cost, are nontransferable and of short duration and afford the recipients the
right only to purchase the Common Stock at a price equal to its estimated fair
market value, which will be the same price as the Purchase Price for the shares
of Common Stock sold in the Community Offering. Such valuation is not binding on
the IRS or DOR. If the subscription rights granted to Eligible Account Holders
or Supplemental Eligible Account Holders are deemed to have an ascertainable
value, receipt of such rights could be taxable to those Eligible Account Holders
or Supplemental Eligible Account Holders who receive and/or exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Eligible Account Holders and Supplemental
Eligible Account Holders are encouraged to consult with their own tax advisor as
to the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
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INTERPRETATION AND AMENDMENT OF THE PLAN OF CONVERSION
To the extent permitted by law, all interpretations of the Plan by
the Bank will be final. The Plan provides that the Bank's Board of Directors
shall have the discretion to interpret and apply the provisions of the Plan to
particular circumstances and that such interpretation or application shall be
final. This includes any and all interpretations, applications and
determinations made by the Board of Directors on the basis of such information
and assistance as was then reasonably available for such purpose.
The Plan provides that, if deemed necessary or desirable by the
Board of Directors, the Plan may be substantively amended at any time prior to
solicitation of proxies from members to vote on the Plan by a two-thirds vote of
the Bank's Board of Directors. After submission of the proxy materials to the
members, the Plan may be amended by a two-thirds vote of the Board of Directors
at any time prior to the Special Meeting with the concurrence of the OTS. The
Plan may be amended at any time after the approval of members with the approval
of the OTS and no further approval of the members will be necessary unless
otherwise required by the OTS. By adoption of the Plan, the Bank's members will
be deemed to have authorized amendment of the Plan under the circumstances
described above.
The establishment of the Foundation will be considered as a separate
matter from approval of the Plan of Conversion. If the Bank's members approve
the Plan of Conversion, but not the creation of the Foundation, the Bank intends
to complete the Conversion without the Foundation. Failure to approve the
establishment of the Foundation may materially increase the pro forma market
value of the Common Stock since the Valuation Range, as set forth herein, takes
into account the dilutive impact of the issuance of shares to the Foundation. In
such an event, the Bank may establish a new Estimated Price Range and commence a
resolicitation of subscribers. In the event of a resolicitation, unless an
affirmative response is received within a specified period of time, all funds
will be promptly returned to investors, as described elsewhere herein. See
"--Stock Pricing."
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the
Conversion by a director or an executive officer of the Bank will be subject to
a restriction that the shares not be sold for a period of one year following the
Conversion, except in the event of the death of such director or executive
officer. Each certificate for restricted shares will bear a legend giving notice
of this restriction on transfer and instructions will be issued to the effect
that any transfer within such time period of any certificate or record ownership
of such shares other than as provided above is a violation of the restriction.
Any shares of Common Stock issued at a later date as a stock dividend, stock
split, or otherwise, with respect to such restricted stock will be subject to
the same restrictions. The directors and executive officers of the Bank will
also be subject to the insider trading rules promulgated pursuant to the
Exchange Act and any other applicable requirements of the federal securities
laws.
Purchases of outstanding shares of Common Stock of the Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1.0% of the Company's outstanding
Common Stock or to the purchase of stock pursuant to any stock option plan to be
established after the Conversion.
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Unless approved by the OTS, the Company, pursuant to OTS
regulations, will be prohibited from repurchasing any shares of the Common Stock
for three years except: (i) for an offer to all stockholders on a pro rata
basis; or (ii) for the repurchase of qualifying shares of a director.
Notwithstanding the foregoing, beginning one year following completion of the
Conversion the Company may repurchase its Common Stock so long as: (i) the
repurchases within the following two years are part of an open-market program
not involving greater than 5% of its outstanding capital stock during a
twelve-month period; (ii) the repurchases do not cause the Company to become
undercapitalized; and (iii) the Company provides to the Regional Director of the
OTS no later than 10 days prior to the commencement of a repurchase program
written notice containing a full description of the program to be undertaken and
such program is not disapproved by the Regional Director. In addition, under
current OTS policies, repurchases may be allowed in the first year following
Conversion and in amounts greater than 5% in the second and third years
following Conversion, provided there are valid and compelling business reasons
for such repurchases and the OTS does not object to such repurchases.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the
Bank from the mutual to the stock form of organization and, in connection
therewith, a new Federal Stock Charter and Bylaws to be adopted by members of
the Bank. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option of
the Board of Directors of the Bank. See "The Conversion- General." In the event
that the holding company form of organization is utilized, as described below,
certain provisions in the Company's Certificate of Incorporation and Bylaws and
in its management remuneration entered into in connection with the Conversion,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In the event that the holding company form of organization is not
utilized, the Bank's Stock Charter and Bylaws and management remuneration
entered into in connection with the Conversion may have anti-takeover effects as
described below. In addition, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of the material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which shareholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
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Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act and includes shares beneficially owned by such person or any of his
affiliates (as defined in the Certificate of Incorporation), shares which such
person or his affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power, but shall not include
shares beneficially owned by the ESOP or directors, officers and employees of
the Bank or Company or shares that are subject to a revocable proxy and that are
not otherwise beneficially owned, or deemed by the Company to be beneficially
owned, by such person and his affiliates. The Certificate of Incorporation of
the Company further provides that this provision limiting voting rights may only
be amended upon the vote of 80% of the outstanding shares of voting stock (after
giving effect to the limitation on voting rights).
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the directors. The
Certificate of Incorporation and the Bylaws provide that any vacancy occurring
in the Board, including a vacancy created by an increase in the number of
directors or resulting from death, resignation, retirement, disqualification,
removal from office or other cause, shall be filled for the remainder of the
unexpired term exclusively by a majority vote of the directors then in office.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Company. The
Certificate of Incorporation of the Company provides that a director may be
removed from the Board of Directors prior to the expiration of his term only for
cause, upon the vote of 80% of the outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent.
The Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be called
only by the Board of Directors of the Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Company may be taken only at an annual or special meeting
and prohibits stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 11,000,000 shares of Common Stock and 1,000,000 shares of Preferred
Stock. The shares of Common Stock and Preferred Stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates and liquidation preferences. As
a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third
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party seeks control and thereby assist management to retain its position.
The Company's Board of Directors currently has no plans for the issuance of
additional shares, other than the issuance of shares in the Conversion,
including shares contributed to the Foundation, and the issuance of additional
shares pursuant to the terms of the Stock Program and upon exercise of stock
options to be issued pursuant to the terms of the Stock Option Plan or Master
Stock-Based Benefit Plan, which are to be established and presented to
stockholders at the first annual meeting after the Conversion.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Company's outstanding shares of voting
stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under Delaware law, absent this provision, Business
Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of the Company and any other affected class
of stock. Under the Certificate of Incorporation, at least 80% approval of
shareholders is required in connection with any transaction involving an
Interested Stockholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, a group acting in concert, corporation,
partnership or other entity (other than the Company or its subsidiaries) which
owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include (i) any merger or consolidation of the Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder; (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company in exchange for any assets, cash or
securities the value of which equals or exceeds 25% of the fair market value of
the Common Stock of the Company; (iv) the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of any
Interested Stockholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Company which has
the effect of increasing the proportionate share of Common Stock or any class of
equity or convertible securities of the Company owned directly or indirectly by
an Interested Stockholder or Affiliate thereof. The directors and executive
officers of the Bank are purchasing in the aggregate approximately 2.7% of the
shares of the Common Stock at the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock Program and Stock Option Plan or
Master Stock-Based Benefit Plan is received, the Company expects to acquire 4%
of the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, on behalf of the Stock Program or Master Stock-Based
Benefit Plan and expects to issue an amount equal to 10% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, under the Stock Option Plan or Master Stock-Based Benefit Plan to
directors, officers and employees. As a result, assuming the Master Stock-Based
Benefit Plan or Stock Program and Stock Option Plan are approved by
Stockholders, directors, officers and employees have the potential to control
the voting of approximately 24.7% of the Company's Common Stock, thereby
enabling them to prevent the approval
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of the transactions requiring the approval of at least 80% of the Company's
outstanding shares of voting stock described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the
Company further provides that the Board of Directors of the Company, when
evaluating any offer of another "Person" (as defined therein) to (i) make a
tender or exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity, or (iii) purchase or
otherwise acquire all or substantially all of the properties and assets of the
Company, may, in connection with the exercise of its judgment in determining
what is in the best interest of the Company, the Bank and the stockholders of
the Company, give due consideration to all relevant factors, including, without
limitation, the social and economic effects of acceptance of such offer on the
Company's customers and the Bank's present and future account holders, borrowers
and employees; on the communities in which the Company and the Bank operate or
are located; and on the ability of the Company to fulfill its corporate
objectives as a savings and loan holding company and on the ability of the Bank
to fulfill the objectives of a federally-chartered stock savings bank under
applicable statutes and regulations. By having these standards in the
Certificate of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
the Company's Certificate of Incorporation must be approved by a majority vote
of its Board of Directors and also by a majority of the outstanding shares of
its voting stock; provided, however, that an affirmative vote of at least 80% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, director and officer indemnification by the Company and amendment of
the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may
be amended by its Board of Directors, or by a vote of 80% of the total votes
eligible to be voted at a duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to give at least 90
days advance notice to the Secretary of the Company. The notice provision
requires a stockholder who desires to raise new business to provide certain
information to the Company concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide the Company with certain information concerning the nominee and the
proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. The
provisions of the Employment Agreements, CIC Agreements, Employee Severance
Compensation Plan, Stock Program, Stock Option Plan or Master Stock-Based
Benefit Plan to be established may also discourage takeover attempts by
increasing the costs to be incurred by the Bank and the Company in the event of
a takeover. See "Management of the Bank -- Employment Agreements" and
"-- Benefits -- Stock Option Plan."
