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As filed with the Securities and Exchange Commission on January 22, 1998
Registration No. 333-40115
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1
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 1,686(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.
(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.
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PROSPECTUS SUPPLEMENT
BAY STATE BANCORP, INC.
BAY STATE FEDERAL SAVINGS BANK
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN AND TRUST
This Prospectus Supplement relates to the offer and sale to
participants (the "Participants") in the Bay State Federal Savings Bank
Employees' Savings & Profit Sharing Plan and Trust (the "Plan") of
participation interests and shares of Bay State Bancorp, Inc. common stock, par
value $.01 per share (the "Common Stock"), as set forth herein.
In connection with the proposed conversion of Bay State Federal
Savings Bank (the "Bank" or "Employer") from a mutual savings bank to a stock
savings bank, a holding company, Bay State Bancorp, Inc. (the "Company"), has
been formed. The simultaneous conversion of the Bank to the stock form, the
issuance of the Bank's common stock to the Company and the offer and sale of
the Company's Common Stock to the public are herein referred to as the
"Conversion."
Effective as of January 1, 1984, the Bank adopted the Financial
Institutions Thrift Plan (the "Thrift Plan"), which was a multiple employer
defined contribution plan sponsored by the Financial Institutions Thrift Plan.
In connection with the proposed Conversion, the Bank, effective January 1,
1998, withdrew its participation from the Thrift Plan and adopted the
amended and restated Bay State Federal Savings Bank Employees' Savings and
Profit Sharing Plan and Trust (the "Plan"). The Plan is a prototype document
designed by Pentegra Services, Inc., which is a corporate affiliate of
Financial Institutions Thrift Plan. The Plan is designed to provide
Participants with an opportunity to invest in Common Stock.
This Prospectus Supplement relates to the initial election of
Participants to direct that all or a portion of their accounts be invested in
the Employer Stock Fund (as defined herein) in connection with the Conversion
and also to elections by Participants to direct that all or a portion of their
accounts be invested in the Employer Stock Fund after the Conversion.
The Prospectus dated ________________, 199__ of the Company (the
"Prospectus") which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operation and business of the Bank. This
Prospectus Supplement, which provides detailed information with respect to the
Plan, should be read only in conjunction with the Prospectus. Terms not
otherwise defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, OR
ANY OTHER AGENCY, NOR HAS SUCH COMMISSION, DEPARTMENT, CORPORATION OR ANY STATE
SECURITIES COMMISSION OR OTHER AGENCY 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 FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S PRINCIPAL IS SUBJECT TO LOSS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" ON PAGES __ TO __ IN THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ______________, 199__.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, BANK OR THE PLAN. THIS PROSPECTUS SUPPLEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE BANK OR THE PLAN SINCE THE DATE HEREOF, OR THAT THE
INFORMATION HEREIN CONTAINED OR INCORPORATED BY REFERENCE IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE
RETAINED FOR FUTURE REFERENCE.
2
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TABLE OF CONTENTS
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PAGE
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THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Securities Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Election to Purchase Common Stock in the Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Value of Participation Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Method of Directing Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Time for Directing Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Irrevocability of Transfer Direction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Direction to Purchase Common Stock After the Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Purchase Price of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Nature of a Participant's Interest in the Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Voting and Tender Rights of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DESCRIPTION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Contributions Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Limitations on Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment of Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Benefits Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Withdrawals and Distributions From the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reports to Plan Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Amendment and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Merger, Consolidation or Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ERISA and Other Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Restrictions on Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SEC Reporting and Short-Swing Profit Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ENROLLMENT APPLICATION
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan.
Up to 40,728 shares, at the actual purchase price of $20.00 per share, of
Common Stock may be acquired by the Plan to be held in the Employer Stock Fund.
The Company is the issuer of the Common Stock. Only employees of the Bank may
participate in the Plan.
The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Participant's investment in units in the
Employer Stock Fund in the Conversion is subject to the priority set forth in
the Plan of Conversion. Information with regard to the Plan is contained in
this Prospectus Supplement and information with regard to the Conversion and
the financial condition, results of operations and business of the Bank and the
Company is contained in the attached Prospectus. The address of the principal
executive office of the Bank is 1299 Beacon Street, Brookline, Massachusetts
02146. The Bank's telephone number is (617) 739-9500.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Bank has adopted the
amended and restated Bay State Federal Savings Bank Employees' Savings & Profit
Sharing Plan and Trust, effective January 1, 1998. The Plan permits each
Participant to direct the trustee of the Plan ("Trustee") to transfer all or
part of the funds which represent the Participant's beneficial interest in the
assets of the Plan to an investment fund that will invest in Common Stock
("Employer Stock Fund") and, to the extent shares are available, to use such
funds to purchase Common Stock in the open market.
If there is not enough Common Stock in the Conversion to fill all
subscriptions, the Common Stock would be apportioned and the Plan may not be
able to purchase all of the Common Stock requested by the Participants. In
such case, the Trustee will purchase shares in the open market after the
Conversion to fulfill Participants' requests. Such purchases may be at prices
higher than the purchase price in the Conversion. Amounts transferred will
include employee contributions, Bank matching contributions and rollover
contributions, if any. The Employer Stock Fund will consist of investments in
the Common Stock made on or after the effective date of the Conversion. Funds
not transferred to the Employer Stock Fund will remain in the other investment
funds of the Plan as directed by the Participant on the attached Enrollment and
Investment Applications. A PARTICIPANT'S ABILITY TO TRANSFER FUNDS TO THE
EMPLOYER STOCK FUND AND THE PLAN TRUSTEE'S ABILITY TO PURCHASE COMMON STOCK FOR
A PARTICIPANT IN THE CONVERSION IS SUBJECT TO THE PARTICIPANT'S GENERAL
ELIGIBILITY TO PURCHASE SHARES OF COMMON STOCK IN THE CONVERSION AND THE
PURCHASE LIMITATIONS SET FORTH IN THE PLAN OF CONVERSION. FOR GENERAL
INFORMATION AS TO THE ABILITY OF PARTICIPANTS TO DIRECT THE TRUSTEE TO PURCHASE
SHARES IN THE CONVERSION, SEE "THE CONVERSION--SUBSCRIPTION OFFERING AND
SUBSCRIPTION RIGHTS" IN THE ATTACHED PROSPECTUS.
VALUE OF PARTICIPATION INTERESTS
The market value of the Thrift Plan as of September 30, 1997 was
$814,573. Each Participant has been informed of the value of his or her
beneficial interest in the Plan. This value represents the market value of
past contributions to the Thrift Plan by the Bank and by the Participants and
earnings thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
If a Participant wishes to transfer all of his or her beneficial
interest in the assets of the Plan to the Employer Stock Fund to purchase
Common Stock issued in connection with the Conversion, he or she should
indicate that decision on the Enrollment and Investment Applications attached
to the back of this Prospectus Supplement
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TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the
Employer Stock Fund in order to purchase Common Stock issued in connection with
the Conversion is ______________, 1998. The Enrollment and Investment
Applications should be returned to the Bank's Human Resources Department by
__:__ Eastern Time, on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the reinvestment of
their accounts ("Accounts") under the Plan after the Conversion as explained
below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant will be able to direct that a
certain percentage (in multiples of not less than 1%) of the net value of such
Participant's interests in the Trust assets be transferred to the Employer
Stock Fund and invested in Common Stock, or to the other investment funds
available under the Plan. Alternatively, a Participant may direct that a
certain percentage of such Participant's interest in the Employer Stock Fund be
transferred from the Employer Stock Fund to the other investment funds
available under the Plan. Participants will be permitted to direct that future
contributions made to the Plan by or on their behalf be invested in Common
Stock. Following the initial election, the allocation of a Participant's
interest in the Employer Stock Fund may be changed by the Participant, with
each change generally becoming effective on each business day coinciding with
or next following the day the Plan Administrator receives notice for such
change. Special restrictions apply to transfers directed by those Participants
who are executive officers, directors and principal stockholders of the Company
who are subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price paid for such shares of Common
Stock will be the same price as is paid by all other persons who purchase
shares of Common Stock in the Conversion.
Any shares of Common Stock purchased by the Trustee after the
Conversion will be acquired in open market transactions. The prices paid by
the Trustee for shares of Common Stock will not exceed "adequate consideration"
as defined in Section 3(18) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Transaction fees associated with the purchase,
sale or transfer of the Common Stock in the Employer Stock Fund after the
Conversion will be paid by the Employer Stock Fund.
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan,
as trustee (see "Administration of the Plan--Trustees"). Each Participant has
an allocable interest in the investment funds of the Plan but not in any
particular assets of the Plan. Accordingly, a specific number of shares of
Common Stock will not be directly attributable to the account of any
Participant. Net earnings, e.g., gains and losses, are allocated to the
account of a Participant based on units in the Employer Stock Fund held by the
Participants. Therefore, earnings with respect to a Participant's account
should not be affected by the investment designations (including investments in
Common Stock) of other Participants.
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VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights
attributable to all Common Stock held by the Trust as directed by Participants
with interests in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively. In the event of a tender offer for the Common Stock,
the Plan provides that each Participant will be allotted a number of tender
instruction rights reflecting such Participant's proportionate interest in the
Employer Stock Fund. The percentage of shares of Common Stock held in the
Employer Stock Fund that will be tendered will be the same as the percentage of
the total number of tender instruction rights that are exercised in favor of
tendering. The remaining shares of Common Stock held in the Employer Stock
Fund will not be tendered. The Plan makes provision for Participants to
exercise their voting instruction rights and tender instruction rights on a
confidential basis.
DESCRIPTION OF THE PLAN
INTRODUCTION
Effective as of January 1, 1984, the Bank adopted the Financial
Institutions Thrift Plan (the "Thrift Plan"), which was a multiple employer
defined contribution plan sponsored by the Financial Institutions Thrift Plan.
In connection with the proposed Conversion, the Bank, effective January 1,
1998, withdrew its participation from the Thrift Plan and adopted the amended
and restated Bay State Federal Savings Bank Employees' Savings and Profit
Sharing Plan and Trust (the "Plan"). The Plan is a prototype document designed
by Pentegra Services, Inc., which is a corporate affiliate of Financial
Institutions Thrift Plan. The Plan's fiscal year is the calendar year ("Plan
Year"). The Plan is designed to provide Participants with an opportunity to
invest in Common Stock. The Plan is drafted to be a tax-exempt trusteed
savings plan established in accordance with the requirements under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) of the Code. The Bank will adopt any
amendments to the Plan that may be necessary to ensure the qualified status of
the Plan under the Code and applicable Treasury Regulations. The Bank will
submit the Plan to the IRS for a determination that the Plan, as amended, is
qualified under Section 401(a) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the
Internal Revenue Code Relating to Retirement Plans) of ERISA, except the
funding requirements contained in Part 3 of Title I of ERISA which by their
terms do not apply to an individual account plan (other than a money purchase
pension plan). The Plan is not subject to Title IV (Plan Termination
Insurance) of ERISA. Neither the funding requirements contained in Part 3 of
Title I of ERISA nor the plan termination insurance provisions contained in
Title IV of ERISA will be extended to Participants or beneficiaries under the
Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW CERTAIN AMOUNTS
HELD FOR HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE
IMPOSED ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE
59-1/2, UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
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Reference to Full Text of Plan. The following statements are summaries
of certain material provisions of the Plan. They are not complete and are
qualified in their entirety by the full text of the Plan. Copies of the Plan are
available to all employees by filing a request with the Plan Administrator which
in this case is the Bank. Each employee is urged to read carefully the full
text of the Plan.
ELIGIBILITY AND PARTICIPATION
All employees are eligible to participate in the Plan, except those
employees included in a unit of employees covered by a collective bargaining
agreement, employees who are non-resident aliens and employees compensated on
an hourly basis. An eligible employee will become a Participant in the Plan on
the first day of the month following the employee's attainment of age 21 and
completion of a minimum of 1,000 hours of service with the Bank within a twelve
consecutive month period of employment with the Bank. Hours of service are
determined on the actual number of hours of employment. Directors who are not
employees of the Bank are not eligible to participate in the Plan.
As of September 30, 1997, there were approximately 47 employees
eligible to participate in the Thrift Plan, and approximately 42 employees had
elected to contribute to the Thrift Plan.
CONTRIBUTIONS UNDER THE PLAN
Participant Contributions. Each Participant in the Plan is permitted
to elect to make after-tax contributions pursuant to a salary reduction
agreement by an amount not less than 1% nor more than 15% of the Participant's
monthly Compensation (as defined below) and have that amount contributed to the
Plan on such Participant's behalf. For purposes of the Plan, "Compensation"
means a Participant's total taxable compensation ("Basic Salary"). The annual
Compensation of each Participant taken into account under the Plan is limited
to $160,000 for 1998 (adjusted for cost of living as permitted by the Code). A
Participant may elect to modify the amount contributed to the Plan under such
Participant's salary reduction agreement one time per calendar month. Such
changes generally become effective the first business day of the month
following receipt by the Employer of such change. Deferred contributions are
generally transferred by the Bank to the Trustee of the Plan monthly.
Employer Contributions. The Bank currently makes a monthly
contribution to the Plan of an amount equal to 50% of each Participant's
monthly contributions up to the first 6% of a Participant's Compensation.
After the Conversion, at the discretion of the Bank, and upon amending the
Plan, the Employer contributions may be credited to the Participant's Account
in the Bay State Federal Savings Bank Employee Stock Ownership Plan.
Rollover Amount from Other Plans. An employee eligible to participate
in the Plan, prior to satisfying the service requirements, who, as a result of a
plan termination, termination of employment, disability, or attainment of age
59 1/2, has had distributed to such employee the entire interest in another
plan which meets the requirements of Section 401(a) of the Code (the "Other
Plan") may, in accordance with Section 402(a)(5) of the Code and procedures
approved at the discretion of the Trustee, transfer the distribution received
from the Other Plan to the Trustee.
LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the
requirements of the Code, the Plan provides that the amount of annual additions
allocated to each Participant's Account during any Plan Year may not
exceed the lesser of 25% of the Participant's "Section 415 Compensation" for
the Plan Year or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). Annual additions are the employer contributions,
employee contributions and forfeitures credited to the account of the employee
for the Plan Year. A Participant's "Section 415 Compensation" is a
Participant's compensation from the Bank, excluding
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<PAGE> 9
any distributions from a plan of deferred compensation. In addition,
annual additions shall be limited to the extent necessary to prevent the
limitations for the combined plans of the Bank from being exceeded. To the
extent that these limitations would be exceeded by reason of excess annual
additions to the Plan with respect to a Participant, such excess will be
disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to
reduce the Bank's contributions for such Participant in the
next Limitation Year, which is the same as the Plan Year, and
each succeeding Limitation Year if necessary;
(ii) If an excess amount still exists, and the Participant is NOT
covered by the Plan at the end of the Limitation Year, the
excess amount will be held unallocated in a suspense account
which will then be applied to reduce future Bank contributions
for all remaining Participants in the next Limitation Year,
and each succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of
investment gains and losses.
Limitation on Plan Contributions for Highly Compensated Employees.
Section 401(m) of the Code limits the amount that may contributed to the Plan
in any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amounts contributed by or on behalf of all other employees
eligible to participate in the Plan. Specifically, the actual contribution
percentage for a Plan Year (i.e., the average of the ratios calculated
separately for each eligible employee in each group, by dividing the amount of
employee and employer contributions credited to the Account of such eligible
employee by such eligible employee's compensation for the Plan Year) of the
Highly Compensated Employees may not exceed the greater of (a) 125% of the
actual contribution percentage of all other eligible employees, or (b) the
lesser of (i) 200% of the actual contribution percentage of all other eligible
employees, or (ii) the actual contribution percentage of all other eligible
employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who,
(i) was a 5% owner of the Employer at any time during the year or preceding
year; or (2) had compensation for the preceding year in excess of $80,000 and,
if the Employer so elects, was in the top 20% of employees by compensation for
such year. The dollar amount in the foregoing sentence is for 1998. Such
amount is adjusted periodically to reflect increases in the cost of living.
In order to prevent the disqualification of the Plan, any amounts
contributed by Highly Compensated Employees that exceed the average deferral
limitation in any Plan Year ("excess contributions"), together with any income
allocable thereto, must be distributed to such Highly Compensated Employees
before the close of the following Plan Year. However, the Bank will be subject
to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
recharacterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a
Top-Heavy Plan (as defined below), then (i) the Bank may be required to make
certain minimum contributions to the Plan on behalf of non-key employees (as
defined below), and (ii) certain additional restrictions would apply with
respect to the combination of annual additions to the Plan and projected annual
benefits under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any
Plan Year if, as of the last day of the preceding Plan Year, the aggregate
balance of the Accounts of Participants who are Key Employees exceeds 60% of
8
<PAGE> 10
the aggregate balance of the Accounts of all Participants. "Key Employees"
generally include any employee who, at any time during the Plan Year or any of
the four preceding Plan Years, is (1) an officer of the Bank having annual
compensation in excess of $65,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owning, directly or indirectly, the largest interests in the
employer, (3) a 5% owner of the employer, (i.e., owns directly or indirectly
more than 5% of the stock of the employer, or stock possessing more than 5% of
the total combined voting power of all stock of the employer) or (4) a 1% owner
of the employer having annual compensation in excess of $160,000. The dollar
amounts in the foregoing sentence are for 1998.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held
in the Plan Trust (the "Trust") which is administered by the Trustee appointed
by the Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustee to invest all or a portion of his Accounts in various
managed investment portfolios, described below. A Participant may elect to
change his investment directions with respect to both past contributions and
for more additions to the Participant's accounts invested in these investment
alternatives. These elections generally become effective on the business day
next following the day the Plan Administrator receives the Participant's notice
of the elections. Any amounts credited to a Participant's Accounts for which
investment directions are not given will be invested by the Trustee in the
Money Market Fund.
Under the Plan, prior to the effective date of the Conversion, the
Accounts of a Participant held in the Trust will be invested by the Trustee at
the direction of the Participant in the following managed portfolios:
PSI Money Market Fund: Invests in a broad range of high-quality
short-term instruments. Its objective is short-term: to achieve competitive
short-term rates of return while preserving the value of your principal.
PSI Stable Value Fund: Invests primarily in Guaranteed Investment
Contracts and Synthetic Guaranteed Investment Contracts. Its objective is
short- to intermediate-term: to achieve a stable return over short to
intermediate periods of time while preserving the value of your investment.
PSI Government Bond Fund: Invests in U.S. Treasury bonds with a
maturity of 20 years or more. Its objective is long-term: to earn a higher
level of income along with the potential for capital appreciation.
PSI S&P 500 Stock Fund: Invests in the stocks of a broad array of
established U.S. companies. Its objective is long-term: to earn higher returns
by investing in the largest companies in the U.S. economy.
PSI S&P MidCap Stock Fund: Invests in the stocks of mid-sized U.S.
companies. Its objective is long-term: to earn higher returns which reflect
the growth potential of such companies.
PSI International Stock Fund: Invests in over 1,000 foreign stocks in
20 countries. Its objective is long-term: to offer the potential return of
investing in the stocks of established non-U.S. companies, as well as the
potential risk-reduction of broad diversification.
PSI Asset Allocation Fund (Income Plus): Invests approximately 80% of
its portfolio in a combination of stable value investments and U.S. bonds. The
balance is invested in U.S. and international stocks. Its objective is
intermediate-term: to preserve the value of your investment over short periods
of time and to offer some potential for growth.
PSI Asset Allocation Fund (Growth): Invests in U.S. domestic and
international stocks, U.S. domestic bonds, and stable value investments. Its
objective is intermediate-term: to provide a balance between the pursuit of
growth and protection from risk.
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<PAGE> 11
PSI Asset Allocation Fund (Growth and Income): Invests the majority
of its assets in stocks--domestic as well as international. Its objective is
long-term: to pursue high growth of your investment over time.
Effective upon the Conversion, a Participant may invest all or a
portion of his accounts in the portfolios described above and in the Bay State
Bancorp, Inc. Stock Fund described below:
Bay State Bancorp, Inc. Stock Fund: Invests in common stock of the
parent holding company, Bay State Bancorp, Inc.
A Participant may elect (in increments of 1%), to have both past and
future contributions and additions to the Participant's Accounts invested
either in the Employer Stock Fund or in such other managed portfolios listed
above. These elections will generally be effective the last business day or
next following the plan administrators' receipt of such investment directions.
Any amounts credited to a Participant's Accounts for which investment
directions are not given will be invested in the Money Market Fund. Because
investment allocations only are required to be made in increments of 1%,
Participants can invest their Accounts in each of the six available investment
funds. Lack of diversification with respect to the investment of a
Participant's Account is not a significant risk given the six investment
options available to Participants and the ability of Participants to make
investment designations daily.
The net gain (or loss) in the Accounts from investments other than the
Employer Stock Fund (including interest payments, dividends, realized and
unrealized gains and losses on securities, and expenses paid from the Trust)
are determined daily during the Plan Year. Net gain (or loss) in the Account
from investments (including interest, dividends, realized and unrealized gain
and expenses paid) from the Employer Stock Fund will be determined weekly. For
purposes of such allocations, all assets of the Trust are valued at their fair
market value.
Contributions under the Plan may be invested in the nine (9) managed
portfolios listed below. The annual percentage of returns on these funds, net
of any fees being charged to the portfolio for 1994, 1995 and 1996 was:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
PSI Money Market Fund 5.3% 5.9% 3.9%
PSI Stable Value Fund 6.5 6.8 7.1
PSI Government Bond Fund 1.9 18.1 (3.0)
PSI S&P 500 Stock Fund 21.7 37.0 0.9
PSI S&P MidCap Stock Fund 18.5 30.1 (3.8)
PSI International Stock Fund 10.6 15.0 4.2
PSI Asset Allocation Fund
(Income Plus) 8.3 12.9 2.3
PSI Asset Allocation Fund
(Growth) 18.0 31.4 0.8
PSI Asset Allocation Fund
(Growth and Income) 12.3 20.5 1.6
</TABLE>
The Employer Stock Fund.
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<PAGE> 12
The Employer Stock Fund will consist of investments in Common Stock
made on and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Enrollment and Investment Application,
Participants will be able to change their investments. Any cash dividends paid
on Common Stock held in the Employer Stock Fund will be credited to a cash
dividend subaccount for each Participant investing in the Employer Stock Fund.
The Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund (except the amounts credited to cash dividend subaccounts)
to purchase shares of Common Stock. It is expected that all purchases will be
made at prevailing market prices. Under certain circumstances, the Trustee may
be required to limit the daily volume of shares purchased. Pending investment
in Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments. When Common Stock is purchased or
sold, the cost or net proceeds are charged or credited to the Accounts of
Participants affected by the purchase or sale. A Participant's Account will be
adjusted to reflect changes in the value of shares of Common Stock resulting
from stock dividends, stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the
Employer Stock Fund, the return on any investment in the Employer Stock Fund
will consist only of the market value appreciation of the Common Stock
subsequent to its purchase. Following the Conversion, the Board of the Company
may consider a policy of paying dividends on the Common Stock, however, no
decision has been made by the Board of the Company regarding the amount or
timing of dividends, if any.
As of the date of this Prospectus Supplement, none of the shares of
Common Stock have been issued or are outstanding and there is no established
market for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL
RISKS ASSOCIATED WITH INVESTMENTS IN COMMON STOCK OF THE COMPANY. FOR A
DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" ON PAGES __ AND __ IN THE
PROSPECTUS.
BENEFITS UNDER THE PLAN
Vesting. A Participant has at all times a fully vested,
nonforfeitable interest in his Accounts and the earnings thereon under the
Plan.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW CERTAIN AMOUNTS
HELD FOR HIS BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF
AGE 59 1/2 UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS
OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK.
Withdrawals Prior to Termination of Employment. A Participant may
make a withdrawal from his Accounts under the Plan pursuant to the rules under
the Plan.
Notwithstanding, Bank contributions may not be available for
withdrawal prior to termination of employment until (i) such employer
contributions have been invested in the Plan for 2 years, (ii) the employee has
been a Plan Participant for at least 5 years, or (iii) the Participant attains
age 59 1/2.
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<PAGE> 13
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include a
distribution of Common Stock of the Company credited to the Participant's
Account. A Participant whose total vested account balance equals, exceeds or
has ever exceeded $3,500 at the time of termination, may elect, in lieu of a
lump sum payment, to be paid in annual installments over a period of 20 years,
with the right to take a lump sum distribution of the vested balance at any
time during such period. Benefit payments ordinarily shall be made not later
than 60 days following the end of the Plan Year in which occurs the later of
the Participant's: (i) termination of employment; (ii) attainment of age 65;
(iii) 10th anniversary of commencement of participation in the Plan. However,
if the vested portion of the Participant's Account balances exceeds $3,500,
no distribution shall be made from the Plan prior to the Participant's
attaining age 65 unless the Participant consents to an earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving spouse
in a lump sum by the end of the Plan year following the date of his death, or
if the payment of his benefit had commenced before his death, in accordance
with the distribution method in effect at death. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment in
cash or in Common Stock, or, if the payment of his benefit had commenced before
his death, in accordance with the distribution method in effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding, loans made to Participants pursuant to the Plan and, as provided,
with respect to a qualified domestic relations order (as defined in the Code),
benefits payable under the Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the Plan shall be void.
ADMINISTRATION OF THE PLAN
Trustees. The Trustee with respect to the Plan is the named fiduciary
of the Plan for purposes of Section 402 of ERISA. The current trustee of the
Plan with respect to the Employer Stock Fund is John F. Murphy. The Trustee
with respect to the investment funds other than the Employer Stock Fund is The
Bank of New York. Effective 30 days after the Conversion, it is expected that
The Bank of New York will also be trustee with respect to the Employer Stock
Fund.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion
to manage and control the assets of the Plan pursuant to the terms of the Plan
and to manage, invest and reinvest the Trust and income therefrom. The Trustee
has the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the
Trust in person or by proxy, provided, however, that the Plan Administrator
shall direct the Trustee as to voting and tendering of all Common Stock held in
the Employer Stock Fund.
The Trustee is entitled to reasonable compensation for its services
and is also entitled to reimbursement for expenses properly and actually
incurred in the administration of the Trust. The expenses of the Trustee and
the compensation of the persons so employed is paid out of the Trust except to
the extent such expenses and compensation are paid by the Bank.
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<PAGE> 14
The Trustee must render at least annual reports to the Bank and to the
Participants in such form and containing information that the Trustee deems
necessary.
REPORTS TO PLAN PARTICIPANTS
The Administrator will furnish to each Participant a statement at
least quarterly showing (i) the balance in the Participant's Account as of the
end of that period, (ii) the amount of contributions allocated to such
Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan Administrator is the Bank.
A committee of the Bank has been designated by the Board of Directors of the
Bank to act on the Bank's behalf as the Plan Administrator. The name, address
and telephone number of the current Plan Administrator is Bay State Federal
Savings Bank, 1299 Beacon Street, Brookline, Massachusetts 02146. The Bank's
telephone number is (617) 739-9500. The Administrator is responsible for the
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Participants, beneficiaries
and others under Sections 104 and 105 of ERISA.
AMENDMENT AND TERMINATION
The Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan, each employee who ceases to be a Participant shall have a fully vested
interest in his Account. The Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another
plan, or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan had then terminated) receive
a benefit immediately after the merger, consolidation or transfer which is
equal to or greater than the benefit he would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan or the
other plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of the material federal income
tax aspects of the Plan which are of general application under the Code and is
not intended to be a complete or definitive description of the federal income
tax consequences of participating in or receiving distributions from the Plan.
The summary is necessarily general in nature and does not purport to be
complete. Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
13
<PAGE> 15
The Plan shall be submitted to the IRS for a determination that it is
qualified under Section 401(a) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which
include the following: (1) The sponsoring employer is allowed an immediate tax
deduction for the amount of matching contributions made to the Plan each year;
(2) Participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) Earnings of the plan are tax-exempt thereby
permitting the tax-free accumulation of income and gains on investments. The
Plan will be administered to comply in operation with the requirements of the
Code as of the applicable effective date of any change in the law. The Bank
expects to timely adopt any amendments to the Plan that may be necessary to
maintain the qualified status of the Plan under the Code. Following any such
amendment, the Plan will be submitted to the IRS for a determination that the
Plan, as amended, continues to qualify under Sections 401(a) and 501(a) of the
Code.
Assuming that the Plan is administered in accordance with the
requirements of the Code and that the IRS issues a favorable determination as
described in the preceding paragraph, participation in the Plan under existing
federal income tax laws will have the following effects:
(a) Bank matching contributions credited to a Participant's
Account and all investment earnings on this Account
are not includable in a Participant's federal taxable income
until such contributions or earnings are actually distributed
or withdrawn from the Plan. Special tax treatment may apply
to the taxable portion of any distribution that includes
Common Stock or qualifies as a Lump Sum Distribution (as
described below).
(b) Income earned on assets held by the Trust will not be taxable
to the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant
or the beneficiary of a Participant will qualify as a "Lump Sum Distribution"
if it is made: (i) within a single taxable year of the Participant or
beneficiary; (ii) on account of the Participant's death or separation from
service, or after the Participant attains age 59 1/2; and (iii) consists of
the balance to the credit of the Participant under the Plan and all other
profit sharing plans, if any, maintained by the Bank. The portion of any Lump
Sum Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "total
taxable amount") consists of the entire amount of such Lump Sum Distribution
less the amount of after-tax contributions, if any, made by the Participant to
any other profit sharing plans maintained by the Bank which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump
Sum Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, a Participant who
has completed at least five years of participation in the Plan before the
taxable year in which the distribution is made, or a beneficiary who receives a
Lump Sum Distribution on account of the Participant's death (regardless of the
period of the Participant's participation in the Plan or any other
profit-sharing plan maintained by the Employer), may elect to have the ordinary
income portion of such Lump Sum Distribution taxed according to a special
averaging rule ("five-year averaging"). The election of the special averaging
rules may apply only to one Lump Sum Distribution received by the Participant
or beneficiary, provided such amount is received on or after the Participant
turns 59-1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1986 may elect to have their Lump Sum Distribution taxed under either the
five-year averaging rule or under the prior law ten-year averaging rule. Such
individuals also may elect to have that portion of the Lump Sum Distribution
attributable to the Participant's pre-1974 participation in the Plan taxed at a
flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum
Distribution includes Common Stock, the distribution generally will be taxed in
the manner described above, except that the total taxable amount will be
reduced by the amount of any net unrealized appreciation with respect to such
Common Stock, i.e., the excess of the value of such Common Stock at the time of
the distribution over its cost to the Plan. The tax basis of such Common Stock
to the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale
14
<PAGE> 16
or other taxable disposition of such Common Stock, to the extent of the amount
of net unrealized appreciation at the time of distribution, will be considered
long-term capital gain regardless of the holding period of such Common Stock.
Any gain on a subsequent sale or other taxable disposition of the Common Stock
in excess of the amount of net unrealized appreciation at the time of
distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified
Plan or to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an Individual Retirement Account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or a Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to
20% of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently
than annually) over the Participant's life or the joint life of the Participant
and the Participant's designated beneficiary, or (b) for a specified period of
ten years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred i.e., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant)
on or after the death of the Participant, (ii) attributable to the
Participant's being disabled within the meaning of Section 72(m)(7) of the
Code, (iii) part of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
and his beneficiary, (iv) made to the Participant after separation from service
on account of early retirement under the Plan after attainment of age 55, (v)
made to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and
will be submitted to the IRS for a determination that it is qualified under
Section 401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF THE MATERIAL FEDERAL INCOME
TAX ASPECTS OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS
NOT INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
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<PAGE> 17
RESTRICTIONS ON RESALE
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rules 144 and 405
under the Securities Act of 1933, as amended ("Securities Act") (e.g.,
directors, officers and substantial stockholders of the Company) may reoffer or
resell such shares only pursuant to a registration statement filed under the
Securities Act or, assuming the availability thereof, pursuant to Rule 144 or
some other exemption of the registration requirements of the Securities Act.
Any person who may be an "affiliate" of the Company may wish to consult with
counsel before transferring any Company Stock owned by him. In addition,
Participants are advised to consult with counsel as to the applicability of
Section 16 of the Securities Exchange Act of 1934, as amended ("Exchange Act")
which may restrict the sale of Common Stock where acquired under the Plan, or
other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the
time of resale will be free to resell any shares of Common Stock distributed to
them under the Plan, either publicly or privately, without regard to the
registration and prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive
rules thereunder. An "affiliate" of the Company is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with the Company. Normally, a director, principal
officer or major shareholder of a corporation may be deemed to be an
"affiliate" of that corporation. A person who may be deemed an "affiliate" of
the Company at the time of a proposed resale will be permitted to make public
resales of the Company's Common Stock only pursuant to a "reoffer" Prospectus
or in accordance with the restrictions and conditions contained in Rule 144
under the Securities Act or some other exemption from registration, and will
not be permitted to use this Prospectus in connection with any such resale. In
general, the amount of the Company's Common Stock which any such affiliate may
publicly resell pursuant to Rule 144 in any three-month period may not exceed
the greater of one percent of the Company's Common Stock then outstanding or
the average weekly trading volume reported on the American Stock Exchange
during the four calendar weeks prior to the sale. Such sales may be made only
through brokers without solicitation and only at a time when the Company is
current in filing the reports required of it under the Exchange Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability
requirements on executive officers, directors and persons beneficially owning
more than ten percent of public companies such as the Company. Section 16(a)
of the Exchange Act requires the filing of reports of beneficial ownership.
Within ten days of becoming a person subject to the reporting requirements of
Section 16(a), a Form 3 reporting initial beneficial ownership must be filed
with the Securities and Exchange Commission (the "SEC"). Certain changes in
beneficial ownership, such as purchases, sales, gifts and participation in
savings and retirement plans must be reported periodically, either on a Form 4
within ten days after the end of the month in which a change occurs, or
annually on a Form 5 within 45 days after the close of the Company's fiscal
year. Participation in the Employer Stock Fund of the Plan by executive
officers, directors and persons beneficially owning more than ten percent of
Common Stock of the Company must be reported to the SEC annually on a Form 5 by
such individuals. At September 30, 1997, 54.5% of the Prior Plan assets were
allocated to executive officers.
In addition to the reporting requirements described above, Section
16(b) of the Exchange Act provides for the recovery by the Company of profits
realized by any officer, director or any person beneficially owning more than
ten percent of the Company's Common Stock ("Section 16(b) Persons") resulting
from the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit
recovery provisions of Section 16(b) for Participant-directed employer security
transactions within an employee benefit plan, such as the Plan, provided
certain requirements are met. These requirements generally involve
restrictions upon the timing of elections to acquire or dispose of employer
securities for the accounts of Section 16(b) Persons.
16
<PAGE> 18
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order under the Plan, Section 16(b) Persons are required to hold shares of
Common Stock distributed from the Plan for six months following such
distribution.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon
by Muldoon, Murphy & Faucette, Washington, D.C., which firm is acting as
special counsel for the Company in connection with the Bank's Conversion from a
mutual savings bank to a stock savings bank and the concurrent formation of the
Company.
17
<PAGE> 19
PSI FORM 7 (97)-A10
CHANGE OF INVESTMENT ALLOCATION
MEMBER DATA (PLEASE TYPE OR PRINT CLEARLY):
1. Soc. Sec. Number: - -
-- -- -- -- -- -- -- -- --
2. Name
------------------------------------------------------------------
Last First Middle Initial
3. Current Address
-------------------------------------------------------
Street City State Zip Code
SECTION 1
NEW INVESTMENT DIRECTIONS (APPLICABLE TO FUTURE CONTRIBUTIONS ONLY):
I hereby revoke any previous investment instructions and now direct that any
future contributions and/or loan repayments, if any, made by me or on behalf of
my Employer, including those contributions and/or repayments received by the
Bay State Federal Savings Bank Employees' Savings and Profit Sharing Plan and
Trust during the same reporting as this form, be invested in the following
whole percentages.
<TABLE>
<S> <C>
S&P 500 Stock Fund %
---------
Stable Value Fund %
---------
S&P MidCap Stock Fund %
---------
Money Market Fund %
---------
Government Bond Fund %
---------
International Stock Fund %
---------
Income Plus Asset Allocation Fund %
---------
Growth & Income Asset Allocation Fund %
---------
Growth Asset Allocation Fund %
---------
Bay State Bancorp, Inc. Stock Fund %
=========
100
</TABLE>
SECTION II
NEW INVESTMENT DIRECTIONS (APPLICABLE TO ACCUMULATED BALANCES ONLY)
I hereby revoke any previous investment direction and now direct that the
market value of the units that I have invested in the following Funds, to the
extent permissible, be transferred out of the specified Fund and invested in
the selected Funds in whole percentages. THE TOTAL OF YOUR FUND TO FUND
PERCENTAGES MUST TOTAL 100%.
