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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1998
REGISTRATION NO. 333-40471
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT
NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BROOKLINE BANCORP, INC.
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 6712 (TO BE APPLIED FOR)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
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160 WASHINGTON STREET
BROOKLINE, MASSACHUSETTS 02147-7612
(617) 730-3500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
RICHARD P. CHAPMAN, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
160 WASHINGTON STREET
BROOKLINE, MASSACHUSETTS 02147-7612
(617) 730-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
ERIC LUSE, ESQ.
ROBERT B. POMERENK, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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(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, check
the following box. [_]
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 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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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BROOKLINE BANCORP, INC.
Cross Reference Sheet Showing Location in the
Subscription and Community Offering Prospectus
of Information Required by Items of Form S-1
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Registration Statement Item and Caption Prospectus Headings
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1. Forepart of the Registration Statement Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and
pages of Prospectus Outside Back
Cover Pages
3. Summary Information, Risk Factors and Summary of Reorganization and Offering; Risk
Ratio of Earnings to Fixed Charges Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price The Reorganization and Offering--
Stock Pricing and the Number of Shares ro be Offered
in the Offering
6. Dilution Not applicable
7. Selling Security Holders Not applicable
8. Plan of Distribution Front Cover Page; Summary of Reorganization and
Offering; The Reorganization and Offering--
Subscription Offering; --Community Offering; --Plan
Of Distribution and Selling Commissions
9. Description of Securities to be Description of Capital Stock of the Company;
Registered Restrictions on Acquisition of the Company and the
Bank;
10. Interests of Named Experts and Counsel Not applicable
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Registration Statement Item and Caption Prospectus Headings
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11. Information with Respect to the Front Cover Page; Brookline Bancorp, MHC;
Registrant Brookline Bancorp, Inc.; Brookline Savings Bank;
Dividend Policy; Consolidated
Statements of Income; Management's
and Analysis of Financial Condition and Discussion
Results of Operations; Business
of the Company; Business of the Bank; Regulation and
Supervision; Management of the Company;
Management of the Bank; The Reorganization and
Offering; Description of Capital Stock of the Company;
Consolidated Financial Statements
12. Disclosure of Commission Not applicable.
Position on Indemnification
for Securities Act Liabilities
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PROSPECTUS
BROOKLINE BANCORP, INC.
8,789,000 (Anticipated minimum) Shares of Common Stock
11,891,000 (Anticipated Maximum) Shares of Common Stock
13,674,650 (Anticipated Maximum, as Adjusted) Shares of Common Stock
Brookline Bancorp, Inc. (the "Company" or "Brookline Bancorp"), a
Massachusetts corporation, is offering up to 11,891,000 shares of its common
stock, par value $.01 per share (the "Common Stock"), for a purchase price of
$10.00 per share (the "Purchase Price") in connection with the mutual holding
company reorganization (the "Reorganization") of Brookline Savings Bank (the
"Bank"). The Reorganization will include the formation of a Massachusetts-
chartered stock savings bank (the "Stock Bank") as the successor to the Bank in
its mutual form, and the concurrent formation of the Company as a majority-owned
subsidiary of Brookline Bancorp, MHC (the "Mutual Company"), as described more
specifically below. In certain circumstances, the maximum number of shares sold
hereby may be increased to up to 13,674,650 shares without a resolicitation of
subscribers in the event of an increase by up to 15% in the estimated pro forma
market value of the Company and the Bank. See "The Reorganization and Offering--
Stock Pricing and Number of Shares to be Offered in the Offering."
The shares are being offered pursuant to the Bank's Plan of
Reorganization From a Mutual Savings Bank to a Mutual Holding Company and Stock
Issuance Plan (the "Plan") on a priority basis in a subscription offering (the
"Subscription Offering") to: (i) the Bank's Eligible Account Holders (defined as
holders of deposit accounts totaling $50 or more as of September 30, 1996);
(ii) the Bank's Supplemental Eligible Account Holders (defined as holders of
deposit accounts totaling $50 or more as of [ ], 1997); (iii) the Bank
Employee Stock Ownership Plan and Trust (the "ESOP") (for a total of up to 4% of
the share issued in the Offering, as defined below); and (iv) the Bank's
employees, officers and trustees. Subscription rights are non-transferable.
There is no obligation to subscribe for shares of Common Stock. There will be no
change to the deposit accounts of Eligible Account Holders and Supplemental
Eligible Account Holders who choose not to subscribe for shares of Common Stock.
Concurrently, and subject to the prior rights of holders of subscriptions in
categories (i) through (iv) above, the Company is offering the shares of Common
Stock not subscribed for in the Subscription Offering for sale in a direct
community offering to certain members of the general public (the "Community
Offering"). Shares not subscribed for in the Subscription and Community
Offerings may be offered for sale to certain members of the general public in a
syndicated community offering (the "Syndicated Community Offering"). The Company
reserves the right, in its absolute discretion to accept or reject, in whole or
in part, any or all orders in the Community Offering and Syndicated Community
Offering. The Subscription Offering, the Community Offering and the Syndicated
Community Offering are referred to collectively as the "Offering."
Pursuant to the Plan, the Bank will organize the Mutual Company as a
Massachusetts-chartered mutual holding company, which will own at least 51% of
the Common Stock of the Company for so long as the Mutual Company remains in
existence. The Bank will be a wholly-owned subsidiary of the Company. The Bank
is regulated and the Mutual Holding Company will be regulated by the
Massachusetts Division of Banks (the "Division"). The Mutual Company and the
Company also will be regulated by the Board of Governors of the Federal Reserve
System (the "FRB"). References to the Bank shall include Brookline Savings Bank
in its current mutual form, or its post-Reorganization stock form as indicated
by the context. References to the "Stock Bank" shall mean Brookline Savings Bank
in its post-reorganization stock form.
The shares of Common Stock sold in the Offering will represent a
minority ownership interest equal to 47% of the Common Stock of the Company. The
remaining issued and outstanding shares of Common Stock will be owned by the
Mutual Company. Except for the ESOP, no Eligible Account Holder, Supplemental
Eligible Account Holder, or employee, officer or trustee, in their respective
capacities as such, may purchase in the Subscription Offering more than $300,000
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 $300,000 of Common Stock; and no person together
with associates and persons acting in concert with such person may purchase in
the aggregate more than $1.0 million of Common Stock in the Offering; provided
that the Bank may, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, increase such
maximum purchase limitation to up to 5% of the maximum number of shares offered
in the Offering or decrease such maximum purchase limitation to as low as 0.1%
of the maximum number of shares offered in the Offering. The ESOP intends to
purchase up to 4% of the total number of shares sold in the Offering. The
minimum purchase is 25 shares of Common Stock. Orders are subject to adjustment
as a result of these and other limitations established pursuant to the Plan,
which may be changed after the date hereof, and in the event of an
oversubscription. See "The Reorganization and Offering."
The shares of Common Stock will be issued at an aggregate purchase
price equal to the estimated pro forma market value of such stock based on an
independent appraisal of the Company and the Bank prepared by Feldman Financial
Advisors, Inc. ("Feldman Financial"), an independent appraisal firm. Feldman
Financial determined that the estimated pro forma market value of the Common
Stock as of November 7, 1997 (the "Independent Valuation") ranged from a minimum
of $187.0 million to a maximum of $253.0 million, with a midpoint of $220.0
million (the "Valuation Range"). The shares of Common Stock being sold in the
Offering represent a minority ownership interest in the outstanding Common Stock
of the Company equal to 47.0% of the estimated pro forma market value of the
Common Stock based on the Independent Valuation. The aggregate Purchase Price of
the Common Stock to be sold in the Offering will range from $87.9 million to
$118.9 million (the "Offering Range") at a purchase price of $10.00 per share.
The Independent Valuation will be updated immediately prior to consummation of
the Offering. The maximum of the Valuation Range may be increased at that time
by up to 15% to up to $291.0 million, which would result in a corresponding
increase in the maximum of the Offering Range to up to 13,674,650 shares to
reflect changes in market and financial conditions, without a resolicitation of
subscribers. No resolicitation of subscribers will be made and subscribers will
not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Common Stock are less than the minimum or more
than 15% above the maximum of the Offering Range. See "The Reorganization and
Offering--Stock Pricing and Number of Shares to be Offered in the Offering." Any
adjustment of shares will have a corresponding effect on the estimated net
proceeds of the Offering and the pro forma capitalization and per share data of
the Company. See "Use of Proceeds," "Capitalization" and "Pro Forma Data." In
addition to the shares of Common Stock to be sold in the Offering, 53% of the
shares of Common Stock outstanding upon the closing of the Reorganization and
the Offering will be held by the Mutual Company.
The Bank and the Company have engaged Ryan, Beck & Co., Inc., a
registered broker-dealer ("Ryan Beck"), to consult with and advise the Bank in
connection with the sale of Common Stock in the Offering. Ryan Beck has agreed
to use its best efforts to assist the Company and the Bank in the solicitation
of subscription and purchase orders for shares of Common Stock in the Offering.
Ryan Beck is not obligated to take or purchase any shares of Common Stock in the
Offering. See "The Reorganization and Offering--Plan of Distribution and Selling
Commissions."
The Subscription and Community Offerings will terminate at 11:00 a.m.,
Boston Time, on February ___, 1998 (the "Expiration Date"), unless extended by
the Bank and the Company with the approval of the Division and the Federal
Deposit Insurance Corporation ("FDIC"), if necessary. Orders submitted are
irrevocable until completion of the Offering; provided, that, if the Offering is
not completed within 45 days after the close of the Subscription and Community
Offerings (i.e., by April __, 1998), all subscribers will have the right to
modify or rescind their subscription, or to have their subscription funds
returned promptly with interest, (or to have their withdrawal authorizations
canceled). The Reorganization and Offering must be approved by all applicable
regulatory authorities. Moreover, the Reorganization cannot be completed until
15 days following approval by the FDIC and FRB of the Bank's merger application
and holding company application, respectively. See "Summary of Reorganization
and Offering--Conditions to Closing of Reorganization and Offering."
Persons interested in purchasing Common Stock must return the
accompanying Order Form, together with full payment for all Common Stock to be
purchased at $10.00 per share, or appropriate instructions authorizing
withdrawals of such an amount from existing deposit accounts at the Bank. An
executed Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank. Purchase orders made by check or
money order will earn interest at the Bank's passbook rate from the date of
receipt until completion or termination of the Offering. Payments authorized by
withdrawal from deposit accounts at the Bank will continue to earn interest at
the contractual rate until the Offering is completed or terminated; these funds
will be otherwise unavailable to the depositor. No early withdrawal penalties
will apply for funds withdrawn from an account at the Bank for the purpose of
purchasing stock. If the Offering is not completed by the Expiration Date, all
funds held will be returned promptly with interest and all withdrawal
authorizations will be canceled. See "The Reorganization and Offering--Procedure
for Purchasing Shares--Payment for Shares."