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The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation, Bylaws and management remuneration plans to be
established are in the best interest of the Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of the Company and
that otherwise is in the best interest of all stockholders.
DELAWARE CORPORATE LAW
The state of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined
therein) who owns 15% or more of the outstanding voting stock of a Delaware
corporation (an "Interested Stockholder") may not consummate a merger or other
business combination transaction with such corporation at any time during the
three-year period following the date such "Person" became an Interested
Stockholder. The term "business combination" is defined broadly to cover a wide
range of corporate transactions including mergers, sales of assets, issuances of
stock, transactions with subsidiaries and the receipt of disproportionate
financial benefits.
The statute exempts the following transactions from the requirements
of Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain business
combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
Certificate of Incorporation or Bylaws electing not to be governed by Section
203. At the present time, the Board of Directors does not intend to propose any
such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any
effort that might be made to obtain control of the Bank after the Conversion,
the Board of Directors believes that it is appropriate to adopt certain
provisions permitted by federal regulations to protect the interests of the
converted Bank and its stockholders from any hostile takeover. Such provisions
may, indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Certain Anti-Takeover Provisions Which May
Discourage Takeover Attempts."
The Bank's Federal Stock Charter will contain a provision whereby
the acquisition of or offer to acquire beneficial ownership of more than 10% of
the issued and outstanding shares of any class of equity
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securities of the Bank by any person (i.e., any individual, corporation, group
acting in concert, trust, partnership, joint stock company or similar
organization), either directly or through an affiliate thereof, will be
prohibited for a period of five years following the date of completion of the
Conversion. Any stock in excess of 10% acquired in violation of the Federal
Stock Charter provision will not be counted as outstanding for voting purposes.
This limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors, to
cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could indirectly
result in a change in control of the Bank, the Board of Directors of the Bank
will be able to assert this provision of the Bank's Federal Stock Charter
against such holders. Although the Board of Directors of the Bank is not
currently able to determine when and if it would assert this provision of the
Bank's Federal Stock Charter, the Board of Directors, in exercising its
fiduciary duty, may assert this provision if it were deemed to be in the best
interests of the Bank, the Company and its stockholders. It is unclear, however,
whether this provision, if asserted, would be successful against such persons in
a proxy contest which could result in a change in control of the Bank indirectly
through a change in control of the Company. Finally, for five years,
stockholders will not be permitted to call a special meeting of stockholders
relating to a change of control of the Bank or a charter amendment or to
cumulate their votes in the election of directors. Furthermore, the staggered
terms of the Board of Directors could have an anti-takeover effect by making it
more difficult for a majority of shares to force an immediate change in the
Board of Directors since only one-third of the Board is elected each year. The
purpose of these provisions is to assure stability and continuity of management
of the Bank in the years immediately following the Conversion.
Although the Bank has no arrangements, understandings or plans at
the present time, except as described in "Description of Capital Stock of the
Company--Preferred Stock," for the issuance or use of the shares of undesignated
Preferred Stock proposed to be authorized, the Board of Directors believes that
the availability of such shares will provide the Bank with increased flexibility
in structuring possible future financings and acquisitions and in meeting other
corporate needs which may arise. In the event of a proposed merger, tender offer
or other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Directors does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
The Plan of Conversion prohibits any person, prior to the completion
of the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan or the Common Stock
to be issued upon their exercise. The Plan also prohibits any person, prior to
the completion of the Conversion, from offering, or making an announcement of an
offer or intent to make an offer, to purchase such subscription rights or Common
Stock.
For three years following the Conversion, OTS regulations prohibit
any person from acquiring or making an offer to acquire more than 10% of the
stock of any converted savings institution, except for: (i) offers that, if
consummated, would not result in the acquisition by such person during the
preceding 12-month period of more than 1% of such stock; (ii) offers for up to
25% in the aggregate by the ESOP or
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other tax qualified plans of the Bank or the Company; or (iii) offers which are
not opposed by the Board of Directors of the Bank and which receive the prior
approval of the OTS. Such prohibition is also applicable to the acquisition of
the stock of the Company. Such acquisition may be disapproved by the OTS if it
is found, among other things, that the proposed acquisition (a) would frustrate
the purposes of the provisions of the regulations regarding conversions; (b)
would be manipulative or deceptive; (c) would subvert the fairness of the
conversion; (d) would be likely to result in injury to the savings institution;
(e) would not be consistent with economical home financing; (f) would otherwise
violate law or regulation; or (g) would not contribute to the prudent deployment
of the savings institution's conversion proceeds. In the event that any person,
directly or indirectly, violates this regulation, the securities beneficially
owned by such person in excess of 10% shall not be counted as shares entitled to
vote and shall not be voted by any person or counted as voting shares in
connection with any matters submitted to a vote of stockholders. The definition
of beneficial ownership for this regulation extends to persons holding revocable
or irrevocable proxies for the Company's stock under circumstances that give
rise to a conclusive or rebuttable determination of control under the OTS
regulations.
In addition, any proposal to acquire 10% of any class of equity
security of the Company generally would be subject to approval by the OTS under
the Change in Bank Control Act. The OTS requires all persons seeking control of
a savings institution and, therefore, indirectly its holding company, to obtain
regulatory approval prior to offering to obtain control. Federal law generally
provides that no "person," acting directly or indirectly or through or in
concert with one or more other persons, may acquire directly or indirectly
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person. Such change in control restrictions on the acquisition
of holding company stock are not limited to three years after conversion but
will apply for as long as the regulations are in effect. Persons holding
revocable or irrevocable proxies may be deemed to be beneficial owners of such
securities under OTS regulations and therefore prohibited from voting all or the
portion of such proxies in excess of the 10% aggregate beneficial ownership
limit. Such regulatory restrictions may prevent or inhibit proxy contests for
control of the Company or the Bank which have not received prior regulatory
approval.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 11,000,000 shares of Common Stock
having a par value of $.01 per share and 1,000,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 8% of the Common Stock issued in the
Conversion to the Foundation, the Company currently expects to issue up to
2,204,550 shares of Common Stock (or 2,535,232 in the event of an increase of
15% in the Estimated Price Range) and no shares of Preferred Stock in the
Conversion. Except as discussed above in "Restriction on Acquisition of the
Company and the Bank," each share of the Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable.
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THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or
from certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders thereof may have a priority over the holders of the Common
Stock with respect to dividends.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or the Company's Certificate of
Incorporation or as are otherwise presented to them by the Board of Directors.
Except as discussed in "Restrictions on Acquisition of the Company and the
Bank," each holder of Common Stock will be entitled to one vote per share and
will not have any right to cumulate votes in the election of directors. If the
Company issues Preferred Stock, holders of the Preferred Stock may also possess
voting rights. Certain matters require an 80% shareholder vote. See
"Restrictions on Acquisition of the Company and the Bank."