<TABLE>
<S> <C> <C>
% FROM % FROM % FROM
- ------- -------- -------
S&P 500 STOCK FUND TO: STABLE VALUE FUND TO: S&P MIDCAP STOCK FUND TO:
% STABLE VALUE FUND % S&P 500 Stock Fund % S&P 500 Stock Fund
- ------- -------- -------
% S&P MidCap Stock Fund % S&P MidCap Stock Fund % Stable Value Fund
- ------- -------- -------
% Money Market Fund % Government Bond Fund % Money Market Fund
- ------- -------- -------
% Government Bond Fund % International Stock Fund % Government Bond Fund
- ------- -------- -------
% International Stock Fund % Income Plus Fund % International Stock Fund
- ------- -------- -------
% Income Plus Fund % Growth and Income Fund % Income Plus Fund
- ------- -------- -------
% Growth and Income Fund % Growth Fund % Growth and Income Fund
- ------- -------- -------
% Growth Fund % Bay State Bancorp, Inc. Stock Fund % Growth Fund
- ------- ======== -------
% Bay State Bancorp, Inc. Stock Fund 100 % Bay State Bancorp, Inc. Stock Fund
======= =======
100 100
% FROM % FROM % FROM
- ------- -------- -------
MONEY MARKET FUND TO: GOVERNMENT BOND FUND TO: INTERNATIONAL STOCK FUND TO:
% S&P 500 Stock Fund % S&P 500 Stock Fund % S&P 500 Stock Fund
- ------- -------- -------
% Stable Value Fund % Stable Value Fund % Stable Value Fund
- ------- -------- -------
% S&P MidCap Stock Fund % S&P MidCap Stock Fund % S&P MidCap Stock Fund
- ------- -------- -------
% Government Bond Fund % Money Market Fund % Money Market Fund
- ------- -------- -------
% International Stock Fund % International Stock Fund % Government Bond Fund
- ------- -------- -------
% Income Plus Fund % Income Plus Fund % Growth and Income Fund
- ------- -------- -------
% Growth and Income Fund % Growth and Income Fund % Income Plus Fund
- ------- -------- -------
% Growth Fund % Growth Fund % Growth Fund
- ------- -------- -------
% Bay State Bancorp, Inc. Stock Fund % Bay State Bancorp, Inc. Stock Fund % Bay State Bancorp, Inc. Stock Fund
======= ======== =======
100 100 100
</TABLE>
(CONTINUED ON REVERSE SIDE)
<PAGE> 20
<TABLE>
<S> <C> <C>
% FROM % FROM % FROM
- ------- ------- -------
INCOME PLUS ASSET ALLOCATION FUND TO: GROWTH AND INCOME ASSET ALLOCATION GROWTH ASSET ALLOCATION FUND TO:
% S&P 500 Stock Fund FUND TO: % S&P 500 Stock Fund
- ------- % S&P 500 Stock Fund -------
% Stable Value Fund ------- % Stable Value Fund
- ------- % Stable Value Fund -------
% S&P MidCap Stock Fund ------- % S&P MidCap Stock Fund
- ------- % S&P MidCap Stock Fund -------
% Money Market Fund ------- % Money Market Fund
- ------- % Money Market Fund -------
% Government Bond Fund ------- % Government Bond Fund
- ------- % Government Bond Fund -------
% International Stock Fund ------- % International Stock Fund
- ------- % International Stock Fund -------
% Growth and Income Fund ------- % Income Plus Fund
- ------- % Income Plus Fund -------
% Growth Fund ------- % Growth & Income Fund
- ------- % Growth Fund -------
% Bay State Bancorp, Inc. Stock Fund ------- % Bay State Bancorp, Inc. Stock Fund
======= % Bay State Bancorp, Inc. Stock Fund =======
100 ======= 100
100
</TABLE>
NOTE: ALL PERCENTAGES ELECTED IN SECTION II WILL BE SUBTRACTED FROM CURRENT
FUND VALUE PRIOR TO ANY REALLOCATION NOTED ON THIS FORM.
Notes:
No amounts invested in the Stable Value Fund may be transferred directly to
the Money Market Fund. Stable Value Fund amounts invested in the S&P 500 Stock
Fund, S&P MidCap Stock Fund, Government Bond Fund, International Stock Fund,
Income Plus Asset Allocation Fund, Growth and Income Asset Allocation Fund,
and/or Growth Asset Allocation Fund, for a period of three months may be
transferred to the Money Market Fund upon the submission of a separate Change of
Investment Allocation form.
The percentage that can be transferred to the Money Market Fund may be limited
by any amounts previously transferred from the Stable Value Fund that have not
satisfied the equity wash requirement. Such amounts will remain in either the
S&P 500 Stock Fund, S&P MidCap Stock Fund, Government Bond Fund, International
Stock Fund, Income Plus Asset Allocation Fund, Growth and Income Asset
Allocation Fund, and/or Growth Asset Allocation Fund and a separate direction
to transfer them to the Money Market Fund will be required when they become
available.
MEMBER'S SIGNATURE
---------------------------- --------------------
Signature of Member Date
PENTEGRA SERVICES IS HEREBY AUTHORIZED TO MAKE THE ABOVE LISTED CHANGE(S) TO
THIS MEMBER'S RECORD.
- ---------------------------------------------------- --------------------
Signature of Bay State Federal Savings Bank's Date
Authorized Representative
<PAGE> 21
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
BAY STATE BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR BAY STATE FEDERAL SAVINGS BANK)
__________ SHARES OF COMMON STOCK
Bay State Bancorp, Inc. (the "Company"), a Delaware corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") __________ shares, at a per share price of $20.00, of its common
stock, par value $.01 per share (the "Common Stock"), to be issued upon the
conversion (the "Conversion") of Bay State Federal Savings Bank, Brookline,
Massachusetts (the "Bank") from a federally chartered mutual savings bank to a
federally chartered stock savings bank and the issuance of the Bank's
outstanding capital stock to the Company pursuant to a plan of conversion, (the
"Plan of Conversion"). The remaining __________ shares of the Common Stock have
been subscribed for in subscription and community offerings (the "Subscription
and Community Offerings") by the Bank's holders of deposit accounts with the
Bank with a balance of $50 or more as of August 31, 1996, by the Bay State
Federal Savings Bank Employee Stock Ownership Plan, a tax-qualified employee
benefit plan, and related trust (the "ESOP"), by holders of deposit accounts
with a balance of $50 or more as of ______________, 1997, by certain other
account holders and borrowers of the Bank and then by certain members of the
general public. See "The Conversion - General." Contained herein is the
Prospectus in the form used in the Subscription and Community Offerings. The
purchase price for all shares purchased in the Syndicated Community Offering
will be the same as the price paid by subscribers in the Subscription and
Community Offerings (the "Purchase Price"). The Purchase Price of $20.00 per
share is the amount to be paid for each share at the time a purchase order is
submitted. See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock.
Funds submitted to the Bank with purchase orders will earn interest
at the Bank's passbook rate of interest from the date of receipt until
completion or termination of the Conversion. The Syndicated Community Offering
will expire no later than _______________, 199_, unless extended by the Bank and
the Company with the approval of the Office of Thrift Supervision (the "OTS").
Such extensions may not go beyond _______________, 199_. If an extension of time
has been granted, all subscribers will be notified of such extension, and of
their rights to confirm their subscriptions, or to modify or rescind their
subscriptions and have their funds returned promptly with interest, and of the
time period within which the subscriber must notify the Bank of his intention to
confirm, modify or rescind his subscription. If an affirmative response to any
resolicitation is not received by the Bank and the Company from subscribers,
such orders will be rescinded and all funds will be returned promptly with
interest. The minimum number of shares which may be purchased
<PAGE> 22
is 25 shares. Except for the ESOP, which may purchase up to 10% of the total
number of shares of Common Stock issued in the Conversion, no person, together
with associates of and persons acting in concert with such person, may purchase
more than the total number of shares offered in the Community Offering and the
Syndicated Community Offering that could be purchased for $225,000 at the
Purchase Price and no person, together with associates of and persons acting in
concert with such person, may purchase more than 1% of the total number of
shares issued in the Conversion. See "Plan of Conversion - Subscription Rights
and Limitations on Common Stock Purchases." The Company reserves the right, in
its absolute discretion, to accept or reject, in whole or in part, any or all
subscriptions in the Syndicated Community Offering.
The Company and the Bank have engaged Sandler, O'Neill & Partners,
L.P. ("Sandler O'Neill") as financial advisors to assist them in the sale of the
Common Stock in the Syndicated Community Offering. It is anticipated that
Sandler O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such Selected Dealers
will not exceed 7% of the aggregate Purchase Price of the shares sold in the
Syndicated Community Offering. Neither Sandler O'Neill nor any Selected Dealer
shall have any obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering.
The Company has received conditional approval to have its Common
Stock listed on the American Stock Exchange ("AMEX") under the symbol "BYS."
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. The absence or discontinuance of a market may have an
adverse impact on both the price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE
TREASURY, OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR
HAS SUCH COMMISSION, OFFICE, 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 FEDERALLY INSURED OR GUARANTEED.
2
<PAGE> 23
<TABLE>
<CAPTION>
==============================================================================================================================
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
<S> <C> <C> <C> <C>
Minimum Per Share $20.00 $ $ $
Midpoint Per Share $20.00 $ $ $
Maximum Per Share $20.00 $ $ $
Total Minimum(4) $ $ $ $
Total Midpoint $ $ $ $
Total Maximum(4) $ $ $ $
Total Maximum, As Adjusted(5) $ $ $ $
==============================================================================================================================
</TABLE>
- ------------------------------
(1) Consists of a pro rata allocation of estimated expenses of the Bank and
the Company in connection with the Conversion (other than estimated fees
to be paid to Sandler O'Neill for services in connection with the
Subscription and Community Offerings) and estimated compensation of
Sandler O'Neill and Selected Dealers in connection with the sale of the
remaining shares in the Syndicated Community Offering which fees are
estimated to be $__________ million and $__________ million at the minimum
and the maximum of the estimated price range and may be deemed to be
underwriting fees. The information under "Pro Forma Data" in the
Prospectus was based on the assumptions stated therein, which may differ
from the estimates used for this table. See "The Conversion - Marketing
and Underwriting Arrangements" for a more detailed discussion of fee
arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance
of the net proceeds will be transferred to the Bank in exchange for all of
the capital stock of the Bank to be issued in connection with the
Conversion.
(3) The net proceeds of the Subscription and Community Offerings (based upon
the sale of the __________ shares subscribed for at a price of $20.00 per
share and after allocation of a pro rata portion of the estimated expenses
relating to the Conversion) are estimated to be
$__________.
(4) Based on an estimated price range of $__________ to $__________ at $20.00
per share (the "Estimated Price Range"). The Total Minimum reflects the
sale of __________ shares at a per share price of $20.00, leaving a total
of __________ shares to be sold in the Syndicated Community Offering.
(5) Gives 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% to reflect
changes in market and financial conditions following commencement of the
offerings. See "The Conversion - Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, see "The Conversion
- Subscription Rights and Limitations on Common Stock Purchases."
SANDLER O'NEILL & PARTNERS, L.P.
---------------------------------
The date of this Prospectus Supplement is _______________, 1997.
3
<PAGE> 24
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.
<TABLE>
<CAPTION>
====================================================================================================================
ESTIMATED UNDERWRITING
COMMISSIONS AND OTHER FEES AND ESTIMATED
SUBSCRIPTION PRICE(1) EXPENSES(2) NET PROCEEDS(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share...................... $20.00 $0.84 $19.16
- --------------------------------------------------------------------------------------------------------------------
Midpoint Per Share..................... $20.00 $0.75 $19.25
- --------------------------------------------------------------------------------------------------------------------
Maximum Per Share...................... $20.00 $0.70 $19.30
- --------------------------------------------------------------------------------------------------------------------
Total Minimum(1)....................... $30,175,000 $1,268,000 $28,907,000
- --------------------------------------------------------------------------------------------------------------------
Total Midpoint(1)...................... $35,500,000 $1,344,000 $34,156,000
- --------------------------------------------------------------------------------------------------------------------
Total Maximum(1)....................... $40,825,000 $1,419,000 $39,406,000
- --------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4).......... $46,948,750 $1,506,000 $45,442,750
====================================================================================================================
</TABLE>
(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> 25
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
<PAGE> 26
INSERT MAP PAGE HERE
3
<PAGE> 27
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
<PAGE> 28
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."
5
<PAGE> 29
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. 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."
6
<PAGE> 30
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"). 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"). 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 3.8% or 2.8% 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
22.6% or 21.7% 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> 31
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> 32
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> 33
<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> 34
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> 35
<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."
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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
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<PAGE> 37
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 potential 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
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<PAGE> 38
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.
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<PAGE> 39
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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<PAGE> 40
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> 41
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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<PAGE> 42
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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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
21
<PAGE> 45
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.
22
<PAGE> 46
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
23
<PAGE> 47
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."
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<PAGE> 48
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 3.8% or
2.8% 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> 49
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.
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
26
<PAGE> 50
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. 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,
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<PAGE> 51
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> 52
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.
29
<PAGE> 53
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
30
<PAGE> 54
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> 55
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> 56
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> 57
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> 58
<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> 59
- ----------
(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> 60
<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> 61
- ----------
(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> 62
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> 63
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> 64
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.
MANAGEMENT OF INTEREST RATE RISK
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> 65
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> 66
<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> 67
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> 68
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> 69
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> 70
<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> 71
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> 72
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> 73
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
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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
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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 assessment rate decreased from 23 basis
points for fiscal 1996 to a range of 6.48 to 23 basis points for 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.
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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
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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
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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
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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."
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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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
57
<PAGE> 81
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.
58
<PAGE> 82
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.
59
<PAGE> 83
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.
60
<PAGE> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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.
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<PAGE> 93
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>
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<PAGE> 94
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 the six months ended September 30, 1997 and the fiscal
year ended March 31, 1997, 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 and $79,000,
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.
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<PAGE> 95
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
future 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> 96
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.
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<PAGE> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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
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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
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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."
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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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<PAGE> 118
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 nine
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, Richard F. McBride and C. Brendan Noonan, 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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<PAGE> 120
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 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.
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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<PAGE> 121
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.
C. Brendan Noonan is President of Prudential Prime Properties, a
real estate brokerage firm located in Cambridge, Massachusetts and is associated
with The Prudential Real Estates Affiliates, Inc. Mr. Noonan has been a director
of the Bank since 1992.
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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<PAGE> 122
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, Noonan 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,
Noonan, 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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<PAGE> 124
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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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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<PAGE> 127
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 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
C. Brendan Noonan 50,000 2,500 0.15 2,500 0.11
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 (10 persons)...... $1,225,000 61,250 3.76% 61,250 2.78%
========== ====== ==== ====== ====
</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 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 2.8% 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 21.7% 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.
145
<PAGE> 169
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
146
<PAGE> 170
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.
147
<PAGE> 171
BAY STATE FEDERAL SAVINGS BANK AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and March 31, 1997
and 1996 F-3
Consolidated Income Statements for the six months ended September 30, 1997 and 1996
(unaudited) and the years ended March 31, 1997, 1996 and 1995 41
Consolidated Statements of Changes in Equity for the six months ended September 30, 1997
(unaudited) and 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 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> 172
[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 of Bay State
Federal Savings Bank and Subsidiary as of March 31, 1997 and 1996 and the
related consolidated income statements, changes in equity and cash flows for
each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 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.
/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> 173
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> 174
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> 175
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> 176
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> 177
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 is an inactive
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> 178
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. 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> 179
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> 180
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> 181
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.
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> 182
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 $2,280 $2,288
March 31, 1997:
Issuer Cost Basis Fair Value
------ ------------ -----------
Shay ARM Fund $2,211 $2,210
</TABLE>
F-12
<PAGE> 183
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> 184
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.
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> 185
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> 186
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> 187
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> 188
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> 189
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> 190
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> 191
<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> 192
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> 193
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> 194
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> 195
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> 196
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> 197
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> 198
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> 199
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> 200
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 January 22, 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 January 22, 1998
- ----------------------------- Officer, Treasurer and Chairman
John F. Murphy of the Board of Directors
(principal executive
and financial officer)
/s/ Robert F. Moran Financial Officer January 22, 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> 201
<TABLE>
<CAPTION>
<S> <C>
/s/ * Director
- -----------------------------
C. Brendan Noonan
/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> 202
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
EXHIBIT 1.2
2,041,250 Shares
(subject to increase up to 2,082,938 shares
in the event of an oversubscription)
BAY STATE BANCORP, INC.
(a Delaware corporation)
Common Stock
(par value $.01 per share)
AGENCY AGREEMENT
November ___, 1997
SANDLER O'NEILL & PARTNERS, L.P.
Two World Trade Center, 104th Floor
New York, New York 10048
Ladies and Gentlemen:
Bay State Bancorp, Inc., a Delaware corporation (the
"Company"), and Bay State Federal Savings Bank, a federal savings
bank (the "Bank"), hereby confirm their agreement with Sandler
O'Neill & Partners, L.P. ("Sandler O'Neill" or the "Agent") with
respect to the offer and sale by the Company of 2,041,250 shares
(subject to increase up to 2,347,437 shares in the event of an
oversubscription) of the Company's Common Stock, par value $.01 per
share (the "Common Stock"). The shares of Common Stock to be sold by
the Company are hereinafter sometimes called the "Securities." In
addition, as described herein, the Company expects to contribute
shares of Common Stock in an amount equal to 8% of the shares of
Common Stock sold in the Offerings (as hereinafter defined) to the
Bay State Federal Charitable Foundation (the "Foundation"), such
shares hereinafter being referred to as the "Foundation Shares".
The Securities are being offered for sale and the
Foundation Shares are being contributed in accordance with the plan
of conversion (the "Plan") adopted by the Board of Directors of the
Bank pursuant to which the Bank intends to convert from a federally
chartered mutual savings bank to a federally chartered stock savings
bank and issue all of its stock to the Company. Pursuant to the
Plan, the Company is offering to the Bank's tax qualified employee
benefit plans, including the Employee Stock Ownership Plan (the
"ESOP") (collectively, the "Employee Plans") and to certain of the
Bank's members rights to subscribe for the Securities in a
subscription offering (the "Subscription Offering"). To the extent
the Securities are not subscribed for in the Subscription Offering,
such Securities may be offered to certain members of the general
public, with preference given to certain natural persons residing in
the counties in which the Bank's offices are located, in a direct
community offering (the "Community Offering") to be commenced
subsequent to the Subscription Offering. It is currently anticipated
by the Bank
<PAGE> 2
-2-
and the Company that any Securities not subscribed for in the
Subscription or Community Offering will be offered, subject to
Section 3 hereof, in a syndicated community offering (the "Syndicated
Community Offering"). The Subscription Offering, the Community
Offering and the Syndicated Community Offering are hereinafter
referred to collectively as the "Offerings," and the conversion of
the Bank from mutual to stock form, the acquisition of the capital
stock of the Bank by the Company and the Offerings are hereinafter
referred to collectively as the "Conversion." It is acknowledged
that the number of Securities to be sold in the Conversion may be
increased or decreased as described in the Prospectus (as hereinafter
defined). If the number of Securities is increased or decreased in
accordance with the Plan, the term "Securities" shall mean such
greater or lesser number, where applicable. In the event that a
holding company form of organization is not utilized, all pertinent
terms of this Agreement 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.
In connection with the Conversion and pursuant to the terms of
the Plan as described in the Prospectus, the Company has established
the Foundation. Immediately following the consummation of the
Conversion, subject to the approval of the establishment of the
Foundation by the members of the Bank and compliance with certain
conditions as may be imposed by regulatory authorities, the Company
will contribute between 107,100 and 144,900 Foundation Shares of
Common Stock (subject to increase in certain circumstances to 166,635
shares) to the Foundation.
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form SB-2
(No. 33-____), including a related prospectus, for the registration
of the Securities and the Foundation Shares under the Securities Act
of 1933, as amended (the "Securities Act"), has filed such amendments
thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare
such registration statement effective, and will file such additional
amendments thereto and such amended prospectuses and prospectus
supplements as may hereafter be required. Such registration statement
(as amended to date, if applicable, and as from time to time amended
or supplemented hereafter) and the prospectuses constituting a part
thereof (including in each case all documents incorporated or deemed
to be incorporated by reference therein and the information, if any,
deemed to be a part thereof pursuant to the rules and regulations of
the Commission under the Securities Act, as from time to time amended
or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations"), are hereinafter referred to as the
"Registration Statement" and the "Prospectus," respectively, except
that if any revised prospectus shall be used by the Company in
connection with the Subscription and Community Offerings or the
Syndicated Community Offering which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes
effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act
Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Agent
for such use.
<PAGE> 3
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Concurrently with the execution of this Agreement, the Company
is delivering to the Agent copies of the Prospectus of the Company to
be used in the Subscription and Community Offerings. Such prospectus
contains information with respect to the Bank, the Company and the
Common Stock.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) The Company and the Bank jointly and severally
represent and warrant to the Agent as of the date hereof as follows:
(i) The Registration Statement has been declared
effective by the Commission, no stop order has been issued with
respect thereto and no proceedings therefor have been initiated
or, to the knowledge of the Company and the Bank, threatened by
the Commission. At the time the Registration Statement became
effective and at the Closing Time referred to in Section 2
hereof, the Registration Statement complied and will comply in
all material respects with the requirements of the Securities
Act and the Securities Act Regulations and did not and will not
contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus, at
the date hereof does not and at the Closing Time referred to in
Section 2 hereof will not include an untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus made in reliance
upon and in conformity with information with respect to the
Agent furnished to the Company in writing by the Agent expressly
for use in the Registration Statement or Prospectus (the "Agent
Information," which the Company and the Bank acknowledge appears
only in the sections captioned "Market for Common Stock" and the
first two paragraphs of the section "The Conversion-Marketing
and Underwriting Arrangements" of the Prospectus).
(ii) The Company has filed with the Department of the
Treasury, Office of Thrift Supervision (the "OTS") the Company's
application for approval of its acquisition of the Bank (the
"Holding Company Application") on Form H-(e)1-S promulgated
under the savings and loan holding company provisions of the
Home Owners' Loan Act, as amended ("HOLA") and the regulations
promulgated thereunder. The Company has received written notice
from the OTS of its approval of the acquisition of the Bank,
such approval remains in full force and effect and no order has
been issued by the OTS suspending or revoking such approval and
no proceedings therefor have been initiated or, to the knowledge
of the Company or the Bank, threatened by the OTS. At the date
of such approval and at the Closing Time referred to in Section
2, the Holding Company Application complied and will comply in
all material respects with the applicable provisions of HOLA and
the regulations promulgated thereunder.
<PAGE> 4
-4-
(iii) Pursuant to the rules and regulations of the OTS
governing the conversion of federally chartered mutual savings
banks to stock form (the "Conversion Regulations"), the Bank has
filed with the OTS an application for conversion on Form AC, and
has filed such amendments thereto and supplementary materials as
may have been required to the date hereof (such application, as
amended to date, if applicable, and as from time to time amended
or supplemented hereafter, is hereinafter referred to as the
"Conversion Application"), including copies of the Bank's Proxy
Statement, dated ______________, 1997, relating to the
Conversion (the "Proxy Statement"), and the Prospectus. The OTS
has, by letter dated __________, 199__, approved the Conversion
Application, such approval remains in full force and effect and
no order has been issued by the OTS suspending or revoking such
approval and no proceedings therefor have been initiated or, to
the knowledge of the Company or the Bank, threatened by the
OTS. At the date of such approval and at the Closing Time
referred to in Section 2, the Conversion Application complied
and will comply in all material respects with the applicable
provisions of the Conversion Regulations.
(iv) At the time of their use, the Proxy Statement and
any other proxy solicitation materials will comply in all
material respects with the applicable provisions of the
Conversion Regulations and will not contain an untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
Company and the Bank will promptly file the Prospectus and any
supplemental sales literature with the Commission and the OTS.
The Prospectus and all supplemental sales literature, as of the
date the Registration Statement became effective and at the
Closing Time referred to in Section 2, complied and will comply
in all material respects with the applicable requirements of the
Conversion Regulations and, at or prior to the time of their
first use, will have received all required authorizations of the
OTS for use in final form.
(v) Neither the SEC nor the OTS has, by order or
otherwise, prevented or suspended the use of the Prospectus or
any supplemental sales literature authorized by the Company or
the Bank for use in connection with the Offerings.
(vi) At the Closing Time referred to in Section 2, the
Company and the Bank will have completed the conditions
precedent to the Conversion and the establishment of the
Foundation in accordance with the Plan, the applicable
Conversion Regulations and all other applicable laws,
regulations, decisions and orders, including all material terms,
conditions, requirements and provisions precedent to the
Conversion imposed upon the Company or the Bank by the OTS, the
Federal Deposit Insurance Corporation (the "FDIC"), or any other
regulatory authority, other than those which the regulatory
authority permits to be completed after the Conversion.
(vii) Keller & Company, Inc., which prepared the
valuation of the Bank as part of the Conversion, has advised the
Company and the Bank in writing that it
<PAGE> 5
-5-
satisfies all requirements for an appraiser set forth in the
Conversion Regulations and any interpretations or guidelines
issued by the FDIC with respect thereto.
(viii) Shatswell MacLeod & Company, P.C., the
accountants who certified the consolidated financial statements
and supporting schedules of the Bank included in the
Registration Statement and the Prospectus, have advised the
Company and the Bank in writing that they are, with respect to
the company and the Bank, independent public accountants within
the meaning of the Code of Ethics of the American Institute of
Certified Public Accountants (the "AICPA"), and such accountants
are, with respect to the Company, the Bank and each subsidiary
of the Bank, independent certified public accountants as
required by the Securities Act and the Securities Act
Regulations.
(ix) The Bank has one subsidiary which is inactive.
(x) The consolidated financial statements and the
related notes thereto included in the Registration Statement and
the Prospectus present fairly the financial position of the
Company, the Bank and its consolidated subsidiary at the dates
indicated and the results of operations, retained earnings and
cash flows for the periods specified, and comply as to form in
all material respects with the applicable accounting
requirements of the Securities Act Regulations and the
Conversion Regulations; except as otherwise stated in the
Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and the supporting
schedules and tables included in the Registration Statement
present fairly the information required to be stated therein.
(xi) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, except as otherwise stated therein (A) there has
been no material adverse change in the financial condition,
results of operations or business affairs of the Company, the
Bank and its subsidiary considered as one enterprise, whether or
not arising in the ordinary course of business, and (B) except
for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the
Company, the Bank or its subsidiary, other than those in the
ordinary course of business, which are material with respect to
the Company, the Bank and its subsidiary, considered as one
enterprise.
(xii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement; and the
Company is duly qualified as a foreign corporation to transact
business and is in good standing in the State of Massachusetts
and in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to
so qualify would not have a material adverse effect on the
financial condition, results of operations or business
<PAGE> 6
-6-
affairs of the Company, the Bank and its subsidiary, considered as
one enterprise.
(xiii) Upon consummation of the Conversion and the
contribution of the Foundation Shares as described in the
Prospectus, the authorized, issued and outstanding capital stock
of the Company will be as set forth in the Prospectus under
"Capitalization" (except for subsequent issuances, if any,
pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectus); no shares of Common Stock have
been or will be issued and outstanding prior to the Closing Time
referred to in Section 2; at the time of Conversion, the
Securities will have been duly authorized for issuance and, when
issued and delivered by the Company pursuant to the Plan against
payment of the consideration calculated as set forth in the Plan
and stated on the cover page of the Prospectus, will be duly and
validly issued and fully paid and non-assessable; the terms and
provisions of the Common Stock and the capital stock of the
Company conform to all statements relating thereto contained in
the Prospectus; the certificates representing the shares of
Common Stock conform to the requirements of applicable law and
regulations; and the issuance of the Securities is not subject
to preemptive or other similar rights.
(xiv) The Bank, as of the date hereof, is a federally
chartered savings bank in mutual form and upon consummation of
the Conversion will be a federally chartered savings bank in
stock form, in both instances with full corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus; the
Company, the Bank and its subsidiary have obtained all licenses,
permits and other governmental authorizations currently required
for the conduct of their respective businesses or required for
the conduct of their respective businesses as contemplated by
the Holding Company Application and the Conversion Application,
except where the failure to obtain such licenses, permits or
other governmental authorizations would not have a material
adverse effect on the financial condition, results of operations
or business affairs of the Company, the Bank and its subsidiary
considered as one enterprise; all such licenses, permits and
other governmental authorizations are in full force and effect
and the Company, the Bank and its subsidiary are in all material
respects in compliance therewith; neither the Company, the Bank
nor its subsidiary has received notice of any proceeding or
action relating to the revocation or modification of any such
license, permit or other governmental authorization which,
singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse
effect on the financial condition, results of operations or
business affairs of the Company, the Bank and its subsidiary,
considered as one enterprise; and the Bank is in good standing
under the laws of the United States and is qualified as a
foreign corporation in any jurisdiction in which the failure to
so qualify would have a material adverse effect on the financial
condition, results of operations or business affairs of the
Company, the Bank and its subsidiary considered as one
enterprise.
(xv) The deposit accounts of the Bank are insured by
the Savings Association Insurance Fund ("SAIF") of the FDIC up
to the applicable limits and upon consummation of the
Conversion, the liquidation account for the benefit of eligible
<PAGE> 7
-7-
account holders and supplemental eligible account holders will be
duly established in accordance with the requirements of the
Conversion Regulations. The Bank is a "qualified thrift lender"
within the meaning of 12 U.S.C. Section 1467a(m).
(xvi) Upon consummation of the Conversion, the
authorized capital stock of the Bank will be 11,000,000 shares
of common stock, par value $.01 per share (the "Bank Common
Stock") and 1,000,000 shares of preferred stock, par value $.01
per share (the "Bank Preferred Stock"), and the issued and
outstanding capital stock of the Bank will be as set forth in
the Prospectus; and as of Closing Time referred to in Section 2,
all of the issued and outstanding capital stock of the Bank will
be duly authorized, validly issued and fully paid and
nonassessable, and have been issued in compliance with all
federal and state securities laws. The shares of Bank Common
Stock to be issued to the Company will have been duly authorized
for issuance and, when issued and delivered by the Bank pursuant
to the Plan against payment of the consideration calculated as
set forth in the Plan and as described in the Prospectus, will
be duly and validly issued and fully paid and nonassessable, and
all such capital stock will be owned beneficially and of record
by the Company free and clear of any security interest,
mortgage, pledge, lien, encumbrance or legal or equitable claim;
the terms and provisions of the Bank Common Stock and the Bank
Preferred Stock conform to all statements relating thereto
contained in the Prospectus, and the certificates representing
the shares of the Bank Common Stock will conform with the
requirements of applicable laws and regulations; and the
issuance of the Bank Common Stock is not subject to preemptive
or similar rights.
(xvii) The Foundation has been duly incorporated and is
validly existing as a non stock corporation in good standing
under the laws of the State of Delaware with corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus; the
Foundation will not be a savings and loan holding company within
the meaning of 12 U.S.C. Section 1467a(a)(1)(D) as a result of
the issuance of shares of Common Stock to it in accordance with
the terms of the Plan and in the amounts as described in the
Prospectus; no approvals are required to establish the
Foundation and to contribute the shares of Common Stock thereto
as described in the Prospectus other than those imposed by the
OTS; except as specifically disclosed in the Prospectus and the
Proxy Statement, there are no agreements and/or understandings,
written or oral, between the Company and/or the Bank and the
Foundation with respect to the control, directly or indirectly,
over the voting and the acquisition or disposition of the
Foundation Shares; at the time of the Conversion, the Foundation
Shares will have been duly authorized for issuance and, when
issued and contributed by the Company pursuant to the Plan, will
be duly and validly issued and fully paid and non-assessable;
and the issuance of the Foundation Shares is not subject to
preemptive or similar rights.
(xviii) The subsidiary of the Bank has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own,
lease and operate its properties and to conduct its business,
and is duly qualified to transact business and is in
<PAGE> 8
-8-
good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to
so qualify would not have a material adverse effect on the
financial condition, results of operations or business affairs
of the Company, the Bank and its subsidiary considered as one
enterprise; the activities of subsidiary are permitted to
subsidiary of a federally chartered savings bank by the rules,
regulations, resolutions and practices of the OTS; all of the
issued and outstanding capital stock of the subsidiary has been
duly authorized and validly issued, is fully paid and
nonassessable and is owned by the Bank, directly, free and clear
of any security interest, mortgage, pledge, lien, encumbrance or
legal or equitable claim.
(xix) The Company and the Bank have taken all corporate
action necessary for them to execute, deliver and perform this
Agreement, and this Agreement has been duly executed and
delivered by, and is the valid and binding agreement of, the
Company and the Bank, enforceable in accordance with its terms,
except as may be limited by bankruptcy, insolvency or other laws
affecting the enforceability of the rights of creditors
generally and judicial limitations on the right of specific
performance and except as the enforceability of indemnification
and contribution provisions may be limited by applicable
securities laws.
(xx) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus and prior to the Closing Time, except as otherwise
may be indicated or contemplated therein, none of the Company,
the Bank or its subsidiary will have (A) issued any securities
or incurred any liability or obligation, direct or contingent,
or borrowed money, except borrowings in the ordinary course of
business from the same or similar sources and in similar amounts
and having similar maturities as indicated in the Prospectus, or
(B) entered into any transaction or series of transactions which
is material in light of the business of the Company, the Bank
and its subsidiary, taken as a whole, excluding the origination,
purchase and sale of loans or the purchase or sale of investment
securities or mortgaged-backed securities in the ordinary course
of business or otherwise as indicated in the Prospectus.
(xxi) No approval of any regulatory or supervisory or
other public authority is required in connection with the
execution and delivery of this Agreement or the issuance of the
Securities and the Foundation Shares that has not been obtained
and a copy of which has been delivered to the Agent, except for
the declaration of effectiveness of any required post-effective
amendment to the Registration Statement by the Commission and
approval thereof by the OTS, the issuance of the Stock Charter
by the OTS, and as may be required under the securities laws of
various jurisdictions.
(xxii) Neither the Company, the Bank nor subsidiary is
in violation of its certificate of incorporation, organization
certificate, articles of incorporation or charter, as the case
may be, or bylaws (and the Bank will not be in violation of its
charter or bylaws in stock form upon consummation of the
Conversion); and neither the Company,
<PAGE> 9
-9-
the Bank nor its subsidiary is in default (nor has any event occurred
which, with notice or lapse of time or both, would constitute a
default) in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company, the Bank or its subsidiary is a
party or by which it or them may be bound, or to which the
property or assets of the Company, the Bank or its subsidiary is
subject, except for such defaults that would not, individually
or in the aggregate, have a material adverse effect on the
financial condition, results of operations or business of the
Company, the Bank and its subsidiary considered as one
enterprise; and there are no contracts or documents of the
Company, the Bank or its subsidiary which are required to be
filed as exhibits to the Registration Statement or the
Conversion Application which have not been so filed.
(xxiii) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
herein have been duly authorized by all necessary corporate
action and do not and will not conflict with or constitute a
breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property
or assets of the Company, the Bank or its subsidiary pursuant
to, any contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the Company, the Bank or its
subsidiary is a party or by which it or them may be bound, or
to which the property or assets of the Company or its
subsidiary is subject, except for such defaults that would not,
individually or in the aggregate, have a material adverse effect
on the financial condition, results of operations or business
affairs of the Company, the Bank and its subsidiary considered
as one enterprise; nor will such action result in any violation
of the provisions of the certificate of incorporation,
organization certificate, articles of incorporation or charter
or by-laws of the Company, the Bank or its subsidiary, or any
applicable law, administrative regulation or administrative or
court decree.
(xxiv) No labor dispute with the employees of the
Company, the Bank or its subsidiary exists or, to the knowledge
of the Company or the Bank, is imminent or threatened; and the
Company and the Bank are not aware of any existing or threatened
labor disturbance by the employees of its principal suppliers
or contractors which might be expected to result in any material
adverse change in the financial condition, results of operations
or business affairs of the Company, the Bank and its subsidiary
considered as one enterprise.
(xxv) Each of the Company, the Bank and its subsidiary
has good and marketable title to all properties and assets for
which ownership is material to the business of the Company, the
Bank or its subsidiary and to those properties and assets
described in the Prospectus as owned by them, free and clear of
all liens, charges, encumbrances or restrictions, except such as
are described in the Prospectus or are not material in relation
to the business of the Company, the Bank or its subsidiary
considered as one enterprise; and all of the leases and
subleases material to the business of the Company, the Bank or
its subsidiary under which the Company, the Bank or its
subsidiary hold properties,
<PAGE> 10
-10-
including those described in the Prospectus, are valid and binding
agreements of the Company, the Bank and its subsidiary,
enforceable in accordance with their terms.
(xxvi) None of the Company, the Bank nor its subsidiary
are in violation of any directive from the OTS or the FDIC to
make any material change in the method of conducting its
respective businesses; the Bank and its subsidiary have
conducted and are conducting their business so as to comply in
all material respects with all applicable statutes, regulations
and administrative and court decrees (including, without
limitation, all regulations, decisions, directives and orders of
the OTS or the FDIC).
(xxvii) There is no action, suit or proceeding before or
by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company or the
Bank, threatened, against or affecting the Company, the Bank or
its subsidiary which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or
which might result in any material adverse change in the
financial condition, results of operations or business affairs
of the Company, the Bank and its subsidiary considered as one
enterprise, or which might materially and adversely affect the
properties or assets thereof or which might materially and
adversely affect the consummation of the Conversion; all pending
legal or governmental proceedings to which the Company, the Bank
or its subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, are considered in the aggregate not
material; and there are no contracts or documents of the Company
or any of its subsidiary which are required to be filed as
exhibits to the Registration Statement or the Conversion
Application which have not been so filed.
(xxviii) The Bank has obtained an opinion of its counsel,
Muldoon, Murphy & Faucette with respect to the legality of the
Securities to be issued and the Foundation Shares and the state
and local income tax and federal income tax consequences of the
Conversion (including franchise tax, sales or use tax, license
fee on foreign corporations, stock transfer tax, real property
transfer gain tax and real estate transfer tax), copies of which
are filed as exhibits to the Registration Statement; all
material aspects of the aforesaid opinions are accurately
summarized in the Prospectus; the facts and representations upon
which such opinions are based are truthful, accurate and
complete in all material respects; and neither the Bank nor the
Company has taken or will take any action inconsistent therewith.
(xxix) The Bank has obtained an opinion of Shatswell
MacLeod & Company, P.C. with respect to the Massachusetts income
tax consequences of the Conversion, a copy of which is filed as
an exhibit to the Registration Statement, and an opinion of
Muldoon Murphy & Faucette with respect to the federal income tax
consequences of the Foundation; all material aspects of the
aforesaid opinions that are required to be disclosed are
accurately summarized in the Prospectus; the facts and
representation upon which such opinions are based are truthful,
accurate and complete in
<PAGE> 11
-11-
all material respects, and neither the Bank nor the Company has taken
or will take any action inconsistent therewith.
(xxx) The Company is not required to be registered
under the Investment Company Act of 1940, as amended.