The Company has received conditional approval to have its Common Stock
listed on the Nasdaq National Market System under the symbol "BRKL." The Company
has never issued stock to the public or any person and there can be no assurance
that an active and liquid trading market for the Common Stock will develop or
that purchasers will be able to sell their shares at or above the Purchase
Price. Ryan Beck has advised the Company that
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it intends to act as a market maker for the Common Stock following consummation
of the Reorganization and Offering. See "Market for Common Stock beginning on
Page 20 of this Prospectus."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS."
THE BANK'S REORGANIZATION, INCLUDING THE OFFERING, IS CONTINGENT UPON APPROVAL
OF THE PLAN BY ITS CORPORATORS, WHICH HAS BEEN OBTAINED, AND THE SALE OF THE
MINIMUM NUMBER OF SHARES OFFERED IN THE OFFERING.
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[RYAN BECK LOGO]
The Date of this Prospectus is January __, 1998.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE MASSACHUSETTS DIVISION OF BANKS, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR BY ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES
COMMISSION OR OTHER STATE AGENCY, NOR HAS SUCH COMMISSION, DIVISION,
CORPORATION, OTHER AGENCY, OR ANY STATE SECURITIES COMMISSION OR OTHER STATE
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 DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND,
THE SAVINGS ASSOCIATION INSURANCE FUND, THE DEPOSITORS INSURANCE FUND OR ANY
OTHER GOVERNMENT AGENCY, AND ARE NOT GUARANTEED BY THE MUTUAL COMPANY, THE
COMPANY OR THE BANK. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
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Estimated
Estimated Underwriting
Minority Commissions and
Subscription Ownership Other Fees and Estimated Net
Price(1) Interest(2) Expenses(3) Proceeds(4)
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Minimum Price Per Share.............. $10.00 N/A $0.25 $9.75
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Midpoint Price Per Share............. $10.00 N/A $0.21 $9.79
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Maximum Price Per Share.............. $10.00 N/A $0.19 $9.81
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Minimum Total........................ $87,890,000 47.0% $2,200,000 $ 85,690,000
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Midpoint Total....................... $103,400,000 47.0% $2,200,000 $101,200,000
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Maximum Total........................ $118,910,000 47.0% $2,200,000 $116,710,000
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Adjusted Maximum Total(5)............ $136,746,500 47.0% $2,200,000 $134,546,500
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(1) Determined in accordance with an independent appraisal prepared by Feldman
Financial Advisors, Inc. ("Feldman Financial") dated as of November 7,
1997, which states that the estimated pro forma market value of the Common
Stock ranged from $187,000,000 to $253,000,000 with a midpoint of
$220,000,000 (the "Valuation Range"). The independent appraisal of Feldman
Financial 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 the Common Stock nor an assurance that a
purchaser of Common Stock will thereafter be able to sell the Common Stock
at prices within the Valuation Range. Based on the Valuation Range, the
Board of Directors of the Company and the Board of Trustees of the Bank
established an estimated price range for the 47% of the Common Stock of the
Company being offered for sale in the Offering within a range of $87.9
million to $118.9 million (the "Offering Range") or between 8,789,000 and
11,891,000 shares of Common Stock issued at the $10.00 per share price (the
"Purchase Price") to be paid for each share of Common Stock subscribed for
or purchased in the Offering. See "The Reorganization and Offering--Stock
Pricing and Number of Shares to be Offered in the Offering."
(2) The Company will issue to the Mutual Company 53% of the shares of Common
Stock that will be outstanding at the conclusion of the Reorganization and
Offering; 47% of the Company's to-be outstanding shares will be sold in the
Offering.
(3) Consists of the estimated costs to the Bank and the Company arising from
the Reorganization and Offering, including estimated expenses of
approximately $1.2 million, and marketing fees to be paid to Ryan Beck of
$1.0 million. See "The Reorganization and Offering--Plan of Distribution
and Selling Commissions." The actual fees and expenses may vary from the
estimates. See "Pro Forma Data" for the assumptions used to arrive at these
estimates.
(4) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold and other factors. Includes the purchase of
shares of Common Stock by the Brookline Savings Bank Employee Stock
Ownership Plan and related trust (the "ESOP") which is intended to be
funded by a loan to the ESOP from 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."
(5) As adjusted to reflect an increase in the Independent Valuation of up to
15% immediately prior to the completion of the Offering and 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 or changes in market and
financial conditions. See "Pro Forma Data" and "The Reorganization and
Offering--Stock Pricing and Number of Shares to be Offered in the
Offering." For a discussion of the distribution and allocation of the
additional shares, if any, see "The Reorganization and
Offering--Subscription Offering, " "--Community Offering" and
"--Limitations upon Purchases of Common Stock."
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SUMMARY OF REORGANIZATION AND OFFERING
The following summary does not purport to be complete, and is qualified
in its entirety by more detailed information and the Consolidated Financial
Statements of the Bank and Notes thereto appearing elsewhere in this Prospectus.
The Bank: Brookline Savings Bank (the "Bank") is a Massachusetts-
chartered, FDIC-insured mutual savings bank
headquartered in Brookline, Massachusetts. The Bank
emphasizes the origination of multi-family and
commercial real estate mortgage loans which constituted
71.6% of gross loans at August 31, 1997. The Bank also
offers traditional deposit and single-family mortgage
loan products and, to a lesser extent, construction and
development mortgage loans, home equity loans and other
consumer loans. The Bank also participates in short-term
commercial loans to national companies and organizations
that are originated and serviced primarily by money
center banks. As of August 31, 1997, the Bank operated
five full-service offices in the Town of Brookline, an
urban and suburban community adjacent to the City of
Boston. At August 31, 1997, the Bank had total assets of
$680.3 million, total deposits of $481.5 million and
retained earnings of $125.4 million. The Bank's
principal executive office is located at 160 Washington
Street, Brookline, Massachusetts 02147, and its
telephone number at that address is (617) 730-3500. See
"Brookline Savings Bank."
The Company: Brookline Bancorp, Inc. (the "Company") is a
Massachusetts corporation organized at the direction of
the Bank to become a bank holding company and own 100%
of the Bank's capital stock to be issued upon completion
of the Reorganization. To date, the Company has not
engaged in any business. Upon completion of the
Reorganization and Offering, the only significant assets
of the Company will be the capital stock of the Bank, a
loan which is expected to be made by the Company to the
Bank's ESOP to finance the purchase of up to 4% of the
Common Stock issued in the Offering, and up to 50% of
the net proceeds of the Offering which will be retained
by the Company. The remaining net proceeds will be
contributed to the Bank. The net proceeds will be used
by the Company for general business purposes, including
a loan to the ESOP. Initially, the net proceeds are
expected to be invested by the Company primarily in
short-and medium-term fixed-income securities. The
Company's offices are located at 160 Washington Street,
Brookline, Massachusetts 02147, and its telephone number
is (617) 730-3500. See "Brookline Bancorp, Inc.," "Use
of Proceeds" and "The Reorganization and
Offering--General."
The Mutual Company: Brookline Bancorp, MHC (the "Mutual Company") is the
proposed parent mutual holding company of the Company,
and will own 53% of the Common Stock of the Company upon
completion of the Offering. It is expected that the
Mutual Company will not engage in any business activity
other than to hold a majority of the Common Stock of the
Company and to invest any funds held by the Mutual
Company. See "Brookline Bancorp, MHC." The Mutual
Company's offices will be located at 160 Washington
Street, Brookline, Massachusetts 02147, and its
telephone number at that address will be (617) 730-3500.
The Plan: On October 8, 1997, the Board of Trustees of the Bank
unanimously adopted the Plan of Reorganization from a
Mutual Savings Bank to a Mutual Company and Stock
Issuance Plan. Pursuant to the Plan, the Bank will
organize: (i) the Stock Bank as a
Massachusetts-chartered stock savings bank and the
successor to the Bank in its current mutual form; (ii)
the Company as a Massachusetts corporation
4
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which will own 100% of the stock of the Stock Bank; and
(iii) the Mutual Company as a Massachusetts-chartered
mutual holding company which will own at least 51% of
the Common Stock of the Company so long as the Mutual
Company remains in existence. The Stock Bank will
succeed to the business and operations of the Bank in
its mutual form and the Company will issue up to 47% of
its Common Stock in the Offering. The Plan has been
approved by the affirmative vote of the majority of the
Bank's corporators as well as a majority of the Bank's
"independent corporators" who must constitute at least
60% of all corporators. The Plan authorizes the Company
to offer Common Stock in one or more stock offerings up
to a maximum of 49% of the issued and outstanding shares
of the Company's voting stock. The Bank has the right,
in its sole discretion, to interpret the Plan and
determine whether prospective purchasers qualify to
purchase stock under the Plan. See "The Reorganization
and Offering--The Reorganization."
The Minority Ownership The Company will issue to the Mutual Company at least
Interest: 51% of the shares of Common Stock that will be
outstanding at the conclusion of the Reorganization and
Offering. The shares of Common Stock that will be sold
in the Offering will constitute no more than 47% of the
shares that will be outstanding after the Offering (the
"Minority Ownership Interest").
Terms of the Offering: The shares of Common Stock are being offered for sale at
a fixed price of $10.00 per share in the Subscription
Offering pursuant to subscription rights in the
following order of priority to: (i) holders of deposit
accounts in the Bank with a balance of $50 or more on
September 30, 1996 ("Eligible Account Holders"); (ii)
holders of deposit accounts in the Bank with a balance
of $50 or more on March 31, 1997 ("Supplemental Eligible
Account Holders"); (iii) the Bank's ESOP;and (iv)
employees, officers and trustees of the Bank.
Concurrently, and subject to the prior rights of holders
of subscription rights, any shares of Common Stock not
subscribed for in the Subscription Offering are being
offered in the Community Offering at $10.00 per share to
certain members of the general public with a preference
given to residents of the Bank's Community (as herein
defined). All shares of Common Stock not purchased in
the Subscription Offering and the Community Offering, if
any, may be offered for sale to the general public at
$10.00 per share in a Syndicated Community Offering
through a syndicate of registered broker-dealers (which
may include Ryan Beck) to be formed and managed by Ryan
Beck acting as agent of the Company to assist the
Company and the Bank in the sale of the Common Stock.