As a federal mutual savings bank, corporate powers and control of
the Bank are vested in its Board of Directors, who elect the officers of the
Bank and who fill any vacancies on the Board of Directors as it exists upon
Conversion. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which will be the
Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
Liquidation. In the event of any liquidation, dissolution or winding
up of the Bank, the Company, as holder of the Bank's capital stock, would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "The Conversion--Liquidation Rights"), all assets of the Bank available for
distribution. In the event of liquidation, dissolution or winding up of the
Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of the Company available for distribution. If Preferred Stock is issued,
the holders thereof may have a priority over the holders of the Common Stock in
the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Company will
not be entitled to preemptive rights with respect to any shares which may be
issued. The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will
be issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time-to-time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and conversion rights which could dilute the
voting strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
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DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
The Federal Stock Charter of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 11,000,000
shares of common stock, par value $1.00 per share, and 1,000,000 shares of
preferred stock, par value $1.00 per share, which preferred stock may be issued
in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of Common Stock
of the Bank will have the same relative rights as, and will be identical in all
respects with, each other share of common stock. After the Conversion, the Board
of Directors will be authorized to approve the issuance of Common Stock up to
the amount authorized by the Federal Stock Charter without the approval of the
Bank's stockholders. Assuming that the holding company form of organization is
utilized, all of the issued and outstanding common stock of the Bank will be
held by the Company as the Bank's sole stockholder. THE CAPITAL STOCK OF THE
BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN
INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--Federal Taxation" for a discussion of the
consequences of the payment of cash dividends from income appropriated to bad
debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock will possess exclusive voting rights in the Bank. Each
holder of shares of common stock will be entitled to one vote for each share
held, subject to the right of shareholders to cumulate their votes for the
election of directors. During the five-year period after the effective date of
the Conversion, cumulation of votes will not be permitted. See "Restrictions on
Acquisition of the Company and the Bank--Anti-Takeover Effects of the Company's
Certificate of Incorporation and Bylaws and Management Remuneration Adopted in
Conversion."
Liquidation. In the event of any liquidation, dissolution, or
winding up of the Bank, the holders of common stock will be entitled to receive,
after payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon) and distribution of the balance in the
special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders, all assets of the Bank available for distribution in
cash or in kind. If preferred stock is issued subsequent to the Conversion, the
holders thereof may also have priority over the holders of common stock in the
event of liquidation or dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the
Bank will not be entitled to preemptive rights with respect to any shares of the
Bank which may be issued. The common stock will not be subject to redemption.
Upon receipt by the Bank of the full specified purchase price therefor, the
common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar
and Transfer Company.
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EXPERTS
The consolidated financial statements of the Bank and its subsidiary
as of March 31, 1997 and 1996 and for each of the years in the three-year period
ended March 31, 1997, have been included in this Prospectus, in reliance upon
the report of Shatswell, MacLeod & Company, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Keller has consented to the publication herein of the summary of its
report to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its valuation with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and the Company
by Muldoon, Murphy & Faucette, Washington, D.C., special counsel to the Bank and
the Company. Muldoon, Murphy & Faucette will rely as to certain matters of
Delaware law on the opinion of Morris, Nichols, Arsht & Tunnell. The
Commonwealth of Massachusetts tax consequences of the Conversion and certain
matters related to the Foundation will be passed upon for the Bank and the
Company by Shatswell, MacLeod & Company, P.C. Certain legal matters will be
passed upon for Sandler O'Neill by Serchuk & Zelermyer, LLP, White Plains, New
York.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under
the Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC including the Company. This Prospectus contains a description of
the material terms and features of all material contracts, reports or exhibits
to the Registration Statement required to be described. The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an application for conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Office of the Regional Director of the
OTS located at 10 Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12(b) of the Exchange Act and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the
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Bank amends the Plan to eliminate the concurrent formation of the Company as
part of the Conversion, the Bank will register its stock with the OTS under
Section 12(b) of the Exchange Act and, upon such registration, the Bank and the
holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Federal Stock Charter and Bylaws of the Bank and the Certificate
of Incorporation and Bylaws of the Foundation are available without charge from
the Bank.
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BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet as of September 30, 1997 (unaudited) and the restated
Consolidated Balance Sheets as of March 31, 1997 and 1996 F-3
Consolidated Income Statements for the six months ended September 30, 1997 and 1996
(unaudited) and the restated Consolidated Income Statements for the years ended
March 31, 1997, 1996 and 1995 41
Consolidated Statement of Changes in Equity for the six months ended September 30, 1997
(unaudited) and the restated Consolidated Statements of Changes in Equity for the years
ended March 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the six months ended September 30, 1997 and
1996 (unaudited) and the restated Consolidated Statements of Cash Flows for the years
ended March 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
- ------------------
The financial statements for Bay State Bancorp, Inc. have been omitted because
Bay State Bancorp, Inc. has not yet issued any stock, has no liabilities, and
has not conducted any business other than of an organizational nature.
All schedules have been omitted either because they are not required, not
applicable, or are included in the Notes to Consolidated Financial Statements.
F-1
<PAGE> 150
[SHATSWELL, MACLEOD & COMPANY, P.C.]
The Board of Directors
Bay State Federal Savings Bank
Brookline, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets, as restated, of
Bay State Federal Savings Bank and Subsidiary as of March 31, 1997 and 1996 and
the related consolidated income statements, as restated, changes in equity, as
restated, and cash flows, as restated, for each of the years in the three-year
period ended March 31, 1997. These restated consolidated financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these restated consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the restated consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Bay State Federal Savings Bank and Subsidiary as of March 31, 1997
and 1996 and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended March 31, 1997, in
conformity with generally accepted accounting principles.
The consolidated financial statements for the years ended March 31, 1997, 1996
and 1995 are restatements of previously issued consolidated financial
statements. The restatements were necessary to correct certain errors in the
consolidated financial statements originally issued. The corrections are
described in the consolidated statements of changes in equity, Note 9, Note 11
and Note 14.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
April 25, 1997, except for Note 17,
as to which the date is September 9, 1997
F-2
<PAGE> 151
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
As Restated
March 31,
September 30, ---------------------
ASSETS 1997 1997 1996
- ------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 3,669 $ 3,617 $ 3,589
Federal funds sold 1,000 -- 4,917
-------- -------- --------
Cash and cash equivalents 4,669 3,617 8,506
Investments in available-for-sale securities (at fair value) 3,252 2,903 3,286
Investments in held-to-maturity securities (fair values of $13,186
as of September 30, 1997 (unaudited), $13,306 as of March 31, 1997
and $16,018 as of March 31, 1996) 13,156 13,553 16,181
Stock in Federal Home Loan Bank of Boston, at cost 1,672 1,672 1,672
Loans, net of the allowance for loan losses of $2,133 as of
September 30, 1997 (unaudited), $1,687 as of March 31, 1997 and
$1,774 as of March 31, 1996 219,370 207,063 186,534
Mortgage loans held-for-sale -- -- 47
Premises and equipment, net of depreciation and amortization 2,358 1,898 1,519
Other real estate owned -- 73 65
Accrued interest receivable 1,319 1,233 1,178
Other assets 1,967 1,062 862
-------- -------- --------
Total assets $247,763 $233,074 $219,850
======== ======== ========
LIABILITIES AND EQUITY
- ----------------------
Demand deposits $ 253 $ 117 $ 233
Savings and NOW deposits 92,931 90,919 85,576
Certificate accounts 108,977 106,023 102,124
-------- -------- --------
Total deposits 202,161 197,059 187,933
Advances from Federal Home Loan Bank of Boston 22,500 14,500 11,650
Other borrowed funds 1,486 1,065 1,048
Other liabilities 1,280 976 880
-------- -------- --------
Total liabilities 227,427 213,600 201,511
-------- -------- --------
Commitments and contingencies -- -- --
Equity:
Retained earnings 19,789 19,091 17,962
Net unrealized holding gain on available-for-sale securities,
net of taxes 547 383 377
-------- -------- --------
Total equity 20,336 19,474 18,339
-------- -------- --------
Total liabilities and equity $247,763 $233,074 $219,850
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 152
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Holding Gain On
Retained Available-For-
Earnings Sale Securities Total
-------- --------------- -----
<S> <C> <C> <C>
Balance, March 31, 1994 as previously reported by
Bay State Federal Savings Bank $12,363 $ -- $ 12,363
Restatement to correct the cash surrender value of life
insurance policy 63 -- 63
Pooling of interests with Union Federal Savings Bank 2,151 -- 2,151
------- ----- --------
Balance, March 31, 1994 as restated 14,577 -- 14,577
Net income 1,701 -- 1,701
Unrealized holding gain on available-for-sale securities