(xxxi) All of the loans represented as assets on the
most recent consolidated financial statements or consolidated
selected financial information of the Bank included in the
Prospectus meet or are exempt from all requirements of federal,
state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of
Regulation Z and 12 C.F.R. Parts 226 and 560, real estate
settlement procedures, consumer credit protection, equal credit
opportunity and all disclosure laws applicable to such loans,
except for violations which, if asserted, would not result in a
material adverse effect on the financial condition, results of
operations or business of the Company, the Bank and its
subsidiary considered as one enterprise.
(xxxii) To the knowledge of the Company and the Bank,
with the exception of the intended loan to the Bank's ESOP by
the Company to enable the ESOP to purchase shares of Common
Stock in an amount of up to 8% of the Common Stock issued in the
Conversion, none of the Company, the Bank or employees of the
Bank has made any payment of funds of the Company or the Bank as
a loan for the purchase of the Common Stock or made any other
payment of funds prohibited by law, and no funds have been set
aside to be used for any payment prohibited by law.
(xxxiii) The Company, the Bank and its subsidiary are in
compliance in all material respects with the applicable
financial recordkeeping and reporting requirements of the
Currency and Foreign Transaction Reporting Act of 1970, as
amended, and the rules and regulations thereunder.
(xxxiv) None of the Company, the Bank nor its subsidiary
nor any properties owned or operated by the Company, the Bank or
its subsidiary is in violation of or liable under any
Environmental Law (as defined below), except for such violations
or liabilities that, individually or in the aggregate, would not
have a material adverse effect on the financial condition,
results of operations or business affairs of the Company, the
Bank and its subsidiary considered as one enterprise. There are
no actions, suits or proceedings, or demands, claims, notices or
investigations (including, without limitation, notices, demand
letters or requests for information from any governmental
agency) instituted or pending, or to the knowledge of the
Company or the Bank threatened, relating to the liability of any
property owned or operated by the Company, the Bank or the
subsidiary thereof, under any Environmental Law. For purposes
of this subsection, the term "Environmental Law" means any
federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with
any regulatory authority relating to (i) the protection,
preservation or restoration of the environment (including,
without limitation,
<PAGE> 12
-12-
air, water, vapor, surface water, groundwater, drinking water supply,
surface soil, subsurface soil, plant and animal life or any
other natural resource), and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing,
handling, labeling, production, release or disposal of any
substance presently listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any
material containing any such substance as a component.
(xxxv) The Company, the Bank and its subsidiary have
filed all federal income and state and local franchise tax
returns required to be filed and have made timely payments of
all taxes shown as due and payable in respect of such returns,
and no deficiency has been asserted with respect thereto by any
taxing authority.
(xxxvi) The Company has received approval, subject to
regulatory approval to consummate the Offerings, to have the
Securities quoted on the American Stock Exchange ("AMEX")
effective as of the Closing Time.
(xxxvii) The Company has filed a registration statement
for the Common Stock under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and has
requested that such registration statement be effective
concurrent with the effectiveness of the Registration Statement.
(b) Any certificate signed by officer of the Company
or the Bank and delivered to either of the Agent to counsel for
the Agent shall be deemed a representation and warranty by the
Company or the Bank to each Agent as to the matters covered
thereby.
SECTION 2. APPOINTMENT OF SANDLER O'NEILL; SALE AND DELIVERY
OF THE SECURITIES; CLOSING.
On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth,
the Company hereby appoints Sandler O'Neill as its Agent to consult
with and advise the Company, and to assist the Company with the
solicitation of subscriptions and purchase orders for Securities, in
connection with the Company's sale of Common Stock in the Offerings.
On the basis of and in reliance upon the representations and
warranties herein contained, and subject to the terms and conditions
herein set forth, Sandler O'Neill accepts such appointment and agrees
to use its best efforts to assist the Company with the solicitation
of subscriptions and purchase orders for Securities in accordance
with this Agreement; provided, however, that the Agent shall not be
obligated to take any action which is inconsistent with any
applicable laws, regulations, decisions or orders. The services to
be rendered by Sandler O'Neill pursuant to this appointment include
the following: (i) consulting as to the securities marketing
implications of any aspect of the Plan of Conversion or related
corporate documents; (ii) reviewing with the Board of Directors the
independent appraiser's appraisal of the Common Stock; (iii)
reviewing all offering documents, including the Prospectus,
<PAGE> 13
-13-
stock order form and related offering materials (it being understood
that preparation and filing of such documents are the sole
responsibility of the Company and the Bank and their counsel); (iv)
assisting in the design and implementation of a marketing strategy
for the Offerings; (v) assisting the Company and the Bank in
obtaining all requisite regulatory approvals; (vi) assisting Bank
management in scheduling and preparing for meetings with potential
investors and broker-dealers; and (vii) providing such other general
advice and assistance as may be requested to promote the successful
completion of the Conversion.
The appointment of the Agent hereunder shall terminate upon
the earlier to occur of (a) forty-five (45) days after the last day
of the Subscription or Community Offering, unless the Company and the
Agent agree in writing to extend such period and the OTS agrees to
extend the period of time in which the Securities may be sold, or (b)
the receipt and acceptance of subscriptions and purchase orders for
all of the Securities, or (c) the completion of the Syndicated
Community Offering.
If any of the Securities remain available after the
expiration of the Subscription and Community Offering, at the request
of the Company and the Bank, Sandler O'Neill will seek to form a
syndicate of registered broker or dealers ("Selected Dealers") to
assist in the solicitation of purchase orders of such Securities on a
best efforts basis, subject to the terms and conditions set forth in
a selected dealers' agreement (the "Selected Dealers' Agreement"),
substantially in the form set forth in Exhibit A to this Agreement.
Sandler O'Neill will endeavor to limit the aggregate fees to be paid
by the Company and the Bank under any such Selected Dealers'
Agreement to an amount competitive with gross underwriting discounts
charged at such time for underwritings of comparable amounts of stock
sold at a comparable price per share in a similar market environment;
provided, however, that the aggregate fees payable to Sandler O'Neill
and Selected Dealers shall not exceed 7% of the aggregate Purchase
Price of the Securities sold by such Selected Dealers. Sandler
O'Neill will endeavor to distribute the Securities among the Selected
Dealers in a fashion which best meets the distribution objective of
the Company and the requirements of the Plan, which may result in
limiting the allocation of stock to certain Selected Dealers. It is
understood that in no event shall Sandler O'Neill be obligated to act
as a Selected Dealer or to take or purchase any Securities.
In the event the Company is unable to sell at least the
total minimum of the Securities, as set forth on the cover page of
the Prospectus, within the period herein provided, this Agreement
shall terminate and the Company shall refund to any persons who have
subscribed for the Securities the full amount which it may have
received from them, together with interest as provided in the
Prospectus, and no party to this Agreement shall have any obligation
to the others hereunder, except for the obligations of the Company
and the Bank as set forth in Sections 4, 6(a) and 7 hereof and the
obligations of the Agent as provided in Sections 6(b) and 7 hereof
which shall survive any such termination. Appropriate arrangements
for placing the funds received from subscriptions for Securities or
other offers to purchase Securities in special interest-bearing
accounts with the Bank until all Securities are sold and paid for
were made prior to the commencement of the Subscription Offering,
with provision for refund to the purchasers as set forth above, or
for delivery to the Company if not less than 1,338,750 shares of
<PAGE> 14
-14-
Common Stock are sold.
If at least the total minimum of Securities, as set forth
on the cover page of the Prospectus, are sold, the Company agrees to
issue or have issued the Securities sold and to release for delivery
certificates for such Securities at the Closing Time against payment
therefor by release of funds from the special interest-bearing
accounts referred to above. The closing shall be held at the offices
of _________________________, at 10:00 a.m., local time, or at such
other place and time as shall be agreed upon by the parties hereto,
on a business day to be agreed upon by the parties hereto. The
Company shall notify the Agent by telephone, confirmed in writing,
when funds shall have been received for all the Securities.
Certificates for Securities shall be delivered directly to the
purchasers thereof in accordance with their directions.
Notwithstanding the foregoing, certificates for Securities purchased
through Selected Dealers shall be made available to the Agent for
inspection at least 48 hours prior to the Closing Time at such office
as the Agent shall designate. The hour and date upon which the
Company shall release for delivery all of the Securities, in
accordance with the terms hereof, is herein called the "Closing Time."
The Company will pay any stock issue and transfer taxes
which may be payable with respect to the sale of the Securities.
In addition to reimbursement of the expenses specified in
Section 4 hereof, the Agent will receive the following compensation
for its services hereunder:
(a) One and 55/100 percent (1.55%) of the aggregate Actual
Purchase Price (as defined in the Prospectus) of the Securities
sold in the Subscription and Community Offering, excluding in
each case shares purchased by (i) any employee benefit plan of
the Company or the Bank established for the benefit of their
respective directors, officers and employees, (ii) by the
Foundation or and (iii) any director, officer or employee of the
Company or the Bank or members of their immediate families
(which term shall mean parents, grandparents, spouse, siblings,
children and grandchildren); and
(b) with respect to any Securities sold by an NASD member
firm (other than Sandler O'Neill) under the Selected Dealers'
Agreement in the Syndicated Community Offering, (i) the
compensation payable to Selected Dealers under any Selected
Dealers' Agreement, (ii) any sponsoring dealer's fees; and (iii)
a management fee to Sandler O'Neill of one and one-half percent
(1.5%). Any fees payable to Sandler O'Neill for Securities sold
by Sandler O'Neill under any such agreement shall be limited to
an aggregate of One and fifty-five one hundredths of one percent
(1.55%) of the Actual Purchase Price of such Securities.
If this Agreement is terminated by the Agent in accordance
with the provisions of Section 9(a) hereof or the Conversion is
terminated by the Company or the Bank, no fee shall be payable by the
Company to Sandler O'Neill; however, the Company shall reimburse the
Agent for all of its reasonable out-of-pocket expenses incurred prior
to termination, including the
<PAGE> 15
-15-
reasonable fees and disbursements of counsel for the Agent, in
accordance with the provisions of Section 4 hereof.
All fees payable to the Agent hereunder shall be payable in
immediately available funds at Closing Time, or upon the termination
of this Agreement, as the case may be. In recognition of the long
lead times involved in the conversion process, the Bank agrees to
make advance payments to the Agent in the aggregate amount of
$25,000, all of which has been previously paid and the remaining
$___________ of which shall be payable upon execution hereof which
shall be credited against any fees or reimbursement of expenses
payable hereunder.
SECTION 3. COVENANTS OF THE COMPANY. The Company and the
Bank covenant with the Agent as follows:
(a) The Company and the Bank will prepare and file such
amendments or supplements to the Registration Statement, the
Prospectus, the Conversion Application and the Proxy Statement
as may hereafter be required by the Securities Act Regulations
or the Conversion Regulations or as may hereafter be requested
by the Agent. Following completion of the Subscription or
Community Offering, in the event of a Syndicated Community
Offering, the Company and the Bank will (i) promptly prepare and
file with the Commission a post-effective amendment to the
Registration Statement relating to the results of the
Subscription and Community Offerings, any additional information
with respect to the proposed plan of distribution and any
revised pricing information or (ii) if no such post-effective
amendment is required, will file with, or mail for filing to,
the Commission a prospectus or prospectus supplement containing
information relating to the results of the Subscription and
Community Offerings and pricing information pursuant to Rule 424
of the Securities Act Regulations, in either case in a form
acceptable to the Agent. The Company and the Bank will notify
the Agent immediately, and confirm the notice in writing, (i) of
the effectiveness of any post-effective amendment of the
Registration Statement, the filing of any supplement to the
Prospectus and the filing of any amendment to the Conversion
Application, (ii) of the receipt of any comments from the OTS or
the Commission with respect to the transactions contemplated by
this Agreement or the Plan, (iii) of any request by the
Commission or the OTS for any amendment to the Registration
Statement or the Conversion Application or any amendment or
supplement to the Prospectus or for additional information, (iv)
of the issuance by the OTS of any order suspending the Offerings
or the use of the Prospectus or the initiation of any
proceedings for that purpose, (v) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for
that purpose, and (vi) of the receipt of any notice with respect
to the suspension of any qualification of the Securities for
offering or sale in any jurisdiction. The Company and the Bank
will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
<PAGE> 16
-16-
(b) The Company and the Bank will give the Agent notice of
its intention to file or prepare any amendment to the Conversion
Application or Registration Statement (including any
post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company
proposes for use in connection with the Syndicated Community
Offering of the Securities which differs from the prospectus on
file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the Securities
Act Regulations), will furnish the Agent with copies of any such
amendment or supplement a reasonable amount of time prior to
such proposed filing or use, as the case may be, and will not
file any such amendment or supplement or use any such prospectus
to which the Agent or counsel for the Agent may object.
(c) The Company and the Bank will deliver to the Agent as
many signed copies and as many conformed copies of the
Conversion Application and the Registration Statement as
originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein)
as the Agent may reasonably request, and from time to time such
number of copies of the Prospectus as the Agent may reasonably
request.
(d) During the period when the Prospectus is required to
be delivered (the "Offering Period"), the Company and the Bank
will comply, at their own expense, with all requirements imposed
upon them by the OTS, by the applicable Conversion Regulations,
as from time to time in force, and by the Securities Act, the
Securities Act Regulations, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations
of the Commission promulgated thereunder, including, without
limitation, Regulation M under the Exchange Act, so far as
necessary to permit the continuance of sales or dealing in
shares of Common Stock during the Offering Period in accordance
with the provisions hereof and the Prospectus.
(e) If any event or circumstance shall occur as a result
of which it is necessary, in the reasonable opinion of counsel
for the Agent, to amend or supplement the Prospectus in order to
make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a
purchaser, the Company and the Bank will forthwith amend or
supplement the Prospectus (in form and substance satisfactory to
counsel for the Agent) so that, as so amended or supplemented,
the Prospectus will not include an untrue statement of a
material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances existing at the time it is delivered to a
purchaser, not misleading, and the Company and the Bank will
furnish to the Agent a reasonable number of copies of such
amendment or supplement. For the purpose of this subsection,
the Company and the Bank will each furnish such information with
respect to itself as the Agent may from time to time reasonably
request.
<PAGE> 17
-17-
(f) The Company and the Bank will take all necessary
action, in cooperation with the Agent, to qualify the Securities
for offer and sale under the applicable securities laws of such
states of the United States and other jurisdictions as the
Conversion Regulations may require and as the Agent and the
Company have agreed; provided, however, that neither the Company
nor the Bank shall be obligated to execute or file any general
consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so
qualified. In each jurisdiction in which the Securities have
been so qualified, the Company and the Bank will file such
statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the
Registration Statement.
(g) The Company authorizes Sandler O'Neill and any
Selected Dealers to act as agent of the Company in distributing
the Prospectus to persons entitled to receive subscription
rights and other persons to be offered Securities having record
addresses in the states or jurisdictions set forth in a survey
of the securities or "blue sky" laws of the various
jurisdictions in which the Offerings will be made (the "Blue Sky
Survey").
(h) The Company will make generally available to its
security holders as soon as practicable, but not later than 60
days after the close of the period covered thereby, an earnings
statement (in form complying with the provisions of Rule 158 of
the 1933 Act Regulations) covering a twelve month period
beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said
Rule 158) of the Registration Statement.
(i) During the period ending on the third anniversary of
the expiration of the fiscal year during which the closing of
the transactions contemplated hereby occurs, the Company will
furnish to its stockholders, as soon as practicable after the
end of each such fiscal year (beginning with its 1998 fiscal
year), an annual report (including consolidated statements of
financial condition and consolidated statements of income,
stockholders' equity and cash flows, certified by independent
public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial
information of the Company, the Bank and its subsidiary for such
quarter in reasonable detail. In addition, such annual report
and quarterly consolidated summary financial information shall
be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing
thereof to stockholders of the Company.
(j) During the period ending on the third anniversary of
the expiration of the fiscal year during which the closing of
the transactions contemplated hereby occurs, the Company will
furnish to the Agent (i) as soon as available, a copy of each
report or other document of the Company furnished generally to
stockholders of the Company or furnished to or filed with the
Commission under the Exchange Act or any national
<PAGE> 18
-18-
securities exchange or system on which any class of securities of the
Company is listed, and (ii) from time to time, such other
information concerning the Company as the Agent may reasonably
request.
(k) The Company and the Bank will conduct the Conversion
including the formation and operation of the Foundation in all
material respects in accordance with the Plan, the Conversion
Regulations and all other applicable regulations, decisions and
orders, including all applicable terms, requirements and
conditions precedent to the Conversion imposed upon the Company
or the Bank by the OTS.
(l) The Company and the Bank will use the net proceeds
received by it from the sale of the Securities in the manner
specified in the Prospectus under "Use of Proceeds."
(m) [Reserved]
(n) The Company will maintain the effectiveness of the
Exchange Act Registration Statement for not less than three
years. The Company will use its best efforts to effect the
listing of the Common Stock on AMEX or for such longer period as
OTS may require.
(o) The Company and the Bank will take such actions and
furnish such information as are reasonably requested by the
Agent in order for the Agent to ensure compliance with the
National Association of Securities Dealers, Inc.'s
"Interpretation Relating to Free-Riding and Withholding."
(p) Other than in connection with any employee benefit
plan or arrangement described in the Prospectus, the Company
will not, without the prior written consent of the Agent, sell
or issue, contract to sell or otherwise dispose of, any shares
of Common Stock other than the Securities for a period of 180
days following the Closing Time.
(q) During the period beginning on the date hereof and
ending on the later of the third anniversary of the Closing Time
or the date on which the Agent receives full payment in
satisfaction of any claim for indemnification or contribution to
which it may be entitled pursuant to Sections 6 or 7,
respectively, neither the Company nor the Bank shall, without
the prior written consent of the Agent, which consent shall not
be unreasonably withheld, take or permit to be taken any action
that could result in the Bank Common Stock becoming subject to
any security interest, mortgage, pledge, lien or encumbrance;
provided, however, that this covenant shall be null and void if
the Board of Governors of the Federal Reserve System, by
regulation, policy statement or interpretive release, or by
written order or written advice addressed to the Bank or the
Agent specifically addressing the provisions of Section 6(a)
hereof, permits indemnification of the Agent by the Bank as
contemplated by such provisions.
<PAGE> 19
-19-
(r) The Company and the Bank will comply with the
conditions imposed by or agreed to with the OTS in connection
with its approval of the Holding Company Application and with
the FDIC in connection with their approval or non-objection of,
or non-objection to, the Conversion Application including those
conditions relating to the establishment and the operation of
the Foundation; the Company and the Bank shall use their best
efforts to ensure that the Foundation submits within the time
frames required by applicable law a request to the Internal
Revenue Service to be recognized as a tax-exempt organization
under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"); the Company and the Bank will take no
action which will result in the possible loss of the
Foundation's tax exempt status; and neither the Company nor the
Bank will contribute any additional assets to the Foundation
until such time that such additional contributions will be
deductible for federal and state income tax purposes.
(s) During the period ending on the first anniversary of
the Closing Time, the Bank will comply with all applicable law
and regulation necessary for the Bank to continue to be a
"qualified thrift lender" within the meaning of 12 U.S.C.
Section 1467a(m).
(t) The Company shall not deliver the Securities until the
Company and the Bank have satisfied each condition set forth in
Section 5 hereof, unless such condition is waived by the Agent.
(u) The Company or the Bank will furnish to Sandler
O'Neill as early as practicable prior to the Closing Date, but
no later than two (2) full business days prior thereto, a copy
of the latest available unaudited interim consolidated financial
statements of the Bank and its subsidiary which have been
prepared by Shatswell, MacLeod & Company, P.C., as stated in
their letters to be furnished pursuant to subsections (e) and
(f) of Section 5 hereof.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Bank
jointly and severally agree to pay all expenses incident to the
performance of their obligations under this Agreement, including but
not limited to (i) the cost of obtaining all securities and bank
regulatory approvals, (ii) the printing and filing of the
Registration Statement as originally filed and of each amendment
thereto, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the purchasers in the Offerings,
(iv) the fees and disbursements of the Company's and the Bank's
counsel, accountants, appraiser and other advisors, (v) the
qualification of the Securities under securities laws in accordance
with the provisions of Section 3(f) hereof, including filing fees and
the fees and disbursements of counsel in connection therewith and in
connection with the preparation of the Blue Sky Survey, (vi) the
printing and delivery to the Agent of copies of the Registration
Statement as originally filed and of each amendment thereto and the
printing and delivery of the Prospectus and any amendments or
supplements thereto to the purchasers in the Offerings and to the
Agent, (vii) the printing and delivery to the Agent of copies of a
Blue Sky Survey, and (viii) the fees and expenses incurred in
connection with the listing of the Securities on the AMEX. In the
event the Agent incurs any such fees and expenses
<PAGE> 20
-20-
on behalf of the Bank or the Company, the Bank will reimburse the
Agent for such fees and expenses whether or not the Conversion is
consummated; provided, however, that the Agent shall not incur any
substantial expenses on behalf of the Bank or the Company pursuant to
this Section without the prior approval of the Bank.
The Company and the Bank jointly and severally agree to pay
certain expenses incident to the performance of the Agent's
obligations under this Agreement, regardless of whether the
Conversion is consummated, including (i) the filing fees paid or
incurred by the Agent in connection with all filings with the
National Association of Securities Dealers, Inc., and (ii) all
reasonable out of pocket expenses incurred by the Agent relating to
the Offerings, including, without limitation, advertising,
promotional, syndication and travel expenses and fees and expenses of
the Agent's counsel. All fees and expenses to which the Agent is
entitled to reimbursement under this paragraph of this Section 4
shall be due and payable upon receipt by the Company or the Bank of a
written accounting therefor setting forth in reasonable detail the
expenses incurred by the Agent, up to an aggregate maximum of $80,000.
SECTION 5. CONDITIONS OF AGENT'S OBLIGATIONS. The Company,
the Bank and the Agent agree that the issuance and the sale of
Securities and all obligations of the Agent hereunder are subject to
the accuracy of the representations and warranties of the Company and
the Bank herein contained as of the date hereof and the Closing Time,
to the accuracy of the statements of officers and directors of the
Company and the Bank made pursuant to the provisions hereof, to the
performance by the Company and the Bank of their obligations
hereunder, and to the following further conditions:
(a) No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the
Securities Act or proceedings therefor initiated or threatened
by the Commission, no order suspending the Offerings or
authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the
OTS and no order suspending the sale of the Securities in any
jurisdiction shall have been issued.
(b) At Closing Time, the Agent shall have received:
(1) The favorable opinion, dated as of Closing Time,
of Muldoon, Murphy & Faucette, counsel for the Company and
the Bank, in form and substance satisfactory to counsel for
the Agent, to the effect that:
(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing
under the laws of the State of Delaware.
(ii) The Company has full corporate power and
authority to own, lease and operate its properties and
to conduct its business as described in the
Registration Statement and Prospectus and to enter
into
<PAGE> 21
-21-
and perform its obligations under this Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good
standing in the State of Massachusetts and in each
other jurisdiction in which such qualification is
required whether by reason of the ownership or leasing
of property or the conduct of business, except where
the failure to so qualify would not have a material
adverse effect upon the financial condition, results
of operations or business affairs of the Company, the
Bank and its subsidiary, considered as one enterprise.
(iv) Upon consummation of the Conversion, and the
issuance of the Foundation Shares to the Foundation
immediately upon completion thereof, the authorized,
issued and outstanding capital stock of the Company
will be as set forth in the Prospectus and, no shares
of Common Stock have been or will be issued and
outstanding prior to the Closing Time.
(v) The Securities and the Foundation Shares
have been duly and validly authorized for issuance and
sale and, when issued and delivered by the Company
pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan, or
contributed by the Company pursuant to the Plan in the
case of the Foundation Shares, will be duly and
validly issued and fully paid and non-assessable.
(vi) The issuance of the Securities and the
Foundation Shares is not subject to preemptive or
other similar rights arising by operation of law or,
to the best of their knowledge and information,
otherwise.
(vii) The Bank has been at all times since the
date hereof and prior to the Closing Time duly
organized and validly existing under the laws of the
United States of America as a federally chartered
savings bank of mutual form, and, at Closing Time, has
become duly organized and validly existing under the
laws of the United States of America as a federally
chartered savings bank of stock form, in both
instances with full corporate power and authority to
own, lease and operate its properties and to conduct
its business as described in the Registration
Statement and the Prospectus; and the Bank is not
required to be qualified as a foreign corporation in
any other jurisdiction in which the failure to so
qualify would have a material adverse effect upon the
financial condition, results of operations or business
affairs of the Bank.
(viii) The Bank is a member in good standing of the
Federal Home Loan Bank of Massachusetts and the
deposit accounts of the Bank
<PAGE> 22
-22-
are insured by the SAIF of the FDIC up to the applicable
limits.
(ix) The subsidiary of the Bank has been duly
incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of
its incorporation, has full corporate power and
authority to own, lease and operate its properties and
to conduct its business as described in the
Registration Statement and is not required to be
qualified as a foreign corporation in any jurisdiction
in which the failure to so qualify would have a
material adverse effect upon the financial condition,
results of operations or business of the Company, the
Bank and its subsidiary, taken as a whole; the
activities of the subsidiary are permitted to a
subsidiary of a savings and loan holding company and
of a federally chartered savings bank by the rules,
regulations, resolutions and practices of the OTS; all
of the issued and outstanding capital stock of the
subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned
by the Bank directly free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(x) The Foundation has been duly incorporated
and is validly existing as a non-stock corporation in
good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and
operate its properties and to conduct its business as
described in the Prospectus; the Foundation is not a
savings and loan holding company within the meaning of
12 U.S.C. Section 1467a(a)(1)(D) as a result of the
issuance of shares of Common Stock to it in accordance
with the terms of the Plan and in the amounts as
described in the Prospectus; no approvals are required
to establish the Foundation and to contribute the
shares of Common Stock thereto as described in the
Prospectus other than those set forth in any written
notice or order of approval or non-objection of the
Conversion, the Conversion Application or the Holding
Company Application, copies of which were provided to
the Agent prior to the Closing Time.
(xi) Upon consummation of the Conversion, all of
the issued and outstanding capital stock of the Bank,
will be duly authorized and when issued and paid for
in accordance with the Plan, will be validly issued
and fully paid and nonassessable, and all such capital
stock will be owned beneficially and of record by the
Company free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity.
<PAGE> 23
-23-
(xii) The OTS has approved the Holding Company
Application and the Conversion Application and, to
such counsel's knowledge, no action is pending or
threatened with respect to the Holding Company
Application or the Conversion Application or the
acquisition by the Company of all of the Bank's issued
and outstanding capital stock; the Holding Company
Application and the Conversion Application comply as
to form in all material respects with the applicable
requirements of the OTS, (except as to financial notes
to financial statements, related schedules and other
financial, appraisal and statistical data) and the
Company is duly authorized to become a savings and
loan holding company and is duly authorized to own all
of the issued and outstanding capital stock of the
Bank to be issued pursuant to the Plan.
(xiii) (A) The execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby, including the establishment of
the Foundation and the contribution thereto of the
Foundation Shares, have been duly and validly
authorized by all necessary action on the part of each
of the Company and the Bank, and this Agreement
constitutes the legal, valid and binding agreement of
each of the Company and the Bank, enforceable in
accordance with its terms, except as rights to
indemnity and contribution hereunder maybe limited
under applicable law (it being understood that such
counsel may avail itself of customary exceptions
concerning the effect of bankruptcy, insolvency,
reorganization, moratorium or similar laws and the
availability of equitable remedies).
(B) The execution and delivery of this Agreement,
the incurrence of the obligations herein set forth and
the consummation of the transactions contemplated here
by, including the establishment of the Foundation and
the contribution thereto of the Foundation Shares,
will not result in any violation of the provisions of
the charter or certificate of incorporation, as the
case may be, or by-laws of the Company, the Bank or
its subsidiary; and the execution and delivery of this
Agreement, the incurrence of the obligations herein
set forth and the consummation of the transactions
contemplated herein will not conflict with or
constitute a breach of, or default under, and no event
has occurred which, with notice or lapse of time or
both, would constitute a default under, or result in
the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the
Company, the Bank and its subsidiary considered as one
enterprise pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other
instrument to which the Company, the Bank or its
subsidiary is a party or by which any of them may be
bound, or to which the property or assets of the
Company, the Bank or its subsidiary is subject, that
individually or in the aggregate, would have a
<PAGE> 24
-24-
material adverse effect on the financial condition,
results of operations or business of the Company, the
Bank and its subsidiary considered as one enterprise.
(xiv) The Prospectus has been duly approved by the
OTS for final use pursuant to the Conversion
Regulations and no action is pending or is threatened
by the OTS to revoke such authorization.
(xv) The Registration Statement has been declared
effective under the Securities Act and no stop order
suspending the effectiveness of the Registration
Statement has been issued under the Securities Act or,
to the best of such counsel's knowledge, proceedings
therefor initiated or threatened by the Commission.
(xvi) No further approval, authorization, consent
or other order of any public board or body is required
in connection with the execution and delivery of this
Agreement, the issuance of the Securities and the
consummation of the Conversion, except as may be
required under the securities or Blue Sky laws of
various jurisdictions as to which no opinion need be
rendered.
(xvii) At the time the Registration Statement
became effective, the Registration Statement (other
than the financial statements, the notes thereto,
related schedules and other financial, appraisal and
statistical data included therein, as to which no
opinion need be rendered) complied as to form in all
material respects with the requirements of the
Securities Act and the Securities Act Regulations and
the Conversion Regulations.
(xviii) The Common Stock conforms in all material
respects to the description thereof contained in the
Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form
and complies with all applicable statutory
requirements.
(xix) There are no legal or governmental
proceedings pending or threatened against or affecting
the Company, the Bank or its subsidiary which are
required, individually or in the aggregate, to be
disclosed in the Prospectus, other than those
disclosed therein, and all pending legal or
governmental proceedings to which the Company, the
Bank or any of its subsidiary is a party or to which
any of their property is subject which are not
described in the Registration Statement, including
ordinary routine litigation incidental to the
business, are, considered in the aggregate, not
material.
(xx) The information in the Prospectus under
"Risk Factors -
<PAGE> 25
-25-
Establishment of the Charitable Foundation," "- Financial
Institution Regulation and Possible Legislation," "-
Possible Anti-Takeover Provisions Which May Discourage
Takeover Attempts," "Business of the Bank - Legal
Proceedings," "Dividend Policy," "Federal and State
Taxation," "Regulation," "The Conversion - Establishment of
the Charitable Foundation," and "- Tax Aspects,"
"Restrictions on Acquisitions of the Company and the Bank,"
"Description of Capital Stock of the Company," and
"Description of Capital Stock of the Bank" to the extent
that it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal conclusions,
has been reviewed by them and is complete and accurate in
all material respects.
(xxi) To the best of such counsel's knowledge,
there are no contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments
required to be described or referred to in the
Registration Statement or to be filed as exhibits
thereto other than those described or referred to
therein or filed as exhibits thereto, the descriptions
thereof or references thereto are correct, and no
default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a
default, in the due performance or observance of any
material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument so
described, referred to or filed.
(xxii) The Plan has been duly authorized by the
Board of Directors of the Company and the Board of
Directors of the Bank and the OTS's approval of the
Plan remains in full force and effect; the Bank's
charter has been amended, effective upon consummation
of the Conversion and the filing of such amended
charter with the OTS, to authorize the issuance of
permanent capital stock; the Company and the Bank have
conducted the Conversion and the establishment and
funding of the Foundation in all material respects in
accordance with applicable requirements of the
Conversion Regulations, the Plan and all other
applicable regulations, decisions and orders
thereunder, including all material applicable terms,
conditions, requirements and conditions precedent to
the Conversion imposed upon the Company or the Bank by
the OTS and no order has been issued by the OTS to
suspend the Conversion or the Offerings and no action
for such purpose has been instituted or threatened by
the OTS; and, to the best of such counsel's knowledge,
no person has sought to obtain review of the final
action of the OTS in approving the Conversion
Application (which includes the Plan which provides
for the establishment of the Foundation) or the
Holding Company Application.
<PAGE> 26
-26-
(xxiii) To the best of such counsel's knowledge, the
Company and the Bank and its subsidiary have obtained
all licenses, permits and other governmental
authorizations currently required for the conduct of
their respective businesses as described in the
Registration Statement and Prospectus, and all such
licenses, permits and other governmental
authorizations are in full force and effect, and the
Company and the Bank and its subsidiary are in all
material respects complying therewith.
(xxiv) Neither the Company, the Bank nor its
subsidiary is in violation of its certificate of
incorporation, organization certificate, articles of
incorporation or charter, as the case may be, or
bylaws (and the Bank will not be in violation of its
charter in stock form upon consummation of the
Conversion) or, to the best of such counsel's
knowledge, in default (nor has any event occurred
which, with notice or lapse of time or both, would
constitute a default) in the performance or observance
of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which
the Company, the Bank or its subsidiary is a party or
by which the Company, the Bank or its subsidiary or
their property may be bound.
(xxv) The Company is not required to be registered
as an investment company under the Investment Company
Act of 1940.
(2) The favorable opinion, dated as of Closing Time,
of Serchuk & Zelermyer, LLP, counsel for the Agent, with
respect to the matters set forth in Section 5(b)(1)(i),
(iv), (v), (vi) (solely as to preemptive rights arising by
operation of law), (xiii)(A), (xvii) and (xviii) and such
other matters as the Agent may reasonably require.
(3) In addition to opinions required by subsections
(b)(l) and (b)(2), respectively, of this Section, Muldoon,
Murphy & Faucette and Serchuk & Zelermyer, LLP shall each
state that nothing has come to their attention that would
lead them to believe that the Registration Statement
(except for financial statements, the notes thereto,
related schedules and other financial, statistical or
appraisal data included therein, as to which counsel need
make no statement), at the time it became effective,
contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or
necessary to make the statements made therein not
misleading or that the Prospectus (except for financial
statements the notes thereto, related schedules and other
financial, statistical or appraisal data included therein,
as to which counsel need make no statement), at the time
the Registration Statement became effective or at Closing
Time, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading. In giving their
<PAGE> 27
-27-
opinions under the sections referenced above, Muldoon,
Murphy & Faucette and Serchuk & Zelermyer, LLP shall each
state that they have not independently verified the
information with respect to the Company and the Bank
contained in the Registration Statement, the Conversion
Application and the Prospectus and may rely as to matters
of fact on certificates of officers and directors of the
Company and the Bank and certificates of public officials,
and Serchuk & Zelermyer, LLP may also rely on the opinion
of Muldoon, Murphy & Faucette.
(c) At Closing Time referred to in Section 2, the Company
and the Bank shall have completed in all material respects the
conditions precedent to the Conversion in accordance with the
Plan, the applicable Conversion Regulations and all other
applicable laws, regulations, decisions and orders, including
all terms, conditions, requirements and provisions precedent to
the Conversion imposed upon the Company or the Bank by the OTS,
or any other regulatory authority other than those which the OTS
permits to be completed after the Conversion.
(d) At Closing Time, there shall not have been, since the
date hereof or since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, any material adverse change in the financial
condition, results of operations or business of the Company, the
Bank and its subsidiary considered as one enterprise, whether or
not arising in the ordinary course of business, and the Agent
shall have received a certificate of the Chief Executive Officer
of the Company and of the Bank, the President of the Company and
the Bank and the chief financial or chief accounting officer of
the Company and of the Bank, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change,
(ii) there shall have been no material transaction entered into
by the Company or the Bank from the latest date as of which the
financial condition of the Company or the Bank as set forth in
the Registration Statement and the Prospectus other than
transactions referred to or contemplated therein and
transactions in the ordinary course of business, (iii) neither
the Company nor the Bank shall have received from the OTS any
direction (oral or written) to make any material change in the
method of conducting its business with which it has not complied
(which direction, if any, shall have been disclosed to the
Agent) or which materially and adversely would affect the
business, financial condition or results of operations of the
Company, the Bank or its subsidiary, (iv) the representations
and warranties in Section 1 hereof are true and correct with the
same force and effect as though expressly made at and as of the
Closing Time, (v) the Company and the Bank have complied with
all agreements and satisfied all conditions on their part to be
performed or satisfied at or prior to Closing Time, (vi) no stop
order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
initiated or threatened by the Commission and (vii) no order
suspending the Offerings or the authorization for final use of
the Prospectus has been issued and no proceedings for that
purpose have been initiated or threatened by the OTS or the FDIC
and no person has sought to obtain regulatory or judicial review
of the action of the OTS in approving the Plan in accordance
with the Conversion Regulations nor has any person sought to
obtain regulatory or judicial review of the action
<PAGE> 28
-28-
of the OTS in approving the Holding Company Application.
(e) At the time of the execution of this Agreement, the
Agent shall have received from Shatswell MacLeod & Company, P.C.
a letter dated such date, in form and substance satisfactory to
the Agent, to the effect that (i) they are independent public
accountants with respect to the Company, the Bank and its
subsidiary within the meaning of the Code of Ethics of the
American Institute of Certified Public Accountants, the
Securities Act and the Securities Act Regulations and the
Conversion Regulations; (ii) it is their opinion that the
consolidated financial statements and supporting notes and
schedules included in the Registration Statement and covered by
their opinions therein comply as to form in all material
respects with the applicable accounting requirements of the
Securities Act and the Securities Act Regulations and the
Conversion Regulations; (iii) based upon limited procedures set
forth in detail in such letter, nothing has come to their
attention which causes them to believe that (A) the unaudited
financial statements and supporting schedules of the Bank and
its subsidiary included in the Registration Statement do not
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, the Securities
Act Regulations and the Conversion Regulations or are not
presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration
Statement and the Prospectus, (B) the unaudited amounts set
forth in the Registration Statement and Prospectus do not agree
with the amounts set forth in unaudited consolidated financial
statements as of and for the dates and periods presented in the
Prospectus were not determined on a basis substantially
consistent with that used in determining the corresponding
amounts in the audited financial statements included in the
Registration Statement, (C) at a specified date not more than
five days prior to the date of this Agreement, there has been
any increase in the consolidated long term or short term debt of
the Bank and its subsidiary or any decrease in consolidated
total assets, the allowance for loan losses, total deposits or
net worth of the Bank and its subsidiary, in each case as
compared with the amounts shown in the September 30, 1997
balance sheet included in the Registration Statement or, (D)
during the period from September 30, 1997 to a specified date
not more than five days prior to the date of this Agreement,
there were any decreases, as compared with the corresponding
period in the preceding year, in total interest income, net
interest income, net interest income after provision for loan
losses, income before income tax expense or net income of the
Bank and its subsidiary, except in all instances for increases
or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur; and (iv) in addition to the
examination referred to in their opinions and the limited
procedures referred to in clause (iii) above, they have carried
out certain specified procedures, not constituting an audit,
with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and
Prospectus and which are specified by the Agent, and have found
such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other
records of the Company, the Bank and its subsidiary identified
in such letter.