The Syndicated Community Offering, if any, would occur
as soon as practicable following the close of the
Subscription Offering and the Community Offering. The
Company and the Bank reserve the absolute right to
reject orders, in whole or part, in their sole
discretion, in the Community Offering and Syndicated
Community Offering. Subscription rights will expire if
not exercised by 11:00 a.m., Boston time, on February
___, 1998 unless extended by the Bank and the Company.
See "The Reorganization and Offering--Subscription
Offering" and "--Community Offering."
Purchase Price and Federal and state regulations require that the aggregate
Independent Valuation: purchase price of the Common Stock offered in the
Offering must be based on the appraised pro forma market
value of the Common Stock, as determined by an
independent valuation. The Bank has retained Feldman
Financial to make such valuation. The Independent
Valuation states that as of November 7, 1997, the
estimated pro forma market value of the Common Stock
ranged from $187,000,000 to $253,000,000, with a
midpoint of $220,000,000 (the "Valuation Range"). Based
5
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on the Valuation Range and the Purchase Price, the total
number of shares of Common Stock that the Company will
issue will range from 18,700,000 shares to 25,300,000,
with a midpoint of 22,000,000 shares. The Bank's Board
of Trustees has determined to offer 47% of such shares
in the Offering, or between 8,789,000 shares and
11,891,000 shares with a midpoint of 10,340,000 shares
(the "Offering Range"). The 53% of the outstanding
shares of Common Stock that are not sold in the Offering
will be issued to the Mutual Company.
Following commencement of the Subscription Offering, the
maximum of the Valuation Range may be increased by up to
15% to up to $290,950,000, which would result in a
corresponding increase in the maximum of the Offering
Range to up to 13,674,650 shares, due to regulatory
considerations or to reflect changes in market and
financial conditions, without a resolicitation of
subscribers. The minimum of the Valuation Range and the
minimum of the Offering Range may not be decreased
without a resolicitation of subscribers. See "The
Reorganization and Offering--Limitations upon Purchases
of Common Stock" as to the method of distribution and
allocation of additional shares that may be issued in
the event of an increase in the Offering Range to fill
unfilled orders in the Subscription and Community
Offerings. The Independent Valuation, however, is not
intended, and must not be construed, as a recommendation
of any kind as to the advisability of purchasing such
shares. Because such valuation 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 such
shares in the Offering will thereafter be able to sell
such shares at prices at or above the Purchase Price.
Marketing Agent: The Bank and the Company have engaged Ryan Beck, a
registered broker-dealer, to consult with and advise the
Bank in connection with the sale of Common Stock in the
Offering. Ryan Beck has agreed to use its best efforts
to assist the Bank and the Company in soliciting
subscriptions and purchase orders in the Offering. The
Bank and the Company will pay to Ryan Beck a fee of $1.0
million for its services payable upon the closing of the
Offering. See "The Reorganization and Offering--Plan of
Distribution and Selling Commissions." Neither Ryan Beck
nor any registered broker-dealer shall have any
obligations to take or purchase any shares of the Common
Stock in the Offering.
Exercise of Order forms to subscribe for shares of Common Stock
Subscription Rights: offered in the Subscription Offering and the Community
Offering will be accompanied 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
Bank. See "The Reorganization and Offering--Procedure
for Purchasing Shares."
Prospectus Delivery To ensure that each purchaser receives a Prospectus at
and Procedure for least 48 hours prior to the Expiration Date in
Delivering Shares: 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
6
<PAGE>
two days prior to such date. Stock order forms will only
be distributed with a Prospectus. The Bank is not
obligated to accept for processing orders not submitted
on an original stock order form. Payment by check, money
order or debit authorization to an existing account at
the Bank must accompany the stock order form. No wire
transfers will be accepted. See "The Reorganization and
Offering--Procedure for Purchasing Shares."
Restrictions on No person may transfer or enter into any agreement or
Transfer of understanding to transfer the legal or beneficial
Subscription Rights: ownership of the subscription rights issued under the
Plan or the shares of Common Stock to be issued upon
their exercise. All depositors who submit Order Forms
will be required to certify that the purchase of Common
Stock by such depositor is solely for the purchaser's
own account and there is no agreement or understanding
regarding the sale or transfer of such shares. The Bank
will pursue any and all legal and equitable remedies in
the event it becomes aware of the transfer of
subscription rights and will not honor orders believed
by the Bank to involve the transfer of subscription
rights. Following the Offering, there generally will be
no restrictions on the transfer or sale of shares by
purchasers other than affiliates of the Company and the
Bank. See "The Reorganization and Offering--Restrictions
on Agreements or Understandings Regarding Transfer of
Common Stock to be Purchased in the Offering."
Purchase Limitations: No Eligible Account Holder, Supplemental Eligible
Account Holder or employee, officer or trustee, in their
respective capacities as such, may purchase in the
Subscription Offering more than $300,000 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 $300,000 of Common Stock; no person, together
with associates or persons acting in concert with such
person, may purchase in the aggregate more than $1.0
million of the Common Stock in the Offering; provided
that the Bank may, in its sole discretion and without
notice to or solicitation of subscribers or other
prospective purchasers, increase or decrease such
maximum purchase limitations. The minimum purchase is 25
shares of Common Stock. The ESOP, however, may purchase
up to 10% of the Common Stock issued in the Offering and
the ESOP intends to purchase 4% of the Common Stock
issued in the Offering.
At any time during the Offering and without approval of
the Bank's corporators or a resolicitation of
subscribers, the Bank and the Company may, in their sole
discretion, decrease the maximum purchase limitation
below $300,000 to as low as 0.1% of the maximum number
of shares offered in the Offering, or increase the
maximum purchase limitation to a maximum of 5% of the
shares to be issued in the Offering. Similarly, the $1.0
million overall maximum purchase limitation may be
increased to up to 5% of total shares of Common Stock
offered in the Offering. Prior to consummation of the
Offering, if the maximum purchase limitation is
increased, subscribers for the maximum amount will be,
and certain other large subscribers in the sole
discretion of the Bank and Company may be, given the
opportunity to increase their subscriptions up to the
then applicable limits.
Dividend Policy: Although no decision has been made yet regarding the
payment of dividends, the Company will consider a policy
of paying quarterly cash dividends on the Common Stock,
with the first such dividend to be declared and paid
following the first full quarter after completion of the
Offering. There can be no assurance that dividends will
be paid or, if paid, what the amount of the dividends
will be, or whether such dividends, once paid, will
continue to be paid. The Mutual Company may, from time
to
7
<PAGE>
time, waive the receipt of dividends declared and paid
by the Company, subject to regulatory approval. There
can be no assurance that the Mutual Company will waive
the receipt of dividends, or that any dividend waiver
would be approved by applicable banking regulators. Any
waiver of dividends by the Mutual Company, if permitted
by regulatory authorities, is likely to (i) be subject
to various conditions, and (ii) result in a reduction of
the Minority Ownership Interest in the event of a
conversion of the Mutual Company to stock form (a
"Conversion Transaction") to reflect the benefit of any
waived dividends to the stockholders of the Company
other than the Mutual Company (the "Minority
Stockholders"). Such an adjustment would have the effect
of diluting the aggregate voting interest of the
Minority Stockholders in the Company immediately
following a Conversion Transaction. Moreover, in the
event of a Conversion Transaction, any dividends
received by the Mutual Company, as well as any other
assets of the Mutual Company (other than Common Stock in
the Company), will be credited to the Mutual Company in
determining the number of shares of Company Common Stock
that will be offered for sale in a Conversion
Transaction and the amount of any voting dilution of the
Minority Ownership Interest. See "Dividend Policy" and
"Risk Factors--Conversion of Mutual Company to Stock
Form."
Offering Expiration The Offering will terminate at 11:00 a.m., Boston Time,
Date: on February __, 1998 (the "Expiration Date"), unless
extended by the Bank and the Company with the approval
of the Division and the FDIC, if necessary. Orders
submitted are irrevocable until completion of the
Offering; provided, that, if the Offering is not
completed within 45 days after the close of the
Subscription and Community Offerings, (ie, by April __,
1998) all subscribers will have the right to modify or
rescind their Subscriptions, or to have their
Subscription funds returned promptly with interest, (or
to have their withdrawal authorizations cancelled). See
"The Reorganization and Stock Offering--Procedure for
Purchasing Shares."
Conditions to Closing The Reorganization and Offering will not be consummated
of Reorganization until the following conditions are satisfied: (i) the
and Offering: Bank's corporators approve the Plan; (ii) the Bank
receives favorable rulings or opinions of counsel with
respect to the federal and Massachusetts tax
consequences of the Reorganization and Offering; (iii)
the FDIC issues a notice of non-objection to the
Reorganization and Offering, approves the merger portion
of the Reorganization under the Bank Merger Act, and
approves deposit insurance for the Stock Bank and the de
novo savings bank (the "De Novo") to be organized to
effect the Reorganization; (iv) the Division authorizes
the Reorganization and Offering and approves the merger
portion of the Reorganization, and the Massachusetts
Board of Bank Incorporation ("BBI") approves the charter
of the Stock Bank and the De Novo organized to
facilitate the Reorganization; and (v) the FRB approves
applications by the Mutual Company and the Company under
the Bank Holding Company Act to acquire direct or
indirect control of the Bank. The Bank's corporators
have voted to approve the Plan. However, the regulatory
approvals referred to have not yet been obtained, and
there can be no assurances that the required regulatory
approvals will be obtained. Moreover, the Reorganization
and Offering cannot be completed until 15 days following
approval by the FDIC and FRB of the merger application
and holding company applications, respectively.
Accordingly, the Reorganization and Offering are
unlikely to be completed prior to March, 1998.
Approvals, nonobjections, and authorizations by the
8
<PAGE>
FDIC, the FRB, the Division or the BBI do not constitute
recommendations or endorsements of the Reorganization by
such entities.
Reasons for the The primary purpose of the Reorganization is to
Reorganization: establish a stock holding company and to convert the
Bank to the stock form of ownership, which will enable
the Bank to compete and expand more effectively in the
financial services marketplace. The Reorganization will
permit the Company to issue capital stock, which is a
source of capital not available to mutual savings banks,
and will enable depositors, employees, management and
trustees to obtain an equity ownership interest in the
Bank. Since the Company will not be offering all of its
Common Stock for sale to depositors and the public in
the Offering, the Reorganization will result in less
capital raised in comparison to a standard
mutual-to-stock conversion. The Reorganization, however,
also will allow the Company and the Bank to raise
additional capital in the future since a majority of the
Company's Common Stock will be available for sale in the
event of a conversion of the Mutual Company to stock
form. The Reorganization also will provide the Bank with
greater flexibility to structure and finance the
expansion of its operations, including the potential
acquisition of other financial institutions, and to
diversify into other financial services, to the extent
permissible by applicable law and regulation. See "The
Reorganization and Offering--Reasons for the
Reorganization."