due to adoption of SFAS No. 115 balance as of
April 1, 1994 -- 214 214
Net change in unrealized holding gain on available-for-
sale securities -- (15) (15)
------- ----- --------
Balance, March 31, 1995 as restated 16,278 199 16,477
Net change in unrealized holding gain on available-for-
sale securities -- 178 178
Net income 1,684 -- 1,684
------- ----- --------
Balance, March 31, 1996 as restated 17,962 377 18,339
Net income 1,129 -- 1,129
Net change in unrealized holding gain on
available-for-sale securities -- 6 6
------- ----- --------
Balance, March 31, 1997 as restated 19,091 383 19,474
Net income 698 -- 698
Net change in unrealized holding gain on
available-for-sale securities -- 164 164
------- ----- --------
Balance, September 30, 1997 (unaudited) $19,789 $ 547 $ 20,336
======= ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 153
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months As Restated
Ended September 30, For the Years Ended March 31,
------------------- -----------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 698 $ 216 $ 1,129 $ 1,684 $ 1,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sales of premises and equipment -- (5) (5) -- --
Disposals of premises and equipment -- -- 17 -- 27
Provision for loan losses 444 5 117 1 6
Net (increase) decrease in mortgage loans
held-for-sale -- 47 47 (47) --
Gain on sale of mortgage loans (5) (4) (6) (2) (7)
Depreciation and amortization 107 92 199 201 241
(Increase) decrease in deferred loan origination fees 5 18 (58) (93) 15
Securities (gains) losses from sales of
available-for-sale securities, net -- (48) (123) -- 18
Amortization of securities, net of accretion 4 (2) 3 -- 15
Deferred tax (benefit) expense (169) 31 (626) 119 355
Increase (decrease) in income taxes payable 212 (551) (214) (65) 70
Write-downs of other real estate owned -- -- -- 5 --
Gain on sale of other real estate owned (19) -- (33) -- (18)
Increase (decrease) in other liabilities (19) 1,194 3 (87) (733)
Increase (decrease) in accrued expenses 110 47 549 (3) (42)
Increase (decrease) in accrued interest payable -- (2) (2) 2 --
(Increase) decrease in other assets (138) (20) 83 32 (109)
Increase in cash surrender value -- -- (27) (28) (24)
Decrease in thrift fund 96 -- -- -- --
(Increase) decrease in prepaid expenses (112) 33 130 6 (176)
(Increase) decrease in accrued interest receivable (87) (17) (55) (176) 128
-------- ------- -------- -------- -------
Net cash provided by operating activities 1,127 1,034 1,128 1,549 1,467
-------- ------- -------- -------- -------
Cash flows from investing activities:
Proceeds from sale of other real estate owned 272 -- 49 -- 397
Proceeds from maturities of held-to-maturity
securities 393 2,335 2,625 2,353 307
Purchases of held-to-maturity securities -- -- -- (12,822) (1,454)
Proceeds from sales of available-for-sale securities -- 65 139 -- 977
Proceeds from maturities of available-for-sale securities -- 500 1,500 -- --
Purchases of available-for-sale securities (69) (1,063) (1,127) (1,083) (74)
Purchase of Federal Home Loan Bank stock -- -- -- (8) (178)
Distribution to Rabbi Trust (697) -- -- -- --
Net increase in loans (12,948) (9,443) (20,627) (2,006) (3,263)
Recoveries of previously charged-off loans 18 -- 21 97 15
Proceeds from sales of premises and equipment -- 13 14 -- --
Capital expenditures (567) (228) (604) (152) (118)
-------- ------- -------- -------- -------
Net cash used in investing activities (13,598) (7,821) (18,010) (13,621) (3,391)
-------- ------- -------- -------- -------
</TABLE>
F-5
<PAGE> 154
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months As Restated
Ended September 30, For the Years Ended March 31,
------------------- ---------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW
and savings accounts 2,148 319 5,227 (5,316) (947)
Net increase (decrease) in certificate accounts 2,954 1,067 3,899 14,912 (372)
Repayment of advances from the Federal Home
Loan Bank (34,000) (28,650) (71,300) (38,650) (7,000)
Advances from the Federal Home Loan Bank 42,000 34,650 74,150 42,300 8,000
Net increase (decrease) in other borrowed funds 421 (327) 17 385 663
-------- -------- -------- -------- -------
Net cash provided by financing activities 13,523 7,059 11,993 13,631 344
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents 1,052 272 (4,889) 1,559 (1,580)
Cash and cash equivalents at beginning of period 3,617 8,506 8,506 6,947 8,527
-------- -------- -------- -------- -------
Cash and cash equivalents at end of period $ 4,669 $ 8,778 $ 3,617 $ 8,506 $ 6,947
======== ======== ======== ======== =======
Supplemental disclosures:
Interest paid $ 4,910 $ 4,484 $ 9,220 $ 8,421 $ 6,506
Income taxes paid 518 718 916 1,215 1,093
Loans transferred to other real estate owned 180 -- 309 -- 125
Loans originated from sale of other real estate owned -- -- 285 -- 188
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 155
BAYSTATE FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended September 30, 1997 and 1996 (unaudited)
and the Years Ended March 31, 1997, 1996 and 1995
(Dollars in Thousands)
NOTE 1 - NATURE OF OPERATIONS
The Bank is a federally chartered mutual savings bank which was incorporated in
1920 and is headquartered in Brookline, Massachusetts. The Bank operates its
business from five banking offices located in Massachusetts. The reporting
entity is Bay State Federal Savings Bank and its wholly owned subsidiary BSF
Service Corporation. In the year ended March 31, 1997 Union Federal Savings Bank
("Union Federal"), a mutual entity was merged with and into Bay State Federal
Savings Bank. The merger was accounted for as a pooling-of-interests. The merger
met all of the conditions specified by APB 16 to be accounted for by the
pooling-of-interests method. The two banks were independent of each other and
combined in their entirety to continue what was once previously separate
operations, with Bay State Federal Savings Bank being the surviving entity. The
depositors of Union Federal became depositors of Bay State Federal Savings Bank.
There were no transactions after the merger that were inconsistent with the
combining of the interests of the depositors. See Note 16.
The Bank provides a full range of banking services to individual and business
customers in eastern Massachusetts. The Bank is subject to competition from
other financial institutions doing business in eastern Massachusetts.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally accepted
accounting principles and predominant practices within the banking industry. The
financial statements of the Bank were prepared using the accrual basis of
accounting. The significant accounting policies of the Bank are summarized below
to assist the reader in better understanding the financial statements and other
data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the
accounts of Bay State Federal Savings Bank and its wholly owned
subsidiary, BSF Service Corporation (Bank). BSF Service Corporation,
which has been inactive since 1994, is a subsidiary which was formed
for the purpose of real estate development activities. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The data presented for the six months ended September 30, 1997 and 1996
reflect, in the opinion of management, all adjustments (consisting only
of normal recurring adjustments) which are necessary to present fairly
the results for such interim periods. Interim results at and for the
six months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ended March 31,
1998.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks and federal funds sold.
F-7
<PAGE> 156
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts calculated using the interest
method. Gains or losses on sales of investment securities are computed
on a specific identification basis.
The Bank classifies debt and equity securities into one of two
categories: available-for-sale or held-to-maturity. In general,
securities may be classified as held-to-maturity only if the Bank has
the positive intent and ability to hold them to maturity. All other
securities must be classified as available-for-sale.
-- Available-for-sale securities are carried at fair value on
the balance sheet. Unrealized holding gains and losses are
not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
LOANS:
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at
their outstanding principal balances reduced by amounts due to
borrowers on unadvanced loans, any charge-offs, the allowance for loan
losses and any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Bank is amortizing these amounts over the
contractual life of the related loans using the interest method.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
An allowance is available for losses which may be incurred in the
future on loans in the current portfolio. The allowance is increased by
provisions charged to current operations and is decreased by loan
losses, net of recoveries. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of
the risks inherent in its loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management
considers adequate to cover estimated losses on loans which are deemed
probable and estimable based on information currently known to
management. The allowance is based upon a number of factors, including
current economic conditions, actual loss experience and industry
trends. The balance in the allowance for loan losses is considered
adequate by management to absorb any reasonably foreseeable loan
losses.
F-8
<PAGE> 157
As of April 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan,"
as amended by SFAS No. 118. According to SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Statement requires
that impaired loans be measured on a loan by loan basis by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
The Statement is applicable to all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Bank considers its
residential real estate loans and consumer loans that are not
individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Bank applies
SFAS No. 114 on a loan-by-loan basis. The Bank does not apply SFAS No.
114 to aggregations of loans that have risk characteristics in common
with other impaired loans. Interest on a loan is not generally accrued
when the loan becomes ninety or more days overdue. The Bank may place a
loan on nonaccrual status but not classify it as impaired, if (i) it is
probable that the Bank will collect all amounts due in accordance with
the contractual terms of the loan or (ii) the loan is an individually
insignificant residential mortgage loan or consumer loan. Impaired
loans are charged-off when management believes that the collectibility
of the loan's principal is remote. Substantially all of the Bank's
loans that have been identified as impaired have been measured by the
fair value of existing collateral.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets, subsequent writedowns and gains or losses recognized upon sale
are included in other expense.
Beginning in 1995, in accordance with Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan,"
the Bank classifies loans as in-substance repossessed or foreclosed if
the Bank receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
F-9
<PAGE> 158
INCOME TAXES:
The Bank recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established
for the temporary differences between the accounting basis and the tax
basis of the Bank's assets and liabilities at enacted tax rates
expected to be in effect when the amounts related to such temporary
differences are realized or settled.