<PAGE> 29
-29-
(f) At Closing Time, the Agent shall have received from
Shatswell, MacLeod & Company, P.C. a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in
the letter furnished pursuant to subsection (d) of this Section,
except that the specified date referred to shall be a date not
more than five days prior to Closing Time.
(g) At Closing Time, the Securities shall have been
approved for listing on the AMEX upon notice of issuance.
(h) At Closing Time, the Agent shall have received a
letter from Keller & Company, Inc., dated as of the Closing
Time, confirming its appraisal.
(i) At Closing Time, counsel for the Agent shall have been
furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and
sale of the Securities and the Foundation Shares as herein
contemplated and related proceedings, or in order to evidence
the accuracy of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance
and sale of the Securities and the Foundation Shares as herein
contemplated shall be satisfactory in form and substance to the
Agent and counsel for the Agent.
(j) At any time prior to the Closing Time, (i) there shall
not have occurred any material adverse change in the financial
markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis
the effects of which, in the judgment of the Agent, are so
material and adverse as to make it impracticable to market the
Securities or to enforce contracts, including subscriptions or
orders, for the sale of the Securities, and (ii) trading
generally on the American Stock Exchange or New York Stock
Exchange or the Nasdaq Stock Market shall not have been
suspended, and minimum or maximum prices for trading shall not
have been fixed, or maximum ranges for prices for securities
have been required, by either of said Exchanges or by order of
the Commission or any other governmental authority, and a
banking moratorium shall not have been declared by either
Federal or state authorities.
SECTION 6. INDEMNIFICATION.
(a) The Company and the Bank, jointly and severally, agree
to indemnify and hold harmless the Agent, each person, if any, who
controls the Agent, within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and its respective
partners, directors, officers, employees and agents as follows:
(i) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, related to or
arising out of the Conversion (including the establishment of
the Foundation and the contribution of the Foundation Shares
thereto
<PAGE> 30
-30-
by the Company) or any action taken by the Agent where acting as
agent of the Company or the Bank or otherwise as described in
Section 2 hereof;
(ii) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, based upon or
arising out of any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement (or
any amendment thereto), or the omission or alleged omission
therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement
of a material fact contained in the Proxy Statement or
Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(iii) from and against any and all loss, liability,
claim, damage and expense whatsoever, as incurred, to the extent
of the aggregate amount paid in settlement of any litigation, or
any investigation or proceeding by any governmental agency or
body, commenced or threatened, or of any claim pending or
threatened whatsoever described in clauses (i) or (ii) above, if
such settlement is effected with the written consent of the
Company or the Bank, which consent shall not be unreasonably
withheld; and
(iv) from and against any and all expense whatsoever,
as incurred (including, subject to Section 6(c) hereof, the fees
and disbursements of counsel chosen by the Agent), reasonably
incurred in investigating, preparing for or defending against
any litigation, or any investigation, proceeding or inquiry by
any governmental agency or body, commenced or threatened, or any
claim pending or threatened whatsoever described in clauses (i)
or (ii) above, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that the indemnification provided for in this
paragraph(a) shall not apply to any loss, liability, claim, damage or
expense to the extent arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Prospectus (or
any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading which was made in reliance upon and in
conformity with the Agent Information. Notwithstanding the
foregoing, the indemnification provided for leave in this paragraph
(a) shall not apply to the Bank to the extent that such
indemnification by the Bank would constitute a covered transaction
under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the
Company, the Bank, their respective directors and each of their
officers who signed the Registration Statement, and each person, if
any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act against any and all
loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, as incurred,
<PAGE> 31
-31-
but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, of a material fact made in the
Registration Statement or the Prospectus (or any amendments or
supplements thereto) in reliance upon and in conformity with the
Agent Information.
(c) Each indemnified party shall give notice as promptly
as reasonably practicable to each indemnifying party of any action
commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability which it may have
otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense
of any such action. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to
no more than one local counsel in each separate jurisdiction in which
any action or proceeding is commenced) separate from their own
counsel for all indemnified parties in connection with any one action
or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances.
(d) The Company and the Bank also agree that the Agent
shall not have any liability (whether direct or indirect, in contract
or tort or otherwise) to the Bank, the Company, its security holders
or the Bank's or the Company's creditors relating to or arising out
of the engagement of the Agent pursuant to, or the performance by the
Agent of the services contemplated by, this Agreement, except to the
extent that any loss, claim, damage or liability is found in a final
judgment by a court of competent jurisdiction to have resulted
primarily from the Agent's bad faith, willful misconduct or gross
negligence.
(e) In addition to, and without limiting, the provisions
of Section (6)(a)(iv) hereof, in the event that the Agent, any
person, if any, who controls the Agent within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act or any of
its respective partners, directors, officers, employees or agents is
requested or required to appear as a witness or otherwise gives
testimony in any action, proceeding, investigation or inquiry brought
by or on behalf of or against the Company, the Bank, the Agent or any
of its respective affiliates or any participant in the transactions
contemplated hereby in which the Agent or such person or agent is not
named as a defendant, the Company and the Bank jointly and severally
agree to reimburse the Agent for all reasonable and necessary
out-of-pocket expenses incurred by it in connection with preparing or
appearing as a witness or otherwise giving testimony and to
compensate the Agent in an amount to be mutually agreed upon.
SECTION 7. CONTRIBUTION. In order to provide for just and
equitable contribution in circumstances in which the indemnity
agreement provided for in Section 6 hereof is for any reason held to
be unenforceable by the indemnified parties although applicable in
accordance with its terms, the Company, the Bank and the Agent shall
contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity agreement
incurred by the Company or the Bank and the Agent, as incurred, in
such proportions (i) that the Agent is responsible for that portion
represented by the percentage that the maximum aggregate marketing
fees appearing on the cover page of the Prospectus bears to the
maximum
<PAGE> 32
-32-
aggregate gross proceeds appearing thereon and the Company and the
Bank are jointly and severally responsible for the balance or (ii)
if, but only if, the allocation provided for in clause (i) is for any
reason held unenforceable, in such proportion as is appropriate to
reflect not only the relative benefits to the Company and the Bank on
the one hand and the Agent on the other, as reflected in clause (i),
but also the relative fault of the Company and the Bank on the one
hand and the Agent on the other, as well as any other relevant
equitable considerations; provided, however, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes
of this Section, each person, if any, who controls the Agent within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Agent,
and each director of the Company and of the Bank, each officer of the
Company who signed the Registration Statement, and each person, if
any, who controls the Company or the Bank within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act
shall have the same rights to contribution as the Company and the
Bank. Notwithstanding anything to the contrary set forth herein, to
the extent permitted by applicable law, in no event shall the Agent
be required to contribute an aggregate amount in excess of the
aggregate marketing fees to which the Agent is entitled and actually
paid pursuant to this Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO
SURVIVE DELIVERY. All representations, warranties and agreements
contained in this Agreement, or contained in certificates of officers
of the Company or the Bank submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any
investigation made by or on behalf of the Agent or controlling
person, or by or on behalf of the Company, and shall survive delivery
of the Securities.
SECTION 9. TERMINATION OF AGREEMENT.
(a) The Agent may terminate this Agreement, by notice to
the Company, at any time at or prior to Closing Time (i) if there has
been, since the date of this Agreement or since the respective dates
as of which information is given in the Registration Statement, any
material adverse change in the financial condition, results of
operations or business affairs of the Company or the Bank, or the
Company, the Bank and its subsidiary considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if
there has occurred any material adverse change in the financial
markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the
effect of which in the judgment of the Agent, are so material and
adverse as to make it impracticable to market the Securities or to
enforce contracts, including subscriptions or orders, for the sale of
the Securities, (iii) if trading generally on the Nasdaq Stock
Market, the American Stock Exchange or the New York Stock Exchange
has been suspended, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been
required, by either of said Exchanges or by order of the Commission
or any other governmental authority, or if a banking moratorium has
been declared by either Federal or Massachusetts authorities, (iv)
if, any condition specified in Section 5 shall not have been
fulfilled when and as required to be fulfilled;
<PAGE> 33
-33-
(v) if there shall have been such material adverse change in the
condition or prospects of the Company or the Bank or the prospective
market for the Company's securities as in the Agent's good faith
opinion would make it inadvisable to proceed with the offering, sale
or delivery of the Securities; (vi) if, in the Agent's good faith
opinion, the price for the Securities established by Keller &
Company, Inc., is not reasonable or equitable under then prevailing
market conditions, or (vii) if the Conversion is not consummated on
or prior to ____________________, 1998.
(b) If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to
any other party except as provided in Section 4 hereof relating to
the reimbursement of expenses and except that the provisions of
Sections 6 and 7 hereof shall survive any termination of this
Agreement.
SECTION 10. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly
given if mailed or transmitted by any standard form of
telecommunication. Notices to the Agent shall be directed to the
Agent at Two World Trade Center, 104th Floor, New York, New York
10048, attention of Catherine A. Lawton, Esq., Vice President;
notices to the Company and the Bank shall be directed to either of
them at 1299 Beacon Street, Brookline, Massachusetts 02146, attention
of _____________________________ , ___________________ .
SECTION 11. PARTIES. This Agreement shall inure to the
benefit of and be binding upon the Agent, the Company and the Bank
and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person,
firm or corporation, other than the Agent, the Company and the Bank
and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision
herein or therein contained. This Agreement and all conditions and
provisions hereof and thereof are intended to be for the sole and
exclusive benefit of the Agent, the Company and the Bank and their
respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement
represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersedes any
and all other prior oral or written agreements, except for the two
engagement letter agreements, each dated September 9, 1997 by and
between the Agent and the Bank, relating to the Agent's providing
conversion agent and financial advisor services to the Company and
the Bank in connection with the Conversion. No waiver, amendment or
other modification of this Agreement shall be effective unless in
writing and signed by the parties hereto.
SECTION 13. GOVERNING LAW AND TIME. This Agreement shall
be governed by and construed in accordance with the laws of the State
of New York applicable to agreements made and to be performed in said
State without regard to the conflicts of laws provisions thereof.
<PAGE> 34
-34-
Unless otherwise noted, specified times of day refer to Eastern time.
SECTION 14. SEVERABILITY. Any term or provision of this
Agreement which is invalid or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any
provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 15. HEADINGS. Sections headings are not to be
considered part of this Agreement, are for convenience and reference
only, and are not to be deemed to be full or accurate descriptions of
the contents of any paragraph or subparagraph.
If the foregoing is in accordance with your understanding
of our agreement, please sign and return to the Company a counterpart
hereof, whereupon this instrument, along with all counterparts, will
become a binding agreement between the Agent, the Company and the
Bank in accordance with its terms.
Very truly yours,
BAY STATE BANCORP, INC.
By:
------------------------------------
Title:
BAY STATE FEDERAL SAVINGS BANK
By:
------------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
SANDLER O'NEILL & PARTNERS, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By:
--------------------------------------
[Name]
Vice President
<PAGE> 1
PLAN OF CONVERSION
FOR
BAY STATE FEDERAL SAVINGS BANK
1. INTRODUCTION
This Amended Plan of Conversion ("Plan") provides for the conversion of
Bay State Federal Savings Bank ("BANK") from a federally-chartered mutual
savings bank to a federally-chartered capital stock savings bank. The Board of
Directors of the BANK currently contemplates that all of the stock of the BANK
shall be held by a Delaware corporation (the "Holding Company"). The Board of
Directors has carefully considered the alternatives available to the BANK with
respect to its corporate structure and has determined that a mutual to stock
conversion as described in this Plan is in the best interests of the BANK, its
depositors and the community served by the BANK. The Board of Directors
believes that the decline in mutuality is placing mutual savings associations,
such as the BANK, at a disadvantage to the increasing base of stock thrift and
commercial bank institutions. The restructuring of the BANK into the capital
stock form of organization will enable the BANK to compete more effectively
with commercial banks and other financial institutions for new business
opportunities, and as a stock institution, to increase its equity capital base
and access the capital markets when needed and to enhance the BANK'S ability to
expand its franchise and the products it offers. The use of the Holding
Company, if so utilized, would also provide greater organizational and
operating flexibility. Shares of capital stock of the BANK will be sold to the
Holding Company and the Holding Company will offer the Conversion Stock upon
the terms and conditions set forth herein to the
<PAGE> 2
Eligible Account Holders, the Employee Plans established by the BANK or Holding
Company, Supplemental Eligible Account Holders and Other Members in the
respective priorities set forth in this Plan. Any shares of Conversion Stock not
subscribed for by the foregoing classes of persons will be offered for sale to
certain members of the public either directly by the BANK and the Holding
Company through a Community Offering or a Syndicated Community Offering or
through an underwritten firm commitment public offering or through a combination
thereof. In the event that the BANK decides not to utilize the Holding Company
in the conversion, Conversion Stock of the BANK, in lieu of the Holding Company,
will be sold as set forth above and in the respective priorities set forth in
this Plan. In addition to the foregoing, the BANK and the Holding Company, as
part of this Plan, intend to implement stock option plans and other stock
benefit plans and will provide employment or severance agreements to certain
management employees and certain other compensation to the directors, officers
and employees of the BANK as described in the prospectus for the Conversion
Stock.
In furtherance of the BANK's long term commitment to its community, this
Plan provides for the establishment of a charitable foundation as part of the
Conversion. The charitable foundation is intended to complement the BANK's
existing community reinvestment activities in a manner that will allow the
communities in which the BANK operates to share in the potential growth and
profitability of the Holding Company and the BANK over the long term. Consistent
with the BANK's goal, the Holding Company intends to donate to the charitable
foundation from its authorized but unissued common stock up to 8% of the number
of shares sold in the Conversion. The establishment of the charitable foundation
is subject to the approval of the
2
<PAGE> 3
Voting Members of the BANK. In the event the charitable foundation is not
approved, the BANK may determine to complete the Conversion without the
charitable foundation.
This Plan, which has been unanimously approved by the Board of Directors
of the BANK, must also be approved by the affirmative vote of a majority of the
total number of outstanding votes entitled to be cast by Voting Members of the
BANK at a special meeting to be called for that purpose. Prior to the submission
of this Plan to the Voting Members for consideration, the Plan must be approved
by the Office of Thrift Supervision (the "OTS").
2. DEFINITIONS
For the purposes of this Plan, the following terms have the following
meanings:
Account Holder - The term Account Holder means any Person holding a
Savings Account in the BANK or Union Federal, as the case may be.
Acting in Concert - 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.
3
<PAGE> 4
Actual Purchase Price - The term Actual Purchase Price means the per share
price at which the Conversion Stock is ultimately sold in accordance with the
terms hereof.
Associate - The term Associate when used to indicate a relationship with
any person, means (i) any corporation or organization (other than the BANK or a
majority-owned subsidiary of the BANK) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10 percent or
more of any class of equity securities, (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity except that for the
purposes of Sections 9 and 14 hereof, the term "Associate" does not include any
Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity, and except that, for
purposes of aggregating total shares that may be held by Officers and Directors
the term "Associate" does not include any Tax-Qualified Employee Stock Benefit
Plan, and (iii) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a Director or Officer of
the BANK or the Holding Company, if utilized, or any of its parents or
subsidiaries.
Bank - The term BANK means Bay State Federal Savings Bank, Brookline,
Massachusetts.
Community Offering - The term Community Offering means the offering for
sale to certain members of the general public directly by the BANK or the
Holding Company, if utilized, of any shares of Conversion Stock not subscribed
for in the Subscription Offering.
4
<PAGE> 5
Conversion Stock - The term Conversion Stock means the $.01 par value
common stock offered and issued by the Holding Company or the $1.00 par value
Common Stock offered and issued by the BANK, if the Holding Company form of
organization is not utilized, upon conversion.
Director - The term Director means a member of the Board of Directors of
the BANK and, where applicable, a member of the Board of Directors of the
Holding Company.
Eligible Account Holder - The term Eligible Account Holder means any
person holding a Qualifying Deposit on the Eligibility Record Date.
Eligibility Record Date - The term Eligibility Record Date means the date
for determining Eligible Account Holders and is August 31, 1996.
Employees - The term Employees means all Persons who are employed by the
BANK but does not include an Officer or Director.
Employee Plans - The term Employee Plans means the Tax Qualified Employee
Stock Benefit Plans approved by the Board of Directors of the BANK.
Estimated Price Range - The term Estimated Price Range means the range of
minimum and maximum aggregate values determined by the Board of Directors of the
BANK within which the aggregate amount of Common Stock sold in the Conversion
will fall. The Estimated Price Range will be within the estimated pro forma
market value of the Conversion Stock as determined by the Independent Appraiser
prior to the Subscription Offering and as it may be amended from time to time
thereafter.
5
<PAGE> 6
FDIC - The term FDIC means the Federal Deposit Insurance Corporation.
Holding Company - The term Holding Company means the Delaware corporation
formed for the purpose of acquiring all of the shares of capital stock of the
BANK to be issued upon its conversion to stock form unless the Holding Company
form of organization is not utilized. Shares of common stock of the Holding
Company will be issued in the conversion to Participants and others in a
Subscription, Community, Syndicated Community, or underwritten firm commitment
public offering, or through a combination thereof.
Independent Appraiser - The term Independent Appraiser means an appraiser
retained by the BANK to prepare an appraisal of the pro forma market value of
the Conversion Stock.
Local Community - The term Local Community means all counties in the
Commonwealth of Massachusetts in which the BANK maintains a banking office.
Member - The term Member means any Person or entity who qualifies as a
member of the BANK pursuant to its charter and bylaws.
OTS - The term OTS means Office of Thrift Supervision of the Department of
the Treasury.
Officer - The term Officer means an executive officer of the BANK which
includes the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and Controller and any Person performing
functions similar to those performed by the foregoing persons.
Order Form - The term Order Form means any form together with attached
cover letter, sent by the BANK to any Participant or Person containing among
other things a description of the alternatives available to such Person under
the Plan and by which any such Person may make
6
<PAGE> 7
elections regarding subscriptions for Conversion Stock in the Subscription and
Community Offerings.
Other Member - The term Other Member means any person who is a Member of
the BANK (other than an Eligible Account Holder or Supplemental Eligible Account
Holder) at the close of business on the Voting Record Date.
Participants - The term Participants means the Eligible Account Holders,
Employee Plans, Supplemental Eligible Account Holders and Other Members.
Person - The term Person means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts and KEOGH Accounts), any unincorporated
organization, a government or political subdivision thereof or any other entity.
Plan - The term Plan means this Plan of Conversion of the BANK as it
exists on the date hereof and as it may hereafter be amended in accordance with
its terms.
Preferred Subscribers - The term Preferred Subscribers means those members
of the general public which are natural persons residing in the BANK'S Local
Community.
Qualifying Deposit - The term Qualifying Deposit means the balance of
each Savings Account of $50 or more in the BANK or Union Federal at the close
of business on the Eligibility Record Date or the Supplemental Eligibility
Record Date, whichever may be the case. Savings Accounts with total deposit
balances of less than $50 shall not constitute a Qualifying Deposit.
SEC - The term SEC refers to the United States Securities and Exchange
Commission.
Savings Account - The term Savings Account has the same meaning as in
Section 561.42 of the Rules and Regulations of the OTS and includes certificates
of deposit.
7
<PAGE> 8
Special Meeting of Members - The term Special Meeting of Members means the
special meeting and any adjournments thereof held to consider and vote upon this
Plan.
Subscription Offering - The term Subscription Offering means the offering
of Conversion Stock for purchase through Order Forms to Participants.
Subscription Price - The term Subscription Price means the amount per
share of Conversion Stock to be paid initially by Participants in the
Subscription Offering and persons in the Community Offering.
Supplemental Eligibility Record Date - The term Supplemental Eligibility
Record Date means the supplemental record date for determining Supplemental
Eligible Account Holders of the BANK. The Supplemental Eligibility Record Date
shall be the last day of the calendar quarter preceding the OTS' approval of the
application for conversion.
Supplemental Eligible Account Holder - The term Supplemental Eligible
Account Holder means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit, except officers, directors and their associates, as of the
Supplemental Eligibility Record Date.
Syndicated Community Offering - The term Syndicated Community Offering
means the offering of Conversion Stock following the Subscription and Community
Offerings through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan - The term Tax-Qualified
Employee Stock Benefit Plan means any defined benefit plan or defined
contribution plan, such as an employee stock ownership plan, stock bonus plan,
profit-sharing plan or other plan, which, with its related trust, meets the
requirements to be "qualified" under Section 401 of the Internal Revenue Code.
8
<PAGE> 9
A "Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or
defined contribution plan which is not so qualified.
Union Federal - The term Union Federal means Union Federal Savings Bank,
Boston, Massachusetts, which merged into the BANK in February 1997.
Voting Members - The term Voting Members means those persons qualifying as
voting members of the BANK pursuant to its charter and bylaws.
Voting Record Date - The term Voting Record Date means the date fixed by
the Directors in accordance with OTS regulations for determining eligibility to
vote at the Special Meeting of Members.
3. PROCEDURE FOR CONVERSION
After approval of the Plan by the Board of Directors of the BANK, the Plan
shall be submitted together with all other requisite material to the OTS for its
approval. Notice of the adoption of the Plan by the Board of Directors of the
BANK and the submission of the Plan to the OTS for its approval will be
published in a newspaper having general circulation in each community in which
an office of the BANK is located and copies of the Plan will be made available
at each office of the BANK for inspection by the Members. Upon receipt of notice
from the OTS to do so, the BANK also will cause to be published a notice of the
filing with the OTS of an application to convert in accordance with the
provisions of the Plan. Following approval by the OTS, the Plan will be
submitted to a vote of the Voting Members at the Special Meeting of Members
called for that purpose. Upon approval of the Plan by a majority of the total
outstanding votes of the Voting Members, the BANK will take all other necessary
steps pursuant to applicable laws and regulations to convert the BANK to stock
form. The conversion
9
<PAGE> 10
must be completed within 24 months of the approval of the Plan by the Voting
Members, unless a longer time period is permitted by governing laws and
regulations.
The Board of Directors of the BANK intends to take all necessary steps to
form the Holding Company, including the filing of an Application on Form H-(e)1
or H-(e)1-S, if available to the Holding Company, with the OTS. In the event
that the Holding Company is utilized, upon conversion the BANK will issue
capital stock to the Holding Company and the Holding Company will issue and sell
the Conversion Stock in accordance with this Plan.
The Board of Directors of the BANK may determine for any reason at any
time prior to the issuance of the Conversion Stock not to utilize a holding
company form of organization in the Conversion, in which case, the Holding
Company's registration statement on Form S-1 will be withdrawn from the SEC, the
BANK will take all steps necessary to complete the conversion from the mutual to
the stock form of organization, including filing any necessary documents with
the OTS, and will issue and sell the Conversion Stock in accordance with this
Plan. In such event, any subscriptions or orders received for Conversion Stock
of the Holding Company shall be deemed to be subscriptions or orders for
Conversion Stock of the BANK without any further action by the BANK or the
subscribers for the Conversion Stock, unless any such further action is required
by the SEC or the OTS, in which case the BANK shall take such necessary action
to complete the Conversion. Any references to the Holding Company in this Plan
shall mean the BANK in the event the Holding Company is eliminated in the
Conversion.
The Board of Directors of the BANK also intend to take all necessary steps
to establish the charitable foundation and to fund such charitable foundation in
the manner set forth in Section 7A hereof, subject to the approval of the Voting
Members.
10
<PAGE> 11
The Conversion Stock will not be insured by the FDIC. The BANK will not
knowingly lend funds or otherwise extend credit to any Person to purchase shares
of the Conversion Stock.
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an Application on Form H-(e)1 or an H-(e)1-S, if
available to the Holding Company, to be filed with the OTS and a Registration
Statement on Form S-1 to be filed with the SEC. The BANK shall be a wholly-owned
subsidiary of the Holding Company unless the Holding Company is eliminated in
the Conversion.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the Subscription
Offering to the Eligible Account Holders, Employee Plans, Supplemental Eligible
Account Holders and Other Members in the respective priorities set forth in
Sections 8 through 11 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting of
Members and must be commenced in time to complete the Conversion within the time
period specified in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 12 of this Plan. The Subscription Offering may be commenced prior to the
Special Meeting of Members and, in that event, the Community Offering may also
be commenced prior to the Special Meeting of
11
<PAGE> 12
Members. The offer and sale of Conversion Stock prior to the Special Meeting of
Members shall, however, be conditioned upon approval of the Plan by the Voting
Members.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, as provided in Section 13 of this Plan in a manner that will achieve
the widest distribution of the Conversion Stock as determined by the BANK. The
sale of all Conversion Stock subscribed for in the Subscription and Community
Offerings will be consummated simultaneously on the date the sale of Conversion
Stock in the Syndicated Community Offering is consummated and only if all
unsubscribed for Conversion Stock is sold.
The BANK may elect to offer to pay fees on a per share basis to brokers
who assist Persons in determining to purchase shares in the Subscription and
Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to be
issued and offered for sale will be determined jointly by the Board of Directors
of the BANK and the Board of Directors of the Holding Company, if the holding
company form of organization is utilized, immediately prior to the commencement
of the Subscription and Community Offerings, subject to adjustment thereafter if
necessitated by market or financial conditions, with the approval of the OTS, if
necessary. In particular, the total number of shares may be increased by up to
15% of the number of shares offered in the Subscription and Community Offering
if the Estimated Price Range is increased subsequent to the commencement of the
Subscription and Community Offering to reflect changes in market and financial
conditions.
12
<PAGE> 13
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Actual Purchase Price. The aggregate
purchase price for all shares of Conversion Stock will not be inconsistent with
the estimated consolidated pro forma market value of the BANK or the Holding
Company, if utilized. The estimated consolidated pro forma market value of the
BANK or the Holding Company, if utilized, will be determined for such purpose by
the Independent Appraiser. Prior to the commencement of the Subscription and
Community Offerings, an Estimated Price Range will be established, which range
will vary within 15% above to 15% below the midpoint of such range. The number
of shares of Conversion Stock to be issued and the purchase price per share may
be increased or decreased by the BANK. In the event that the aggregate purchase
price of the Conversion Stock is below the minimum of the Estimated Price Range,
or materially above the maximum of the Estimated Price Range, resolicitation of
purchasers may be required provided that up to a 15% increase above the maximum
of the Estimated Price Range will not be deemed material so as to require a
resolicitation. Up to a 15% increase in the number of shares to be issued which
is supported by an appropriate change in the estimated pro forma market value of
the BANK or the Holding Company, if utilized, will not be deemed to be material
so as to require a resolicitation of subscriptions. In the event that the
aggregate purchase price of the Conversion Stock is below the minimum of the
Estimated Price Range or in excess of 15% above the maximum of the Estimated
Price Range, and a resolicitation is required, such resolicitation shall be
effected in such manner and within such time as the BANK shall establish, with
the approval of the OTS, if required.
13
<PAGE> 14
Based upon the independent valuation as updated prior to the commencement
of the Subscription and Community Offerings, the Board of Directors of the
Holding Company, (if a holding company form of organization is utilized) and the
Board of Directors of the BANK will fix the Subscription Price and the range of
the number of shares to be offered. If upon completion of the Subscription and
Community Offerings all of the Conversion Stock is subscribed for, or if because
of a limited number of unsubscribed shares or otherwise a Syndicated Community
Offering cannot be effected, the total number of shares of Conversion Stock to
be issued and sold will be jointly determined by the BANK and Holding Company
(if a holding company form of organization is utilized) as follows: (a) the
estimated aggregate pro forma market value of the BANK or the Holding Company,
as the case may be, immediately after conversion as determined by the
Independent Appraiser, expressed in terms of a specific aggregate dollar amount
rather than as a range, upon completion of the Subscription and Community
Offerings or other sale of all of the Conversion Stock shall be divided by (b)
the Actual Purchase Price.
If there is a Syndicated Community Offering of shares of Conversion Stock
not subscribed for in the Subscription and Community Offerings, the price per
share at which the Conversion Stock is sold in such Syndicated Community
Offering shall be the Subscription Price.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the BANK and Holding Company, if utilized, and to the OTS that, to
the best knowledge of the Independent Appraiser, nothing of a material nature
has occurred which, taking into account all relevant factors, would
14
<PAGE> 15
cause the Independent Appraiser to conclude that the aggregate value of the
Conversion Stock at the Actual Purchase Price is incompatible with its estimate
of the aggregate consolidated pro forma market value of the Holding Company or
the BANK if no Holding Company is utilized. If such confirmation is not
received, the BANK may cancel the Subscription and Community Offerings and/or
the Syndicated Community Offering, extend the Conversion, establish a new
Subscription Price Range and/or Estimated Price Range, extend, reopen or hold
new Subscription and Community Offerings and/or Syndicated Community Offering or
take such other action as the OTS may permit.
The Conversion Stock to be issued in the Conversion shall be fully paid
and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE BANK
Upon the consummation of the sale of all of the Conversion Stock, and in
the event that a holding company form of organization is utilized, the Holding
Company will purchase from the BANK all of the capital stock of the BANK to be
issued by the BANK in the Conversion in exchange for the Conversion proceeds
that are not permitted to be retained by the Holding Company.
The Holding Company will apply to the OTS to retain up to 50% of the
proceeds of the Conversion. Assuming the Holding Company is not eliminated, a
lesser percentage may be acceptable. The BANK believes that the Conversion
proceeds will provide economic strength to the Holding Company and the BANK for
the future in a highly competitive and regulated environment and would
facilitate expansion through acquisitions, diversification into other
15
<PAGE> 16
related businesses and for other business and investment purposes, including the
payment of dividends and future repurchases of Conversion Stock as permitted by
the OTS. If during the Conversion process the Board of Directors of the BANK
determines not to complete the Conversion utilizing a holding company form of
organization, capital stock of the BANK will be issued and sold in accordance
with the Plan. The above activities may also be engaged in by the BANK if the
Holding Company is eliminated.
7A. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company and the BANK intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Internal Revenue Code ( the "Foundation") and to
donate to the Foundation up to 8% of the number of shares of Common Stock sold
in the Conversion. The Foundation is being formed in connection with the
Conversion in order to complement the BANK's existing community reinvestment
activities and to share with the communities in which the BANK operates a part
of the BANK's financial success as a locally headquartered, community minded,
financial services institution. The funding of the Foundation with Common Stock
of the Holding Company accomplishes this goal as it enables such communities to
share in the potential growth and profitability of the Holding Company and the
BANK over the long-term.
The Foundation will be dedicated to the promotion of charitable purposes
within the communities in which the BANK operates, including, but not limited
to, grants or donations to support housing assistance, scholarships, local
education, not-for-profit medical facilities, not-for-profit community groups
and other types of organizations or civic minded projects. The
16
<PAGE> 17
Foundation will annually distribute total grants to assist charitable
organizations or to fund projects within its local community of not less than 5%
of the average fair value of Foundation assets each year. In order to serve the
purposes for which it was formed and maintain its 501(c)(3) qualification, the
Foundation may sell, on an annual basis, a limited portion of the Common Stock
contributed to it by the Holding Company.
The board of directors of the Foundation will be responsible for
establishing the polices of the Foundation with respect to grants or donations,
consistent with the stated purposes of the Foundation.
The establishment and funding of the Foundation as part of the Conversion
is subject to the approval of the approval of the Voting Members by an
affirmative vote of a majority of the votes eligible to be cast by Voting
Members in person or by proxy at the Special Meeting. In the event that the
BANK's Members approve this Plan, but not the charitable foundation, the BANK
may determine to complete the Conversion without the establishment of the
Foundation and may do so without amending this Plan or obtaining any further
vote of the BANK's Members. Failure of the Voting Members to approve the
Foundation may materially affect the pro forma market value of the BANK. In such
an event, the BANK may establish a new Estimated Price Range and commence a
resolicitation of subscribers. For comparison purposes, Voting Members will be
provided with a projection of the pro forma market value of the Conversion
Stock, an Estimated Price Range and certain selected pro forma financial data
that would result if the Conversion were consummated without establishment of
the charitable foundation.
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<PAGE> 18
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, as first priority and
without payment, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to an amount up to the greater of: the amount permitted
to be subscribed for in the Community Offering which amount, pursuant to Section
12, currently is $225,000 of the Conversion Stock offered, but which may be
increased to 5% or decreased to less than $225,000 without the further approval
of members or resolicitation of subscribers; one-tenth of one percent (.10%) of
the total offering of shares of Conversion Stock; or fifteen times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion 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 maximum
purchase limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C 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%.
B. 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
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
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<PAGE> 19
Eligible Account Holders. 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.
C. Subscription rights as Eligible Account Holders received by Directors
and Officers and their Associates which are based on deposits made by such
persons during the twelve (12) months preceding the Eligibility Record Date
shall be subordinated to the Subscription Rights of all other Eligible Account
Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
The Employee Plans shall receive, without payment, as a second priority
after the filling of subscriptions of Eligible Account Holders, nontransferable
subscription rights to purchase in the Subscription Offering the number of
shares of Conversion Stock requested by such Employee Plans. If, after the
filling of subscriptions of Eligible Account Holders, a sufficient number of
shares are not available to fill the subscriptions by such Employee Plans, the
subscription by such Employee Plans shall be filled to the maximum extent
possible; provided, however, that in the event of an increase in the total
number of shares issued due to an increase in the Estimated
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<PAGE> 20
Price Range of up to 15%, the additional shares may be sold to the Employee
Plans subject to the provisions of Section 14.
The Employee Plans shall not be deemed to be an associate or affiliate of
or Person Acting in Concert with any Director or Officer of the Holding Company
or the BANK.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS (THIRD PRIORITY)
A. Each Supplemental Eligible Account Holder shall receive, as third
priority and without payment, nontransferable subscription rights to subscribe
for shares of Conversion Stock equal to an amount up to the greater of: the
amount permitted to be subscribed for in the Community Offering which amount,
pursuant to Section 12, currently is $225,000 of the Conversion Stock offered,
but which may be increased to 5% or decreased to less than $225,000 without the
further approval of members or resolicitation of subscribers; one-tenth of one
percent (.10%) of the total offering of Conversion Stock; or fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Conversion 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 the
Qualifying Deposits of all Supplemental Eligible Account Holders in the BANK on
the Supplemental Eligibility Record Date, subject to the maximum purchase
limitation specified in Section 14A and the minimum purchase limitation
specified in Section 14C 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%.
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<PAGE> 21
B. 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 shares eligible for subscription, the remaining 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.
C. Subscription rights received by an Eligible Account Holder pursuant to
Section 8 shall be applied in partial satisfaction of the subscription rights to
be received as a Supplemental Eligible Account Holder pursuant to this Section
10.
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11. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member shall receive, without payment, as a fourth priority
after the filling of subscriptions of the Eligible Account Holders, the Employee
Plans, and the Supplemental Eligible Account Holders, nontransferable
subscription rights to subscribe for shares of Conversion Stock equal to an
amount up to the greater of: the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 12, currently is $225,000
of the Conversion Stock offered, but which may be increased to 5% or decreased
to less than $225,000 without the further approval of members or resolicitation
of subscribers; or one-tenth of one percent (.10%) of the total offering of
shares of Conversion Stock, subject to the maximum purchase limitation specified
in Section 14A and the minimum purchase limitation specified in Section 14C 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%.
B. In the event that Other Members exercise subscription rights for a
number of shares of Conversion Stock in excess of the total number of shares
eligible for subscription, the remaining shares of Conversion Stock shall 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. If the amount so allocated exceeds the amount
subscribed for
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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.
12. COMMUNITY OFFERING (FIFTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering to certain members of the general public,
which may subscribe together with any Associate or group of persons Acting in
Concert for up to $225,000 of the shares of Conversion Stock offered subject to
the Maximum Overall Purchase Limitation as specified in Section 14A and the
minimum purchase limitation specified in Section 14C 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%; provided, however, that the amount permitted
to be purchased in the Community Offering may be increased to 5% or decreased to
less than $225,000 without the further approval of members or resolicitation of
subscribers. The shares may be made available in the Community Offering through
a direct community marketing program which may provide for utilization of a
broker, dealer, consultant or investment banking firm, experienced and expert in
the sale of savings institution securities. Such entities may be compensated on
a fixed fee basis or on a commission basis, or a combination thereof. Any
excess of shares will be available for purchase by the general public with
preference given to Preferred Subscribers.
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The BANK shall make distribution of the Conversion Stock to be sold in
the Community Offering in such a manner as to promote the widest distribution
of Conversion Stock. The BANK reserves the right to reject any or all orders,
in whole or in part, which are received in the Community Offering.
If the Preferred Subscribers in the Community Offering, whose orders
would otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among the Preferred
Subscribers in the manner which permits each such person to the extent
possible, to purchase the number of shares necessary to make his total
allocation of Conversion Stock equal to the lesser of 100 shares or the number
of shares subscribed for by such persons with preference given to Preferred
Subscribers. Thereafter, unallocated shares will be allocated among the
Preferred Subscribers whose subscriptions remain unsatisfied on a 100 shares
per order basis until all such orders have been filled or the remaining shares
have been allocated. To the extent that there are shares remaining after all
subscriptions by Preferred Subscribers, any remaining shares will be allocated
among members of the general public using the foregoing allocation as applied
to Preferred Subscribers. The BANK may establish all other terms and conditions
of such offer. It is expected that the Community Offering will commence
concurrently with the Subscription Offering. The Community Offering must be
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completed within 45 days after the completion of the Subscription Offering
unless otherwise extended by the OTS.