Use of Proceeds: Net proceeds from the sale of the Common Stock are
estimated to be between $85.7 million and $134.5
million, depending on the number of shares of Common
Stock sold and the expenses of the Offering. Up to 50%
of the net proceeds of the Offering will be retained by
the Company and used for general business purposes,
including a loan by the Company directly to the ESOP to
enable the ESOP to purchase up to 4% of the Common Stock
issued in the Offering. The remaining net proceeds
retained by the Company will be invested initially in
short- and medium-term fixed-income securities. To the
extent shares are unavailable to satisfy the ESOP's
subscription for 4% of the Common Stock issued, the ESOP
may purchase Common Stock in open market transactions
subsequent to the Offering. Net proceeds from the
Offering will be used by the Bank for general corporate
purposes, including origination of loans and purchase of
investments in the ordinary course of business.
Initially, the net proceeds are expected to be invested
primarily in short- and medium-term debt and equity
securities. The Bank also may use the proceeds for the
expansion of its facilities and to support the
acquisition of other financial services businesses, or
diversification into other related businesses or other
corporate purposes. The Bank has no arrangements or
understandings regarding acquisitions or diversification
into other related businesses at this time. See "Use of
Proceeds."
Management Purchases: Trustees, executive officers and associates intend to
subscribe for 340,600 shares of Common Stock, or 3.9% of
the 8,789,000 shares sold at the minimum of the Offering
Range and 2.9% of the 11,891,000 shares sold at the
maximum of the Offering Range. There is no assurance,
however, that such persons will not purchase more or
less than such number of shares or that there will be
sufficient shares available to fill such subscriptions.
Such persons will pay $10.00 per share for such shares.
In addition, the Mutual Company will control the voting
of at least 51% of the total outstanding Common Stock of
the Company, and the Bank's current trustees will
control the Mutual Company. See "Shares to be Purchased
by Management."
9
<PAGE>
Potential Management Among the benefits to the Bank and the Company
Benefits: anticipated from the Reorganization and Offering is the
ability to attract and retain personnel through the use
of stock options and other stock-based benefit programs.
Subsequent to the Offering, the Company intends to adopt
Stock Plans (as defined herein) and Stock Option Plans
(as defined herein) for the benefit of directors,
officers and employees of the Bank and the Company. Such
plans will be subject to stockholders' approval at a
meeting of stockholders which may not be held earlier
than six months after the closing of the Offering. The
Company's current intention is to implement the Stock
Plans and the Stock Option Plans one year after the
completion of the Offering. The Company intends to adopt
the Stock Plans which would provide for the granting of
Common Stock to officers, directors and employees of the
Bank and the Company in an amount equal to at least 4%
of the Common Stock issued in the Offering, or 355,160
shares and 475,640 shares at the minimum and the maximum
of the Offering Range, respectively. The Stock Option
Plans that the Company intends to adopt would provide
the Company with the ability to grant options to
purchase Common Stock to officers, directors and
employees of the Bank and the Company in an amount equal
to 10% of the number of shares of Common Stock issued in
the Offering, or 878,900 shares and 1,189,100 shares at
the minimum and the maximum of the Offering Range,
respectively. For a further description of the Stock
Plans and Stock Option Plans, see "Risk Factors--Stock-
Based Benefits to Management, Employment Contracts and
Change in Control Payments" and "Management of the Stock
Bank--Compensation of Officers and Trustees through
Benefit Plans."
For the purpose of ensuring continuity of senior
management following completion of the Reorganization
and Offering, the Bank has entered into an employment
agreement with each of Richard P. Chapman, Jr., the
Bank's President and Chief Executive Officer, and
Charles H. Peck, the Bank's Executive Vice President.
Under the agreements, the Current Base Salaries for
Messrs. Chapman and Peck are $330,000 and $165,000
respectively. In addition it is anticipated that the
Bank may enter into severance agreements with certain
other executive officers upon completion of the
Reorganization and Offering. See "Management of the
Stock Bank-Employment and Severance Agreements."
Finally, the Bank intends to implement an Employee Stock
Ownership Plan for the benefit of all employees,
including the executive officers of the Bank. See
"Management of the Stock Bank-Compensation of Officers
and Trustees through Benefit Plans-Employee Stock
Ownership Plan and Trust."
Market for Common The Company was recently formed and has never issued
Stock: capital stock, and, as a mutual institution, the Bank
has never issued capital stock. Consequently, there is
no existing market for the Common Stock. The Company has
received conditional approval to have the Common Stock
quoted on the Nasdaq National Market System under the
symbol "BRKL" subject to the completion of the Offering
and compliance with certain conditions, including the
presence of at least three registered and active market
members. Although under no obligation to do so, Ryan
Beck has indicated its intention to act as a market
maker for the Common Stock following consummation of the
Offering. No assurance can be given that the Common
Stock will be quoted on the Nasdaq National Market
System or that an established and liquid trading market
for the Common Stock will develop. In addition, there
can be no assurances that purchasers will be able to
sell their shares at or above the Purchase Price after
the Offering. See "Market for Common Stock."
Conversion of Mutual The Reorganization does not preclude the conversion of
Company to Stock Form: the Mutual Company to the stock form of organization. A
Conversion Transaction would be effected through a
merger of the Mutual Company into the Company or the
Bank concurrently with the sale of the shares of Common
Stock held by the Mutual Company in a subscription
offering to qualifying depositors and others. The
Division has not yet adopted regulations governing the
conversion of Massachusetts-chartered mutual holding
companies to stock form. Accordingly, there can be no
assurance that the Mutual Company will convert to stock
form or of the conditions that the Division would impose
on a Conversion Transaction by the Mutual Company.
However, the Plan provides that any Conversion
Transaction shall be fair and equitable to Minority
Stockholders and establishes a formula for readjusting
the Minority Ownership Interest (if required by
applicable banking regulators) in the event the Mutual
Company has significant assets (other than Common Stock
of the Company) or the Mutual Company waives the receipt
of dividends declared by the Company. Neither the Bank
nor the Company has any plan to undertake a Conversion
Transaction. If a Conversion Transaction does not occur,
the Mutual Company will continue to own at least 51% of
the outstanding Common Stock and purchasers of the
10
<PAGE>
Common Stock in the Offering will remain Minority
Stockholders. See "Risk Factors--Conversion of Mutual
Company to Stock Form."
No Board of Trustees' The Bank's Board of Trustees and the Company's Board of
Recommendation: Directors are not making any recommendations to
depositors or other potential investors regarding
whether such persons should purchase Common Stock. An
investment in the Common Stock must be evaluated by each
investor.
Stock Information Any questions regarding the Reorganization and Offering
Center: should be directed to the Stock Information Center at
(617) 734-8226.
Risk Factors: The purchase of the 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 DEPOSIT
ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FDIC,
THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION
INSURANCE FUND, THE DEPOSITORS INSURANCE FUND, OR ANY
OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE
COMPANY, THE MUTUAL COMPANY OR THE BANK. THE COMMON
STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL INVESTED.
11
<PAGE>
DESCRIPTION OF REORGANIZATION
Pursuant to the Plan, the Bank will reorganize into a two-tier mutual
holding company structure. The two-tier mutual holding company will be
structured as follows and will consist of: (i) a Massachusetts mutual holding
company (the Mutual Company); (ii) a Massachusetts stock holding company (the
Company) that will issue and sell 47% of its Common Stock in the Offering, with
the remaining 53% of its Common Stock owned by the Mutual Company; and (iii) a
Massachusetts-chartered stock savings bank (the Stock Bank), which will be the
successor to the Bank in its current mutual form and which will be wholly-owned
by the Company.
----------------------- ------------------------
The Mutual Public
Company Stockholders
----------------------- ------------------------
53% of the 47% of the
Common Common
Stock Stock
---------------------------------------------------------
The Company
---------------------------------------------------------
100% of the
Common Stock
---------------------------------------------------------
The Stock Bank
---------------------------------------------------------
The Reorganization will structure the Bank in the stock form of
ownership, which is the corporate form used by commercial banks, most major
businesses and a large number of savings institutions. The primary purpose of
the Reorganization is to establish a holding company and to convert the Bank to
the stock form of ownership in order to compete and expand more effectively in
the financial services marketplace. The Reorganization also will enable
employees, management and trustees to have an equity ownership interest in the
Bank, which management believes will enhance long-term growth and performance of
the Bank and the Company by enabling the Bank to attract and retain qualified
employees who have a more direct interest in the financial success of the Bank.
The Reorganization will permit the Company to issue capital stock, which is a
source of capital not available to mutual savings banks. Since the Company will
not be offering all of its Common Stock for sale to depositors and the public in
the Offering, the Reorganization will result in less capital raised in
comparison to a standard mutual-to-stock conversion. The Reorganization,
however, also will allow the Bank to raise additional capital in the future
because a majority of the Company's Common Stock will be available for sale in
the event of a conversion of the Mutual Company to stock form. The
Reorganization also will provide the Bank with greater flexibility to structure
and finance the expansion of its operations, both directly and through the
Company, including the potential acquisition of other financial institutions,
and to diversify into other financial services, to the extent permissible by
applicable law and regulation. Although there are no current arrangements,
understandings or agreements regarding any such opportunities, the Company will
be in a position after the Reorganization, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise. Lastly, the Reorganization will enable the Bank to better manage
its capital by providing broader investment opportunities through the holding
company structure and by enabling the Company to repurchase its common stock as
market conditions permit. Although the Reorganization and Offering will create a
stock savings bank and stock holding company, only a minority of the Common
Stock will be offered for sale in the Offering. As a result, the Bank's ability
to remain an independent savings bank will be preserved through the mutual
holding company structure.