PENSION:
Pension costs are funded as accrued.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Bank disclose
estimated fair value for its financial instruments. Fair value methods
and assumptions used by the Bank in estimating its fair value
disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificate accounts are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on certificate accounts.
Federal Home Loan Bank Advances: Fair values for FHLB advances are
estimated using a discounted cash flow technique that applies interest
rates currently being offered on advances to a schedule of aggregated
expected monthly maturities on FHLB advances.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
F-10
<PAGE> 159
NOTE 3 - SECURITIES
Debt securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities(1):
September 30, 1997 (unaudited):
Marketable equity securities $ 2,319 $933 $ -- $ 3,252
======== ==== ====== ========
March 31, 1997:
Marketable equity securities $ 2,250 $654 $ 1 $ 2,903
======== ==== ====== ========
March 31, 1996:
Marketable equity securities $ 2,639 $648 $ 1 $ 3,286
======== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----- ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
September 30, 1997 (unaudited):
U.S. Government securities $10,302 $ 4 $ 14 $10,292
Mortgage-backed securities 2,854 40 -- 2,894
------- ---- ------- -------
$13,156 $ 44 $ 14 $13,186
======= ==== ======= =======
March 31, 1997:
U.S. Government securities $10,303 $ -- $ 174 $10,129
Mortgage-backed securities 3,250 -- 73 3,177
------- ---- ------- -------
$13,553 $ -- $ 247 $13,306
======= ==== ======= =======
March 31, 1996:
U.S. Government securities $12,304 $ 1 $ 153 $12,152
Mortgage-backed securities 3,877 29 40 3,866
------- ---- ------- -------
$16,181 $ 30 $ 193 $16,018
======= ==== ======= =======
</TABLE>
(1) Marketable equity securities primarily consists of mutual fund securities
and common stock issued by government-sponsored agencies. See Page F-12.
Mortgage-backed securities are insured or issued by GNMA, FHLMC, Fannie Mae or
private issuers, substantially all of which are backed by fixed-rate mortgages.
F-11
<PAGE> 160
The scheduled maturities of debt securities were as follows:
<TABLE>
<CAPTION>
Held-to-maturity
securities:
------------------------
Amortized
Cost Fair
Basis Value
----- -----
(In Thousands)
<S> <C> <C>
September 30, 1997 (unaudited):
Debt securities other than mortgage-backed securities:
Due within one year $ 2,002 $ 1,994
Due after one year through five years 7,300 7,296
Due after five years through ten years 1,000 1,002
Mortgage-backed securities 2,854 2,894
-------- --------
$ 13,156 $ 13,186
======== ========
March 31, 1997:
Debt securities other than mortgage-backed securities:
Due after one year through five years $ 9,303 $ 9,143
Due after five years through ten years 1,000 986
Mortgage-backed securities 3,250 3,177
-------- --------
$ 13,553 $ 13,306
======== ========
</TABLE>
There were no securities pledged as of September 30, 1997 (unaudited), March 31,
1997 and 1996.
During the six months ended September 30, 1997 and 1996 proceeds from sales of
available-for-sale securities amounted to $0 (unaudited) and $65 (unaudited),
respectively. During the six months ended September 30, 1997 and 1996 gross
realized gains on those sales amounted to $0 (unaudited) and $48 (unaudited),
respectively. During the years ended March 31, 1997, 1996 and 1995 proceeds from
sales of available-for-sale securities amounted to $139, $0 and $977,
respectively. During the years ended March 31, 1997, 1996 and 1995 gross
realized gains (losses) on those sales amounted to $123, $0 and $(18),
respectively.
The cost basis and fair market value of securities of issuers which exceeded 10%
of equity were as follows:
<TABLE>
<CAPTION>
September 30, 1997 (unaudited): (In Thousands)
Issuer Cost Basis Fair Value
------ ------------ -----------
<S> <C> <C>
Shay ARM Fund (mutual fund) $2,280 $2,288
March 31, 1997:
Issuer Cost Basis Fair Value
------ ------------ -----------
Shay ARM Fund (mutual fund) $2,211 $2,210
</TABLE>
F-12
<PAGE> 161
NOTE 4 - LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997 1996
---- ---- ----
(unaudited)
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
Residential - secured by 1-4 family $ 164,135 $ 162,837 $ 149,941
Equity lines 3,055 2,359 268
Residential - secured by multi-family 17,314 14,624 13,294
Construction and development 4,473 1,482 3,737
Commercial 29,269 25,291 19,129
--------- --------- ---------
Total mortgage loans 218,246 206,593 186,369
--------- --------- ---------
Other loans:
Loans secured by deposit accounts 433 407 351
Other consumer loans 3,266 2,187 2,083
--------- --------- ---------
Total other loans 3,699 2,594 2,434
--------- --------- ---------
Total principal balance 221,945 209,187 188,803
--------- --------- ---------
Allowance for loan losses (2,133) (1,687) (1,774)
Deferred loan origination fees (442) (437) (495)
--------- --------- ---------
(2,575) (2,124) (2,269)
--------- --------- ---------
Loans, net $ 219,370 $ 207,063 $ 186,534
========= ========= =========
</TABLE>
The amounts shown above are presented net of unadvanced funds on loans. See
Footnote 13.
Certain directors and executive officers of the Bank and companies in which they
have significant ownership interest were customers of the Bank during the six
months ended September 30, 1997. Total loans to such persons and their companies
amounted to $4,430 (unaudited) as of September 30, 1997. During the six months
ended September 30, 1997 principal payments and advances totaled $197
(unaudited) and $0 (unaudited), respectively. Certain directors and executive
officers of the Bank and companies in which they have significant ownership
interest were customers of the Bank during the year ended March 31, 1997. Total
loans to such persons and their companies amounted to $4,626 as of March 31,
1997. During the year ended March 31, 1997 principal payments and advances
totaled $433 and $426, respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the Six Months For the Years
Ended September 30, Ended March 31,
------------------- -------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,687 $ 1,774 $ 1,774 $ 1,825 $ 2,480
Loans charged off (16) (80) (225) (149) (691)
Provision for loan losses 444 5 117 1 6
Recoveries of loans previously charged off 18 -- 21 97 30
------- ------- ------- ------- -------
Balance at end of period $ 2,133 $ 1,699 $ 1,687 $ 1,774 $ 1,825
======= ======= ======= ======= =======
</TABLE>
F-13
<PAGE> 162
There were no loans that meet the definition of an impaired loan in Statement of
Financial Accounting Standards No. 114 as of September 30, 1997 (unaudited),
March 31, 1997 and 1996, during the six months ended September 30, 1997 and 1996
or during the years ended March 31, 1997 and 1996.
For the six months ended September 30, 1997 and the fiscal years ended March
31, 1997 and 1996, the amount of interest income that was recognized on
non-accrual loans was $34 (unaudited), $78 and $23, respectively. For the six
months ended September 30, 1997 and the fiscal years ended March 31, 1997 and
1996, the amount of additional interest income that would have been recognized
on non-accrual loans if such loans had continued to perform in accordance with
their contractual terms was $78 (unaudited), $79, and $56, respectively.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," SFAS No. 122, became effective for the Bank on April 1, 1996.
In the six months ended September 30, 1997 the Bank sold mortgage loans totaling
$510 (unaudited) and retained the servicing rights. In the fiscal year ending
March 31, 1997 the Bank sold mortgage loans totaling $749 and retained the
servicing rights. The fair value of those rights under SFAS No. 122 and SFAS No.
125 is not material and has not been recognized in the financial statements for
the six months ended September 30, 1997 or the year ended March 31, 1997.
NOTE 5 - PREMISES AND EQUIPMENT, NET OF DEPRECIATION AND AMORTIZATION
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
March 31, Estimated
-------------------- Useful
September 30, 1997 1997 1996 Life
------------------ ---- ---- ----
(unaudited)
(In Thousands)
<S> <C> <C> <C> <C>
Land $ 355 $ 355 $ 355
Building and improvements 2,032 1,614 1,506 25-50 years
Furniture, fixtures and equipment 1,690 1,528 1,162 5-10 years
Leasehold improvements 248 208 207 5-10 years
Construction in progress 23 76 --
------- ------- -------
4,348 3,781 3,230
Accumulated depreciation and amortization (1,990) (1,883) (1,711)
------- ------- -------
$ 2,358 $ 1,898 $ 1,519
======= ======= =======
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of certificate accounts, each with a minimum denomination
of $100 was approximately $15,275 (unaudited) as of September 30, 1997, $13,188
and $12,083 as of March 31, 1997 and 1996, respectively.
Deposits greater than $100 are not federally insured.