13. SYNDICATED COMMUNITY OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings may be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the BANK, in a manner that will achieve the widest distribution of the
Conversion Stock subject to the right of the BANK to accept or reject in whole
or in part all subscriptions in the Syndicated Community Offering. In the
Syndicated Community Offering, any person together with any Associate or group
of persons Acting in Concert may purchase up to $225,000 of the total number of
shares of Conversion Stock offered subject to the maximum purchase limitation
specified in Section 14A and the minimum purchase limitation specified in
Section 14C 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%; provided, however,
that this amount may be increased to 5% or decreased to less than $225,000
without the further approval of members or resolicitation of subscribers. The
shares purchased by any Person together with any Associate or group of persons
Acting in Concert pursuant to Section 12 shall be counted toward meeting the
maximum percentage of shares permitted to be purchased pursuant to this Section.
Provided that the Subscription Offering has commenced, the BANK may commence the
Syndicated Community Offering at any time after the mailing to the Members of
the Proxy Statement to be used in connection with the Special Meeting of
Members, provided that the completion of the offer and sale of the Conversion
Stock shall be conditioned upon the approval of this Plan by the Voting Members.
If the Syndicated Community Offering is not sooner
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commenced pursuant to the provisions of the preceding sentence, the Syndicated
Community Offering will be commenced as soon as practicable following the date
upon which the Subscription and Community Offerings terminate.
Alternatively, if a Syndicated Community Offering is not held, the BANK
shall have the right to sell any shares of Conversion Stock remaining following
the Subscription and Community Offerings in an underwritten firm commitment
public offering. The provisions of Section 14 hereof shall not be applicable to
sales to underwriters for purposes of such an offering but shall be applicable
to the sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Actual Purchase Price
less an underwriting discount to be negotiated among such underwriters and the
BANK, which will in no event exceed an amount deemed to be acceptable by the
OTS.
If for any reason a Syndicated Community Offering or an underwritten firm
commitment public offering of shares of Conversion Stock not sold in the
Subscription and Community Offerings can not be effected, or in the event that
any insignificant residue of shares of Conversion Stock is not sold in the
Subscription and Community Offerings or in the Syndicated Community Offering or
an underwritten firm commitment public offering, other purchase arrangements
will be made for the sale of unsubscribed shares by the BANK, if possible. Such
other purchase arrangements will be subject to the approval of the OTS.
14. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 8, 10, 11, 12 and 13, the following
limitations shall apply to all purchases of shares of Conversion Stock:
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A. The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person or
Participant together with any Associate or group or persons Acting in Concert
shall not exceed 1.0% of the Conversion Stock offered (the "Maximum Overall
Purchase Limitation"), except for the Employee Plans which may subscribe for up
to 10% of the Conversion Stock issued and except for certain Eligible Account
Holders and Supplemental Eligible Account Holders which may subscribe for or
purchase shares in accordance with Sections 8 and 10 herein, respectively;
provided, however, in the event that the Maximum Overall Purchase Limitation is
increased to more than 2.0% of the shares of Conversion Stock offered, orders
for Conversion Stock in the Community Offering and in the Syndicated Community
Offering (or, alternatively an underwritten firm commitment public offering), if
any, shall, as determined by the BANK, first be filled to a maximum of 2.0% of
the total number of shares of Conversion Stock offered and thereafter remaining
shares shall be allocated on an equal number of shares basis per order until all
orders have been filled.
B. The maximum number of shares of Conversion Stock which may be purchased
in all categories in the Conversion by Officers and Directors of the BANK and
their Associates in the aggregate shall not exceed 30% of the total number of
shares of Conversion Stock issued.
C. A minimum of 25 shares of Conversion Stock must be purchased by each
Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares of
Conversion Stock which when multiplied by the price per share shall not exceed
$500, as determined by the Board.
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If the number of shares of Conversion Stock otherwise allocable pursuant
to Sections 8, 10, 11, 12 and 13, to any Person or that Person's Associates
would be in excess of the maximum number of shares permitted as set forth above,
the number of shares of Conversion Stock allocated to each such person shall be
reduced to the lowest limitation applicable to that Person, and then the number
of shares allocated to each group consisting of a Person and that Person's
Associates shall be reduced so that the aggregate allocation to that Person and
his or her Associates complies with the above maximums, and such maximum number
of shares shall be reallocated among that Person and his or her Associates as
they may agree, or in the absence of an agreement, in proportion to the shares
subscribed by each (after first applying the maximums applicable to each Person,
separately).
Depending upon market or financial conditions, the Board of Directors of
the BANK and the Holding Company, without further approval of the Members, may
decrease or increase the purchase limitations in this Plan, provided that the
maximum purchase limitations may not be increased to a percentage in excess of
5%. Notwithstanding the foregoing, the Maximum Overall Purchase Limitation may
be increased up to 9.99% provided that orders for Conversion Stock exceeding 5%
of the shares being offered shall not exceed, in the aggregate, 10% of the total
offering. If the BANK or the Holding Company, as the case may be, increases the
maximum purchase limitations, the BANK or the Holding Company, as the case may
be, is only required to resolicit Persons who subscribed for the maximum
purchase amount and may, in the sole discretion of the BANK or the Holding
Company, as the case may be, resolicit certain other large subscribers.
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In the event shares of Conversion stock are sold in excess of the maximum
of the Estimated Price Range, (the "Adjusted Maximum") such shares will be
allocated in the following order of priority: (i) to fill the Employee Plans'
subscription to the Adjusted Maximum; (ii) in the event that there is an over
subscription at the Eligible Account Holder level, to fill unfulfilled
subscriptions of Eligible Account Holders exclusive of the Adjusted Maximum in
accordance with Section 8; (iii) in the event there is an over subscription at
the Supplemental Eligible Account Holder level, to fill unfulfilled
subscriptions of Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum in accordance with Section 10; (iv) in the event that there is an over
subscription at the Other Member level, to fill unfulfilled subscriptions of
Other Members exclusive of the Adjusted Maximum in accordance with Section 11;
and (v) to fill unfulfilled Subscriptions in the Community Offering exclusive of
the Adjusted Maximum in accordance with Section 12.
For purposes of this Section 14, the Directors and Officers of the BANK
and the Holding Company shall not be deemed to be Associates or a group
affiliated with each other or otherwise Acting in Concert solely as a result of
their being Directors or Officers of the BANK or the Holding Company.
Each Person purchasing Conversion Stock in the Conversion shall be deemed
to confirm that such purchase does not conflict with the above purchase
limitations contained in this Plan.
For a period of three years following the Conversion, no Officer, Director
or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of common stock of the BANK or the Holding Company,
as the case may be, except from a broker-dealer registered with the SEC. This
provision shall not apply to negotiated transactions
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involving more than one percent of the outstanding shares of common stock of the
BANK or the Holding Company, as the case may be, the exercise of any options
pursuant to a stock option plan or purchases of common stock of the BANK or the
Holding Company, as the case may be, made by or held by any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of
the BANK or the Holding Company (including the Employee Plans) which may be
attributable to any Officer or Director. As used herein, the term "negotiated
transaction" means a transaction in which the securities are offered and the
terms and arrangements relating to any sale are arrived at through direct
communications between the seller or any person acting on its behalf and the
purchaser or his investment representative. The term "investment representative"
shall mean a professional investment advisor acting as agent for the purchaser
and independent of the seller and not acting on behalf of the seller in
connection with the transaction.
15. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
BANK, together with a properly completed and executed Order Form, or purchase
order in the case of the Syndicated Community Offering, on or prior to the
expiration date specified on the Order Form or purchase order, as the case may
be, unless such date is extended by the BANK; provided, however, that if the
Employee Plans subscribe for shares during the Subscription Offering, such plans
will not be required to pay for the shares at the time they subscribe but rather
may pay for such shares of Conversion Stock subscribed for by such plans at the
Actual Purchase Price upon consummation
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of the Conversion, provided that, in the case of the employee stock ownership
plan ("ESOP") there is in force from the time of its subscription until the
consummation of the Conversion, a loan commitment from the Holding Company or an
unrelated financial institution to lend to the ESOP, at such time, the aggregate
Subscription Price of the shares for which it subscribed. The BANK may make
scheduled discretionary contributions to an Employee Plan provided such
contributions do not cause the BANK to fail to meet its regulatory capital
requirement.
Notwithstanding the foregoing, the BANK and the Holding Company, if
utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the Conversion Stock for
which they are subscribing in the Community Offering at any time prior to 48
hours before the completion of the Conversion, unless such 48 hour period is
waived by the BANK and the Holding Company, in their sole discretion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers in
the Subscription and Community Offerings may pay for the shares subscribed for
by authorizing the BANK on the Order Form to make a withdrawal from the
subscriber's Savings Account at the BANK in an amount equal to the purchase
price of such shares. Such authorized withdrawal, whether from a savings
passbook or certificate account, shall be without penalty as to premature
withdrawal. If the authorized withdrawal is from a certificate account, and the
remaining balance does not meet the applicable minimum balance requirement, the
certificate shall be cancelled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook rate. Funds for which a
withdrawal is authorized will remain in the subscriber's Savings Account but may
not be
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used by the subscriber until the Conversion Stock has been sold or the 45-day
period (or such longer period as may be approved by the OTS) following the
Subscription and Community Offering has expired, whichever occurs first.
Thereafter, the withdrawal will be given effect only to the extent necessary to
satisfy the subscription (to the extent it can be filled) at the purchase price
per share. Interest will continue to be earned on any amounts authorized for
withdrawal until such withdrawal is given effect. Interest will be paid by the
BANK at not less than the passbook annual rate on payments for Conversion Stock
received in cash or by check or money order. Such interest will be paid from the
date payment is received by the BANK until consummation or termination of the
Conversion. If for any reason the Conversion is not consummated, all payments
made by subscribers in the Subscription, Community and Syndicated Community
Offerings will be refunded to them with interest. In case of amounts authorized
for withdrawal from Savings Accounts, refunds will be made by cancelling the
authorization for withdrawal. The BANK is prohibited by regulation from
knowingly making any loans or granting any lines of credit for the purchase of
stock in the Conversion, and therefore, will not do so.
16. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER
FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and BANK has been declared effective by the OTS and the SEC, if the
holding company form of organization is utilized, Order Forms will be
distributed to all Eligible Account Holders, the Employee Plans, the
Supplemental Eligible Account Holders and Other Members at their last
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known addresses appearing on the records of the BANK for the purpose of
subscribing to shares of Conversion Stock in the Subscription Offering and will
be made available for use by those Persons entitled to purchase in the Community
Offering. Notwithstanding the foregoing, the BANK may elect to send Order Forms
only to those Persons who request them after such notice as is approved by the
OTS and is adequate to apprise all Eligible Account Holders, the Employee Plans,
Supplemental Eligible Account Holders and Other Members of the pendency of the
Subscription Offering has been given. Such notice may be included with the proxy
statement for the Special Meeting of Members and may also be included in a
notice of the pendency of the Conversion and the Special Meeting of Members sent
to all Eligible Account Holders and Supplemental Eligible Account Holders in
accordance with regulations of the OTS.
Each Order Form will be preceded or accompanied by the Prospectus (if a
holding company form of organization is utilized) or the Offering Circular (if
the holding company form of organization is not utilized) describing the Holding
Company, if utilized, the BANK, the Conversion Stock and the Subscription and
Community Offerings. Each Order Form will contain, among other things, the
following:
A. A specified date by which all Order Forms must be received by the BANK,
which date shall be not less than twenty (20), nor more than forty-five (45)
days, following the date on which the Order Forms are mailed by the BANK, and
which date will constitute the termination of the Subscription Offering;
B. The Subscription Price per share for shares of Conversion Stock to be
sold in the Subscription and Community Offerings;
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C. A description of the minimum and maximum number of shares of Conversion
Stock which may be subscribed for pursuant to the exercise of subscription
rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of shares of Conversion Stock for which such person elects to
subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a
final copy of the Prospectus or Offering Circular, as the case may be, prior to
execution of the Order Form;
F. A statement to the effect that all subscription rights are
nontransferable, will be void at the end of the Subscription Offering, and can
only be exercised by delivering within the subscription period such properly
completed and executed Order Form, together with cash (if delivered in person),
check or money order in the full amount of the purchase price as specified in
the Order Form for the shares of Conversion Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on the Order Form
that the BANK withdraw said amount from the subscriber's Savings Account at the
BANK) to the BANK;
G. A statement to the effect that the executed Order Form, once received
by the BANK, may not be modified or amended by the subscriber without the
consent of the BANK; and
H. A statement with respect to the residence of the subscriber.
Notwithstanding the above, the BANK and the Holding Company will not
accept orders received on photocopied or facsimilied order forms.
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17. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT
PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
BANK by the United States Postal Service or the BANK is unable to locate the
addressee, (b) are not received back by the BANK or are received by the BANK
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment, except in the
case of institutional investors in the Community Offering, by delivering
irrevocable orders together with a legally binding commitment to pay in cash,
check, money order or wire transfer the full amount of the purchase price prior
to 48 hours before the completion of the Conversion for the shares of Conversion
Stock subscribed for (including cases in which savings accounts from which
withdrawals are authorized are insufficient to cover the amount of the required
payment), or (e) are not mailed pursuant to a "no mail" order placed in effect
by the account holder, the subscription rights of the person to whom such rights
have been granted will lapse as though such person failed to return the
contemplated Order Form within the time period specified thereon; provided,
however, that the BANK may, but will not be required to, waive any immaterial
irregularity on any Order Form or require the submission of corrected Order
Forms or the remittance of full payment for subscribed shares by such date as
the BANK may specify. The interpretation of the BANK of terms and conditions of
the Plan and of the Order Forms will be final, subject to the authority of the
OTS.
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18. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
A. All shares of Conversion Stock purchased by Directors or Officers of
the BANK or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 18B, below, or as may be
approved by the OTS, no interest in such shares may be sold or otherwise
disposed of for value for a period of one (l) year following the date of
purchase.
B. The restriction on disposition of shares of Conversion Stock set forth
in Section 18A above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the BANK or the Holding Company, as the case may be, which
has been approved by the OTS; and
(ii) Any disposition of such shares following the death of the
person to whom such shares were initially sold under the terms of the Plan.
C. With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply:
(i) Each certificate representing shares restricted within the
meaning of Section 18A, above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(ii) Instructions shall be issued to the stock transfer agent for
the BANK or the Holding Company, as the case may be, not to recognize or effect
any transfer of any certificate or record of ownership of any such shares in
violation of the restriction on transfer; and
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(iii) Any shares of capital stock of the BANK or the Holding
Company, as the case may be, issued with respect to a stock dividend, stock
split, or otherwise with respect to ownership of outstanding shares of
Conversion Stock subject to the restriction on transfer hereunder shall be
subject to the same restriction as is applicable to such Conversion Stock.
19. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the BANK shall have
the exclusive voting rights with respect to the BANK as specified in its
charter. The holders of the common stock of the Holding Company (if a holding
company form of organization is utilized) shall have the exclusive voting rights
with respect to the Holding Company.
20. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The BANK shall establish at the time of conversion a liquidation account
in an amount equal to its net worth as of the latest practicable date prior to
conversion ("Liquidation Account"). The liquidation account will be maintained
by the BANK for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their Savings Accounts at the
BANK. Each Eligible Account Holder and Supplemental Eligible Account Holder
shall, with respect to his Savings Account, hold a related inchoate interest in
a portion of the Liquidation Account balance, in relation to his Savings Account
balance at the Eligibility Record Date and/or Supplemental Eligibility Record
Date or to such balance as it may be subsequently reduced, as hereinafter
provided.
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In the unlikely event of a complete liquidation of the BANK (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their Savings Accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the Liquidation Account, in the amount of the then
adjusted subaccount balance for his Savings Account then held, before any
liquidation distribution may be made to any holders of the BANK's capital stock.
No merger, consolidation, bulk purchase of assets with assumption of Savings
Accounts and other liabilities, or similar transactions with an FDIC-issued
institution, in which the BANK is not the surviving institution, shall be deemed
to be a complete liquidation for this purpose. In such transactions, the
Liquidation Account shall be assumed by the surviving institution.
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's and/or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the BANK. Such initial
subaccount balance shall not be increased, but shall be subject to downward
adjustment as described below. For Savings Accounts in existence at both dates,
separate subaccounts shall be determined on the basis of the Qualifying Deposits
in such Savings Account on such record dates. Such initial subaccount balances
shall not be increased but shall be subject to downward adjustment as described
below.
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If, at the close of business on any annual closing date, commencing on or
after the effective date of Conversion, the deposit balance in the Savings
Account of an Eligible Account Holder or Supplemental Eligible Account Holder is
less than the lesser of (i) the balance in the Savings Account at the close of
business on any other annual closing date subsequent to the Eligibility Record
Date or Supplemental Eligibility Record Date, or (ii) the amount of the
Qualifying Deposit in such Savings Account, the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
such downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any subsequent increase in the deposit balance of the
related Savings Account. If any such Savings Account is closed, the related
subaccount shall be reduced to zero.
The creation and maintenance of the Liquidation Account shall not operate
to restrict the use or application of any of the net worth accounts of the BANK.
21. TRANSFER OF SAVINGS ACCOUNTS AND CONTINUITY OF THE BANK
Upon Conversion, each Savings Account Holder having a Savings Account at
the BANK prior to the Conversion will continue to have a Savings Account,
without payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
Conversion.
After the Conversion, the BANK will succeed to all the rights, interests,
duties and obligations of the BANK before the Conversion, including but not
limited to all rights and interests of the BANK in and to its assets and
properties, whether real, personal or mixed. The
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BANK will continue to be a member of the Federal Home Loan Bank System and all
its insured savings deposits will continue to be insured by the FDIC to the
extent provided by applicable law.
22. RESTRICTIONS ON ACQUISITION OF THE BANK AND HOLDING
COMPANY
A. In accordance with OTS regulations, for a period of three years from
the date of consummation of the Conversion, no Person, other than the Holding
Company (if a holding company form of organization is utilized), shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of any class of an equity security of the BANK without the prior written
consent of the OTS.
B. 1. The charter of the BANK contains a provision stipulating that no
person, except the Holding Company (if a holding company form of organization is
utilized), for a period of five years following the date of the Conversion shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of the BANK, without the prior
written approval of the OTS. In addition, such charter may also provide that for
a period of five years following the Conversion, shares beneficially owned in
violation of the above-described charter provision shall not be entitled to vote
and shall not be voted by any person or counted as voting stock in connection
with any matter submitted to stockholders for a vote. In addition, special
meetings of the stockholders relating to changes in control or amendment of the
charter may only be called by the Board of Directors, and shareholders shall not
be permitted to cumulate their votes for the election of directors.
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2. The Certificate of Incorporation of the Holding Company, if a
holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock who beneficially owns in excess of 10% of
such outstanding shares be entitled or permitted to any vote in respect to any
shares held in excess of 10%. In addition, the Certificate of Incorporation and
Bylaws of the Holding Company provide for staggered terms of the directors,
noncumulative voting for directors, limitations on the calling of special
meetings, a fair price provision for certain business combinations and certain
notice requirements.
C. For the purposes of this Section 22:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured institution;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. Section 78c(a)(10).
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23. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The BANK shall not declare or pay a cash dividend on, or repurchase any
of, its capital stock if the effect thereof would cause its regulatory capital
to be reduced below (i) the amount required for the Liquidation Account or (ii)
the federal regulatory capital requirement in Section 567.2 of the Rules and
Regulations of the OTS. Otherwise, the BANK may declare dividends, make capital
distributions or repurchase its capital stock in accordance with applicable law
and regulations.
24. AMENDMENT OF PLAN
If deemed necessary or desirable, 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, and at any time thereafter by
such vote of such Board of Directors with the concurrence of the OTS. Any
amendment to the Plan made after approval by the Members with the approval of
the OTS shall not necessitate further approval by the Members unless otherwise
required by the OTS. The Plan may be terminated by majority vote of the BANK's
Board of Directors at any time prior to the Special Meeting of Members to vote
on the Plan, and at any time thereafter with the concurrence of the OTS.
By adoption of the Plan, the Members of the BANK authorize the Board of
Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
25. CHARTER AND BYLAWS
By voting to adopt the Plan, members of the BANK will be voting to adopt a
Federal Stock Savings Bank Charter and Bylaws for a Federal Stock Savings Bank
attached as Exhibits I
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and II to this Plan. The effective date of the BANK's stock charter and bylaws
shall be the date of issuance and sale of the Conversion Stock as specified by
the OTS.
26. CONSUMMATION OF CONVERSION
The Conversion of the BANK shall be deemed to take place and be effective
upon the completion of all requisite organizational procedures for obtaining a
Federal Stock Savings Bank Charter for the BANK and sale of all Conversion
Stock.
27. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
BANK or the Holding Company, as the case may be, will register the securities
issued in connection with the Conversion pursuant to the Securities Exchange Act
of 1934 and will not deregister such securities for a period of at least three
years thereafter, except that the maintenance of registration for three years
requirement may be fulfilled by any successor to the BANK or any holding company
of the BANK. In addition, the BANK or Holding Company, as the case may be, will
use its best efforts to encourage and assist a market-maker to establish and
maintain a market for the Conversion Stock and to list those securities on a
national or regional securities exchange or the NASDAQ system.
28. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
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
shares of Conversion Stock
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pursuant to the Plan reside. However, no such Person will be issued subscription
rights or be permitted to purchase shares of Conversion Stock in the
Subscription Offering if such Person resides in a foreign country or in a state
of the United States with respect to which both of the following apply: A. a
small number of Persons otherwise eligible to subscribe for shares under the
Plan reside in such state and; B. the issuance of subscription rights or the
offer or sale of shares of Conversion Stock to such Persons would require the
BANK or the Holding Company, as the case may be, under the securities laws of
such state, to register as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such state and such registration or
qualification would be impracticable for reasons of cost or otherwise.
29. EXPENSES OF CONVERSION
The BANK shall use its best efforts to assure that expenses incurred by it
in connection with the Conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The Conversion of the BANK pursuant to this Plan is expressly conditioned
upon the following:
(a) Prior receipt by the BANK of rulings of the United States Internal
Revenue Service and any applicable state taxing authority, or opinions of
counsel, substantially to the effect that the Conversion will not result in any
adverse federal or state tax consequences to Eligible Account Holders or to the
BANK and the Holding Company before or after the Conversion;
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(b) The sale of all of the Conversion Stock offered in the Conversion; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the BANK
shall be final, subject to the authority of the OTS.
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EXHIBIT I
FEDERAL STOCK CHARTER
FOR
BAY STATE FEDERAL SAVINGS BANK
Section 1. Corporate Title.
The full corporate title of the institution is Bay State Federal Savings
Bank (the "BANK").
Section 2. Office.
The home office shall be located in the Town of Brookline, in the County
of Norfolk, Commonwealth of Massachusetts.
Section 3. Duration.
The duration of the BANK is perpetual.
Section 4. Purpose and Powers.
The purpose of the BANK is to pursue any or all of the lawful objectives
of a Federal savings bank chartered under Section 5 of the Home Owners' Loan Act
and to exercise all the express, implied, and incidental powers conferred
thereby and by all acts amendatory thereof and supplemental thereto, subject to
the Constitution and laws of the United States as they are now in effect, or as
they may hereafter be amended, and subject to all lawful and applicable rules,
regulations, and orders of the Office of Thrift Supervision ("Office").
Section 5. Capital Stock.
The total number of shares of all classes of the capital stock which the
BANK has authority to issue is Twelve million (12,000,000), of which Eleven
million (11,000,000) shall be common stock, par value $1.00 per share and of
which One million (1,000,000) shall be preferred stock, par value $1.00 per
share. The shares may be issued from time to time as authorized by the Board of
Directors without further approval of shareholders except as otherwise provided
in this Section 5 or to the extent that such approval is required by governing
law, rule, or regulation. The consideration for the issuance of the shares shall
be paid in full before their issuance and shall not be less than the par value.
Neither promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the BANK. The
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consideration for the shares shall be cash, tangible or intangible property (to
the extent direct investment in such property would be permitted), labor or
services actually performed for the BANK, or any combination of the foregoing.
In the absence of actual fraud in the transaction, the value of such property,
labor, or services, as determined by the Board of Directors of the BANK, shall
be conclusive. Upon payment of such consideration, such shares shall be deemed
to be fully paid and nonassessable. In the case of a stock dividend, that part
of the retained earnings of the BANK that is transferred to common stock or
paid-in-capital accounts upon the issuance of shares as a stock dividend shall
be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization in or connection with
the conversion of the BANK from the mutual to the stock form of capitalization,
no shares of capital stock (including shares issuable upon conversion, exchange,
or exercise of other securities) shall be issued, directly or indirectly, to
officers, directors, or controlling persons of the BANK other than as part of a
general public offering or as qualifying shares to a director, unless their
issuance or the plan under which they would be issued has been approved by a
majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections
hereto) shall entitle the holders of any class or series of capital stock to
vote as a separate class or series or to more than one vote per share, except as
to the cumulation of votes for the election of directors, unless the charter
otherwise provides that there shall be no such cumulative voting: provided, That
this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred
stock, voting as a class or series, to elect some members of the
Board of Directors, less than a majority thereof, in the event of
default in the payment of dividends on any class or series of
preferred stock;
(ii) To any provision that would require the holders of preferred stock,
voting as a class or series, to approve the merger or consolidation
of the BANK with another corporation or the sale, lease, or
conveyance (other than by mortgage or pledge) of properties or
business in exchange for securities of a corporation other than the
BANK if the preferred stock is exchanged for securities of such
other corporation: provided, That no provision may require such
approval for transactions undertaken with the assistance or pursuant
to the direction of the Office or the Federal Deposit Insurance
Corporation;
(iii) To any amendment which would adversely change the specific terms of
any class or series of capital stock as set forth in this Section 5
(or in any supplementary sections hereto), including any amendment
which would create or enlarge any class or series ranking prior
thereto in rights and preferences. An amendment which increases the
number of authorized shares of any class or series of capital stock,
or substitutes the surviving BANK in a merger or consolidation for
the BANK, shall not be considered to be such an adverse change.
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A description of the different classes and series (if any) of the BANK's
capital stock and a statement of the designations, and the relative rights,
preferences, and limitations of the shares of each class of and series (if any)
of capital stock are as follows:
A. Common Stock. Except as provided in this Section 5 (or in any
supplementary sections hereto) the holders of the common stock shall
exclusively possess all voting power. Each holder of shares of
common stock shall be entitled to one vote for each share held by
each holder, except as to the cumulation of votes for the election
of directors, unless the charter otherwise provides that there shall
be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of
stock having preference over the common stock as to the payment of
dividends, the full amount of dividends and of sinking fund, or
retirement fund, or other retirement payments, if any, to which such
holders are respectively entitled in preference to the common stock,
then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends
out of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the
BANK, the holders of the common stock (and the holders of any class
or series of stock entitled to participate with the common stock in
the distribution of assets) shall be entitled to receive, in cash or
in kind, the assets of the BANK available for distribution remaining
after: (i) payment or provision for payment of the BANK's debts and
liabilities; (ii) distributions or provision for distributions in
settlement of its liquidation account; and (iii) distributions or
provision for distributions to holders of any class or series of
stock having preference over the common stock in the liquidation,
dissolution, or winding up of the BANK. Each share of common stock
shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
B. Preferred Stock. The BANK may provide in supplementary sections to
its charter for one or more classes of preferred stock, which shall
be separately identified. The shares of any class may be divided
into and issued in series, with each series separately designated so
as to distinguish the shares thereof from the shares of all other
series and classes. The terms of each series shall be set forth in a
supplementary section to the charter. All shares of the same class
shall be identical except as to the following relative rights and
preferences, as to which there may be variations between different
series:
(a) The distinctive serial designation and the number of shares
constituting such series;
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(b) The dividend rate or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative
and, if so, from which date(s), the payment date(s) for
dividends, and the participating or other special rights, if
any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares of
such series;
(d) Whether the shares of such series shall be redeemable and, if
so, the price(s) at which, and the terms and conditions on
which, such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution, or
winding up of the BANK;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled, the
amount of such fund and the manner of its application,
including the price(s) at which such shares may be redeemed or
purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes of
stock of the BANK and, if so, the conversion price(s) or the
rate(s) of exchange, and the adjustments thereof, if any, at
which such conversion or exchange may be made, and any other
terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such
series shall be issued; and
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of serial preferred stock and whether such shares may
be reissued as shares of the same or any other series of
serial preferred stock.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
The Board of Directors shall have authority to divide, by the adoption of
supplementary charter sections, any authorized class of preferred stock into
series, and, within the limitations set forth in this section and the remainder
of this charter, fix and determine the relative rights and preferences of the
shares of any series so established.
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Prior to the issuance of any preferred shares of a series established by a
supplementary charter section adopted by the Board of Directors, the BANK shall
file with the Secretary of the Office a dated copy of that supplementary section
of this charter establishing and designating the series and fixing and
determining the relative rights and preferences thereof.
Section 6. Preemptive Rights.
Holders of the capital stock of the BANK shall not be entitled to
preemptive rights with respect to any shares of the BANK which may be issued.
Section 7. Liquidation Account.
Pursuant to the requirements of the Office's regulations (12 C.F.R.
563b.3), the BANK shall establish and maintain a liquidation account for the
benefit of its savings account holders as of August 31, 1996 and
[_________________] ("eligible savers"). In the event of a complete liquidation
of the BANK, it shall comply with such regulations with respect to the amount
and the priorities on liquidation of each of the BANK's eligible saver's
inchoate interest in the liquidation account, to the extent it is still in
existence: provided, that an eligible saver's inchoate interest in the
liquidation account shall not entitle such eligible saver to any voting rights
at meetings of the BANK's shareholders.
Section 8. Certain Provisions Applicable for Five Years.
Notwithstanding anything contained in the BANK's charter or bylaws to the
contrary, for a period of five years from the date of consummation of the
conversion of the BANK from mutual to stock form, the following provisions shall
apply:
A. Beneficial Ownership Limitation. No person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of
more than 10 percent of any class of any equity security of the
BANK. This limitation shall not apply to a transaction in which the
BANK forms a holding company in conjunction with conversion, or
thereafter, if such formation is without change in the respective
beneficial ownership interests of the BANK's shareholders other than
pursuant to the exercise of any dissenter and appraisal rights, the
purchase of shares by underwriters in connection with a public
offering, or the purchase of shares by a tax-qualified employee
stock benefit plan which is exempt from the approval requirements
under Section 574.3(c)(1)(vi) of the Office Regulations.
In the event shares are acquired in violation of this Section 8, all
shares beneficially owned by any person in excess of 10% shall be
considered "excess shares" and shall not be counted as shares
entitled to vote and shall not be voted
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by any person or counted as voting shares in connection with any
matters submitted to the shareholders for a vote.
For the purposes of this Section 8, the following definitions apply:
(i) The term "person" includes an individual, a group acting in
concert, a corporation, a partnership, an association, a joint
stock company, a trust, any unincorporated organization or
similar company, a syndicate or any other group formed for the
purpose of acquiring, holding or disposing of the equity
securities of the BANK.
(ii) The term "offer" includes every offer to buy or otherwise
acquire, solicitation of an offer to sell, tender offer for,
or request or invitation for tenders of, a security or
interest in a security for value.
(iii) The term "acquire" includes every type of acquisition, whether
effected by purchase, exchange, operation of law or otherwise.
(iv) The term "acting in concert" means (a) knowing participation
in a joint activity or conscious parallel action towards a
common goal whether or not pursuant to an express agreement,
or (b) 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.
B. Cumulative Voting Limitation. Shareholders shall not be permitted to
cumulate their votes for the election of directors.
C. Call for Special Meetings. Special meetings of shareholders relating
to changes in control of the BANK or amendments to its charter shall
be called only at the direction of the Board of Directors.
Section 9. Directors.
The BANK shall be under the direction of a Board of Directors. The
authorized number of directors, as stated in the BANK's bylaws, shall be not be
less than five nor more than 15 except when a greater number is approved by the
Office or his or her delegate.
Section 10. Amendment of Charter.
Except as provided in Section 5, no amendment, addition, alteration,
change, or repeal of this charter shall be made, unless such is proposed by the
Board of Directors of the BANK,
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approved by the shareholders by a majority of the votes eligible at a legal
meeting unless a higher vote is otherwise required, and approved or pre-approved
by the Office.
As adopted by the BANK's members on _________________, to be effective on
the date the BANK converts from mutual to stock form of organization.
BAY STATE FEDERAL SAVINGS BANK
Attest: __________________________ By: ___________________________
Barbara Olafsson, Secretary John F. Murphy
Bay State Federal Savings Bank President and Chief Executive
Officer
OFFICE OF THRIFT SUPERVISION
Attest: __________________________ By: ___________________________
Secretary to the Office Director of the Office
Declared effective on
the _____ day of __________, 199_
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EXHIBIT II
BYLAWS OF
BAY STATE FEDERAL SAVINGS BANK
ARTICLE I. HOME OFFICE
The home office of Bay State Federal Savings Bank ("BANK") is 1299 Beacon
Street, Brookline, Massachusetts 02146.
ARTICLE II. SHAREHOLDERS
Section l. Place of Meetings. All annual and special meetings of
shareholders shall be held at the home office of the BANK or at such other place
in the State in which the principal place of business of the BANK is located as
the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the BANK for
the election of directors and for the transaction of any other business of the
BANK shall be held annually within 120 days after the end of the BANK's fiscal
year as the board of directors may determine.
Section 3. Special Meetings. For a period of five years from the date of
the completion of the conversion of the BANK from mutual to stock form, special
meetings of the shareholders relating to a change in control of the BANK or to
an amendment of the Charter of the BANK may be called only by the board of
directors. Thereafter, special meetings of the shareholders for any purpose or
purposes, unless otherwise prescribed by the regulations of the Office of Thrift
Supervision ("OTS"), may be called at any time by the chairman of the board, the
president, or a majority of the board of directors, and shall be called by the
chairman of the board, the president or the secretary upon the written request
of the holders of not less than one-tenth of all the outstanding capital stock
of the BANK entitled to vote at the meeting. Such written request shall state
the purpose or purposes of the meeting and shall be delivered at the home office
of the BANK addressed to the chairman of the board, the president or the
secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be
conducted in accordance with the most current edition of Robert's Rules of Order
unless otherwise prescribed by regulations of the OTS or these bylaws. The board
of directors shall designate, when present, either the chairman of the board or
president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose(s) for which the meeting is called shall be
delivered not fewer than 20 nor more than 50 days before the date of the
meeting, either personally or by mail, by or at the direction of the chairman of
the board, the president, the secretary, or the directors calling the meeting,
to each shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the mail, addressed to
the shareholder at the address as it appears on the
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stock transfer books or records of the BANK as of the record date prescribed in
Section 6 of this Article II, with postage prepaid. When any shareholders'
meeting, either annual or special, is adjourned for 30 days or more, notice of
the adjourned meeting shall be given as in the case of an original meeting. It
shall not be necessary to give any notice of the time and place of any meeting
adjourned for less than 30 days or of the business to be transacted at the
meeting, other than an announcement at the meeting at which such adjournment is
taken.
Section 6. Fixing of Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment, or shareholders entitled to receive payment of any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the board of directors shall fix in advance a date as the record date for any
such determination of shareholders. Such date in any case shall be not more than
60 days and, in case of a meeting of shareholders, not fewer than 10 days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this section,
such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the
shareholders, the officer or agent having charge of the stock transfer books for
shares of the BANK shall make a complete list of the shareholders entitled to
vote at such meeting, or any adjournment, arranged in alphabetical order, with
the address and the number of shares held by each. This list of shareholders
shall be kept on file at the home office of the BANK and shall be subject to
inspection by any shareholder at any time during usual business hours, for a
period of 20 days prior to such meeting. Such list shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection by any shareholder during the entire time of the meeting. The
original stock transfer book shall constitute prima facie evidence of the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders.
In lieu of making the shareholder list available for inspection by
shareholders as provided in the preceding paragraph, the board of directors may
elect to follow the procedures prescribed in Section 552.6(d) of the OTS's
Regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the BANK
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If less than a majority of the outstanding shares
is represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to constitute less than a quorum.
Section 9. Proxies. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by his duly authorized
attorney in fact. Proxies solicited
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on behalf of the management shall be voted as directed by the shareholder or, in
the absence of such direction, as determined by a majority of the board of
directors. No proxy shall be valid more than eleven months from the date of its
execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When
ownership stands in the name of two or more persons, in the absence of written
directions to the BANK to the contrary, at any meeting of the shareholders of
the BANK any one or more of such shareholders may cast, in person or by proxy,
all votes to which such ownership is entitled. In the event an attempt is made
to cast conflicting votes, in person or by proxy, by the several persons in
whose names shares of stock stand, the vote or votes to which those persons are
entitled shall be cast as directed by a majority of those holding such and
present in person or by proxy at such meeting, but no votes shall be cast for
such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in person or by
proxy, but no trustee shall be entitled to vote shares held by him without a
transfer of such shares into his name. Shares standing in the name of a receiver
may be voted by such receiver, and shares held by or under the control of a
receiver may be voted by such receiver without the transfer into his name if
authority to do so is contained in an appropriate order of the court or other
public authority by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee, shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the BANK, nor shares held
by another corporation, if a majority of the shares entitled to vote for the
election of directors of such other corporation are held by the BANK, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time for purposes of any meeting.
Section 12. Cumulative Voting. Except as otherwise provided in the BANK's
charter, every shareholder entitled to vote at an election for directors shall
have the right to vote, in person or by proxy, the number of shares owned by the
shareholder for as many persons as there are directors to be elected and for
whose election the shareholder has a right to vote, or to cumulate the votes by
giving one candidate as many votes as the number of such directors to be elected
multiplied by the number of shares shall equal or by distributing such votes on
the same principle among any number of candidates.