12
<PAGE>
The Board of Trustees believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which may
include: (i) the inability of stockholders other than the Mutual Company to
obtain majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Company that may be adopted from time-to-time may have an
adverse impact on Minority Stockholders. A majority of the voting stock of the
Company will be owned by the Mutual Company, which is a mutual institution that
will be controlled by the existing Board of Trustees of the Bank. While this
structure will permit management to focus on the Company's and the Bank's
long-term business strategy for growth and capital redeployment without undue
pressure from stockholders, it will also serve to perpetuate the existing
management and trustees of the Bank. The Mutual Company will be able to elect
all members of the Board of Directors of the Company, and will be able to
control the outcome of all matters presented to the stockholders of the Company
for resolution by vote except for certain matters, such as the approval of the
stock award plans and the stock option plans, that, if established within the
first year after the conclusion of the Offering, must be approved by a majority
of the shares held by the Minority Stockholders. No assurance can be given that
the Mutual Company will not take action adverse to the interests of the Minority
Stockholders. For example, the Mutual Company could revise the dividend policy,
prevent the sale of control of the Company, or defeat a candidate for the Board
of Directors of the Company or other proposals put forth by the Minority
Stockholders.
The Reorganization does not preclude the conversion of the Mutual
Company from the mutual to stock form of organization which would be effected
through a merger of the Mutual Company into the Company or the Bank and the
concurrent sale of the shares held by the Mutual Company in a subscription
offering. Regulations of the Division prohibit such a conversion for three years
following the Offering, subject to a waiver by the Division or for compelling
and valid business reasons established to the satisfaction of the Division. The
Division has not yet adopted regulations governing the conversion of
Massachusetts-chartered mutual holding companies to stock form. Accordingly,
there can be no assurance that the Mutual Company will convert to stock form or
of the specific conditions that the Division would impose on a stock conversion
by the Mutual Company. However, the Plan provides that any conversion shall be
fair and equitable to Minority Stockholders and establishes a formula for
readjusting the Minority Stockholders' ownership interest (if required by
applicable banking regulators) if the Mutual Company has significant assets
other than its ownership of the Common Stock of the Company or if the Mutual
Company waiver the receipt of dividends declared by the Company.
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Company so long as they continue to hold deposit accounts with the Bank.
In addition, all persons who become depositors of the Bank subsequent to the
Reorganization will have such liquidation rights with respect to the Mutual
Company. See "The Reorganization and Offering - Liquidation Rights". Borrowers
currently do not have liquidation rights in the Bank and will not receive such
rights with respect to the Mutual Company.
All insured deposit accounts of the Bank that are transferred to the
Stock Bank will continue to be insured by the FDIC and the Depositors Insurance
Fund ("DIF") up to the legal maximum limit in the same manner as deposit
accounts existing in the Bank immediately prior to the Reorganization. Upon
completion of the Reorganization, the Bank may exercise any and all powers,
rights and privileges of, and shall be subject to all limitations applicable to,
capital stock savings banks under Massachusetts law. As long as the Mutual
Company is in existence, the Mutual Company will be required to own at least 51%
of the voting stock of the Company, and the Company will own 100% of the voting
stock of the Bank. The Bank and the Company may issue any amount of non-voting
stock or debt to persons other than the Mutual Company.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are the selected consolidated financial and other data
of the Bank. This financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31,
At August 31, -----------------------------------------------------
1997/(1)/ 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.................................... $ 680,316 $ 666,988 $ 632,788 $ 607,737 $ 550,025 $ 543,156
Loans (2)....................................... 485,515 480,683 448,631 422,036 378,045 378,413
Allowance for loan losses....................... 12,443 12,326 12,326 12,274 12,745 11,775
Debt securities (3):
Available for sale............................ 104,899 97,007 62,691 31,585 -- --
Held to maturity/held for investment.......... 49,801 41,620 89,342 125,126 151,131 140,948
Marketable equity securities (3):
Available for sale............................ 23,626 20,365 19,074 13,301 -- --
Held for investment........................... -- -- -- -- 3,790 3,973
Deposits........................................ 481,467 484,016 474,215 471,811 444,848 444,507
Borrowed funds.................................. 61,815 60,565 49,665 43,265 27,000 23,700
Retained earnings............................... 125,370 113,947 100,583 85,722 72,522 66,221
Net unrealized gain on securities
available for sale, net of taxes,
included in retained earnings................. 10,957 8,660 7,233 4,100 -- --
Non-performing loans............................ 1,412 1,337 748 1,284 3,360 4,768
Non-performing assets........................... 3,414 3,026 2,470 3,089 6,938 11,269
<CAPTION>
Eight months ended
August 31, Year ended December 31,
------------------------ --------------------------------------------------
1997/(1)/ 1996/(1)/ 1996 1995 1994 1993 1992
---------- ---------- ------- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income.............................. $36,119 $33,563 $51,019 $48,920 $39,943 $37,461 $41,011
Interest expense............................. 17,204 16,859 25,458 23,938 17,761 16,793 21,075
------- ------- ------- ------- ------- ------- -------
Net interest income........................ 18,915 16,704 25,561 24,982 22,182 20,668 19,936
Provision (credit) for loan losses........... -- -- -- -- (477) 2,170 3,893
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
(credit) for loan losses................. 18,915 16,704 25,561 24,982 22,659 18,498 16,043
Gains (losses) on sales of securities, net... 74 464 464 877 4 (10) 132
Other real estate owned income (expense), net 158 186 299 (40) (741) (1,616) (1,253)
Other non-interest income.................... 597 839 1,077 768 816 789 793
Non-interest expense......................... (5,738) (4,807) (7,713) (7,450) (7,696) (7,493) (7,113)
------- ------- ------- ------- ------- ------- -------
Income before income taxes................... 14,006 13,386 19,688 19,137 15,042 10,168 8,602
Provision for income taxes................... 4,880 5,191 7,751 7,409 5,942 3,867 3,197
------- ------- ------- ------- ------- ------- -------
Net income................................... $ 9,126 $ 8,195 $11,937 $11,728 $ 9,100 $ 6,301 $ 5,405
======= ======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Eight months ended
August 31, Year ended December 31,
--------------------- -----------------------------------------------------
1997/(1)/ 1996/(1)/ 1996 1995 1994 1993 1992
--------- ---------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (4):
Performance Ratios:
Return on average assets............................... 2.03% 1.91% 1.84% 1.91% 1.59% 1.16% 1.01%
Return on average retained earnings:
Inclusive of net unrealized gain on securities
available for sale, net of taxes................. 11.46 11.69 11.15 12.62 11.34 9.20 8.64
Exclusive of net unrealized gain on securities
available for sale, net of taxes................. 12.43 12.54 11.95 13.42 11.89 9.20 8.64
Retained earnings to total assets at end of period..... 18.43 16.53 17.08 15.89 14.11 13.19 12.19
Net interest rate spread (5)........................... 3.09 3.08 3.10 3.37 3.40 3.46 3.30
Net interest margin (6)................................ 4.06 3.96 4.00 4.15 3.96 3.92 3.83
Average interest-earning assets to
average interest-bearing liabilities................ 125.18 122.28 122.59 119.96 117.86 114.55 113.34
Total non-interest expense to average assets........... 1.27 1.12 1.19 1.21 1.34 1.38 1.33
Efficiency ratio (7)................................... 29.06 26.42 28.15 28.02 34.57 37.78 36.27
Regulatory Capital Ratios (8):
Tier 1 leverage capital................................ 16.95 15.81 15.86 14.96 13.63 13.31 12.39
Tier 1 risk-based capital.............................. 20.99 18.29 19.26 18.20 17.03 17.26 15.71
Total risk-based capital............................... 22.25 19.55 20.53 19.46 18.30 18.54 16.98
Asset Quality Ratios:
Non-performing loans as a percent of loans (9)......... 0.29 0.23 0.28 0.17 0.30 0.89 1.26
Non-performing assets as a percent of total assets..... 0.50 0.43 0.45 0.39 0.51 1.26 2.07
Allowance for loan losses as a percent of loans........ 2.56 2.55 2.56 2.75 2.91 3.37 3.11
Allowance for loan losses as a percent of
total non-performing loans.......................... 881.23 1,106.52 921.91 1,647.86 955.92 379.32 246.96
Number of Full Service Customer Facilities............... 5 5 5 5 5 5 5
</TABLE>
- --------------------
(1) The data presented at and for the eight months ended August 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 eight
months ended August 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
(2) Loans are comprised of gross loan balances less unadvanced funds on loans,
deferred loan origination fees and unearned discounts.
(3) The Bank adopted SFAS No. 115 as of January 1, 1994 and reclassified
securities having a market value of $26.0 million from its held to
maturity portfolio to its available for sale portfolio in November 1995
pursuant to a FASB interpretation of SFAS No. 115. Prior to the adoption
of SFAS No. 115, securities were carried at amortized cost, adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) 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 daily balances during the indicated periods and are annualized
where appropriate.
(5) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income (tax equivalent
basis) as a percent of average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expenses,
divided by the sum of net interest income and non-interest income.
(8) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Regulatory Capital Requirements."
See "Regulatory Capital Compliance" for the Bank's pro forma capital
levels as a result of the Offering.
(9) 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.
15
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain consolidated financial and other
data of the Bank at and for the periods indicated. Consolidated financial and
operating data and financial ratios and other data at and for the year ended
December 31, 1996 have been derived from and should be read in conjunction with
the audited Consolidated Financial Statements of the Bank and Notes thereto
presented elsewhere in this Prospectus. Consolidated financial and operating
data and financial ratios and other data at and for the eleven months ended
November 30, 1997 and 1996 were derived from unaudited Consolidated Financial
Statements. The results of operations and ratios and other data presented for
the eleven months ended November 30, 1997 are not necessarily indicative of the
results of operations for the year ending December 31, 1997.