For certificate accounts as of September 30, 1997, the aggregate amount of
maturities for each of the following five years ended September 30, and
thereafter are:
<TABLE>
<CAPTION>
(unaudited)
(In Thousands)
<S> <C> <C>
1998 $ 92,435
1999 10,022
2000 4,214
2001 624
2002 1,675
2003 and thereafter 7
---------
$108,977
========
</TABLE>
F-14
<PAGE> 163
For certificate accounts as of March 31, 1997, the aggregate amount of
maturities for each of the following five years ended March 31, and thereafter
are:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C>
1998 $ 87,736
1999 11,166
2000 3,386
2001 2,036
2002 1,692
2003 and thereafter 7
---------
$106,023
========
</TABLE>
NOTE 7 - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
The Bank is a member of the FHLB of Boston and as such is required to invest in
$100 par value stock in the amount of 1% of its outstanding home loans or 5% of
its outstanding advances from the FHLB or 1% of 30% of total assets, whichever
is highest. When such stock is redeemed, the Bank receives from the FHLB an
amount equal to the par value of the stock.
FHLB of Boston advances by year of maturity were as follows as of September 30,
1997:
<TABLE>
<CAPTION>
Average
Stated
Amount Rate
------ ----
(unaudited)
(In Thousands)
<S> <C> <C>
Six months ending March 31, 1998 $22,500 5.63%
======= ====
</TABLE>
FHLB of Boston advances by year of maturity were as follows as of March 31,
1997:
<TABLE>
<CAPTION>
Average
Stated
Amount Rate
------ ----
(In Thousands)
<S> <C> <C>
Year ending March 31, 1998 $14,500 5.46%
======= ====
</TABLE>
In accordance with the FHLB of Boston's collateral requirements, a portion of
first mortgage loans on residential property and all deposits and stock in the
FHLB of Boston are available as collateral to secure such advances.
NOTE 8 - OTHER BORROWED FUNDS
Other borrowed funds consist of overdrawn accounts with Federal Home Loan Bank
of Boston.
F-15
<PAGE> 164
NOTE 9 - INCOME TAXES, AS RESTATED
The components of the income tax expense are as follows:
<TABLE>
<CAPTION>
For the Six Months For the Years
Ended September 30, Ended March 31,
------------------- --------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
(In Thousands)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 481 $ 115 $ 461 $ 830 $ 538
State 180 21 175 320 227
----- ----- ------- ----- ------
661 136 636 1,150 765
----- ----- ------- ----- ------
Deferred:
Federal (123) 23 (317) 84 280
State (46) 8 (100) 35 118
----- ----- ------- ----- ------
(169) 31 (417) 119 398
----- ----- ------- ----- ------
Change in valuation allowance (209)
----- ----- ------- ----- ------
Total income tax expense $ 492 $ 167 $ 10 $1,269 $1,163
===== ===== ======= ===== ======
</TABLE>
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
For the Six Months For the Years
Ended September 30, Ended March 31,
------------------- -------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Cash surrender value of life insurance -- -- (.8) (.4) (.8)
Other (.1) 1.9 (19.2) 1.4 (.6)
Change in valuation allowance -- -- (18.3) -- --
State income tax, net of federal income tax benefit 7.4 7.7 4.3 8.0 8.0
---- ---- ---- ---- ----
41.3% 43.6% 0% 43.0% 40.6%
==== ==== ==== ==== ====
</TABLE>
Previously issued financial statements for the year ended March 31, 1997 have
been restated to include a reduction of income taxes totaling $687. The
reduction consists of a reduction in deferred income taxes resulting from a
change in federal income tax law pertaining to the deduction of loan losses, a
decrease due to the elimination of the allowance for deferred tax assets and a
net reduction due to the tax effect of the restatement of cash surrender value
and the expense of the deferred compensation benefit equalization plan. The
change in the tax law was enacted in the year ended March 31, 1997.
F-16
<PAGE> 165
The Bank had gross deferred tax assets and gross deferred tax liabilities as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------
September 30, 1997 1997 1996
------------------ ---- ----
(unaudited)
(In Thousands)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 809 $ 618 $ 276
Deferred loan fees 33 36 43
Writedowns-other assets -- 26 --
Accrued deferred compensation 255 236 --
Other 24 24 157
------- ----- -----
Gross deferred tax assets 1,121 940 476
Valuation allowance -- -- (209)
------- ----- -----
1,121 940 267
------- ----- -----
Deferred tax liabilities:
Depreciation (127) (116) (69)
Net unrealized holding gain on securities (385) (270) (270)
------- ----- -----
Gross deferred tax liabilities (512) (386) (339)
------- ----- -----
Net deferred tax assets (liabilities) $ 609 $ 554 $ (72)
======= ===== =====
</TABLE>
Based on the Bank's historical and current pretax earnings, management believes
it is more likely than not that the Bank will realize the net deferred tax asset
existing as of September 30, 1997 and March 31, 1997. Management believes that
existing net deductible temporary differences which give rise to the net
deferred tax asset will reverse during periods in which the Bank generates net
taxable income. In addition, gross deductible temporary differences are expected
to reverse in periods during which offsetting gross taxable temporary
differences are expected to reverse. Factors beyond management's control, such
as the general state of the economy and real estate values, can affect future
levels of taxable income and no assurance can be given that sufficient taxable
income will be generated to fully absorb gross deductible temporary differences.
As of September 30, 1997 and March 31, 1997, recoverable income taxes exceed the
amount of the net deferred tax asset.
In prior years, the Bank was allowed a special tax-basis bad debt deduction
under certain provisions of the Internal Revenue Code. As a result, retained
earnings of the Bank as of September 30, 1997 and March 31, 1997 includes
approximately $5,925 (unaudited) and $5,925, respectively for which federal and
state income taxes have not been provided. If the Bank no longer qualifies as a
bank as defined in certain provisions of the Internal Revenue Code, this amount
will be subject to recapture in taxable income ratably over six (6) years,
subject to a combined federal and state tax rate of approximately 41%.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier 1 capital (as defined) to adjusted
total assets (as defined) and Tangible capital (as defined) to Tangible assets
(as defined). Management believes, as of September 30, 1997 (unaudited) and
March 31, 1997, that the Bank meets all capital adequacy requirements to which
it is subject.
F-17
<PAGE> 166
As of March 31, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 and
Tangible capital ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------ --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ------ -------- ------
(Dollar amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997 (unaudited):
Total Risk-Based Capital (to Risk
Weighted Assets) $21,555 15.28% $11,282 >8.0% $14,102 >10.0%
Tier 1 Capital (to Risk Weighted Assets) 19,789 14.01 5,650 >4.0 8,474 >6.0
Tier 1 Capital (to Adjusted Total Assets) 19,789 8.01 9,878 >4.0 12,348 >5.0
Tangible Capital (to Adjusted Total Assets) 19,789 8.01 3,704 >1.5 N/A N/A
As of March 31, 1997:
Total Risk-Based Capital (to Risk
Weighted Assets) $20,708 16.02% $10,341 >8.0% $12,927 >10.0%
Tier 1 Capital (to Risk Weighted Assets) 19,091 14.76 5,173 >4.0 7,760 >6.0
Tier 1 Capital (to Adjusted Total Assets) 19,091 8.20 9,307 >4.0 11,634 >5.0
Tangible Capital (to Adjusted Total Assets) 19,091 8.20 3,490 >1.5 N/A N/A
</TABLE>
- ---------------
> Denotes greater than or equal to.
The following provides a reconciliation of the Bank's stockholders' equity to
regulatory capital at September 30, 1997 (unaudited) and March 31, 1997:
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
------------- ---------
(In Thousands)
<S> <C> <C>
Stockholders' equity $ 20,336 $ 19,474
Less: Unrealized holding gain on securities available-for-sale, net of taxes (547) (383)
-------- --------
Tangible/core capital 19,789 19,091
Plus: Allowance for loan losses 1,766 1,617
-------- --------
Total risk based capital $ 21,555 $ 20,708
======== ========
</TABLE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
All eligible officers and employees are included in noncontributory defined
benefit pension plan provided by the Bank as a participating employer in the
Financial Institutions Retirement Fund (Fund), a multi-employer plan as defined
by Statement of Financial Accounting Standards No. 87. Employees are eligible to
participate in the Retirement Plan after the completion of 12 consecutive months
of employment with the Bank and the attainment of age 21. Hourly paid employees
are excluded from participation in the Retirement Plan. Contributions are based
on individual employers' experience. According to the Fund's administrators, as
of June 30, 1996, the date of the latest actuarial valuation, the market value
of the Fund's net assets exceeded the actuarial present value of vested and
nonvested benefits in the aggregate, using an assumed rate of return of 7.5%.
Defined benefit pension expense for the six months ended September 30, 1997 and
1996 amounted to $83 (unaudited) and $96 (unaudited), respectively and for the
years ended March 31, 1997, 1996 and 1995 was $177, $167 and $112, respectively.