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Section 13. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of election are not so
appointed, the chairman of the board or the president may, or on the request of
not fewer than 10 percent of the votes represented at the meeting shall, make
such appointment at the meeting. If appointed at the meeting, the majority of
the votes present shall determine whether one or three inspectors are to be
appointed. In case any person appointed as inspector fails to appear or fails or
refuses to act, the vacancy may be filled by appointment by the board of
directors in advance of the meeting, or at the meeting by the chairman of the
board or the president.
Unless otherwise prescribed by regulations of the OTS, the duties of such
inspectors shall include: determining the number of shares and the voting power
of each share, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity and effect of proxies; receiving votes, ballots,
or consents; hearing and determining all challenges and questions in any way
arising in connection with the rights to vote; counting and tabulating all votes
or consents; determining the result; and such acts as may be proper to conduct
the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the BANK. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the secretary of the BANK at least five days prior to the date of
the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the BANK. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least 20 days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual
meeting shall be stated in writing and filed with the secretary of the BANK at
least 5 days before the date of the annual meeting, and all business so stated,
proposed, and filed shall be considered at the annual meeting, but no other
proposal shall be acted upon at the annual meeting. Any shareholder may make any
other proposal at the annual meeting and the same may be discussed and
considered, but unless stated in writing and filed with the secretary at least 5
days before the meeting, such proposal shall be laid over for action at an
adjourned, special, or annual meeting of the shareholders taking place 30 days
or more thereafter. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees; but in
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connection with such reports no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be
taken at a meeting of shareholders, or any other action which may be taken at a
meeting of the shareholders, may be taken without a meeting if consent in
writing, setting forth the action so taken, shall be given by all of the
shareholders entitled to vote with respect to the subject matter.
ARTICLE III. BOARD OF DIRECTORS
Section l. General Powers. The business and affairs of the BANK shall be
under the direction of its board of directors. The board of directors shall
annually elect a chairman of the board and a president from among its members
and shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of ten
(10) members and shall be divided into three classes as nearly equal in number
as possible. The members of each class shall be elected for a term of three
years and until their successors are elected and qualified. One class shall be
elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors
shall be held without other notice than this bylaw immediately after, and at the
same place as, the annual meeting of shareholders. The board of directors may
provide, by resolution, the time and place, within the BANK's normal lending
territory, for the holding of additional regular meetings without other notice
than such resolution.
Section 4. Qualification. Each director shall at all times be the
beneficial owner of not less than 100 shares of capital stock of the BANK unless
the BANK is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the president
or one-third of the directors. The persons authorized to call special meetings
of the board of directors may fix any place, within the BANK's normal lending
territory, as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone, or by means of similar communications equipment
by which all persons participating in the meeting can hear each other. Such
participation shall constitute presence in person but shall not constitute
attendance for the purpose of compensation pursuant to Section 12 of this
Article.
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Section 6. Notice. Written notice of any special meeting shall be given to
each director at least 24 hours prior thereto when delivered personally or by
telegram, or at least five days prior thereto when delivered by mail at the
address at which the director is most likely to be reached. Such notice shall be
deemed to be delivered when deposited in the mail so addressed, with postage
prepaid if mailed, or when delivered to the telegraph company if sent by
telegram. Any director may waive notice of any meeting by a writing filed with
the secretary. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by Section
2 of this Article III shall constitute a quorum for the transaction of business
at any meeting of the board of directors, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in the
same manner as prescribed by Section 6 of this Article III.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by regulation of the OTS or
by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the BANK addressed to
the chairman of the board or president. Unless otherwise specified such
resignation shall take effect upon receipt by the chairman of the board or
president. More than three consecutive absences from regular meetings of the
board of directors, unless excused by resolution of the board of directors,
shall automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the remaining directors,
although less than a quorum of the board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election of directors by
the shareholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the board of directors for a
term of office continuing only until the next election of directors by the
shareholders.
Section 12. Compensation. Directors, as such, may receive a stated salary
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the
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board of directors. Members of either standing or special committees may be
allowed such compensation for actual attendance at committee meetings as the
board of directors may determine.
Section 13. Presumption of Assent. A director of the BANK who is present
at a meeting of the board of directors at which action on any BANK matter is
taken shall be presumed to have assented to the action taken unless his dissent
or abstention shall be entered in the minutes of the meeting or unless he shall
file a written dissent to such action with the person acting as the secretary of
the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the BANK within five days after the date a
copy of the minutes of the meeting is received. Such right to dissent shall not
apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called
expressly for that purpose, any director may be removed for cause by a vote of
the holders of a majority of the shares then entitled to vote at an election of
directors. Whenever the holders of the shares of any class are entitled to elect
one or more directors by the provisions of the Charter or supplemental sections
thereto, the provisions of this section shall apply, in respect to the removal
of a director or directors so elected, to the vote of the holders of the
outstanding shares of that class and not to the vote of the outstanding shares
as a whole.
ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES
Section l. Appointment. The board of directors, by resolution adopted by a
majority of the full board, may designate the chief executive officer and two or
more of the other directors to constitute an executive committee. The
designation of any committee pursuant to this Article IV and the delegation of
authority shall not operate to relieve the board of directors, or any director,
of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors
is not in session, shall have and may exercise all of the authority of the board
of directors except to the extent, if any, that such authority shall be limited
by the resolution appointing the executive committee; and except also that the
executive committee shall not have the authority of the board of directors with
reference to: the declaration of dividends; the amendment of the Charter or
bylaws of the BANK, or recommending to the shareholders a plan of merger,
consolidation, or conversion; the sale, lease or other disposition of all or
substantially all of the property and assets of the BANK otherwise than in the
usual and regular course of its business; a voluntary dissolution of the BANK; a
revocation of any of the foregoing; or the approval of a transaction in which
any member of the executive committee, directly or indirectly, has any material
beneficial interest.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the executive committee shall hold office until the next
regular annual meeting of the board of directors following his or her
designation and until a successor is designated as a member of the executive
committee.
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Section 4. Meetings. Regular meetings of the executive committee may be
held without notice at such times and places as the executive committee may fix
from time to time by resolution. Special meetings of the executive committee may
be called by any member thereof upon not less than one day's notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the executive committee need not state the business
proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and action of the executive committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the executive committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled
by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive committee
may be removed at any time with or without cause by resolution adopted by a
majority of the full board of directors. Any member of the executive committee
may resign from the executive committee at any time by giving written notice to
the president or secretary of the BANK. Unless otherwise specified, such
resignation shall take effect upon its receipt; the acceptance of such
resignation shall not be necessary to make it effective.
Section 9. Procedure. The executive committee shall elect a presiding
officer from its members and may fix its own rules of procedure which shall not
be inconsistent with these bylaws. It shall keep regular minutes of its
proceedings and report the same to the board of directors for its information at
the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution
establish an audit, loan, or other committees composed of directors as they may
determine to be necessary or appropriate for the conduct of the business of the
BANK and may prescribe the duties, constitution and procedures thereof.
ARTICLE V. OFFICERS
Section l. Positions. The officers of the BANK shall be a president, one
or more vice presidents, a secretary and a treasurer, each of whom shall be
elected by the board of directors. The board of directors may also designate the
chairman of the board as an officer. The president may also be designated by the
board of directors as the chief executive officer. The president shall be a
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<PAGE> 61
director of the BANK. The offices of the secretary and treasurer may be held by
the same person and a vice president may also be either the secretary or the
treasurer. The board of directors may designate one or more vice presidents as
executive vice president or senior vice president. The board of directors may
also elect or authorize the appointment of such other officers as the business
of the BANK may require. The officers shall have such authority and perform such
duties as the board of directors may from time to time authorize or determine.
In the absence of action by the board of directors, the officers shall have such
powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the BANK shall be
elected annually at the first meeting of the board of directors held after each
annual meeting of the shareholders. If the election of officers is not held at
such meeting, such election shall be held as soon thereafter as possible. Each
officer shall hold office until a successor has been duly elected and qualified
or until the officer's death, resignation or removal in the manner hereinafter
provided. Election or appointment of an officer, employee or agent shall not of
itself create contractual rights. The board of directors may authorize the BANK
to enter into an employment contract with any officer in accordance with
regulations of the OTS; but no such contract shall impair the right of the board
of directors to remove any officer at any time in accordance with Section 3 of
this Article V.
Section 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the BANK will be served thereby,
but such removal, other than for cause, shall be without prejudice to the
contractual rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by the board of directors.
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ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section l. Contracts. To the extent permitted by regulations of the OTS,
and except as otherwise prescribed by these bylaws with respect to certificates
for shares, the board of directors may authorize any officer, employee, or agent
of the BANK to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the BANK. Such authority may be general or confined
to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the BANK and
no evidence of indebtedness shall be issued in its name unless authorized by the
board of directors. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the BANK shall be signed by one or more officers, employees or agents of the
BANK in such manner as shall from time to time be determined by the board of
directors.
Section 4. Deposits. All funds of the BANK not otherwise employed shall be
deposited from time to time to the credit of the BANK in any duly authorized
depositories as the board of directors may select.
ARTICLE VII. CERTIFICATES FOR SHARES
AND THEIR TRANSFER
Section l. Certificates for Shares. Certificates representing shares of
capital stock of the BANK shall be in such form as shall be determined by the
board of directors and approved by the OTS. Such certificates shall be signed by
the chief executive officer or by any other officer of the BANK authorized by
the board of directors, attested by the secretary or an assistant secretary, and
sealed with the corporate seal or a facsimile thereof. The signatures of such
officers upon a certificate may be facsimiles if the certificate is manually
signed on behalf of a transfer agent or a registrar, other than the BANK itself
or one of its employees. Each certificate for shares of capital stock shall be
consecutively numbered or otherwise identified. The name and address of the
person to whom the shares are issued, with the number of shares and date of
issue, shall be entered on the stock transfer books of the BANK. All
certificates surrendered to the BANK for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares has been surrendered and canceled, except that in case of a lost or
destroyed certificate, a new certificate may be issued upon such terms and
indemnity to the BANK as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
BANK shall be made only on its stock transfer books. Authority for such transfer
shall be given only by the holder of record or by his legal representative, who
shall furnish proper evidence of such authority, or by his attorney authorized
by a duly executed power of attorney and filed with the BANK. Such transfer
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<PAGE> 63
shall be made only on surrender for cancellation of the certificate for such
shares. The person in whose name shares of capital stock stand on the books of
the BANK shall be deemed by the BANK to be the owner for all purposes.
ARTICLE VIII. FISCAL YEAR; ANNUAL AUDIT
The fiscal year of the BANK shall end on March 31 of each year. The BANK
shall be subject to an annual audit as of the end of its fiscal year by
independent public accountants appointed by and responsible to the board of
directors. The appointment of such accountants shall be subject to annual
ratification by the shareholders.
ARTICLE IX. DIVIDENDS
Subject to the terms of the BANK's Charter and the regulations and orders
of the OTS, the board of directors may, from time to time, declare, and the BANK
may pay, dividends on its outstanding shares of capital stock.
ARTICLE X. CORPORATE SEAL
The board of directors shall provide a BANK seal, which shall be two
concentric circles between which shall be the name of the BANK. The year of
incorporation or an emblem may appear in the center.
ARTICLE XI. AMENDMENTS
These bylaws may be amended in a manner consistent with regulations of the
OTS at any time by a majority vote of the full board of directors, or by a
majority vote of the votes cast by the shareholders of the BANK at any legal
meeting.
11
<PAGE> 1
January 20, 1998
Board of Directors
Bay State Bancorp, Inc.
1299 Beacon Street
Brookline, Massachusetts 02146
Re: The offering of up to 2,041,250 shares of
Bay State Bancorp, Inc. Common Stock
Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of Bay State Federal Savings Bank (the
"Bank"), a federally-chartered savings bank, from the mutual form of ownership
to the stock form of ownership (the "Conversion"), and the related subscription
offering, community offering and syndicated community offering (the
"Offerings") by Bay State Bancorp, Inc., a Delaware corporation (the
"Company"), of up to 2,041,250 shares of its common stock, par value $.01 per
share ("Common Stock"), (2,347,437 shares if the Estimated Valuation Range is
increased up to 15% to reflect changes in market and financial conditions
following commencement of the Offerings).
In connection with your request for our opinion, you have provided to
us and we have reviewed the Company's certificate of incorporation filed with
the Delaware Secretary of State on October 24, 1997 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form SB-2, as filed with the Securities and Exchange Commission initially on
November 13, 1997 (the "Registration Statement"); a consent of the sole
incorporator of the Company; resolutions of the Board of Directors of the
Company (the "Board") concerning the organization of the Company, the Offerings
and designation of a Pricing Committee of the Board, and the form of stock
certificate approved by the Board to represent shares of Common Stock. We have
also been furnished a certificate of the Delaware Secretary of State certifying
the Company's good standing as a Delaware corporation. Capitalized terms used
but not defined herein shall have the meaning given them in the Certificate of
Incorporation.
<PAGE> 2
Board of Directors
January 20, 1998
Page 2
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying.
We understand that the Company will contribute funds to a wholly-owned
subsidiary of the Company (the "Subsidiary") which Subsidiary will loan to the
trust for the Bank's Employee Stock Ownership Plan (the "ESOP") the funds the
ESOP Trust will use to purchase shares of Common Stock for which the ESOP Trust
subscribes pursuant to the Offerings and for purposes of rendering the opinion
set forth in paragraph 2 below, we assume that: (a) the Board of Directors of
the Company has duly authorized the capital contribution to the Subsidiary for
purposes of making a loan to the ESOP Trust (the "Loan"); (b) the Board of
Directors of the Subsidiary has duly authorized the Loan to the ESOP Trust; (c)
the ESOP serves a valid corporate purpose for the Company; (d) the Loan will be
made at an interest rate and on other terms that are fair to the Subsidiary;
(e) the terms of the Loan will be set forth in customary and appropriate
documents including, without limitation, a promissory note representing the
indebtedness of the ESOP Trust to the Subsidiary as a result of the Loan; and
(f) the closing for the Loan and for the sale of Common Stock to the ESOP Trust
will be held after the closing for the sale of the other shares of Common Stock
sold in the Offerings, the receipt by the Company of the proceeds thereof and
the contribution by the Company to the Subsidiary of the funds sufficient to
make the Loan.
Based upon and subject to the foregoing, and limited in all respects
to matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offerings, the
Common Stock to be issued in the Offerings (including the shares to be issued
to the ESOP Trust) will be duly authorized and, when such shares are sold and
paid for in accordance with the terms set forth in the Prospectus and such
resolution of the Pricing Committee, and certificates representing such shares
in the form provided to us are duly and properly issued, will be validly
issued, fully paid and nonassessable.
The following provisions of the Certificate of Incorporation may not
be given effect by a court applying Delaware law, but in our opinion the
failure to give effect to such provisions will not affect the duly authorized,
validly issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section
D of Article EIGHTH, which grant the Board the
authority to construe and apply the provisions of
those Articles, subsection C.4 of Article FOURTH, to
the
<PAGE> 3
Board of Directors
January 20, 1998
Page 3
extent that subsection obligates any person to
provide to the Board the information such subsection
authorizes the Board to demand, and the provision of
Subsection C.7 of Article EIGHTH empowering the Board
to determine the Fair Market Value of property
offered or paid for the Company's stock by an
Interested Stockholder, in each case to the extent,
if any, that a court applying Delaware law were to
impose equitable limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider
the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating
any such offer.
We consent to the filing of this opinion as an exhibit to the
Registration Statement on Form SB-2 and the Form AC and to the use of the name
of our firm where it appears in the Registration Statement, Form AC and
Prospectus.
Very truly yours,
/s/ MULDOON, MURPHY & FAUCETTE
MULDOON, MURPHY & FAUCETTE
<PAGE> 1
[Morris, Nichols, Arsht & Tunnell Letterhead]
January 20, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of
Delaware law in connection with the conversion of Bay State Federal Savings
Bank, a federally chartered savings bank (the "Bank"), from the mutual form of
ownership to stock form of ownership (the "Conversion"), and the subscription
and community offering (the "Offering"), in connection with the Conversion, by
Bay State Bancorp, Inc., a Delaware corporation (the "Company"), of up to
2,347,437 shares of its common stock, par value $.01 per share (the "Common
Stock").
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its by-laws,
<PAGE> 2
Muldoon, Murphy & Faucette
January 20, 1998
Page 2
the Registration Statement filed with the Securities and Exchange
Commission in connection with the Offering (the "Registration Statement"),
including the prospectus constituting a part thereof (the "Prospectus"), a
consent of the sole incorporator of the Company, resolutions of the Board of
Directors of the Company (the "Board") concerning, inter alia, the organization
of the Company, the Offering and the designation of a Pricing Committee of the
Board (the "Pricing Committee") and the form of stock certificate approved by
the Board to represent shares of Common Stock. We have also obtained a
certificate of the Delaware Secretary of State as to the Company's good
standing as a Delaware corporation. Capitalized terms used but not defined
herein shall have the meanings given them in the Certificate of Incorporation.
We understand that a wholly-owned subsidiary of the Company (the
"Subsidiary") will loan to the Bank's Employee Stock Ownership Plan (the
"ESOP") the funds the ESOP will use to purchase the shares of Common Stock for
which the ESOP has subscribed as part of the Offering. The Subsidiary will
receive the funds necessary to make such loan by way of capital contribution by
the Company to the Subsidiary (the "Capital Contribution"). In this regard, we
have assumed, for purposes of rendering the opinion set forth in paragraph 2
below, that: (a) the board of directors of the Subsidiary has duly authorized
the loan to the ESOP (the "Loan") and the Board has duly authorized the Capital
Contribution; (b) the Loan serves a valid corporate purpose of the Subsidiary
and the Capital Contribution serves as a valid corporate purpose of the
Company; (c) the Loan will be made at an interest rate and on other
<PAGE> 3
Muldoon, Murphy & Faucette
January 20, 1998
Page 3
terms that are fair to the Subsidiary; (d) the terms of the Loan will
be set forth in customary and appropriate documents including, without
limitation, a promissory note representing the indebtedness of the ESOP to the
Subsidiary as a result of the Loan; and (e) the Capital Contribution, the
closing for the Loan and for the sale of Common Stock to the ESOP will be held
after the closing for the sale of the other shares of Common Stock sold in the
Offering and the receipt by the Company of the proceeds thereof.
We call your attention to the fact that the opinions expressed herein
are limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Company, the Offering or the
Conversion, including, without limitation, those applicable to federally
chartered savings banks or their holding companies.
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold
<PAGE> 4
Muldoon, Murphy & Faucette
January 20, 1998
Page 4
in the Offering, the Common Stock to be issued in the Offering (including the
shares to be issued to the ESOP) will be duly authorized and, when such shares
are sold and paid for in accordance with the terms set forth in the Prospectus
and such resolution of the Pricing Committee, and certificates representing such
shares in the form provided to us are duly and properly issued, will be validly
issued, fully paid and nonassessable, with no personal liability for the payment
of the Company's debts arising solely by virtue of the ownership thereof; such
issuance and sale will not be in violation of or subject to any preemptive
rights provided for by Delaware law or by the Certificate of Incorporation.
<PAGE> 5
Muldoon, Murphy & Faucette
January 20, 1998
Page 5
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an Interested Stockholder,
to the extent, if any, that a court
<PAGE> 6
Muldoon, Murphy & Faucette
Janauary 20, 1998
Page 6
applying Delaware law were to impose equitable limitations upon the authority of
the directors of the Company under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which purports to
permit the Board to consider the effect of any offer to acquire the Company on
constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
<PAGE> 1
January 22, 1998
Board of Directors
Bay State Bancorp, Inc.
1299 Beacon Street
Brookline, Massachusetts 02146
Board of Directors
Bay State Federal Savings Bank
1299 Beacon Street
Brookline, Massachusetts 02146
Re: Certain Federal Tax Consequences of the Conversion of Bay
State Federal Savings Bank from a Federally-chartered Mutual
Savings Bank to a Federally-chartered Stock Savings Bank and
the Offer and Sale of Common Stock of Bay State Bancorp, Inc.
(the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax
consequences of the proposed conversion of Bay State Federal Savings Bank (the
"Bank") from a federally-chartered mutual savings bank to a federally-chartered
capital stock savings bank and the acquisition of the Bank's capital stock by
Bay State Bancorp, Inc., a Delaware corporation (the "Holding Company"),
pursuant to the plan of conversion adopted by the Board of Directors on
September 9, 1997 as amended on January 20, 1998 (the "Plan of Conversion").
The proposed transaction is described in the Prospectus and the Plan
of Conversion, and the tax consequences of the proposed transaction will be as
set forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE> 2
Board of Directors
January 22, 1998
Page 2
We have made such inquiries and have examined such documents and
records as we have deemed appropriate for the purpose of this opinion. In
rendering this opinion, we have received certain standard representations of
the Holding Company and the Bank concerning the Holding Company and the Bank as
well as the transaction ("Representations"). These Representations are
required to be furnished prior to the execution of this letter and again prior
to the closing of the Conversion. We will rely upon the accuracy of the
Representations of the Holding Company and the Bank and the statements of facts
contained in the examined documents, particularly the Plan of Conversion. We
have also assumed the authenticity of all signatures, the legal capacity of all
natural persons and the conformity to the originals of all documents submitted
to us as copies. Each capitalized term used herein, unless otherwise defined,
has the meaning set forth in the Plan of Conversion. We have assumed that the
Conversion will be consummated strictly in accordance with the terms of the
Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed
description of the Conversion. These documents as well as the Representations
to be provided by the Holding Company and the Bank are incorporated in this
letter as part of the statement of the facts.
Bay State Federal Savings Bank, with an administrative office in
Brookline, Massachusetts, is a federally-chartered mutual savings bank. As a
mutual savings bank, the Bank has never been authorized to issue stock.
Instead, the proprietary interest in the reserves and undivided profits of the
Bank belong to the deposit account holders of the Bank, hereinafter sometimes
referred to as "depositors." A depositor of the Bank has a right to share, pro
rata, with respect to the withdrawal value of his respective deposit account in
any liquidation proceeds distributed in the event the Bank is ever liquidated.
In addition, a depositor of the Bank is entitled to interest on his account
balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank,
the Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a federally-chartered capital stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized,
the Holding Company will acquire the stock of the Bank by purchase, in exchange
for the Conversion proceeds that are not permitted to be retained by the
Holding Company. The Holding Company will apply to the Office of Thrift
Supervision ("OTS") to retain up to 50% of the proceeds received from the
Conversion. The aggregate sales price of the Common Stock issued in the
Conversion will be based on an independent appraiser's valuation of the
estimated pro forma market value of the Common Stock of the Converted Bank.
The Conversion and sale of the Common Stock will be subject to approval by the
OTS and the approval of the Voting Members.
<PAGE> 3
Board of Directors
January 22, 1998
Page 3
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Bank shall establish at the
time of Conversion a liquidation account in an amount equal to its net worth as
of the latest practicable date prior to Conversion. The liquidation account
will be maintained by the Bank for the benefit of the Eligible Account Holders
and Supplemental Eligible Account Holders who continue to maintain their
Savings Accounts at the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to his Savings Account, hold a
related inchoate interest in a portion of the liquidation account balance, in
relation to his Savings Account balance on the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Bank (and only
in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Savings Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the amount
of the then adjusted subaccount balance for his Savings Account then held,
before any liquidation distribution may be made to any holders of the Bank's
capital stock. No merger, consolidation, purchase of bulk assets with
assumption of Savings Accounts and other liabilities, or similar transaction
with an FDIC institution, in which the Bank is not the surviving institution,
shall be deemed to be a complete liquidation for this purpose. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company
and the Bank intend to establish a charitable foundation that will qualify as
an exempt organization under Section 501(c)(3) of the Internal Revenue Code
(the "Foundation") and to donate to the Foundation 8.0% of the number of shares
of Common Stock sold in the Conversion. The establishment and funding of the
Foundation as part of the Conversion is subject to the approval of the voting
members of the Bank at the Special Meeting of Members. In the event that the
Foundation does not receive the prerequisite approval, the Bank may determine
to complete the Conversion without the Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan
of Conversion states that the Foundation is intended to complement the Bank's
existing community reinvestment activities so as to allow the local community
to share in the growth and profitability of the Holding Company and the
Converted Bank over the long term.
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Bank's Local Community, including, but not
limited to, grants or donations to support housing assistance, scholarships,
local education, not-for-profit medical facilities, not-for-profit community
groups and other types of organizations or civic minded projects. The
Foundation will annually distribute total grants and donations to assist
charitable organizations or to fund
<PAGE> 4
Board of Directors
January 22, 1998
Page 4
projects within its local community of not less than 5% of the average fair
value of the Foundation assets each year.
* * *
You have provided the following representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts
plus interests in the liquidation account of the Converted
Bank to be constructively received under the Plan of
Conversion will, in each instance, be equal to the fair market
value of the withdrawable deposit accounts (plus the related
interest in the residual equity of the Bank) deemed to be
surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed
$50 as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, then no amount of that individual's
total deposits will be excluded from participating in the
liquidation account. The fair market value of the deposit
accounts of the Bank which have a balance of less than $50 on
the Eligibility Record Date or the Supplemental Eligibility
Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by
reason of their ownership of deposits in the Bank immediately
before the Conversion.
(d) After the Conversion, the Converted Bank will continue the
business of the Bank in the same manner as prior to the
Conversion. The Converted Bank has no plan or intention and
the Holding Company has no plan or intention to cause the
Converted Bank to sell its assets other than in the ordinary
course of business.
(e) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Bank other than in the ordinary course of business.
(f) The Holding Company and the Converted Bank have no current
plan or intention to redeem or otherwise acquire any of the
Common Stock issued in the Conversion transaction.
<PAGE> 5
Board of Directors
January 22, 1998
Page 5
(g) Immediately after the Conversion, the assets and liabilities
of the Converted Bank will be identical to the assets and
liabilities of the Bank immediately prior to the Conversion,
plus the net proceeds from the sale of the Converted Bank's
common stock to the Holding Company and any liability
associated with indebtedness incurred by the Employee Plans in
the acquisition of Common Stock by the Employee Plans.
(h) The Bank, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be
issued or acquired at a discount. However, shares may be
given to certain Directors and employees as compensation by
means of the Employee Plans. Compensation to be paid to such
Directors and depositor-employees will be commensurate with
amounts paid to third parties bargaining at arm's length for
similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will
equal or exceed the sum of the liabilities of the Bank which
will be assumed by the Converted Bank and any liabilities to
which the transferred assets are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or
similar court in any Title 11 or similar case within the
meaning of section 368(a)(3)(A) of the Code.
(l) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Bank and no other shares of capital
stock of the Converted Bank will be issued and/or outstanding.
At the time of the Conversion, the Converted Bank does not
have any plan or intention to issue additional shares of its
stock following the transaction. Further, no shares of
preferred stock of the Converted Bank will be issued and/or
outstanding.
(m) Upon the completion of the Conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Bank, nor will there be any securities outstanding
which are convertible into the capital stock of the Converted
Bank.
<PAGE> 6
Board of Directors
January 22, 1998
Page 6
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of
(a) nontransferable subscription rights, or (b) an interest in
the liquidation account of the Converted Bank.
(o) The Bank utilizes a reserve for bad debts in accordance with
section 593 and, following the Conversion, to the extent
allowed under the Code, the Converted Bank shall likewise
utilize a reserve for bad debts in accordance with section
593.
(p) The Bank currently satisfies the 60% "qualified assets" test
of section 7701(a)(19) of the Code. Management expects the
Converted Bank to be able to continue to satisfy the test in
the future. The Converted Bank will also satisfy the
"qualified thrift lender" tests set out in sections 301 and
303 of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989.
(q) Depositors will pay the expenses of the Conversion solely
applicable to them, if any. The Holding Company and the Bank
will each pay expenses of the transaction attributable to them
and will not pay any expenses solely attributable to the
depositors or to the Holding Company shareholders.
(r) The exercise price of the subscription rights received by the
Bank's Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights to purchase
Holding Company Common Stock will be equal to the fair market
value of the stock of the Holding Company at the time of the
completion of the Conversion as determined by an independent
appraisal.
(s) The proprietary interests of the Eligible Account Holders and
the Supplemental Eligible Account Holders in the Bank arise
solely by virtue of the fact that they are account holders in
the Bank.
(t) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
(u) The liabilities of the Bank assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are
subject were incurred by the Bank in the ordinary course of
its business and are associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to
future tax years. The Bank has neither generated nor carried
forward a net operating loss for federal tax purposes in the
past ten tax years.
<PAGE> 7
Board of Directors
January 22, 1998
Page 7
LIMITATIONS ON OPINION
Our opinions expressed herein are based solely upon current provisions
of the Internal Revenue Code of 1986, as amended, including applicable
regulations thereunder and current judicial and administrative authority. Any
future amendments to the Code or applicable regulations, or new judicial
decisions or administrative interpretations, any of which could be retroactive
in effect, could cause us to modify our opinion. No opinion is expressed
herein with regard to the federal, state, or city tax consequences of the
Conversion under any section of the Code except if and to the extent
specifically addressed.
FEDERAL TAX OPINION
Based solely upon the foregoing representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level
other than changes in the form of organization will be
insubstantial. Based upon that fact and the fact that the
equity interest of a depositor in a mutual savings bank is
more nominal than real, unlike that of a shareholder of a
corporation, the Conversion of the Bank from a mutual savings
bank to a stock savings bank is a tax-free reorganization
since it is a mere change in identity, form or place of
organization within the meaning of section 368(a)(1)(F) of the
Code (see Rev. Rul. 80-105, 1980-1 C.B. 78). Neither the Bank
nor the Converted Bank shall recognize gain or loss as a
result of the Conversion. The Bank and the Converted Bank
shall each be "a party to a reorganization" within the meaning
of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or
the Holding Company on the receipt by the Converted Bank of
money from the Holding Company in exchange for shares of the
Converted Bank's capital stock or by the Holding Company upon
the receipt of money from the sale of its Common Stock
(Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the
Converted Bank shall be the same as the basis of such assets
in the hands of the Bank immediately prior to the Conversion
(Section 362(b) of the Code).
<PAGE> 8
Board of Directors
January 22, 1998
Page 8
(4) The holding period of the assets of the Bank in the hands of
the Converted Bank shall include the period during which the
Bank held the assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank on the issuance to them of withdrawable deposit accounts
in the Converted Bank plus interests in the liquidation
account of the Converted Bank in exchange for their deposit
accounts in the Bank or to the other depositors on the
issuance to them of withdrawable deposit accounts (Section
354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of
the stock, no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in the Holding Company
(Section 356(a)). Gain realized, if any, by the Eligible
Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription
rights to purchase shares of Common Stock will be recognized
but only in an amount not in excess of the fair market value
of such subscription rights (Section 356(a)). Eligible
Account Holders and Supplemental Eligible Account Holders will
not realize any taxable income as a result of the exercise by
them of the nontransferable subscription rights (Rev. Rul.
56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental
Eligible Account Holders and other depositors of the Bank will
be the same as the basis of their deposit accounts in the Bank
surrendered in exchange therefor (Section 358(a)(1) of the
Code). The basis of the interests in the liquidation account
of the Converted Bank to be received by the Eligible Account
Holders of the Bank shall be zero (Rev. Rul. 71-233, 1971-1
C.B. 113). The basis of the Holding Company Common Stock to
its stockholders will be the purchase price thereof plus the
basis, if any, of nontransferable subscription rights (Section
1012 of the Code). Accordingly, assuming the nontransferable
subscription rights have no value, the basis of the Common
Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor.
The holding period of the Common Stock purchased pursuant to
the exercise of subscription rights shall commence on the date
on which the right to acquire such stock was exercised
(Section 1223(6) of the Code).
<PAGE> 9
Board of Directors
January 22, 1998
Page 9
Our opinion under paragraph (6) above is predicated on the
representation that no person shall receive any payment, whether in money or
property, in lieu of the issuance of subscription rights. Our opinion under
paragraphs (6) and (7) above assumes that the subscription rights to purchase
shares of Common Stock received by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members have a fair market value of zero.
We understand that you have received a letter from Keller & Company, Inc. that
the subscription rights do not have any value. We express no view regarding
the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair
market value, income may be recognized by various recipients of the
subscription rights (in certain cases, whether or not the rights are exercised)
and Holding Company and/or the Converted Bank may be taxable on the
distribution of the subscription rights.
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause
us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the Form
AC and Form SB-2 Registration Statement of Bay State Bancorp, Inc. and the
references to and summary of this opinion in such Form AC and Form SB-2
Registration Statement.
Sincerely,
/s/ MULDOON, MURPHY & FAUCETTE
MULDOON, MURPHY & FAUCETTE
<PAGE> 1
[LETTERHEAD]
December 22, 1997
PRIVATE and CONFIDENTIAL
Board of Directors
Bay State Federal Savings Bank
1299 Beacon Street
Brookline, MA 02146
Board of Directors
Bay State Bancorp, Inc.
1299 Beacon Street
Brookline, MA 02146
Ladies and Gentlemen:
This letter constitutes our opinion as to certain state income tax consequences
of the proposed conversion of Bay State Federal Savings Bank (Bank) from
federally chartered mutual savings bank to a federally chartered stock savings
bank followed by the acquisition of the Bank's capital stock by Bay State
Bancorp, Inc. (Holding Company), a Delaware corporation, pursuant to the plan of
conversion (the "Conversion").
The opinions contained herein are based solely on the FACTS and REPRESENTATIONS
stated in your letter dated November 10, 1997. All Section references are to the
Internal Revenue Code of 1986, as amended (Code) and Massachusetts General Laws
(MGL) as in effect as of the date of this opinion. If any of the FACTS and
REPRESENTATIONS is not correct or complete, it is imperative that we be informed
in writing as this could have a material adverse effect on our opinion.
STATEMENT OF FACTS
Bay State Federal Savings Bank, with an administrative office in Brookline,
Massachusetts, is a federally chartered mutual savings bank. As a mutual savings
bank, the Bank has never been authorized to issue stock. Instead, the
proprietary interest in the reserves and undivided profits of the Bank belong to
the deposit account holders of the Bank, hereinafter sometimes referred to as
"depositors". A depositor of the Bank has a right to share, pro rata, with
respect to the withdrawal value of his
1
<PAGE> 2
Board of Directors
Bay State Federal Savings Bank
respective deposit account in any liquidation proceeds distributed in the event
the Bank is ever liquidated. In addition, a depositor of the Bank is entitled to
interest on his account balance as fixed and paid by the Bank.
Holding Company is a Delaware corporation recently organized by the Bank for the
purpose of acquiring all of the capital stock of the Bank to be issued in the
Conversion. Holding Company will have authorized capital stock consisting of 11
million shares of common stock ("Common Stock") and 1 million shares of
preferred stock. Only Common Stock will be issued in connection with the
conversion. Holding Company will acquire all of the stock of the Bank in
exchange for 50% of the net proceeds from the Offerings.
DESCRIPTION OF THE CONVERSION
In order to provide organizational and economic strength to the Bank, the Board
of Directors has adopted a plan of conversion (the "Plan of Conversion") whereby
the Bank will be converted into a federally chartered stock savings bank (the
"Converted Bank"), the stock of which will be held entirely by the Holding
Company. In connection with the conversion, the Holding Company will issue
shares of its $0.01 par value Common Stock in Subscription and Community
Offerings. It is anticipated that all such shares of Common Stock not subscribed
for in the Subscription and Community Offerings will be offered to the general
public in a Syndicated Community Offering.
The aggregate sales price of the Common Stock issued in the conversion will be
based on an independent appraiser's valuation of the estimated pro forma value
of the Common Stock of the Converted Bank. The conversion and sale of the Common
Stock will be accomplished pursuant to the rules and regulations and will be
subject to the approval of the Office of the Thrift Supervision, Department of
the Treasury (the "OTS").
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 priority: (1) depositors whose accounts in the
Bank totaled $50 or more on August 31, 1996 ("Eligible Account Holders"); (2)
the Employee Stock Ownership Plan; (3) depositors whose eligible savings
accounts in the Bank totaled $50 or more on December 31, 1997 ("Supplemental
Eligible Account Holders"), and (4) other members of the Bank, consisting of
depositors of the Bank as of a date to be determined, the voting record date
("Voting Record Date") for the special meeting of members to vote on the
Conversion, and borrowers with loans outstanding as of the date to be
determined, 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"). 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.
2
<PAGE> 3
Board of Directors
Bay State Federal Savings Bank
REPRESENTATION
In connection with the proposed reorganization, the following representations
have been made to us by you and we have relied on them as an integral assumption
in reaching our conclusion:
1) The value of the withdrawable deposit accounts plus interest
in the liquidation account of the Converted Bank to be
received under the Plan of Conversion will, in each instance,
be equal to the value of the withdrawable deposit accounts
(plus the related interest in the residual equity of the Bank)
deemed to be surrendered in exchange therefor.
2) If an individual's total deposits in the Bank equal or exceed
$50 as of the Eligibility Record Date and/or the Supplemental
Eligibility Record Date, then no amount of that individual's
total deposits will be excluded from participation in the
liquidation account. The value of the deposit accounts of the
Bank which have a balance of less than $50 on the Eligibility
Record Date of the Supplemental Eligibility Record Date is
less than 1% of the total value of all deposit accounts of the
Bank.
3) Immediately following the Conversion, the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank will own all of the outstanding interests in the
liquidation account and will own such interest solely by
reason of their ownership of deposits in the Bank immediately
before the Conversion.
4) After the Conversion, the Converted Bank will continue the
business of the Bank in the same manner as prior to the
Conversion. The Converted Bank has no plan or intention and
the Holding Company has no plan or intention to cause the
Converted Bank to sell its assets other than in the ordinary
course of business.
5) The Holding Company has no plan or intention to sell,
liquidate or otherwise dispose of the stock of the Converted
Bank other than in the ordinary course of business.
6) The Holding Company and the Converted Bank have no current
plan or intention to redeem or otherwise acquire any of the
Common Stock issued in the Conversion transaction.