<TABLE>
<CAPTION>
AT AT
NOVEMBER 30, DECEMBER 31,
1997 (1) 1996
--------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................................... $693,449 $666,988
Loans (2)............................................................ 498,967 480,683
Allowance for loan losses............................................ 12,454 12,326
Debt securities:
Available for sale.................................................. 87,578 97,007
Held to maturity.................................................... 63,592 41,620
Marketable equity securities:
Available for sale.................................................. 26,613 20,365
Deposits............................................................. 480,736 484,016
Borrowed funds....................................................... 68,265 60,565
Retained earnings.................................................... 130,670 113,947
Net unrealized gain on securities available for sale, net of taxes,
included in retained earnings....................................... 12,845 8,660
Non-performing loans................................................. 803 1,337
Non-performing assets................................................ 3,229 3,026
<CAPTION>
ELEVEN MONTHS
ENDED NOVEMBER 30,
--------------------------
1997(1) 1996(1)
-------- --------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income...................................................... $ 49,564 $ 46,420
Interest expense..................................................... 23,643 23,271
-------- --------
Net interest income................................................. 25,921 23,149
Provision for loan losses............................................ -- --
-------- --------
Net interest income after provision for loan losses................. 25,921 23,149
Gains on sales of securities, net.................................... 74 464
Other real estate owned income, net.................................. 219 277
Other non-interest income............................................ 752 1,023
Non-interest expense................................................. (7,748) (6,740)
-------- --------
Income before income taxes........................................... 19,218 18,173
Provision for income taxes........................................... 6,680 7,094
-------- --------
Net income........................................................... $ 12,538 $ 11,079
======== ========
</TABLE>
(footnotes begin on following page)
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED NOVEMBER 30,
----------------------------
1997(1) 1996(1)
--------- ---------
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (3):
PERFORMANCE RATIOS:
Return on average assets.......................................................... 2.02% 1.87%
Return on average retained earnings:
Inclusive of net unrealized gain on securities available for sale, net of taxes.. 11.22 11.35
Exclusive of net unrealized gain on securities available for sale, net of taxes.. 12.22 12.17
Retained earnings to total assets at end of period................................ 18.84 16.77
Net interest rate spread (4)...................................................... 3.09 3.08
Net interest margin (5)........................................................... 4.09 3.96
Average interest-earning assets to average interest-bearing liabilities........... 125.91 122.53
Total non-interest expense to average assets...................................... 1.25 1.14
Efficiency ratio (6).............................................................. 28.73 27.05
REGULATORY CAPITAL RATIOS (7):
Tier 1 leverage capital........................................................... 17.24 15.79
Tier 1 risk-based capital......................................................... 21.16 19.54
Total risk-based capital.......................................................... 22.42 20.80
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans (8).................................... 0.16 0.30
Non-performing assets as a percent of total assets................................ 0.47 0.45
Allowance for loan losses as a percent of loans................................... 2.50 2.66
Allowance for loan losses as a percent of total non-performing loans.............. 1,550.93 900.37
NUMBER OF FULL SERVICE CUSTOMER FACILITIES......................................... 5 5
- -------------------------
</TABLE>
(1) The data presented at and for the eleven months ended November 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 eleven
months ended November 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
(2) Loans are comprised of gross loan balances less unadvanced funds on loans,
deferred loan origination fees and unearned discounts.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of period ratios, all ratios are based on average daily
balances during the indicated periods and are annualized where appropriate.
(4) The net interest spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income (tax equivalent
basis) as a percent of average-earning assets.
(6) The efficiency ratio represents the ratio of non-interest expenses divided
by the sum of net interest income and non-interest income.
(7) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation--Regulatory Capital Requirements." See
"Regulatory Capital Compliance" for the Bank's pro forma capital levels as a
result of the Offering.
(8) 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.
COMPARISON OF FINANCIAL CONDITION AT NOVEMBER 30, 1997 AND DECEMBER 31, 1996
Total assets were $693.4 million at November 30, 1997 compared to $667.0
million at December 31, 1996, an increase of $26.4 million, or 4.0%. This
growth resulted primarily from an $18.2 million, or 3.9%, increase in net loans
outstanding and a $7.4 million, or 4.1%, increase in investments. Asset growth
was funded primarily by a $7.7 million, or 12.7%, increase in borrowed funds and
a $16.7 million, or 14.7%, increase in retained earnings.
Of the $7.4 million net increase in investments between December 31, 1996
and November 30, 1997, $6.8 million was attributable to higher unrealized gains
on the Bank's marketable equity securities portfolio. Securities held to
maturity increased by $22.0 million while debt securities available for sale
declined $9.4 million and short-term investments declined $11.6 million between
those respective dates. These shifts resulted from the Bank's decision to
improve investment yields by reducing excess liquidity and increasing its
holdings of corporate obligations. Most of the debt securities purchased had
maturities in the range of two years.
The net increase in loans resulted from greater mortgage loan originations
and less purchases of commercial loan participations. From December 31, 1996 to
November 30, 1997, the most significant areas of growth were in one-to-four
family mortgage loans ($10.9 million, or 18.9%), multi-family mortgage loans
($19.5 million, or 9.7%), commercial real estate mortgage loans ($8.2 million,
or 5.9%) and construction loans ($4.6 million, or 63.9%). These increases were
partially offset by a $23.0 million decrease in commercial loan participations
and a modest net decrease in other loan categories. Commercial loan
participations represent purchases of a portion of loans to national companies
and organizations originated and serviced by money center banks. The
participations generally mature between one day and three months. The Bank
views such participations as an alternative investment to slightly lower-
yielding short-term investments.
Total deposits declined by $3.3 million, or 0.7%, from $484.0 million at
December 31, 1996 to $480.7 million at November 30, 1997. The modest reduction
in deposits resulted from continuation of a low interest rate environment
wherein the Bank must compete against other instruments available to the public
such as mutual funds and annuities. The decrease in deposits was more than
offset by a $7.7 million increase in funds borrowed from the FHLB.
The increase in retained earnings to $130.7 million at November 30, 1997,
or 18.8% of total assets, resulted from net earnings of $12.5 million for the
eleven months ended November 30, 1997 and a $4.2 million increase in unrealized
gains (net of taxes) on securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
AND NOVEMBER 30, 1996
General. Net income for the eleven months ended November 30, 1997 was
$12.5 million, an increase of $1.4 million, or 13.2%, as compared to $11.1
million for the eleven months ended November 30, 1996. The increase was
attributable to higher net interest income of $2.8 million and a $414,000
decrease in income tax expense resulting from a lower effective income tax rate,
partially offset by a $1.0 million increase in non-interest expense due to
higher operating costs and a $719,000 decline in non-interest income due in part
to $390,000 less in gains from sales of securities. The increase in net
interest income was due primarily to growth in average interest-earning assets
and receipt of $908,000 in interest from a borrower whose loans were on non-
accrual and which related to interest earned in periods prior to 1997.
Interest Income. Interest income for the eleven months ended November 30,
1997 was $49.6 million, compared to $46.4 million for the eleven months ended
November 30, 1996, an increase of $3.2 million, or 6.8%. Excluding the receipt
of $908,000 in interest income referred to in the preceding paragraph, the rate
of increase over the prior period was 4.8%. Subsequent comments on income from
lending activities in 1997 exclude the effect of the $908,000. Substantially
all of the increase in interest income resulted from growth in average interest-
earning assets of $30.6 million, or 4.7%. The principal areas of growth related
to mortgage loans (up $24.8 million, or 6.0%) and debt securities (up $13.6
million, or 10.2%). Most of the mortgage loan growth resulted from originations
of one-to-four family, multi-family and commercial real estate loans. The
increase in debt securities resulted from a decision to shift some of the Bank's
liquid funds placed in short-term investments and commercial loan participations
into debt securities so as to improve asset yield.
Interest Expense. Interest expense for the eleven months ended November
30, 1997 was $23.6 million, compared to $23.3 million for the eleven months
ended November 30, 1996, an increase of $372,000, or 1.6%. This increase
resulted primarily from a higher average balance of interest-bearing liabilities
($10.2 million, or 1.9%) as the average rate paid on such liabilities declined
by only 1 basis point. Average interest-bearing deposit balances increased
modestly ($1.8 million, or 0.4%) as a continued low rate environment made it
difficult to attract deposits. The Bank increased its borrowings from the FHLB
as part of its management of interest rate risk resulting from the origination
and refinancing of multi-family and commercial real estate mortgage loans at
fixed rates for certain time intervals. Interest expense on borrowed funds
increased $444,000, or 13.3%, in the eleven months ended November 30, 1997 due
to an $8.4 million, or 15.3%, increase in the average rate paid on borrowed
funds to 6.52% in the 1997 period compared to the 1996 period.
Provision for Loan Losses. The Bank did not provide for loan losses in the
eleven month periods ended November 30, 1997 and 1996 based on continuation of
favorable trends in the various factors considered by management in evaluating
the adequacy of the Bank's allowance for loan losses. Non-performing loans
amounted to $803,000, or 0.16%, of total loans at November 30, 1997 and $1.4
million, or 0.30%, at November 30, 1996. At those respective dates, the
allowance for loan losses was $12.5 million and $12.3 million, or 2.50% and
2.66% of total loans outstanding.
Non-Interest Income. Non-interest income is comprised of fees and charges
for Bank services, gains or losses from sales of assets, other real estate owned
activity and other income resulting from miscellaneous transactions. Total non-
interest income was $1.1 million for the eleven months ended November 30, 1997
compared to $1.8 million for the eleven months ended November 30, 1996, a
decrease of $719,000, or 40.8%. The decrease resulted primarily from a $190,000
reduction in Bank fees and services, less gains from sales of marketable equity
securities ($74,000 in the 1997 period compared to $464,000 in the 1996 period),
and a $58,000 reduction in income from other real estate owned activities. The
decrease in Bank fees and services resulted primarily from less fees from loan
prepayments and late payments.
Non-Interest Expense. Non-interest expense increased by $1.0 million, or
15.0%, from $6.7 million for the eleven months ended November 30, 1996 to $7.7
million for the eleven months ended November 30, 1997. Of this increase,
$549,000 related to compensation and employee benefits, which rose 13.3% to $4.7
million for the eleven months ended November 30, 1997. The higher level of
compensation and employee benefits was attributable to several factors: the
addition of a chief financial officer and another commercial loan officer,
increased use of temporary personnel from an outside agency because of personnel
turnover, increased accruals for supplemental executive retirement costs and
bonuses, a one-time charge for compensation-related costs pertaining to the
creation of a real estate investment trust ($65,000), increased personnel
benefit costs and increased personnel training in connection with conversion to
a new computer system.
Occupancy expense increased $67,000, or 11.7%, to $642,000 for the eleven
months ended November 30, 1997 as a result of branch lease renewals at higher
annual rental charges and the cost of refurbishings at the main office of the
Bank. Equipment and data processing expenses increased from $828,000 in the
1996 period to $995,000 in the 1997 period primarily as a result of higher
depreciation expense on new equipment put into use in connection with the Bank's
conversion to a new computer system. Other operating expense categories did not
change significantly between the 1997 and 1996 periods except for an increase of
$54,000 in FDIC deposit insurance premiums and an increase of $244,000 in
professional fees associated with the decision to establish a mutual holding
company, formation of a real estate investment trust subsidiary and higher
annual audit costs.
Income Taxes. Total income tax expense for the eleven months ended
November 30, 1997 was $6.7 million compared to $7.1 million for the eleven
months ended November 30, 1996, resulting in effective tax rates of 34.8% and
39.0% for the respective periods. The lower effective tax rate resulted from
creation of a real estate investment trust and continued utilization of a
securities investment subsidiary to substantially reduce state income taxes.
The rate of federal income tax is slightly less than the statutory rate as a
result of the exemption of part of the Bank's dividend income on equity
securities from taxable income.