F-18
<PAGE> 167
The Bank sponsors a defined contribution plan, Financial Institutions Thrift
Plan (Thrift Plan), covering substantially all of its employees. Employees are
eligible to participate in the Thrift Plan upon the completion of 12 months of
continuous employment with the Bank (during which period they complete at least
1,000 hours of service) and the attainment of age 21. Employees paid on a hourly
basis are not eligible for participation. Thrift Plan contributions made by the
Bank for the six months ended September 30, 1997 and 1996 amounted to $22
(unaudited) and $18 (unaudited), respectively and for the years ended March 31,
1997, 1996 and 1995 were $34, $29 and $37, respectively.
In the fiscal year ended March 31, 1997 the Bank established a deferred
compensation benefit equalization plan for officers and employees designated by
management. The liability for such plan as of September 30, 1997 and March 31,
1997 was $744 (unaudited) and $697, respectively, and is included in other
liabilities on the balance sheets. The liability for such plan in the financial
statements previously issued for the year ending March 31, 1997 has been
restated to increase the liability by approximately $565. The after-income-tax
effect on net income for the year ended March 31, 1997 was a reduction of $328.
In the six month period ended September 30, 1997 the Bank distributed $697
(unaudited) to a Rabbi Trust in connection with the deferred compensation
benefit equalization plan. This asset has been included in the Bank's balance
sheet as of September 30, 1997 (unaudited) under other assets because it is
available to the general creditors of the Bank in the event of the Bank's
insolvency.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases space in three buildings under noncancelable operating leases
which expire in December 1998, February 2000 and February 2002. Rental expense
on these leases was $193 (unaudited) and $182 (unaudited) for the six months
ended September 30, 1997 and 1996, respectively and $358, $354 and $344 for the
years ended March 31, 1997, 1996 and 1995, respectively. The leases require
minimum annual rental payments as follows:
<TABLE>
<CAPTION>
Year ending September 30, (unaudited) (In Thousands)
- -------------------------------------
<S> <C>
1998 $ 351
1999 318
2000 288
2001 276
2002 115
--------
$1,348
========
</TABLE>
<TABLE>
<CAPTION>
Year ending March 31,
- ---------------------
<S> <C>
1998 $350
1999 340
2000 304
2001 276
2002 253
--------
$1,523
========
</TABLE>
NOTE 13 - FINANCIAL INSTRUMENTS
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
F-19
<PAGE> 168
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant
and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows:
<TABLE>
<CAPTION>
September 30,
1997
----------------------------
Carrying
Amount Fair Value
---------- ----------
(unaudited)
(In Thousands)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,669 $ 4,669
Available-for-sale securities 3,252 3,252
Held-to-maturity securities 13,156 13,186
Stock in Federal Home Loan Bank
of Boston 1,672 1,672
Loans, net 219,370 219,301
Mortgage loans held-for-sale -- --
Accrued interest receivable 1,319 1,319
Financial liabilities:
Deposits 202,161 202,329
Federal Home Loan Bank advances 22,500 22,499
Other borrowed funds 1,486 1,486
</TABLE>
F-20
<PAGE> 169
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------
1997 1996
------------------------------ ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 3,617 $ 3,617 $ 8,506 $ 8,506
Available-for-sale securities 2,903 2,903 3,286 3,286
Held-to-maturity securities 13,553 13,306 16,181 16,018
Stock in Federal Home Loan Bank
of Boston 1,672 1,672 1,672 1,672
Loans, net 207,063 206,124 186,534 186,182
Mortgage loans held-for-sale -- -- 47 47
Accrued interest receivable 1,233 1,233 1,178 1,178
Financial liabilities:
Deposits 197,059 197,464 187,933 188,687
Federal Home Loan Bank advances 14,500 14,493 11,650 11,647
Other borrowed funds 1,065 1,065 1,048 1,048
</TABLE>
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------
September 30, 1997 1997 1996
------------------ ---------- -------
Notional Notional Notional
Amount Amount Amount
---------- ---------- ---------
(unaudited)
(In Thousands)
<S> <C> <C> <C>
Commitments to originate loans* $ 5,313 $10,795 $ 6,759
Commitments to purchase loans 2,748 -- 1,678
Letters of credit -- 25 --
Unadvanced funds on loans:
Residential loans 1,645 1,279 235
Home equity loans 1,871 1,199 448
Commercial loans 2,268 578 682
Construction loans 2,784 1,349 1,623
Consumer loans 390 -- 29
------- ------- -------
$17,019 $15,225 $11,454
======= ======= =======
</TABLE>
*The range of rates for fixed rate loans included within commitments to
originate loans were $9.5% (unaudited), 8.375% to 10.5%, and 6.375% to 12.00% as
of September 30, 1997, March 31, 1997 and 1996, respectively. The range of terms
for these fixed rate loans were one year (unaudited), one year to thirty years,
and one year to thirty years as of September 30, 1997, March 31, 1997 and 1996,
respectively. For all periods presented, there were no fixed rate loans included
in commitments to purchase loans.
There is no material difference between the notional amount and the estimated
fair value of loan commitments and unadvanced portions of loans.
The Bank has no derivative financial instruments subject to the provisions of
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
F-21
<PAGE> 170
NOTE 14 - PRIOR PERIOD ADJUSTMENTS
The Bank has restated its previously issued 1997, 1996 and 1995 financial
statements to reflect adjustments related to cash surrender value on life
insurance, income taxes and the deferred compensation benefit equalization plan.
In addition, the restatement of the 1995 financial statements includes the
pooling of interests adjustments discussed in Note 16.
Previously reported retained earnings as of March 31, 1994 has been increased by
$63 and previously reported results of operations have been changed as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Income before income taxes:
As previously reported $ 1,678 $ 2,925 $ 2,407
As restated 1,139 2,953 2,864
Net income:
As previously reported 981 1,656 1,356
As restated 1,129 1,684 1,701
Retained earnings:
As previously reported 18,828 17,847 16,191
As restated 19,091 17,962 16,278
</TABLE>
Previously reported net income has been increased to correct errors in the cash
surrender value of life insurance, income tax expense and the expense of the
deferred compensation benefit equalization plan. See the Statements of Changes
in Equity, Note 9 and Note 11.
NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in the state of Massachusetts.
NOTE 16 - MERGER WITH UNION FEDERAL SAVINGS BANK
On February 21, 1997 Union Federal Savings Bank (Union), a mutual entity, was
merged with and into Bay State Federal Savings Bank (Bay State). The merger was
accounted for as a pooling of interests, and accordingly, the accompanying
consolidated financial statements have been restated to include the accounts and
operations of Union for all periods prior to the merger.
Separate results of the combining entities are as follows:
<TABLE>
<CAPTION>
Bay State Union Combined
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
April 1, 1996 to February 20, 1997
Net interest and dividend income $6,372 $1,257 $7,629
Net income 1,177 56 1,233
Year ended March 31, 1996
Net interest and dividend income 6,683 1,442 8,125
Net income 1,513 171 1,684
Year ended March 31, 1995
Net interest and dividend income 6,980 1,464 8,444
Net income 1,356 345 1,701
</TABLE>
F-22
<PAGE> 171
Union's fiscal years ended on December 31. The restated financial statements
reflect a change in fiscal years for Union to March 31, to conform to Bay
State's presentation.
NOTE 17 - CONVERSION TO FEDERALLY CHARTERED CAPITAL STOCK SAVINGS BANK
On September 9, 1997, the Board of Directors of the Bank approved a Plan of
Conversion for Bay State Federal Savings Bank ("Plan"). The Plan provides for
the conversion of the Bank from a federally-chartered mutual savings bank to a
federally-chartered capital stock savings bank. All of the stock of the Bank
will be held by a holding company which will offer its stock to the parties set
forth in the Plan. The Plan is subject to the approval of a majority of votes
eligible to be cast by persons or entities who qualify as members of the Bank
pursuant to its charter and by-laws. The Plan must also be approved by the
Office of Thrift Supervision.
Pursuant to the Plan, the Company intends to establish a Charitable Foundation
("Foundation") in connection with the Conversion. The Plan provides that the
Bank and the Company will create the Foundation and donate an amount of the
Company's common stock equal to 8% of the common stock to be issued in the
Conversion. The Foundation will be dedicated to charitable purposes within the
communities in which the Bank operates and to complement the Bank's existing
community activities. Establishment of the Foundation is subject to the approval
of the Bank's members at the special meeting being held to vote upon the
Conversion.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to a limitation based on 10 percent of
the Company's annual taxable income. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an expense
in the full amount of the contribution, offset in part by the corresponding tax
deduction, during the quarter in which the contribution is made.