7) Immediately after the Conversion, the assets and liabilities
of the Converted Bank will be identical to the assets and
liabilities of the Bank immediately prior to the Conversion,
plus the net proceeds from the sale of the common stock of the
Converted Bank to the Holding Company and any liability
associated with indebtedness incurred by the Employee Stock
Ownership Plan in the acquisition of Common Stock.
3
<PAGE> 4
Board of Directors
Bay State Federal Savings Bank
8) The Bank, Converted Bank and the Holding Company are
corporations within the meaning of section 7701(a)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
9) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the conversion will be
issued or acquired at a discount. However, shares may be given
to certain directors and employees as compensation by means of
the Employee and/or Stock Plans that may be approved at the
conversion or subsequently thereto. Compensation to be paid to
such directors and depositor-employees will be commensurate
with amounts paid to third parties bargaining at arm's length
for similar services.
10) The value of the assets of the Bank, which will be transferred
to Converted Bank in the Conversion, will equal or exceed the
sum of the liabilities of the Bank which will be assumed by
the Converted Bank and any liabilities to which the
transferred assets are subject.
11) The Bank is not under the jurisdiction of a bankruptcy or
similar court in any Title II or similar case within the
meaning of section 368(a)(3)(A) of the Code.
12) Upon the completion of the Conversion, the Holding Company
will own and hold 100% of the issued and outstanding capital
stock of the Converted Bank and no other shares of capital
stock of the Converted Bank will be issued and/or outstanding.
At the time of the conversion, the Converted Bank does not
have any plan or intention to issue additional shares of its
stock following the transaction. No shares of preferred stock
of the Converted Bank will be issued and/or outstanding.
13) Upon the completion of the conversion, there will be no
rights, warrants, contracts, agreements, commitments or
understandings with respect to the capital stock of the
Converted Bank, nor will there be any securities outstanding
which are convertible into the capital stock of the Converted
Bank.
14) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
15) Depositors will pay the expenses of the conversion solely
applicable to them, if any. The Holding company and the Bank
will each pay expenses of the transaction attributable to each
respective entity and will not pay any expenses solely
attributable to the depositors of the Bank or to the
shareholders of the Holding Company.
4
<PAGE> 5
Board of Directors
Bay State Federal Savings Bank
16) The exercise price of the subscription rights received by the
Eligible Account Holders, Supplemental Eligible Account
Holders, and other holders of subscription rights of the Bank
to purchase Holding Company common stock will be equal to the
value of the stock of the Holding Company at the time of the
completion of the Conversion as determined by an independent
appraisal.
17) The proprietary interests of the Eligible Account Holders and
the Supplemental Eligible Account Holders in the Bank arise
solely by virtue of the fact that they are account holders in
the Bank.
18) There is no plan or intention for the Converted Bank to be
liquidated or merged with another corporation following this
proposed transaction.
19) The liabilities of the Bank assumed by the Converted Bank plus
the liabilities, if any, to which the transferred assets are
subject were incurred by the Bank in the ordinary course of
its business and are associated with the assets transferred.
20) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to
future tax years. The Bank has neither generated nor carried
forward a net operating loss for federal tax purposes in the
past 5 tax years.
21) If it becomes necessary for Holding Company to loan money to
the ESOP, the money will be lent from a newly created
subsidiary of Holding company ("ESOP Loan Subsidiary") or from
a third party creditor.
DISCUSSION
FINANCIAL INSTITUTION EXCISE TAX
Bank is a federally chartered mutual savings bank subject to the Massachusetts
Financial institution excise tax under MGL chapter 63, sections 1,2,2A, and 7.
Holding Company will be a Delaware chartered corporation subject to
Massachusetts excise tax under MGL chapter 63, Section 39 or the excise imposed
under MGL chapter 63, Section 38B(b) if Holding Company is classified as a
security corporation pursuant to that section. The ESOP Loan Subsidiary, if any,
will be a Massachusetts domestic corporation subject to the Massachusetts
Financial Institution excise tax under MGL chapter 63, sections 1, 2, 2A, and 7.
The Massachusetts Financial Institution excise tax provides that banks and
certain corporations are taxed on net income as defined in MGL chapter 63,
section 1, which provides that net income is equal to gross income other than
ninety-five percent of dividends received in any taxable year beginning on or
after January first, nineteen
5
<PAGE> 6
Board of Directors
Bay State Federal Savings Bank
hundred and ninety-nine from or on account of the ownership of any class of
stock if the financial institution owns fifteen (15) percent or more of the
voting stock of the institution paying the dividend, less the deductions, but
not the credits allowable under the provisions of the Internal Revenue Code, as
amended and in effect for the taxable year. For taxable years beginning on or
after January first, nineteen hundred and ninety-nine, the provisions of Section
291 of said Code shall not apply; and the provisions of Sections 171(a(2) and
265 of said Code shall only apply to the extent that the income to which the
deductions relate is excludable from gross income. Deductions with respect to
the following items, however, shall not be allowed except as otherwise provided:
(a) dividends received, except as otherwise provided;
(b) losses sustained in other taxable years; or
(c) taxes on or measured by income, franchise taxes measured by
net income, franchise taxes for the privilege of doing
business and capital stock taxes imposed by any state.
Pursuant MGL chapter 63, Section 1 for taxable years beginning on or after
January 1, 1995, gross income is defined as "gross income under the provisions
of the Federal Internal Revenue Code, as amended and in effect for the taxable
year, plus the interest from bonds, notes and evidences of indebtedness of any
state, including the Commonwealth (of Massachusetts)". Therefore, a transaction
that is non taxable for federal income tax purposes because it qualifies as a
tax-free reorganization within the meaning of Section 368(a)(1)(F) of the
Federal Internal Revenue Code will also be non taxable for Massachusetts
financial Institution excise tax purposes by reason of the fact that the federal
tax treatment is also applicable for Massachusetts excise tax purposes.
Although there is no case law nor regulations, announcements, or letter rulings
issued by the Massachusetts Department of Revenue ("DOR") since the adoption of
the revised definition of gross income, the DOR has issued numerous letter
rulings regarding reorganizations under pre-1995 law. In several letter rulings,
the DOR has ruled that no gain or loss should be recognized on transactions
which qualify as reorganizations under Code Section 368(a).(1) Other letter
rulings have been issued which exclude from Massachusetts gross income or loss
resulting from the conversion of a mutual savings or cooperative bank to a stock
savings or cooperative bank.(2)
The letter rulings relating to the conversion from mutual to stock form of doing
business specifically address the issue of whether or not the issuance of stock,
under Section 1032 of the Code, creates income to the issuer. In all of the
rulings, the DOR stated that no gain or loss should be recognized on the receipt
of money in exchange for shares of common stock.(3)
- -------------------
(1) Massachusetts Letter Rulings 82-5, 83-53, 85-3, and 85-63.
(2) Massachusetts Letter Rulings 84-11, 83-61, and 83-53.
(3) Ibid.
6
<PAGE> 7
Board of Directors
Bay State Federal Savings Bank
Accordingly, no gain should be recognized by either Holding Company upon
issuance of its shares to the public or by Bank upon issuance of its shares to
Holding Company.
While the above rulings apply to pre-1995 tax law, the statutory definition of
gross income under pre-1995 tax law was very broad to include gross income from
all sources. Accordingly, it is our opinion that the conclusions reached by
these rulings lend credence to our conclusion that a non taxable transaction for
federal income tax purposes will also be non taxable for Massachusetts Financial
Institution excise tax purposes.
CORPORATE EXCISE TAX
It is the intent of management of Holding Company to obtain classification as a
Massachusetts Security Corporation under Massachusetts Chapter 63, Section
38B(b) for Massachusetts corporation excise tax purposes. One of the
requirements for obtaining classification as a Massachusetts Security
Corporation is that the company be engaged "exclusively in buying, selling,
dealing in, or holding securities its own behalf and not as a broker."(4)
Holding Company has been authorized to loan money to the ESOP plan to be used
for the purchase of Holding Company stock. The lending of money is an
impermissible activity for Massachusetts Security Corporations(5) and would
result in disqualification as a Massachusetts Security Corporation. Such
disqualification could result in additional taxes (net worth and/or income
based) being incurred by Holding Company.
Management has represented to us that if it becomes necessary for the Holding
Company to loan money to the ESOP plan, the Holding Company will create a newly
formed subsidiary, ESOP Loan Subsidiary. ESOP Loan Subsidiary will then loan the
money to the ESOP plan; or, the ESOP may borrow from a third party creditor.
Massachusetts Letter Rulings 88-13 and 91-3 address the issues of whether bank
holding companies and other corporations, respectively, were allowed to own
wholly-owned subsidiaries and what their permissible activities would be. In
both rulings, and particularly in the case of bank holding companies,
corporations were given fairly broad powers to manage the investment in their
wholly-owned subsidiaries provided they did not actually conduct a trade or
business themselves.
Provided ESOP Loan Subsidiary is created in such a manner that the business of
ESOP Loan Subsidiary can be managed by ESOP Loan Subsidiary and is not managed
by Holding Company, the formation of ESOP Loan Subsidiary followed by the
lending of money from ESOP Loan Subsidiary to the ESOP plan should not violate
the requirements necessary to obtain and retain Massachusetts Security
Corporation Classification status for Holding Company.
- -------------------
(4) Massachusetts General Law, Chapter 63, Section 38B.
(5) Massachusetts Directive 86-35.
7
<PAGE> 8
Board of Directors
Bay State Federal Savings Bank
OPINION
Accordingly, based upon the facts and representations stated herein, it is the
opinion of Shatswell, MacLeod & Company, P.C. regarding the Massachusetts income
tax effect of the planned reorganization that:
1) Provided that the Conversion qualifies as a tax-free
reorganization within the meaning of section 368(a)(1)(F) of
the Code, the Conversion will also qualify as a tax-free
reorganization for Massachusetts corporation excise tax
purposes (Massachusetts Letter Rulings 84-11, 83-53, and
83-61).
2) No gain or loss shall be recognized by the converted Bank or
the Holding Company on the receipt by the Converted Bank of
money from the Holding Company in exchange for shares of the
Converted Bank's capital stock or by the Holding Company upon
the receipt of money from the sale of its Common Stock
(Massachusetts Letter Ruling 87-11, Section 1032(a) of the
Internal Revenue Code.
3) The basis of the assets of the Bank in the hands of the
Converted Bank shall be the same as the basis of such assets
in the hands of the Bank immediately prior to the Conversion
(Massachusetts Letter Ruling 84011, Section 362(b) of the
Internal Revenue Code).
4) The holding period of the assets of the Bank in the hands of
the Converted Bank shall include the period during which the
Bank held the assets (Section 1223(2) of the Internal Revenue
Code and Massachusetts Letter ruling 84-11).
5) No gain or loss will be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders of the
Bank on the constructive issuance to them withdrawable deposit
accounts in the Converted Bank plus interests in the
liquidation account of the Converted Bank in exchange for
their deposit accounts in the Bank or to the other depositors
on the issuance of them of withdrawable deposit accounts
(Massachusetts Letter Ruling 84-11 and Section 354(a) of the
Internal Revenue Code).
6) Provided that the amount to be paid for such stock pursuant to
the subscription rights is equal to the fair market value of
the stock, no gain or loss will be recognized by Eligible
Account Holders and Supplemental Eligible Account Holders upon
the distribution to them of the nontransferable subscription
rights to purchase shares of stock in the Holding Company
(Section 356(a) of the Internal Revenue Code and
8
<PAGE> 9
Board of Directors
Bay State Federal Savings Bank
Massachusetts Letter Ruling 84-11). Gain realized, if any, by
the Eligible Account Holders and Supplemental Eligible Account
Holders on the distribution to them of nontransferable
subscription rights to purchase shares of Common Stock will be
recognized but only in an amount not in excess of the fair
market value of such subscription rights (Section 356(a) and
Massachusetts Letter Ruling 84-11). Eligible Account Holders
and Supplemental Account Holders will not realize any taxable
income as a result of the exercise by them of the
nontransferable subscription rights (Massachusetts Letter
Ruling 84-11).
7) The basis of the deposit accounts in the Converted Bank to be
received by the Eligible Account Holders, Supplemental
Eligible Account Holders and other depositors of the Bank will
be the same as the basis of their deposit accounts in the Bank
surrendered in exchange therefor (Section 358(a)(1) of the
Internal Revenue Code and Massachusetts Letter Rulings 84-11
and 83-61). The basis of the interests in the liquidation
account of the Converted Bank to be received by the Eligible
Account Holders of the Bank shall be zero (Massachusetts
Letter Rulings 84-11 and 83-61). The basis of the Holding
Company Common Stock to its stockholders will be the purchase
price thereof plus the fair market values, if any, of
nontransferable subscription rights (Section 1012 of the
Internal Revenue Code and Massachusetts Letter Rulings 84-11
and 83-61). Therefore, assuming the nontransferable
subscription rights have no value, the basis of the Common
Stock to the Eligible Account Holders and Supplemental
Eligible Account Holders will be the amount paid therefor. The
holding period of the Common Stock purchased pursuant to the
exercise of subscription rights shall commence on the date on
which the right to acquire such stock was exercised (Section
1223(6) of the Internal Revenue Code and Massachusetts Letter
Ruling 84-11 and 83-61).
8) Under MGL Chapter 63, Sections 1,2, and 7, the Bank and the
Converted Bank will be treated as the same savings bank and as
if the Conversion had not occurred (Massachusetts Letter
Ruling 84-11). Therefore,
a) the part of the current taxable year of the Bank
before the Conversion and the part of the current
taxable year of the Converted Bank after the
Conversion will constitute a single taxable year of
the Converted Bank;
b) the Converted Bank will succeed to and take into
account the net operating income of the Bank as of
the date of the Conversion; and
c) for the current taxable year, the Converted Bank may
claim as a credit any estimated tax payments under
MGL Chapter 63, Section 2 made by the Bank prior to
the Conversion.
9
<PAGE> 10
Board of Directors
Bay State Federal Savings Bank
9) The lending of money from ESOP Loan Subsidiary to the ESOP
plan will not prevent Holding Company from qualifying as a
Massachusetts Security Corporation provided that Holding
Company does not conduct any other activities deemed
impermissible under MGL Chapter 63, Section 38B, and the
various regulations announcements and letter rulings issued by
the Massachusetts Department of Revenue.
Our opinion under paragraph (6) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under paragraphs (6) and (7)
above assumes that the subscription rights to purchase shares of Common Stock
received by Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members have a fair market value of zero. We understand that you have
received an opinion from Keller & Company that the subscription rights have no
value. We express no opinion regarding the valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the rights are exercised) and Holding Company
and/or the Converted Bank may be taxable on the distribution of the subscription
rights.
Our opinion assumes that the Conversion qualifies under Section 368(a) of the
Internal Revenue Code as a tax-free reorganization. We understand that the
federal tax opinion is being rendered by Muldoon, Murphy & Faucette, Attorneys
at Law. We express no opinion regarding whether or not the Conversion qualifies
as a tax-free reorganization under the Internal Revenue Code.
CONCLUSION
The opinions contained herein are rendered only with respect to the specific
matters discussed herein and we express no opinion with respect to any other
legal, federal, state, or local tax aspect of these transactions. This opinion
is not binding upon any tax authority including the Massachusetts Department of
Revenue or any court and no assurance can be given that a position contrary to
that expressed herein will not be asserted by a tax authority.
In rendering our opinions we are relying upon the relevant provisions of the
Internal Revenue Code of 1986, as amended, Massachusetts General Laws and the
regulations, judicial and administrative interpretations thereof, all as of the
date of this letter.
10
<PAGE> 11
Board of Directors
Bay State Federal Savings Bank
However, all of the foregoing authorities are subject to change or modification
which can be retroactive in effect and, therefore, could also affect our
opinions. We undertake no responsibility to update our opinion for any
subsequent change or modification.
Very truly yours,
/s/ Shatswell, MacLeod & Company, P.C.
11
<PAGE> 1
EXHIBIT 8.2
SHATSWELL, MACLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
174 SOUTH BOULEVARD
WEST SPRINGFIELD, MASSACHUSETTS 01089
(413)737-5789
November 12, 1997
PRIVATE and CONFIDENTIAL
Board of Directors
Bay State Federal Savings Bank
1299 Beacon Street
Brookline, MA 02146
Board of Directors
Bay State Bancorp, Inc.
1299 Beacon Street
Brookline, MA 02146
Ladies and Gentlemen:
This letter constitutes our opinion as to certain Federal income tax issues
related to the proposed establishment of a private foundation (the "Foundation")
in connection with the proposed conversion of Bay State Federal Savings Bank
(the "Bank") from a federally chartered mutual savings bank to a federally
chartered stock savings bank followed by the acquisition of the Bank's capital
stock by Bay State Bancorp, Inc. (the "Holding Company"), a Delaware
corporation, pursuant to the plan of Conversion (the "Conversion").
The opinions contained herein are based solely on the FACTS and REPRESENTATIONS
stated in your letter dated November 10, 1997. All Section references are to the
Internal Revenue Code of 1986, as amended (the "Code") as in effect as of the
date of this opinion. If any of the FACTS and REPRESENTATIONS are not correct,
complete, or have been changed, it is imperative that we be informed in writing
as this could have a material adverse effect on our opinion.
STATEMENT OF FACTS
The Board of Directors of Bay State Federal Savings Bank has adopted a plan of
conversion from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank. In connection with the anticipated
mutual-to-stock conversion, Bay State Bancorp, Inc. has been formed. The primary
initial activity of the Holding Company will be ownership of its wholly-owned
subsidiary, the Bank.
The Board wishes to share part of the financial success of the Bank with the
communities which the Bank serves. However, the Bank has other corporate
purposes. Therefore, the Board has decided it would be appropriate to establish
a
1
<PAGE> 2
Board of Directors
Bay State Federal Savings Bank
private foundation completely dedicated to performing charitable causes within
the Bank's market area. The Foundation will be incorporated under Delaware law
as a non-stock corporation.
The Foundation's Board of Directors will initially consist of four (4) members,
all of whom will be members of the Board of Directors or Officers of the Holding
Company, the Bank or an affiliate or subsidiary of the Holding Company or the
Bank.
The Bank and the incorporators will fund the Foundation with approximately
$2,000 in cash. The Holding Company will donate, concurrent with the
consummation of the Conversion, 8 percent of its issued and outstanding common
stock to the Foundation. In order to comply with certain requirements of
Delaware corporate law, the Foundation will pay an amount equal to the par value
of the donated stock, which will be $0.01 per share for an aggregate nominal
consideration of approximately $1,071 to $1,666. As a result, the Foundation
will hold between $2.1 million (at the minimum) and $3.3 million (at the super
maximum) in shares of the common stock of the Holding Company, or 7.4% of the
issued and outstanding common stock.
DISCUSSION
Charitable Contribution Deduction
Subject to certain limitations, Section 170(a) of the Internal Revenue Code
provides for the deduction of contributions and gifts to or for the use of
organizations described in Section 170(c) of the Internal Revenue Code, payment
of which is made within the taxable year. The Foundation will be a private
foundation organized exclusively for charitable purposes. Contributions to the
Foundation will be deductible as charitable contributions for federal income tax
purposes.
If a charitable contribution is made in property other than money, Treasury
Regulation 1.170A-1(c) provides that the amount of the deduction is the fair
market value of the property at the time of the contribution. The fair market
value of the property is the price at which the property would change hands
between a willing buyer and a willing seller.
Section 1032 of the Internal Revenue Code provides that no gain or loss is
recognized to a corporation on the receipt of money or other property in
exchange for stock (including treasury stock) of such corporation. Thus, no gain
is recognized to the Holding Company if it sells its stock at fair market value.
Section 170(e) of the Internal Revenue Code provides for a reduction in the
amount of charitable contributions of property to private foundations. Treasury
Regulation 1.170A-4(a) provides, in general, that the value of the contribution
must be reduced by the amount of gain that would have been recognized if the
property had been sold at its fair market value at the time of the contribution.
Thus, the amount of deduction is generally limited to the taxpayer's basis in
the property.
2
<PAGE> 3
Board of Directors
Bay State Federal Savings Bank
Rev. Rul. 75-348, 1975-2 C.B. 75, holds that a corporation that pledges to sell
shares of its common stock at a specified price to a charitable organization is
entitled to a charitable contribution deduction, in the taxable year the pledge
is exercised, for the excess of the fair market value of the shares on the date
of the exercise over the exercise price. The Revenue Ruling discusses the
interplay of Section 1011(b), relating to bargain sales of property sold to a
charitable organization, and Section 1032. The Ruling states that Section
1011(b) is not applicable because under Section 1032, no gain would be
recognized. Accordingly, the contribution does not have to be reduced by the
potential gain if the stock had been sold.
Therefore, the Holding Company will be entitled to a charitable contribution
deduction in the manner and to the extent provided in Section 170 for its
contribution of stock to the Foundation. Due to the provision of Section 1032,
the reduction provisions found in Section 170(e) will not be applicable to the
deduction that arises upon the contribution of the stock. The amount of the
charitable contribution deduction will be the difference between the nominal par
value that the Foundation is required to pay the Holding Company pursuant to
Delaware law and the fair market value of the shares on the date of the
contribution. Such amount should be the mean between the highest and lowest
quoted selling price on that date less than $.01 per share. For purposes of this
letter, we assume that amount will be $19.99 per share. Section 170(b)(2) limits
the charitable contribution deduction of a corporation for any taxable year to
10 percent of taxable income computed without the charitable contribution,
certain special deductions, net operating loss carrybacks and capital loss
carrybacks.
Section 170(d)(2) allows the taxpayer to carry over the excess contribution to
each of the five succeeding tax years. Any amount contributed in the succeeding
years, plus the carry over amount, is subject to the 10 percent limitation.
Accordingly, the Holding Company has 6 years in which to use the charitable
contribution in its consolidated Federal income tax returns.
The Bank estimates that its charitable contributions should approximate $20,000
to $30,000 each year. The Bank and the Holding Company estimate that their
consolidated taxable income before charitable contributions for the following
fiscal years ending on March 31, will be approximately $2,383,000 for 1998,
$4,101,000 for 1999, $4,401,000 for 2000, $4,545,000 for 2001, $4,520,000 for
2002 and $4,913,000 for 2003 for purposes of estimating their MINIMUM
contribution to the Foundation. Estimated consolidated taxable income before
charitable contributions used in estimating the SUPER MAXIMUM contribution of
the Bank and the Holding Company to the Foundation should be approximately
$3,119,000 for 1998, $6,379,000 for 1999, $6,846,000 for 2000, $7,070,000 for
2001, $7,032,000 for 2002 and $7,642,000 for 2003.
3
<PAGE> 4
Board of Directors
Bay State Federal Savings Bank
Based upon the assumption that the Bank and Holding Company will join in a
consolidated Federal income tax return with taxable income before charitable
contributions as indicated above, the application of the limitations of Section
170(b)(2) is estimated to be as follows:
<TABLE>
<CAPTION>
1) Minimum Other
Contribution Contributions Cash Estimated
(107,100 shares) to Foundation Carryforward Contributions Total Limitation
- ---------------- ------------- ------------ ------------- --------- ----------
<S> <C> <C>
1998 $ 2,142,000 25,000 2,167,000 238,300
1999 1,928,700 25,000 1,953,700 410,100
2000 1,543,600 25,000 1,568,600 440,100
2001 1,128,500 25,000 1,153,500 454,500
2002 699,000 25,000 724,000 452,000
2003 272,000 25,000 297,000 297,000
------------- ------- -------
$ 2,142,000 (A) 150,000 (B)
============= =======
Total Contribution Deduction 1998 Through 2003 (A + B) $2,292,000
==========
<CAPTION>
2) Super
Maximum Other
Contribution Contributions Cash Estimated
(166,635 shares) to Foundation Carryforward Contributions Total Limitation
- ---------------- ------------- ------------ ------------- --------- ----------
<S> <C> <C>
1998 $ 3,332,700 25,000 3,357,700 311,900
1999 3,045,800 25,000 3,070,800 637,900
2000 2,432,900 25,000 2,457,900 684,600
2001 1,773,300 25,000 1,798,300 707,000
2002 1,091,300 25,000 1,116,300 703,200
2003 413,100 25,000 438,100 438,100
--------------- ------- -------
$ 3,332,700 (A) 150,000 (B)
=============== =======
Total Contribution Deduction 1998 Through 2003 (A + B) $3,482,700
==========
</TABLE>
Self-Dealing
Section 4941 of the Internal Revenue Code imposes an excise tax on acts of
self-dealing between a disqualified person and a private foundation. Generally,
a disqualified person is someone who manages the foundation or who is considered
a "substantial contributor" to the foundation. In addition, disqualified persons
include family members, businesses, and other entities related to a foundation
manager or a substantial contributor.
4
<PAGE> 5
Board of Directors
Bay State Federal Savings Bank
Although disqualified persons may generally make gifts to private foundations,
foundations are precluded from engaging in most other transactions with
disqualified persons. It is immaterial that the foundation actually derives a
benefit from the self-dealing transaction.
Treasury Regulation 53.4941(d)-1(a) provides that an act of self-dealing does
not include a transaction whereby the disqualified person status arises only as
a result of the transaction. As an example, the regulations indicate that a
transfer of property to a private foundation is not an act of self-dealing if
the seller becomes a disqualified person only as a result of the seller becoming
a substantial contributor as a result of the bargain element of the sale.
Therefore, if the Holding Company is not a disqualified person just prior to the
transfer, the transfer will not be an act of self-dealing.
Section 507(d)(2) defines a "substantial contributor" as any person who
contributes an aggregate amount of more than $5,000 to the private foundation if
that amount is greater than 2 percent of the total contributions and bequests
received by the foundation before the end of the tax year of the Foundation.
Accordingly, the Holding Company can contribute up to $5,000 to the private
Foundation without becoming a disqualified person. You have represented to us
that any amount to be exchanged for the stock in excess of $5,000 will be
contributed to the Foundation by third parties.
Accordingly, based upon the facts and representations stated herein, it is the
opinion of Shatswell, MacLeod & Company, P.C. regarding the federal income tax
effect of the planned establishment of the Foundation that:
1) The Foundation will qualify as an organization described in Sec. 501(c)(3)
of the Internal Revenue Code and will be a private foundation rather than
a public charity.
2) The Holding Company will be entitled to a charitable contribution
deduction in the manner and to the extent provided in Section 170 for its
contribution of stock to the Foundation.
3) The amount of the charitable contribution deduction will be the difference
between the amount that the Foundation is required to pay the Holding
Company pursuant to Delaware law and the fair market value of the shares
on the date of the contribution plus the initial funding of the
Foundation, subject to the limitation imposed by Section 170(d)(2).
4) The purchase of the stock of the Holding Company by the Foundation will
not constitute an act of self-dealing.
5
<PAGE> 6
Board of Directors
Bay State Federal Savings Bank
CONCLUSION
The opinions contained herein are rendered only with respect to the specific
matters discussed herein and we express no opinion with respect to any other
legal, federal, state or local tax aspect of these transactions. This opinion is
not binding upon any tax authority including any court and no assurance can be
given that a position contrary to that expressed herein will not be asserted by
a tax authority.
In rendering our opinions we are relying upon the relevant provisions of the
Internal Revenue Code of 1986, as amended, and the regulations, judicial and
administrative interpretations thereof, as of the date of this letter.
However, all of the foregoing authorities are subject to change or modification
which can be retroactive in effect and, therefore, could also affect our
opinions. We undertake no responsibility to update our opinion for any
subsequent change or modification.
Very truly yours,
/s/ SHATSWELL, MACLEOD & COMPANY, P.C.
6
<PAGE> 1
EXHIBIT 10.6
FORM OF
BAY STATE FEDERAL SAVINGS BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I .................................................................. 1
PURPOSE OF THE PLAN .................................................... 1
ARTICLE II .................................................................. 2
DEFINITIONS.............................................................. 2
2.1 Bank........................................................ 2
----
2.2 Board of Directors ......................................... 2
------------------
2.3 Change in Control........................................... 2
-----------------
2.4 Code........................................................ 3
----
2.5 Committee................................................... 3
---------
2.6 Company..................................................... 3
-------
2.7 Company Stock............................................... 3
-------------
2.8 Eligible Employee........................................... 3
-----------------
2.9 Employee.................................................... 3
--------
2.10 ERISA....................................................... 3
-----
2.11 ESOP........................................................ 3
----
2.12 Nonqualified Plan........................................... 3
-----------------
2.13 Participant................................................. 3
-----------
2.14 SERP Benefit................................................ 3
------------
2.15 SERP........................................................ 3
----
2.16 Termination for Cause....................................... 3
---------------------
2.17 Termination of Service...................................... 4
----------------------
ARTICLE III.................................................................. 4
PARTICIPATION........................................................... 4
3.1 Eligibility for Participation............................... 4
------------------------------
3.2 Commencement of Participation............................... 4
-----------------------------
3.3 Vesting..................................................... 4
-------
3.4 Termination of Participation................................ 5
----------------------------
ARTICLE IV................................................................... 5
BENEFITS TO PARTICIPANTS................................................ 5
4.1 SERP Benefits............................................... 5
-------------
4.2 Form of Benefits............................................ 6
----------------
ARTICLE V.................................................................... 6
ADMINISTRATION.......................................................... 6
5.1 The Committee............................................... 6
-------------
5.2 Duties of the Committee..................................... 6
-----------------------
5.3 Liability of the Committee.................................. 7
--------------------------
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
5.4 Expenses.................................................... 7
--------
ARTICLE VI................................................................... 8
AMENDMENT AND TERMINATION............................................... 8
6.1 Amendment and Termination................................... 8
--------------------------
ARTICLE VII.................................................................. 8
MISCELLANEOUS PROVISIONS................................................ 8
7.1 No Right to Continual Employment............................ 8
--------------------------------
7.2 Non-Alienation of Benefits.................................. 8
--------------------------
7.3 Payment if Participant is Incompetent....................... 9
-------------------------------------
7.4 Termination for Cause....................................... 9
---------------------
7.5 The Bank Sole Source of Benefits............................ 9
--------------------------------
7.6 Lost Participants........................................... 9
-----------------
7.7 Withholding................................................. 9
-----------
7.8 Governing Law...............................................10
-------------
7.9 Operation as Unfunded Nonqualified Plan.....................10
---------------------------------------
</TABLE>
(iii)
<PAGE> 4
BAY STATE FEDERAL SAVINGS BANK
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE ______________, 199_
WHEREAS, effective ________________, 199__ Bay State Federal Savings
Bank (the "Bank") adopted Bay State Federal Savings Bank Employee Stock
Ownership Plan (the "ESOP"), a tax-qualified employee stock ownership plan; and
WHEREAS, the ESOP is leveraged with a ______-year exempt loan used to
acquire shares of Company Stock; and
WHEREAS, the final payment with respect to the ESOP loan is scheduled
to be made by the ESOP trustee on _____________, 20___; and
WHEREAS, the Bank expects that certain key management employees will
retire from the employ of the Bank prior to final payment of the ESOP loan and
the final allocation of Company Stock acquired with the proceeds of the ESOP
loan; and
WHEREAS, the Board of Directors of the Bank (the "Board of
Directors") desires to implement a plan to provide certain key management
employees with benefits to replace the benefits to which they would have
otherwise been entitled under the ESOP had they remained in the employ of the
Bank until the complete repayment of the ESOP loan and the final allocation of
Company Stock acquired with the proceeds of the ESOP loan;
NOW, THEREFORE, by resolution of the Board of Directors of the Bank,
the Bay State Federal Savings Bank Management Supplemental Executive Retirement
Plan (the "SERP") has been established.
ARTICLE I
PURPOSE OF THE PLAN
The purpose of the SERP is to provide certain key management
employees of the Bank who retire prior to complete repayment of the ESOP loan
and the final allocation of Company Stock acquired with the proceeds of the ESOP
loan with benefits to make up lost benefits to which they would otherwise have
been entitled under the terms of the ESOP had they continued their employment
with the Bank until complete repayment of the ESOP loan.
<PAGE> 5
ARTICLE II
DEFINITIONS
The following definitions shall apply for the purposes of this SERP
unless a different meaning is clearly indicated by the context.
2.1 Bank means Bay State Federal Savings Bank, having its principal
office at 1299 Beacon Street, Brookline, Massachusetts 02146 and its successors
or assigns.
2.2 Board of Directors means the Board of Directors of the Bank, as
duly constituted from time to time.
2.3 Change in Control of the Company or the Bank means an event of a
nature that: (i) would be required to be reported in response to Item 1(a) of
the current report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act");
or (ii) results in a Change in Control of the Bank or the Company within the
meaning of the Change in Bank Control Act and the Rules and Regulations
promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R.
Section 303.4(a) with respect to the Bank and the Board of Governors of the
Federal Reserve System ("FRB") at 12 C.F.R. Section 225.41(b) with respect to
the Company, as in effect on the date hereof; or (iii) results in a transaction
requiring prior FRB approval under the Bank Holding Company Act of 1956 and the
regulations promulgated thereunder by the FRB at 12 C.F.R. Section 225.11, as in
effect on the date hereof except for the Company's acquisition of the Bank; or
(iv) without limitation such a Change in Control shall be deemed to have
occurred at such time as (A) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Bank or the Company representing 20% or more of the Bank's or the Company's
outstanding securities except for any securities of the Bank purchased by the
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors of the Company on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-quarters of
the directors comprising the Incumbent Board, or whose nomination for election
by the Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Company or similar transaction occurs in which the
Bank or Company is not the resulting entity; or (D) solicitations of
shareholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or Bank or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or
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<PAGE> 6
property or securities not issued by the Bank or the Company shall be
distributed; or (E) a tender offer is made for 20% or more of the voting
securities of the Bank or the Company.
2.4 Code means the Internal Revenue Code of 1986, as amended from
time to time (including the corresponding provisions of any succeeding law).
2.5 Committee means the administrative committee appointed by the
Board to administer the SERP pursuant to the terms of Article V hereof.
2.6 Company means Bay State Bancorp, Inc., the holding company of
the Bank.
2.7 Company Stock means the common stock of Bay State Bancorp, Inc.
2.8 Eligible Employee means an Employee who is eligible for
participation in the SERP pursuant to the provisions of Article III hereof.
2.9 Employee means any person, including an officer, who is employed
by the Bank.
2.10 ERISA means the Employee Retirement Income Security Act of 1974,
as amended from time to time (including the corresponding provisions of any
succeeding law).
2.11 ESOP means the Bay State Federal Savings Bank Employee Stock
Ownership Plan.
2.12 Nonqualified Plan means a plan of deferred compensation which
does not meet the requirements of Section 401(a) of the Code.
2.13 Participant means any person who participates in the SERP in
accordance with its terms.
2.14 SERP Benefit means the benefit payable to a Participant pursuant
to the terms of the SERP.
2.15 SERP means the Bay State Federal Savings Bank Management
Supplemental Executive Retirement Plan, as set forth herein, and as amended from
time to time.
2.16 Termination for Cause means termination of employment because of
the Employee's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or willful violation of any law, rule or regulation (other than traffic
violations or similar offenses). The basis for any Employee's Termination for
Cause shall be determined by the Board of Directors in its sole discretion.
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<PAGE> 7
2.17 Termination of Service means an Employee's separation from the
service of the Bank, whether by resignation, discharge, death, disability,
retirement or otherwise.
ARTICLE III
PARTICIPATION
3.1 Eligibility for Participation.
Only Eligible Employees may be or become Participants. An Employee
shall become an Eligible Employee for SERP Benefits if:
(a) He is a participant in the ESOP, and
(b) The Board of Directors, in its sole discretion, designates
him as an Eligible Employee.
3.2 Commencement of Participation.
An Eligible Employee shall become a Participant in the SERP on the
date determined by the Board. However, in no event will an Employee become a
Participant prior to __________, 199___.
3.3 Vesting.
A Participant shall vest in his SERP Benefit according to the
following schedule:
<TABLE>
<CAPTION>
Anniversary of SERP Participation Vested Percentage
--------------------------------- -----------------
<S> <C>
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
</TABLE>
Notwithstanding the preceding, a Participant shall vest immediately in his SERP
Benefit upon the occurrence of a Change in Control of the Bank or the Company.
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<PAGE> 8
3.4 Termination of Participation.
A Participant's participation in the SERP shall cease on the earlier
of
(a) the date of the Participant's Termination of Service, or
(b) the date on which the Participant ceases to be an
Eligible Employee.
ARTICLE IV
BENEFITS TO PARTICIPANTS
4.1 SERP Benefits.
(a) An individual who satisfies the eligibility requirements of
Section 3.1 and becomes a Participant pursuant to Section 3.2 shall be entitled
to an unfunded, unsecured promise from the Bank to receive a SERP Benefit upon
Termination of Service as a result of his attainment of "Normal Retirement Age"
or satisfaction of the requirements for an "Early Retirement Benefit" (as those
terms are defined in the ESOP) under the terms of ESOP.
(b) The SERP Benefit shall be determined by:
(i) projecting the total number of shares of Company Stock that
would have been allocated to the Participant's account under
the ESOP had the Participant continued in the employ of the
Bank, measured from the date the Participant was first eligible
to participate in the ESOP until the ESOP loan would have been
repaid in full and the final allocation of shares of Company
Stock acquired with the ESOP loan would have been made; and
then
(ii) reducing the number of shares projected in (i), above, by
the actual number of shares of Company Stock allocated to the
Participant's account under the terms of the ESOP as of the
last day of the final Plan Year in which the Participant was an
"Active Participant" (as defined in the ESOP) in the ESOP; and
then
(iii) multiplying the number of shares of Company Stock
determined after application of (ii), above, by the average
fair market value of the Company Stock for the five-year period
immediately preceding the Participant's Termination of Service
(or the number of years the Participant has participated in the
SERP if such number is fewer than five).
The projection of shares required by (i), above, shall be performed by a public
accountant based on assumptions which the Board of Directors has approved as
reasonable at the time the calculation for the SERP Benefit is performed.
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<PAGE> 9
4.2 Form of Benefits.
(a) SERP Benefits shall be payable in a lump sum payment as soon as
practicable after the Participant's Termination of Service. However, the
Committee reserves the right to make payments in a series of periodic payments.