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.
Lending Risks Associated with Multi-Family and Commercial Real Estate Mortgage
Lending
The Bank's urban and suburban market area is characterized by a large
number of apartment buildings, condominiums and office buildings. As a result,
in serving the borrowing needs of its customers, the Bank originates a
significant number of multi-family and commercial real estate mortgage loans.
Such loans generally involve larger principal amounts and a greater degree of
risk than one-to-four family residential mortgage loans. Many of the Bank's
borrowers have more than one multi-family or commercial real estate mortgage
loan outstanding with the Bank. Moreover, these loans are concentrated primarily
in the greater Boston metropolitan area and eastern Massachusetts. At August 31,
1997, the Bank's portfolio of multi-family, commercial real estate, and
construction and development mortgage loans totaled $365.1 million, or 73.2% of
gross loans, and 52.9% of total interest-earning assets. At that date,
multi-family real estate mortgage loans totaled $214.1 million, or 42.9% of
gross loans, commercial real estate mortgage loans totaled $143.2 million, or
28.7% of gross loans, and construction and development mortgage loans totaled
$7.8 million, or 1.6% of gross loans. Additionally at such date, the Bank had
$22.5 million of outstanding commitments to fund multi-family, commercial real
estate and construction and development mortgage loans. See "Business of the
Bank--Lending Activities."
Multi-family and commercial real estate mortgage loans are generally
viewed as exposing the lender to a greater risk of loss than one-to-four family
residential mortgage loans. Repayment of multi-family and commercial real estate
mortgage loans generally is dependent, in large part, on sufficient income from
the property to cover operating expenses and debt service. Economic events and
government regulations, which are outside the control of the borrower or lender,
could impact the value of the properties securing loans or the future cash flow
of the affected properties. See "Business of the Bank--Delinquent Loans, Other
Real Estate Owned and Classified Assets."
Geographic Concentration of Loans
The Bank's lending area is concentrated primarily in the greater Boston
metropolitan area and eastern Massachusetts (the "primary lending area").
Accordingly, the asset quality of the Bank's loan portfolio is highly dependent
upon the economy and unemployment rate in this area. These factors are affected
to a great extent by the success of financial service and "high technology"
companies headquartered in the area. The success of these companies in the past
few years has helped to keep the economy stable. Their continued success,
however, is dependent on the strength of national and international financial
markets and their ability to develop new technological products, both of which
are factors subject to rapid change. A downturn in the economy in the Bank's
primary lending area would likely adversely affect the Bank's operations. See
"Business of the Bank--Market Area and Competition."
Sensitivity to Changes in Interest Rates
The Bank's profitability, like that of most financial institutions,
depends 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
securities, and its interest expense on interest-bearing liabilities, such as
deposits and borrowed funds. Accordingly, the Bank's results of operations and
financial condition depend largely on movements in market interest rates and its
ability to manage its assets and liabilities in response to such movements.
The Bank has sought to manage its interest rate risk exposure by (i)
emphasizing the origination of adjustable rate mortgage loans and (ii) investing
in liquid and relatively short-term debt securities. At August 31, 1997, 95.4%
of the Bank's gross loans contractually due after August 31, 1998 had adjustable
interest rates. While management anticipates that adjustable rate mortgage loans
will better offset the adverse effects of an increase in interest rates, the
16
<PAGE>
larger mortgage payments required from adjustable-rate borrowers in a rising
interest rate environment could potentially lead to an increase in the Bank's
level of loan delinquencies and defaults.
Also at August 31, 1997, the $104.9 million of debt securities in the
Bank's investment portfolio classified as available for sale had a weighted
average life to maturity of 11 months, and the $49.8 million of debt securities
classified as held to maturity had a weighted average life of two years. These
securities, combined with the $27.1 million portfolio of equity securities,
represented 26.9% of the Bank's interest-earning assets at August 31, 1997. In
addition, short-term investments ($7.5 million) and commercial loan
participations ($36.5 million) maturing within 90 days from August 31, 1997
equaled 6.5% of interest-earning assets at that date.
At August 31, 1997, $441.2 million, or 82.8% of the Bank's
interest-bearing deposits and borrowed funds had maturities of one year or less.
As a result, at August 31, 1997, the Bank's cumulative one-year gap position,
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, was a negative 9.81%. Due to the Bank's level of short-term
certificates of deposit, the Bank's cost of funds may increase at a greater rate
in a rising interest rate environment than if it had a greater amount of
transaction deposit accounts (NOW, savings and money market savings accounts)
which, in turn, may adversely affect net interest income and net income.
Accordingly, in a rising interest rate environment, the Bank's interest-bearing
liabilities may adjust upwardly more rapidly than the yield on its
adjustable-rate loans, thereby adversely affecting the Bank's interest rate
spread, net interest income and net income.
Uncertainty as to Future Growth Opportunities
In an effort to fully deploy post-Offering capital, in addition to
attempting to increase its loan and deposit growth, the Company may seek to
expand its banking franchise by acquiring other financial institutions or
branches. The Company's ability to grow through selective acquisitions of other
financial institutions or branches of such institutions will depend on
successfully identifying, acquiring and integrating such institutions or
branches. Moreover, the Bank's ability to increase its multi-family and
commercial real estate mortgage lending will depend on market conditions in the
Bank's primary lending area. There can be no assurance the Bank will be able to
generate loan growth internally or identify attractive acquisition candidates,
acquire such candidates on favorable terms or successfully integrate any
acquired institutions or branches into the Bank. Neither the Company nor the
Bank has any specific plans, arrangements or understandings regarding any such
expansions or acquisitions at this time, nor have criteria been established to
identify potential candidates for acquisition.
Low Return on Equity following the Reorganization
At August 31, 1997, the Bank's ratio of equity to assets was 18.43%.
The Bank's equity position will be significantly increased as a result of the
Offering. On a pro forma basis as of August 31, 1997, assuming the sale of
Common Stock at the midpoint of the Offering Range, the Company's consolidated
ratio of equity to assets would exceed 28%. The Company's ability to leverage
this capital will be significantly affected by competition for loans and
deposits and economic conditions. The Bank currently anticipates that it will
take considerable time to prudently deploy such capital. As a result, the Bank's
return on equity is expected to be below the industry average for a period of
time after the Offering.
Strong Competition within the Bank's Market Area
Competition in the banking and financial services industry is intense.
In its market area, the Bank competes for loans and deposits with commercial
banks, savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment
banking firms operating locally and elsewhere. Many of these competitors have
substantially greater resources and lending limits than the Bank and may offer
certain services that the Bank does not or cannot provide. Moreover, in recent
years, a more active secondary market for securitized commercial real estate
mortgage loans has developed, with the result that the Bank has encountered
greater competition for the origination of commercial real estate mortgage loans
from non-portfolio
17
<PAGE>
commercial lenders. Deposit customers have shifted funds from relatively
low-yielding deposit accounts at banking institutions into other types of
investments, including, in particular, mutual funds.
Regulatory Oversight and Legislation
The Bank is subject to extensive regulation, supervision and
examination by the Massachusetts Division of Banks, as its chartering authority,
and by the FDIC as insurer of its deposits up to applicable limits. The Bank
also is a member of the Federal Home Loan Bank System and is subject to certain
limited regulations promulgated by the Federal Home Loan Bank (the "FHLB") and
the Division. As the holding company of the Bank, the Company will be subject to
regulation and oversight by the FRB. Such regulation and supervision govern the
activities in which an institution and its holding company may engage and are
intended primarily for the protection of the insurance fund, depositors and
borrowers. Regulatory authorities have been granted extensive discretion in
connection with their supervisory and enforcement activities which are intended
to strengthen the financial condition of the banking and thrift industries,
including the imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for loan losses. Regulatory and law enforcement authorities also have
wide discretion and extensive enforcement powers under various consumer
protection and civil rights laws, including the Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement
Procedures Act and the Massachusetts deceptive acts and practices law. These
laws permit private individual and class action law suits and provide for the
recovery of attorneys fees in certain instances. Any change in the
interpretation or application to the Bank of such laws, regulations and
oversight and enforcement powers, whether by the Division, the FDIC, other state
or federal authorities, Congress, or the Massachusetts legislature could have a
material impact on the Company, the Bank and their respective operations. See
"Regulation."
Certain Anti-Takeover Provisions
The Mutual Holding Company Structure. Under Massachusetts law, at least
51% of the Company's voting shares must be owned by the Mutual Company, and the
Mutual Company will be controlled by its Board of Trustees who will consist
initially of the current members of the Board of Trustees of the Bank. The
Mutual Company, acting through its Board of Trustees, will be able to control
the business and operations of the Company and of the Bank and will be able to
prevent any challenge to the ownership or control of the Company by Minority
Stockholders.
Provisions in the Company's and the Bank's Governing Instruments.
Certain provisions of the Company's Articles of Organization and Bylaws,
particularly a provision limiting voting rights, and the Bank's Charter and
Bylaws, as well as certain federal and state regulations, assist the Company in
maintaining its status as an independent, publicly-owned corporation. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings of stockholders and certain uniform price provisions for
certain business combinations. Moreover, the regulations of the Division
prohibit, for a period of three years following the date of a conversion, offers
to acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding stock of the Bank. The Bank's Charter also prohibits for three years
the acquisition, directly or indirectly, of the beneficial ownership of more
than 4.9% of the Bank's equity securities and after such three year period, 10%
of the Bank's equity securities. Any person, or group acting in concert,
violating this restriction may not vote the Bank's or Company's securities in
excess of the designated percentage. 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 current management. See "Restrictions on Acquisition of the Company
and the Bank."
Absence of Market for Common Stock
The Company, as a newly organized company, has never issued capital
stock and, consequently, there is no established market for its Common Stock at
this time. The Company has received approval to have its Common Stock quoted on
the Nasdaq National Market under the symbol "BRKL" conditioned on the
consummation of the Offering. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon
18
<PAGE>
the existence of willing buyers and sellers at any given time, the presence of
which is dependent upon the individual decisions of buyers and sellers over
which neither the Company nor any market maker has control. Accordingly, there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that, if developed, will continue, nor is there any
assurance that purchasers of the Common Stock will be able to sell their shares
at or above the Purchase Price. In the event a liquid market for the Common
Stock does not develop or market makers for the Common Stock discontinue their
activities, such occurrences may have an adverse impact on the market value of
the Common Stock. See "Market for Common Stock."