At the time of the Conversion, the Bank will establish a liquidation account in
an amount equal to its equity as reflected in the latest balance sheet used in
the final conversion prospectus. The liquidation account will be maintained for
the benefit of eligible account holders and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent that
eligible account holders and supplemental eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's or supplemental eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder and supplemental eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The costs associated with Conversion will be deferred and will be deducted from
the proceeds upon the sale and issuance of stock. In the event the Conversion is
not consummated, costs incurred will be charged to expense. At September 30,
1997 there was $139 (unaudited) in deferred conversion costs.
After the conversion, the Bank may not declare or pay dividends on its stock if
such declaration and payment would violate statutory or regulatory requirements.
NOTE 18 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
F-23
<PAGE> 172
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY BAY STATE BANCORP, INC., THE BANK OR SANDLER O'NEILL & PARTNERS,
L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF BAY STATE BANCORP, INC. OR THE BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
______________________________
TABLE OF CONTENTS
Page
Summary of the Conversion and the Offerings....................................
Selected Consolidated Financial and
Other Data of the Bank.....................................................
Recent Developments............................................................
Risk Factors...................................................................
Bay State Bancorp, Inc. .......................................................
Bay State Federal Savings Bank ................................................
Regulatory Capital Compliance..................................................
Use of Proceeds................................................................
Dividend Policy................................................................
Market for the Common Stock....................................................
Capitalization.................................................................
Pro Forma Data.................................................................
Comparison of Valuation and Pro Forma Information With
No Foundation...............................................................
Bay State Federal Savings Bank and Subsidiary Consolidated
Statements of Income.......................................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................
Business of the Bank...........................................................
Federal and State Taxation.....................................................
Regulation.....................................................................
Management of the Company......................................................
Management of the Bank.........................................................
The Conversion.................................................................
Restrictions on Acquisition of the Company
and the Bank...............................................................
Description of Capital Stock of the Company....................................
Description of Capital Stock of the Bank.......................................
Transfer Agent and Registrar...................................................
Experts........................................................................
Legal and Tax Opinions.........................................................
Additional Information.........................................................
Index of Consolidated Financial Statements.....................................
___________________________
UNTIL __________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
__________________________
2,041,250 Shares
BAY STATE BANCORP, INC.
(Proposed Holding Company for
Bay State Federal Savings Bank)
COMMON STOCK
______________
PROSPECTUS
______________
February __, 1998
Sandler O'Neill & Partners, L.P.
__________________________
<PAGE> 173
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party to
or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an
<PAGE> 174
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this Article TENTH, or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses conferred in
this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself and
any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
<PAGE> 175
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
<TABLE>
<CAPTION>
<S> <C>
OTS filing fee....................................... $ 14,400
SEC filing fee(1).................................... 15,319
NASD filing fee(1)................................... 5,000
Exchange listing fee(1).............................. 20,000
Printing, postage and mailing........................ 170,000
Legal fees and expenses.............................. 300,000
Accounting fees and expenses......................... 125,000
Appraiser's fees and expenses (including
business plan)..................................... 27,500
Marketing fees and selling commissions(1)............ 646,000
Underwriter's expenses (including underwriter's
counsel fees)...................................... 80,000
Conversion agent fees................................ 15,000
Transfer agent fees and expenses..................... 12,000
Certificate printing................................. 5,000
Telephone, temporary help and other
equipment.......................................... 15,000
Blue Sky fees and expenses .......................... 10,000
Miscellaneous........................................ 45,781
--------
TOTAL................................................ $1,506,000
==========
</TABLE>
(1) Actual expenses based upon the registration of 2,535,232 shares at $20.00
per share. All other expenses are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE> 176
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.1 Engagement Letter between Bay State Federal Savings Bank and Sandler
O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement*
2.1 Amended Plan of Conversion (including the Federal Stock Charter and
Bylaws of Bay State Federal Savings Bank)*
3.1 Certificate of Incorporation of Bay State Bancorp, Inc.*
3.2 Bylaws of Bay State Bancorp, Inc.*
3.3 Federal Stock Charter and Bylaws of Bay State Federal Savings Bank
(See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Bay State Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality*
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality*
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.1 Opinion of Shatswell, MacLeod & Company, P.C. re: State Tax Matters*
8.2 Opinion of Shatswell, MacLeod & Company, P.C. re: Establishment of
Private Foundation*
10.1 Form of Bay State Federal Savings Bank Employee Stock Ownership Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Employment Agreement between Bay State Federal Savings Bank and
certain executive officers*
10.4 Form of Employment Agreement between Bay State Bancorp, Inc. and
certain executive officers*
10.5 Form of Change in Control Agreement between Bay State Federal Savings
Bank and certain executive officers*
10.6 Form of Bay State Federal Savings Bank Management Supplemental
Executive Retirement Plan*
10.7 Form of Bay State Federal Savings Bank Retirement Benefit Equalization
Plan*
10.8 Form of Bay State Federal Savings Bank Employee Severance Compensation
Plan*
23.1 Consent of Shatswell, MacLeod & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc.(P)*
99.2 Draft Form of The Bay State Federal Savings Charitable Foundation Gift
Instrument*
</TABLE>
- -------------------------
*Previously Filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE> 177
ITEM 28. UNDERTAKINGS.
The small business issuer will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
<PAGE> 178
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the Town of
Brookline, Commonwealth of Massachusetts, on February 5, 1998.
Bay State Bancorp, Inc.
By: /s/ John F. Murphy
-----------------------------------
John F. Murphy
President, Chief Executive Officer
Treasurer and Chairman of the
Board of Directors
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ John F. Murphy President, Chief Executive February 5, 1998
- ----------------------------- Officer, Treasurer and Chairman
John F. Murphy of the Board of Directors
(principal executive
and financial officer)
/s/ Robert F. Moran Financial Officer February 5, 1998
- ----------------------------- (principal accounting officer)
Robert F. Moran
/s/ * Director
- -----------------------------
Robert B. Cleary
/s/ * Director
- -----------------------------
Jerome R. Dangel
/s/ * Director
- -----------------------------
Leo F. Grace
/s/ * Director
- -----------------------------
Richard F. Hughes
/s/ * Director
- -----------------------------
Richard F. McBride
</TABLE>
<PAGE> 179
<TABLE>
<CAPTION>
<S> <C>
/s/ * Director
- -----------------------------
Kent T. Spellman
/s/ * Director
- -----------------------------
H. Chester Webster
</TABLE>
- -----------------------
* Pursuant to Power of Attorney filed on November 13, 1997, as Exhibit 24.1
to the Registration Statement on Form SB-2 of Bay State Bancorp, Inc.
<PAGE> 180
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
<TABLE>
<S> <C>
1.1 Engagement Letter between Bay State Federal Savings Bank and Sandler
O'Neill & Partners, L.P.*
1.2 Draft Form of Agency Agreement*
2.1 Amended Plan of Conversion (including the Federal Stock Charter and
Bylaws of Bay State Federal Savings Bank)*
3.1 Certificate of Incorporation of Bay State Bancorp, Inc.*
3.2 Bylaws of Bay State Bancorp, Inc.*
3.3 Federal Stock Charter and Bylaws of Bay State Federal Savings Bank
(See Exhibit 2.1 hereto)*
4.0 Draft Stock Certificate of Bay State Bancorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality*
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality*
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters*
8.1 Opinion of Shatswell, MacLeod & Company, P.C. re: State Tax
Matters*
8.2 Opinion of Shatswell, MacLeod & Company, P.C. re: Establishment of
Private Foundation*
10.1 Form of Bay State Federal Savings Bank Employee Stock Ownership Plan*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of Employment Agreement between Bay State Federal Savings Bank and
certain executive officers*
10.4 Form of Employment Agreement between Bay State Bancorp, Inc. and
certain executive officers*
10.5 Form of Change in Control Agreement between Bay State Federal Savings
Bank and certain executive officers*
10.6 Form of Bay State Federal Savings Bank Management Supplemental
Executive Retirement Plan*
10.7 Form of Bay State Federal Savings Bank Retirement Benefit Equalization
Plan*
10.8 Form of Bay State Federal Savings Bank Employee Severance Compensation
Plan*
23.1 Consent of Shatswell, MacLeod & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette*
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of Keller & Company, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of Keller & Company, Inc. (P)*
99.2 Draft Form of The Bay State Federal Savings Charitable Foundation
Foundation Gift Instrument*
</TABLE>
- ------------------------
*Previously Filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE> 1
[LETTERHEAD]
Consent of Independent Public Accountants
The Board of Directors
Bay State Federal Savings Bank
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts," "Legal and Tax Opinions," "State and Local
Taxation," "Tax Aspects," "Consolidated Statements of Income" and "Effects of
Conversion" in the Prospectus, which is a part of the Registration Statement on
Form SB-2 for Bay State Bancorp, Inc. and Form AC for Bay State Federal Savings
Bank.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
February 4, 1998