(b) SERP Benefits, at the discretion of the Committee, shall be paid
in cash, Company Stock or some combination thereof.
ARTICLE V
ADMINISTRATION
5.1 The Committee.
Except for the functions reserved to the Bank or the Board of
Directors, the administration of the SERP shall be the responsibility of the
Committee. The Committee shall consist of three (3) or more persons designated
by the Board of Directors. Members of the Committee shall serve for such terms
as the Board of Directors shall determine and until their successors are
designated and qualified. Any member of the Committee may resign upon at least
sixty (60) days written notice to the Board, or may be removed from office by
the Board of Directors for failure or inability to carry out his
responsibilities in an effective manner.
5.2 Duties of the Committee.
The Committee shall have the power and the duty to take all actions
and to make all decisions necessary or proper to carry out the purpose of the
SERP. The determination of the Committee as to any question involving the
general administration and interpretation of the SERP shall be final, conclusive
and binding. Any discretionary actions to be taken under the SERP by the
Committee shall be uniform in their nature and applicable to all persons
similarly situated. Without limiting the generality of the foregoing, the
Committee shall have the following powers and duties:
(a) the duty to furnish to all Participants, upon request,
copies of the SERP and to require any person to furnish such information as it
may request for the purpose of the proper administration of the SERP as a
condition to receiving any benefits under the SERP;
(b) the duty to make and enforce such rules and regulations and
prescribe the use of such forms as it shall deem necessary for the efficient
administration of the SERP;
(c) the duty to interpret the SERP, and to resolve ambiguities,
inconsistencies and omissions, which findings shall be binding, final and
conclusive;
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<PAGE> 10
(d) the duty to decide on questions concerning the SERP in
accordance with the provisions of the SERP;
(e) the duty to determine the amount of benefits which shall be
payable to any person in accordance with the provisions of the SERP and to
provide a full and fair review to any Participant whose claim for benefits has
been denied in whole or in part;
(f) the power to designate a person who may or may not be a
member of the Committee as SERP "Administrator." If the Committee does not so
designate an Administrator, the Bank shall be the SERP Administrator;
(g) the power to allocate any such powers and duties to or among
individual members of the Committee; and
(h) the power to designate persons other than Committee members
to carry out any duty or power which would otherwise be a responsibility of the
Committee or Administrator, under the terms of the SERP.
5.3 Liability of the Committee.
To the extent permitted by law, the Committee and any person to whom
it may delegate any duty or power in connection with administering the SERP, the
Bank, any Employer, and the officers and directors thereof, shall be entitled to
rely conclusively upon, and shall be fully protected in any action taken or
suffered by them in good faith in the reliance upon, any actuary, counsel,
accountant, other specialist, or other person selected by the Committee, or in
reliance upon any tables, valuations, certificates, opinions or reports which
shall be furnished by any of them. Further, to the extent permitted by law, no
member of the Committee, nor the Bank, any Employer, nor the officers or
directors thereof, shall be liable for any neglect, omission or wrongdoing of
any other members of the Committee, agent, officer or employee of the Bank or
any Employer. Any person claiming benefits under the SERP shall look solely to
the Bank for redress.
5.4 Expenses.
All expenses incurred prior to the termination of the SERP that shall
arise in connection with the administration of the SERP (including, but not
limited to administrative expenses, proper charges and disbursements,
compensation and other expenses and charges of any actuary, counsel, accountant,
specialist, or other person who shall be retained or employed by the Committee
in connection with the administration of the SERP), shall be paid by the Bank.
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<PAGE> 11
ARTICLE VI
AMENDMENT AND TERMINATION
6.1 Amendment and Termination.
The Board of Directors shall have the power to suspend or terminate
the SERP in whole or in part at any time, and from time to time to extend,
modify, amend or revise the SERP in such respects as the Board of Directors, by
resolution, may deem advisable; provided, however, that no such extension,
modification, amendment, revision, or termination shall deprive a Participant or
any beneficiary of any benefit payable under the SERP at the time of such
extension, modification, amendment, revision, or termination.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 No Right to Continual Employment.
The SERP shall not be deemed to constitute a contract of employment
between the Bank and any Employee or other person, whether or not in the employ
of the Bank, nor shall anything herein contained be deemed to give any Employee
or other person, whether or not in the employ of the Bank, any right to be
retained in the employ of the Bank, or to interfere with the right of the Bank
to discharge any Employee at any time and to treat such Employee without any
regard to the effect which such treatment might have upon such Employee as a
Participant of the SERP.
7.2 Non-Alienation of Benefits.
Except as may otherwise be required by law, no distribution or
payment under the SERP to any Participant or beneficiary shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, whether voluntary or involuntary, and any attempt to so
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the
same shall be void; nor shall any such distribution or payment be in any way
liable for or subject to the debts, contracts, liabilities, engagements or torts
of any person entitled to such distribution or payment. If any Participant or
beneficiary is adjudicated bankrupt or purports to anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge any such distribution or payment,
voluntarily or involuntarily, the Committee, in its sole discretion, may cancel
such distribution or payment or may hold or cause to be held or applied such
distribution or payment, or any part thereof, to or for the benefit of such
Participant or beneficiary, in such manner as the Committee shall direct.
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<PAGE> 12
7.3 Payment if Participant is Incompetent.
If the Bank determines that any person entitled to payments under the
SERP is incompetent by reason of physical or mental disability, it may cause all
payments thereafter becoming due to such person to be made to any other person
for the benefit of the incompetent person, without responsibility to follow
application of amounts so paid. Payments made pursuant to this provision shall
completely discharge the SERP, the Bank and the Committee.
7.4 Termination for Cause.
If any Participant entitled to payments under the SERP separates from
service as a result of Termination for Cause, the Bank may cause all payments
thereafter becoming due to such Participant to be forfeited under the SERP.
7.5 The Bank Sole Source of Benefits.
The Bank shall be the sole source of benefits under the SERP, and
each Employee, Participant, beneficiary, or any other person who shall claim the
right to any payment or benefit under the SERP shall be entitled to look solely
to the Bank for payment of benefits.
7.6 Lost Participants.
If the Bank is unable to make payment to any Participant,
beneficiary, or any other person to whom a payment is due under the SERP,
because it cannot ascertain the identity or whereabouts of such Participant,
beneficiary, or other person after reasonable efforts have been made to identify
or locate such person (including a notice of the payment so due mailed to the
last known address of such Participant, beneficiary, or other person shown on
the records of the Bank), such payment and all subsequent payments otherwise due
to such Participant, beneficiary or other person shall be forfeited _______
(____) months after the date such payment first became due; provided, however,
that such payment and any subsequent payments shall be reinstated,
retroactively, no later than sixty (60) days after the date on which the
Participant, beneficiary, or other person is identified or located.
7.7 Withholding.
If upon the payment of any benefits under the SERP, the Bank shall be
required to withhold any amounts with respect to such payment by reason of any
federal, state or local tax laws, rules or regulations, then the Bank shall be
entitled to deduct and withhold such amounts from any such payments. In any
event, such person shall make available to the Bank, promptly when requested by
the Bank, sufficient funds or other property to meet the requirements of such
withholding. Furthermore, the Bank shall be entitled to take and authorize such
steps as it may deem advisable in order to have the amounts required to be
withheld made available to the Bank
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<PAGE> 13
out of any funds or property due to become due to such person, whether under the
SERP or otherwise.
7.8 Governing Law.
The provisions of the SERP shall be construed, administered and
governed under applicable federal laws and the laws of the Commonwealth of
Massachusetts.
7.9 Operation as Unfunded Nonqualified Plan.
The SERP is intended to be an unfunded, Nonqualified Plan maintained
"primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees" as that phrase is used for
purposes of Sections 201, 301 and 401 of ERISA. The SERP is not intended to
comply with the requirements of section 401(a) of the Code. The SERP shall be
administered and construed so as to effectuate this intent.
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<PAGE> 14
Bay State Federal Savings Bank has adopted this Plan, to be executed by a
designee of the Board and duly attested, on this the ___ day of _______, 199__.
ATTEST: BAY STATE FEDERAL SAVINGS BANK
By
- -------------------------- ------------------------
11
<PAGE> 1
BAY STATE FEDERAL SAVINGS BANK
RETIREMENT BENEFIT EQUALIZATION PLAN
TABLE OF CONTENTS
[RESERVED]
2
<PAGE> 2
ARTICLE I
INTRODUCTION
SECTION 1.01 PURPOSE, DESIGN AND INTENT.
(a) The purpose of the Bay State Federal Savings Bank Retirement Benefit
Equalization Plan (the "Plan") is to assist Bay State Federal Savings
Bank (the "Bank") and its affiliates in retaining the services of key
employees until their retirement, to induce such employees, to use their
best efforts to enhance the business of the Bank and its affiliates, and
to provide certain supplemental retirement benefits to such employees.
(b) The Plan, in relevant part, is intended to constitute an unfunded
"excess benefit plan" as defined in Section 3(36) of the Employee
Retirement Income Security Act of 1974, as amended. The Plan is
specifically designed to provide certain key employees with retirement
benefits which would have been payable under the Regulations governing
the Comprehensive Retirement Program of the Financial Institutions
Retirement Fund, as adopted by Bay State Federal Savings Bank and as may
be amended from time to time, the Bay State Federal Savings Bank
Employee Stock Ownership Plan, and the Bay State Federal Savings Bank
Employees' Savings and Profit Sharing Plan, but for the limitations
placed on the benefits under the plans for such employees by Sections
401(a)(17), 401(m), and 415 of the Code (as defined in Section 2.01(e)
of the Plan).
SECTION 1.02 EFFECTIVE DATE.
The Plan is effective as of October 1, 1997.
ARTICLE II
DEFINITIONS
SECTION 2.01 DEFINITIONS.
When used herein, the following words and phrases shall have the meaning set
forth below:
(a) "ACTUARY" means the independent consulting actuary retained by the
Employer to assist the Plan Administrator in its administration of the
Plan.
(b) "ANNUAL SUPPLEMENTAL RETIREMENT BENEFIT" means the annual benefit
payable to a Participant pursuant to the Plan, as determined in
accordance with provisions of Section 4.01 of the Plan.
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<PAGE> 3
(c) "BENEFICIARY" means the person or persons designated by a Participant,
in accordance with Section 3.02 of the Plan, to receive any benefit
payable upon the death of such Participant.
(d) "BOARD OF DIRECTORS" means the Board of Directors of the Employer.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "ESOP" means the Bay State Federal Savings Bank Employee Stock Ownership
Plan.
(g) "EMPLOYER" means Bay State Federal Savings Bank and its affiliates (as
determined pursuant to Section 414(b), (c), (m), or (o) of the Code),
which participate in the Plan.
(h) "FUND" means the Financial Institutions Retirement Fund, a qualified and
tax-exempt pension plan and trust under Sections 401(a) and 501(a) of
the Code.
(i) "PARTICIPANT" means an employee whom the Board of Directors designates,
pursuant to Section 3.01 of the Plan, as eligible to benefit under the
Plan.
(j) "PLAN" means this Bay State Federal Savings Bank Retirement Benefit
Equalization Plan.
(k) "PLAN ADMINISTRATOR" means the Board of Directors or the person(s)
designated by the Board of Directors, pursuant to Section 9.02 of the
Plan, to administer the Plan.
(l) "REGULATIONS" means the Regulations governing the Comprehensive
Retirement Program of the Fund, as adopted by the Employer and as may be
amended from time to time.
(m) "SAVINGS PLAN" means the Bay State Federal Savings Bank Employees
Savings and Profit Sharing Plan.
(n) "SUPPLEMENTAL ESOP BENEFIT" means the benefit payable to the Participant
pursuant to the Plan, as determined in accordance with the provisions of
Section 4.02 of the Plan.
(o) "SUPPLEMENTAL SAVINGS BENEFIT" means the benefit payable to the
Participant pursuant to the Plan, as determined in accordance with the
provisions of Section 4.02 of the Plan.
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<PAGE> 4
ARTICLE III
ELIGIBILITY AND PARTICIPATION
SECTION 3.01 ELIGIBILITY AND PARTICIPATION.
Each employee of the Employer shall be eligible to participate in the Plan. An
employee shall become a Participant in the Plan upon his or her designation as
such by the Board of Directors, as designated on Appendix A hereto. An
individual shall cease participation in the Plan when he or she is no longer
entitled to receive any benefit under the Plan. A benefit shall be payable under
the Plan to or on account of a Participant only upon the Participant's
retirement, death, or other termination from service with the Employer.
SECTION 3.02 DESIGNATION OF BENEFICIARY.
(a) Each Participant may file with the Plan Administrator a written
designation of one or more persons who shall be entitled to receive any
benefit payable under the Plan upon such Participant's death. A
Participant may, from time to time, revoke or change his Beneficiary
designation without the consent of any prior Beneficiary by filing a new
designation with the Plan Administrator. The last such designation
received by the Plan Administrator shall be controlling.
(b) If no such Beneficiary designation is in effect at the time of a
Participant's death, or if no designated Beneficiary survives the
Participant, or if, in the opinion of the Plan Administrator, such
designation conflicts with applicable law, the Participant's estate
shall be deemed to have been designated as the Participant's
Beneficiary. If the Plan Administrator is in doubt as to the right of
any person to receive any benefit under the Plan, the Plan Administrator
may retain such amount, without liability for any interest thereon,
until the rights thereto are determined, or the Plan Administrator may
pay such amount into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Plan and
the Employer therefor.
ARTICLE IV
AMOUNT OF BENEFITS
SECTION 4.01 ANNUAL SUPPLEMENTAL RETIREMENT BENEFIT.
A Participant's Annual Supplemental Retirement Benefit under the Plan shall be
equal to the excess of (a) over (b), where:
(a) is the annual benefit (as calculated by the Fund on the basis of the
form of payment elected under the Regulations by the Participant and
including any "Active Service Death Benefit," "Retirement Adjustment
Payment," and "Single Purchase Fixed Percentage
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<PAGE> 5
Adjustment" which the Employer elected to provide its employees under
the Regulations) that would otherwise be payable to or on account of the
Participant by the Fund under the Regulations if the provisions of the
Regulations were administered without regard to the limitations imposed
by Sections 401(a)(17) and/or 415 of the Code; and
(b) is the annual benefit (as calculated by the Fund on the basis of the
form of payment elected under the Regulations by the Participant and
including any "Active Service Death Benefit," "Retirement Adjustment
Payment," and "Single Purchase Fixed Percentage Adjustment" which the
Employer elected to provide its employees under the Regulations) that is
payable to or on account of the Participant by the Fund under the
Regulations after giving effect to any reduction of such benefit
required by the limitations imposed by Sections 401(a)(17) and/or 415 of
the Code.
No "Annual Increment" shall be payable with respect to any benefit under the
Plan except that the Annual Supplemental Retirement Benefit determined under
this Section 4.01 shall be actuarially increased to reflect the value of the
"Annual Increment" which would have been payable under the Regulations,
utilizing for that purpose the same actuarial factors and assumptions then used
by the Fund to determine actuarial equivalence under the Regulations.
SECTION 4.02 SUPPLEMENTAL ESOP BENEFIT.
A Participant's Supplemental ESOP Benefit under the Plan shall be equal to the
excess of (a) over (b), where:
(a) is annual contributions made by the Employer that would otherwise be
allocated to the accounts of the Participant under the ESOP for a
particular year if the provisions of the ESOP were administered without
regard to the limitations imposed by Sections 401(a)(17) and/or 415 of
the Code; and
(b) is the annual contributions made by the Employer and that are actually
allocated to the accounts of the Participant under the provisions of the
ESOP for that particular year after giving effect to any reduction of
such allocation required by the limitations imposed by Sections
401(a)(17) and/or 415 of the Code.
SECTION 4.03 SUPPLEMENTAL SAVINGS BENEFIT.
A Participant's Supplemental Savings Benefit under the Plan shall be equal to
the excess of (a) over (b), where:
(a) is matching contributions that would otherwise be allocated to an
account of the Participant under the Savings Plan for a particular year
if the provisions of the Savings Plan were administered without regard
to the limitations imposed by Sections 401(a)(17), 401(m), and/or 415 of
the Code; and
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<PAGE> 6
(b) is the matching contributions made by the Employer that are actually
allocated to an account of the Participant under the provisions of the
Savings Plan for that particular year after giving effect to any
reduction of such allocation required by the limitations imposed by
Sections 401(a)(17), 401(m), and/or 415 of the Code.
ARTICLE V
SECTION 5.01 SUPPLEMENTAL ESOP BENEFIT ACCOUNT.
(a) The Bank will establish a memorandum account, the "Supplemental ESOP
Benefit Account," for each Participant on its books, and each year the
Plan Administrator will credit the amount of contributions determined
under Section 4.02 of the Plan. The Plan Administrator shall credit the
Supplemental ESOP Benefit Account with an amount equal to the
appropriate number of shares of stock of the holding company of the Bank
or other medium of contribution that would have otherwise been made to
the Participant's accounts under the ESOP but for the limitations
imposed by the Code. Shares of stock shall be valued under this Plan in
the same manner as under the ESOP. Cash contributions credited to a
Participant's Supplemental ESOP Benefit Account shall be credited
monthly with interest at a rate equal to the combined weighted return
provided to the Participant's non-stock accounts under the ESOP.
(b) A Participant shall have a non-forfeitable right to a Supplemental ESOP
Benefit under this Section 5.01 in the same percentage as he has to
benefits under the ESOP at the time the benefits become distributable to
him.
SECTION 5.02 SUPPLEMENTAL SAVINGS BENEFIT ACCOUNT.
(a) The Bank will establish a memorandum account, the "Supplemental Savings
Benefit Account" for each Participant on its books, and each year the
Plan Administrator will credit the amount of contributions determined
under Section 4.03 of the Plan. Contributions credited to a
Participant's Supplemental Savings Benefit Account shall be credited
monthly with interest at a rate equal to the combined weighted return
provided to the Participant's matching contribution account under the
Savings Plan.
(b) A Participant shall have a non-forfeitable right to a Supplemental
Savings Benefit under this Plan in the same percentage as he has to
matching contributions under the Savings Plan at the time the benefits
become distributable to him.
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<PAGE> 7
ARTICLE VI
BENEFIT PAYMENTS
SECTION 6.01 REGULAR FORM OF PAYMENT OF ANNUAL SUPPLEMENTAL RETIREMENT BENEFIT.
Unless the Participant elects an optional form of payment under the Plan
pursuant to Section 6.02 of the Plan, the Annual Supplemental Retirement
Benefit, if any, payable to or on account of such Participant under Section 4.01
of the Plan, shall be converted by the Actuary and shall be payable to or on
account of the Participant in the "Regular Form" of payment, utilizing for that
purpose the same actuarial factors and assumptions then used by the Fund to
determine actuarial equivalence under the Regulations. For purposes of the Plan
the "Regular Form" of payment means an Annual Benefit payable for the
Participant's lifetime and the death benefit described in Section 6.03 of the
Plan.
SECTION 6.02 OPTION FORM OF PAYMENT REGARDING ANNUAL SUPPLEMENTAL RETIREMENT
BENEFIT.
(a) A Participant may, with the consent of the Plan Administrator, elect in
writing to have his Annual Supplemental Retirement Benefit converted by
the Actuary to any optional form of payment then permitted under the
Regulations, except that no benefit under the Plan may be paid in the
form of a lump sum. The Actuary shall utilize for the purpose of that
conversion the same actuarial factors and assumptions then used by the
Fund to determine actuarial equivalence under the Regulations.
(b) If a Participant elects an optional form of payment under paragraph (a)
of this Section 6.02 and dies after the date his benefit payments under
the Plan had commenced, the only death benefit payable under the Plan in
respect of said Participant shall be the amount, if any, payable under
the optional form of payment which the Participant elected under the
Plan. If a Participant elects an optional form of payment under
paragraph (a) of this Section 6.02 and dies before the date his benefit
payments under the Plan commence, his election of an optional form of
benefit shall be inoperative and his benefits shall be distributed to
his Beneficiary in accordance with the provisions of Section 6.03 of the
Plan.
(c) An election of an optional form of payment under paragraph this Section
6.02 may be made only on a form prescribed by the Plan Administrator and
filed by the Participant with the Plan Administrator prior to the
commencement of any payment of his benefit under Section 6.04 of the
Plan.
SECTION 6.03 PAYMENTS OF ANNUAL SUPPLEMENTAL RETIREMENT BENEFIT UPON DEATH.
(a) Upon the death of a Participant who had not elected an optional form of
payment under Section 6.02 of the Plan, a death benefit shall be paid to
the Participant's Beneficiary in a lump sum equal to the excess, if any,
of (i) over (ii), where:
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(i) is an amount equal to 12 times the Annual Benefit, if any,
payable under Section 4.01 of the Plan, and
(ii) is the sum of the benefit payments, if any, which the
Participant had received under the Plan upon his death.
(b) If a Participant to whom an Annual Supplemental Retirement Benefit is
payable under the Plan dies before commencement of the payment of his
benefit, the death benefit payable under paragraph (a) of this Section
6.03 shall be payable to the Participant's Beneficiary as if the payment
of the Participant's benefit had commenced on the first day of the month
in which his death occurred.
SECTION 6.04 TIMING OF BENEFIT PAYMENTS REGARDING ANNUAL SUPPLEMENTAL
RETIREMENT BENEFIT.
A Participant's Annual Supplemental Retirement Benefit under the Plan shall be
paid in monthly installments commencing on the first day of the month next
following the Participant's retirement date under the Regulations, except that
no benefit shall be paid prior to the date benefits under the Plan can be
definitely determined by the Plan Administrator.
SECTION 6.05 PAYMENTS OF ANNUAL SUPPLEMENTAL RETIREMENT BENEFIT UPON
REEMPLOYMENT.
If a Participant is restored to employment with the Employer after payment of
his Annual Supplemental Retirement Benefit under the Plan has commenced, all
payments under the Plan shall thereupon be discontinued. Upon the Participant's
subsequent retirement or termination of employment with the Employer, his
benefit under the Plan shall be recomputed in accordance with Sections 4.01 and
6.01 of the Plan, but shall be reduced by the equivalent value of the amount of
any Annual Supplemental Retirement Benefit paid by the Plan in respect of his
previous retirement or termination of employment, and such reduced benefit shall
be paid to such Participant in accordance with the provisions of the Plan. For
purposes of this Section 6.05, the equivalent value of the benefit paid in
respect of a Participant's previous retirement or termination of employment
shall be determined by the Actuary utilizing the same actuarial factors and
assumptions then used by the Fund to determine actuarial equivalence under the
Regulations.
SECTION 6.06 PAYMENT OF SUPPLEMENTAL ESOP BENEFIT.
A Participant's Supplemental ESOP Benefit shall be paid to the Participant in
the same form, time, medium (i.e., cash and/or stock), and manner as his
benefits under the ESOP.
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SECTION 6.07 PAYMENT OF SUPPLEMENTAL SAVINGS BENEFIT.
A Participant's Supplemental Savings Benefit shall be paid to the Participant in
the same form, time, and medium (i.e., cash and/or stock), and manner as his
benefits under the Savings Plan; provided, however, that no distribution shall
take place from this Plan solely as a result of a distribution under the Savings
Plan as a result of a loan or hardship distribution under the Savings Plan.
SECTION 6.08 PAYMENTS OF SUPPLEMENTAL ESOP AND/OR SAVINGS BENEFITS UPON DEATH.
Upon the death of a Participant before distribution of the full amount of any
Supplemental ESOP Benefit and/or any Supplemental Savings Benefit, any remaining
amounts shall be distributed to his beneficiary in a lump sum distribution as
soon as administratively practicable following such Participant's death.
ARTICLE VII
CLAIMS PROCEDURES
SECTION 7.01 CLAIMS REVIEWER.
For purposes of handling claims with respect to this Plan, the "Claims Reviewer"
shall be the Plan Administrator, unless the Board of Directors designates
another person or persons as Claims Reviewer.
SECTION 7.02 CLAIMS PROCEDURE.
(a) An initial claim for benefits under the Plan must be made by the
Participant or his or her Beneficiary in accordance with the terms of
this Section 7.02.
(b) Not later than ninety (90) days after receipt of such a claim, the Claims
Reviewer will render a written decision on the claim to the claimant,
unless special circumstances require the extension of such 90-day period.
If such extension is necessary, the Claims Reviewer shall provide the
Participant or the Participant's Beneficiary with written notification of
such extension before the expiration of the initial 90-day period. Such
notice shall specify the reason or reasons for such extension and the
date by which a final decision can be expected. In no event shall such
extension exceed a period of 90 days from the end of the initial 90-day
period.
(c) In the event the Claims Reviewer denies the claim of a Participant or
the Beneficiary in whole or in part, the Claims Reviewer's written
notification shall specify, in a manner calculated to be understood by
the claimant, the reason for the denial; a reference to the Plan or
other document or form that is the basis for the denial; a description
of any additional material or information necessary for the claimant to
perfect the claim; an
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<PAGE> 10
explanation as to why such information or material is necessary; and an
explanation of the applicable claims procedure.
(d) Should the claim be denied in whole or in part and should the claimant be
dissatisfied with the Claims Reviewer's disposition of the claimant's
claim, the claimant may have a full and fair review of the claim by the
Employer upon written request therefor submitted by the claimant or the
claimant's duly authorized representative and received by the Employer
within sixty (60) days after the claimant receives written notification
that the claimant's claim has been denied. In connection with such
review, the claimant or the claimant's duly authorized representative
shall be entitled to review pertinent documents and submit the claimant's
views as to the issues, in writing. The Employer shall act to deny or
accept the claim within sixty (60) days after receipt of the claimant's
written request for review unless special circumstances require the
extension of such 60-day period. If such extension is necessary, the
Employer shall provide the claimant with written notification of such
extension before the expiration of such initial 60-day period. In all
events, the Employer shall act to deny or accept the claim within 120
days of the receipt of the claimant's written request for review. The
action of the Employer shall be in the form of a written notice to the
claimant and its contents shall include all of the requirements for
action on the original claim.
(e) In no event may a claimant commence legal action for benefits the
claimant believes are due the claimant until the claimant has exhausted
all of the remedies and procedures afforded the claimant by this Article
VII.
ARTICLE VIII
AMENDMENT AND TERMINATION
SECTION 8.01 AMENDMENT OF THE PLAN.
The Employer may at any time amend the Plan, but such amendment shall not
adversely affect the rights of any Participant or Beneficiary, without his or
her consent, to any benefit under the Plan to which such Participant or
Beneficiary may have previously become entitled prior to the effective date of
such amendment. The Plan Administrator shall be authorized to make minor or
administrative changes to the Plan, as well as amendments required by applicable
federal or state law (or authorized or made desirable by such statutes);
provided, however, that such amendments must subsequently be ratified by the
Board of Directors.
SECTION 8.02 TERMINATION OF THE PLAN.
The Employer may at any time terminate the Plan, but such termination shall not
adversely affect the rights of any Participant or Beneficiary, without his or
her consent, to any benefit under the Plan to which such Participant or
Beneficiary may have previously become entitled prior to the
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effective date of such termination. Upon termination of the Plan, distribution
of benefits under the Plan shall commence as if the Participant had retired and
began receiving benefits under the Plan.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE.
The right of a Participant or the Participant's Beneficiary to receive a
distribution hereunder shall be an unsecured claim against the general assets of
the Employer, and neither a Participant nor his or her designated Beneficiary
shall have any rights in or against any assets of the Employer. The Plan at all
times shall be considered entirely unfunded both for tax purposes and for
purposes of Title I of the Employee Retirement Income Security Act of 1974, as
amended. The Employer may, within its sole discretion, establish a bookkeeping
reserve or a grantor trust (within the meaning of Sections 671 through 677 of
the Code) to reflect or to aid it in meeting its obligations under the Plan with
respect to any Participant, prospective Participant, or Beneficiary. Any funds
invested hereunder shall continue for all purposes to be part of the general
assets of the Employer and available to its general creditors in the event of
bankruptcy or insolvency. Any benefits which may be payable pursuant to this
Plan are not subject in any manner to anticipation, sale, alienation, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of a
Participant or a Participant's Beneficiary. The Plan constitutes a mere promise
by the Employer to make benefit payments in the future. No interest or right to
receive a benefit may be taken, either voluntarily or involuntarily, for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
SECTION 9.02 PLAN ADMINISTRATOR.
The Plan shall be administered by the Plan Administrator, which shall be the
Board of Directors, unless the Board of Directors appoints any individual or
group of individuals to act as Plan Administrator. The Plan Administrator shall
have the authority, duty and power to interpret and construe the provisions of
the Plan as it deems appropriate. The Plan Administrator shall have the duty and
responsibility of maintaining records, making the requisite calculations and
disbursing the payments hereunder. The Plan Administrator shall be entitled to
rely on all tables, valuations, certificates, opinions, data and reports
furnished by any actuary, accountant, controller, counsel or other person
employed or retained by the Employer with respect to the Plan. The
interpretations, determinations, regulations and calculations of the Plan
Administrator shall be final and binding on all persons and parties concerned.
SECTION 9.03 EXPENSES.
Expenses of administration of the Plan shall be paid by the Employer.
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SECTION 9.04 RIGHTS OF PARTICIPANTS AND BENEFICIARIES.
(a) The sole rights of a Participant or Beneficiary under this Plan shall be
to have this Plan administered according to its provisions, to receive
whatever benefits he or she may be entitled to hereunder.
(b) Nothing in the Plan shall be interpreted as a guaranty that any funds in
any trust which may be established in connection with the Plan or assets
of the Employer will be sufficient to pay any benefit hereunder.
(c) The adoption and maintenance of this Plan shall not be construed as
creating any contract of employment or service between the Employer and
any Participant or other individual. The Plan shall not affect the right
of the Employer to deal with any Participants in employment or service
respects, including their hiring, discharge, compensation, and
conditions of employment or other service.
SECTION 9.05 INCOMPETENT INDIVIDUALS.
The Employer may from time to time establish rules and procedures which it
determines to be necessary for the proper administration of the Plan and the
benefits payable to an individual in the event that individual is declared
incompetent and a conservator or other person legally charged with that
individual's care is appointed. Except as otherwise provided herein, when the
Employer determines that such individual is unable to manage his or her
financial affairs, the Employer may pay such individual's benefits to such
conservator, person legally charged with such individual's care, or institution
then contributing toward or providing for the care and maintenance of such
individual. Any such payment shall constitute a complete discharge of any
liability of the Employer and the Plan for such individual.
SECTION 9.06 SALE, MERGER, OR CONSOLIDATION OF THE EMPLOYER.
The Plan shall be binding upon and inure to the benefit of the employer and its
successors and assigns and the members, and the successors, assigns, designees
and estates of the members. The Plan shall also be binding upon and inure to the
benefit of any successor organization succeeding to substantially all of the
assets and business of the Employer, but nothing in the Plan shall preclude the
Employer from merging or consolidating into or with, or transferring all or
substantially all of its assets to, another organization which assumes the Plan
and all obligations of the Employer hereunder. The Employer agrees that it will
make appropriate provision for the preservation of members' rights under the
Plan in any agreement or plan which it may enter into to effect any merger,
consolidation, reorganization or transfer of assets. Upon such a merger,
consolidation, reorganization, or transfer of assets and assumption of Plan
obligations of the Employer, the term "Employer" shall refer to such other
organization and the Plan shall continue in full force and effect.
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<PAGE> 13
SECTION 9.07 LOCATION OF PARTICIPANTS.
Each Participant shall keep the Employer informed of his or her current address
and the current address of his or her designated Beneficiary. The Employer shall
not be obligated to search for any person. If such person is not located within
three (3) years after the date on which payment of the Participant's benefits
payable under this Plan may first be made, payment may be made as though the
Participant or his or her Beneficiary had died at the end of such three-year
period.
SECTION 9.08 LIABILITY OF THE EMPLOYER.
Notwithstanding any provision herein to the contrary, neither the Employer nor
any individual acting as an employee or agent of the Employer shall be liable to
any Participant, former Participant, Beneficiary, or any other person for any
claim, loss, liability or expense incurred in connection with the Plan, unless
attributable to fraud or willful misconduct on the part of the Employer or any
such employee or agent of the Employer.
SECTION 9.09 WITHHOLDING.
The Employer shall withhold or cause to be withheld from all benefits payable
under the Plan all federal, state, local, and other taxes required by applicable
law to be withheld with respect to such payments.
SECTION 9.10 INTERPRETATION.
As used in the Plan, the masculine gender shall be deemed to refer to the
feminine, and the singular person shall be deemed to refer to the plural,
whenever appropriate.
SECTION 9.11 HEADINGS.
All Article and Section headings used herein have been inserted solely as a
matter of convenience and shall not in any manner define or limit the scope or
intent of any provisions of the Plan.
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SECTION 9.12 GOVERNING LAW.
All questions pertaining to the construction, validity and effect of the Plan
shall be determined in accordance with the laws of the United States and to the
extent not preempted by such laws, by the laws of the Commonwealth of
Massachusetts.
This Plan has been duly adopted this ____ day of ______________, 199__,
to be effective as of the 1st day of October, 1997.
By:
President
ATTEST:
Secretary
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<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
January 21, 1998
<PAGE> 1
January 21, 1998
Re: Valuation Appraisal of Bay State Bancorp, Inc.
Bay State Federal Savings Bank
Brookline, Massachusetts
We hereby consent to the use of our firm's name, Keller & Company, Inc.
("Keller"), and the reference to our firm as experts in the Application for
Conversion on Form AC to be filed by Bay State Federal Savings Bank and any
amendments thereto and references to our opinion regarding subscription rights
filed as an exhibit to the applications referred to hereafter. We also consent
to the use of our firm's name in the Form SB-2 to be filed by Bay State
Bancorp, Inc. with the Securities and Exchange Commission and any amendments
thereto, and to the statements with respect to us and the references to our
Valuation Appraisal Report and in the said Form AC and any amendments thereto
and in the notice and Application for Conversion filed by Bay State Federal
Savings Bank, Brookline, Massachusetts.
Very truly yours,
KELLER & COMPANY, INC.
by: /s/ JOHN A. SHAFFER
-------------------------
John A. Shaffer
Vice President
<PAGE> 2
January 21, 1998
The Board of Directors
Bay State Federal Savings Bank
1299 Beacon Street
Brookline, Massachusetts 02146
Re: Subscription Rights - Conversion of Bay State Federal Savings Bank
Brookline, Massachusetts
Gentlemen:
The purpose of this letter is to provide an opinion of the value of the
subscription rights of the "to be issued" common stock of Bay State Bancorp,
Inc. ("Bay State Bancorp" or the "Corporation"), Brookline, Massachusetts in
regard to the conversion of Bay State Federal Savings Bank ("Bay State Federal"
or the "Bank") from a federal-chartered mutual savings bank to a
federal-chartered stock savings bank.
Because the Subscription Rights to purchase shares of Common Stock in Bay State
Bancorp, which are to be issued to the depositors of Bay State Federal and the
other members of the Bank and will be acquired by such recipients without cost,
will be nontransferable and of short duration and will afford the recipients
the right only to purchase shares of Common Stock at the same price as will be
paid by members of the general public in a Direct Community Offering, we are of
the opinion that:
(1) The Subscription Rights will have no ascertainable fair market
value, and;
(2) The price at which the Subscription Rights are exercisable
will not be more or less than the fair market value of the
shares on the date of the exercise.
Further, it is our opinion that the Subscription Rights will have no economic
value on the date of distribution or at the time of exercise, whether or not a
community offering takes place.
Sincerely,
KELLER & COMPANY, INC.
/s/ JOHN A. SHAFFER
John A. Shaffer
Vice President
<PAGE> 1
EXHIBIT 99.1 APPRAISAL REPORT OF KELLER & COMPANY, INC.
(Filed pursuant to Rule 202 of Regulation S-T)
<PAGE> 1
EXHIBIT 99.2
GIFT INSTRUMENT
CHARITABLE GIFT TO THE BAY STATE FEDERAL CHARITABLE FOUNDATION
Bay State Bancorp, Inc., Brookline, Massachusetts (the "Company"),
desires to make a gift of its common stock, par value $.01 per share to The Bay
State Federal Savings Charitable Foundation (the "Foundation"), a nonprofit
corporation organized under the laws of the State of Delaware. The purpose of
the donation is to establish a bond between Bay State Bancorp, Inc. and the
community in which it and its affiliates operate to enable the community to
share in the potential growth and success of the Company and its affiliates over
the long term. To that end, Bay State Bancorp, Inc. now gives, transfers, and
delivers to the Foundation ________________________ shares of its common stock,
par value $.01 per share, or total consideration of $__________, subject to the
following conditions:
1. The Foundation will use the donation solely for charitable
purposes, including community development, in the communities in which the
Company and its affiliates operate in accordance with the provisions of the
Foundation's Certificate of Incorporation.
2. Consistent with the Company's intent to form a long-term bond
between the Company and the community, the amount of Common Stock that may be
sold by the Foundation in any one year shall not exceed 5% of the market value
of the assets held by the Foundation, except that this restriction will not
prohibit the board of directors of the Foundation from selling a greater amount
of Common Stock in any one year if the board of directors of the Foundation
determines that the failure to sell a greater amount of the Common Stock held by
the Foundation would: (a) result in a long-term reduction of the value of the
Foundation's assets relative to their then current value that would jeopardize
the Foundation's capacity to carry out its charitable purposes; or (b) otherwise
jeopardize the Foundation's tax-exempt status.
3. The Common Stock contributed to the Foundation by the Company
shall, for so long as such shares are held by the Foundation, be considered by
the Company to be voted in the same ratio as all other shares of Common Stock of
the Company which are voted on each and every proposal considered by
stockholders of the Company, provided, however, that if this Condition No. 3 is
waived by the Office of Thrift Supervision pursuant to Office of Thrift
Supervision Order No. ______, dated ___________, 1998 (a copy of which is
attached hereto), then this Condition No. 3 shall become void and of no effect.
Dated:_________, 1998 Bay State Bancorp, Inc.
By:
---------------------------------
John F. Murphy
President and
Chief Executive Officer