Stock-Based Benefits to Management, Employment Agreements And Change in Control
Payments
Stock Plans. Subject to Division approval, the Company intends to adopt
one or more stock-based benefit plans which would provide stock grants of Common
Stock to non-employee directors and selected officers and employees of the
Company and the Bank (the "Stock Plans") and intends to seek stockholder
approval of such plans at a meeting of stockholders following the Offering,
which may be held no earlier than six months after completion of the Offering.
The Company's current intention is to implement the Stock Plans one year after
completion of the Offering. The Company expects to acquire Common Stock on
behalf of the Stock Plans in an amount equal to at least 4% of the Common Stock
issued in connection with the Offering, or 351,560 shares and 475,640 shares at
the minimum and the maximum of the Offering Range, respectively. These shares
will be acquired either through open market purchases or from authorized but
unissued Common Stock. If the Stock Plans are funded by the issuance of
authorized but unissued shares, the voting interests of existing shareholders
would be diluted by 1.8%.
Although no specific award determinations have been made, the Company
anticipates that it will provide awards under the Stock Plans to the directors
and selected officers and employees of the Company and the Bank to the extent
permitted by applicable regulations. Current FDIC regulations provide that, to
the extent any non-tax qualified stock plan or stock option plan is implemented
within one year after conversion, no individual may receive more than 25% of the
shares of any such stock-based benefit plan and non-employee directors or
trustees may not receive more than 5% individually, or 30% in the aggregate, of
the shares awarded under any such plan. The shares granted under the Stock Plans
will be awarded at no cost to the recipients. Under the terms of the Stock
Plans, 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. Recipients will vote
allocated shares. The plan trustee will not vote allocated shares if it does not
receive instructions from the recipient. The specific terms of the Stock Plans
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 include
consideration of 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 Plans and stock option plans, discussed below, may be
provided under separate plans established for officers and employees and
non-employee trustees 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 of the separate plans. The implementation
of such Stock Plans may result in increased compensation expense to the Company
and may have a dilutive effect on existing stockholders. See "Management of the
Stock Bank--Compensation of Officers and Trustees through Benefit Plans."
Stock Option Plans. Subject to Division approval, the Company also
intends to adopt stock-based benefit plans which would provide options to
purchase Common Stock ("Stock Options") to officers, employees and non-employee
trustees and directors of the Company and the Bank (the "Stock Option Plans")
and intends to seek stockholder approval of such plans at a meeting of
stockholders following the Offering, which may be held no earlier than six
months after completion of the Offering. The Company's current intention is to
implement the Stock Option Plans one year after completion of the Offering.
Although no specific determinations have been made, the Company expects that
non-employee directors and selected officers and employees of the Company and
the Bank will be granted options to purchase Common Stock in an amount equal to
10% of the Common Stock issued in the Offering, (or 878,900 shares and 1,189,100
shares at the minimum and maximum of the Offering Range, respectively). It is
currently intended that the exercise price of the Stock Options will be equal to
the fair market value of the underlying Common Stock on the date of grant. Stock
Options will permit such trustees, directors, officers and employees to benefit
from any increase in the market value of the shares in excess of the exercise
price at the time of exercise. Recipients of Stock Options will not be required
to pay for the shares until the date of exercise. The specific terms of the
Stock Option Plans intended to be adopted and amounts and awards thereunder have
not yet been determined by the Board and any such determination will
19
<PAGE>
include consideration of 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 a single stock option plan, may be
granted under separate stock option plans for officers and employees and
non-employee directors or may be provided for under the master stock-based
benefit plan which would incorporate the features and benefits of the separate
stock option plans and the Stock Plans. The implementation of such Stock Option
Plans may have a dilutive effect upon existing stockholders of the Company to
the extent option exercises are satisfied with authorized but unissued shares.
See "Management of the Stock Bank--Compensation of Officers and Trustees through
Benefit Plans--Stock Option Plan."
Change In Control Provisions. The Bank has entered into employment
agreements with Messrs. Chapman and Peck, and may enter into severance
agreements with certain other executive officers of the Bank. These agreements
provide for benefits and cash payments in the event of a change in control of
the Company or the Bank. These provisions may have the effect of increasing the
cost of acquiring the Company or the Bank, thereby discouraging future attempts
to take over the Company or the Bank. Additionally, the Bank's employee
severance agreements, which similarly provide a cash payment and benefits to
certain employees upon termination following a change in control of the Company
or the Bank, also may have the effect of increasing the cost of acquiring the
Company or the Bank. Based on current salaries, cash payments to be paid in the
event of a change in control pursuant to the terms of the employment agreements
and severance agreements would be approximately $1.9 million. However, the
actual amount to be paid in the event of a change in control of the Bank or the
Company cannot be estimated at this time because the actual amount is based on
the highest salary (or, in certain cases, the average salary) of the employee,
the number of executive officers, if any, who are granted severance agreements
and the terms of such agreements, and other factors existing at the time of the
change in control. See "Restrictions on Acquisition of the Company and the
Bank--Provisions of the Company's Articles of Organization and Bylaws,"
"Management of the Stock Bank--Employment and Severance Agreements," "--Change
in Control Agreements," "--Employee Severance Compensation Plan,"
"--Compensation of Officers and Trustees through Benefit Plans--Stock Option
Plan."
Employee Stock Ownership Plan. The Bank intends to implement an
Employee Stock Ownership Plan (the ESOP) in connection with the Offering. The
ESOP intends to borrow funds from the Company and use those funds to purchase a
number of shares equal to up to 4% of the Common Stock to be issued in the
Offering, or 355,160 shares and 475,640 shares at the minimum and maximum of the
Offering Range, respectively. These shares will be acquired in the Offering, to
the extent shares are available, or immediately following the Offering through
open market purchases. Shares purchased by the ESOP will be held in a suspense
account for allocation among eligible employees as the loan is repaid. Shares
held in the suspense account will be voted in a manner calculated to most
accurately reflect the instructions received from eligible employees regarding
the allocated stock. Accordingly, the ESOP, as owner of 4% of the Common Stock
issued in the Offering, may provide limited change of control protection, since
such shares will be voted by persons (employees of the Bank) who may be expected
to support the decisions of management of the Bank.
Management Control of Company through Mutual Company
As the majority stockholder of the Company, the Mutual Company will
elect directors and direct the affairs and business operations of the Company.
The Mutual Company, in turn, will be managed and controlled by its corporators,
trustees and executive officers. Accordingly, the purchasers of the Common Stock
in the Offering will be Minority Stockholders of the Company who will have
limited influence in electing directors or otherwise directing the affairs of
the Company, and will have no control over the affairs of the Mutual Company. No
assurance can be given that the Mutual Company will not take actions that may be
considered adverse to the interests of Minority Stockholders.
Possible Increase in Valuation Range and Number of Shares Issued
The number of shares to be sold in the Offering may be increased as a
result of an increase in the Valuation 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 Offering Range is so increased,
it is expected that the Company will issue up to 13,674,650 shares of Common
Stock at the Purchase Price for an aggregate purchase price of up to
$136,746,500. 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
net 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. See "The Reorganization and Offering--The Offering."
Role of the Financial Advisor/Best Efforts Offering
The Bank has engaged Ryan Beck as a financial and marketing advisor,
and Ryan Beck has agreed to use its best efforts to solicit subscriptions and
purchase orders for Common Stock in the Offering. Ryan Beck has not prepared any
report or opinion constituting a recommendation or advice to the Bank or the
Company, nor has it prepared an opinion as to the fairness of the Purchase Price
or the terms of the Offering. Ryan Beck expresses no opinion as to the prices at
which Common Stock to be issued in the Offering may trade. Furthermore, Ryan
Beck has not verified the accuracy or completeness of the information contained
in the Offering Circular. See "The Reorganization Offering - Plan of
Distribution and Selling Commissions."
Conversion of Mutual Company to Stock Form
The Plan provides that the Mutual Company may convert to stock form (a
Conversion Transaction) by merging the Mutual Company either into the Company or
the Bank. In a Conversion Transaction, the shares of Common Stock owned by the
Mutual Company will be canceled and shares of Common Stock of the Company will
be offered for sale to eligible depositors and others in a subscription and
community offering in accordance with regulations of the FDIC and the Division.
The Plan provides that any Conversion Transaction shall be fair and equitable to
Minority Stockholders, and establishes a formula for adjusting the Minority
Ownership Interest in the event such adjustment is required by applicable
banking regulators. Regulations of the Division would prohibit a Conversion
Transaction for three years following the Offering, subject to a waiver by the
Division for supervisory reasons or for compelling and valid business reasons
established to the satisfaction of the Division. To date, however, the Division
has not yet issued regulations regarding the conversion of a Massachusetts
mutual holding company to stock form, and there can be no assurance that such
regulations will be effective at such time as the Mutual Company may wish to
undertake a Conversion Transaction. Moreover, there can be no assurance as to
what form such regulations will take and what conditions the Division may impose
on a Conversion Transaction. Neither the Bank nor the Company has any plan to
undertake a Conversion Transaction. If a Conversion Transaction does not occur,
the Mutual Company will continue to own at least 51% of the outstanding Common
Stock, and purchasers in the Offering will remain Minority Stockholders.
20
<PAGE>
The Mutual Company may, from time-to-time, waive the receipt of
dividends declared and paid by the Company, subject to regulatory approval.
There can be no assurance that the Mutual Company will waive the receipt of
dividends, or that any dividend waiver would be approved by applicable banking
regulators. Any waiver of dividends by the Mutual Company, if permitted by
regulatory authorities, is likely to (i) be subject to various conditions, and
(ii) result in a reduction of the Minority Ownership Interest in the event of a
Conversion Transaction, to reflect the benefit of any waived dividends to the
Minority Stockholders. Such an adjustment would have the effect of diluting the
aggregate voting interest of the Minority Stockholders in the Company
immediately following a Conversion Transaction. Moreover, in the event of a
Conversion Transaction, any dividends received by the Mutual Company, as well as
any other assets of the Mutual Company (other than Common Stock in the Company),
will be credited to the Mutual Company in determining the number of shares of
Company Common Stock that will be offered for sale in a Conversion Transaction
and the amount of any voting dilution of the Minority Ownership Interest. See
"Dividend Policy." Accordingly, the Reorganization and Offering are unlikely to
be completed prior to March __, 1998. Approvals, nonobjections, and
authorizations by the FDIC, the FRB, the Division or the BBI do not constitute
recommendations or endorsements of the Reorganization by such entities.
Conditions to Closing of Reorganization and Offering
The Reorganization and Offering will not be consummated until the
following conditions are satisfied: (i) the Bank's corporators approve the Plan;
(ii) the Bank receives favorable rulings or opinions of counsel with respect to
the federal and Massachusetts tax consequences of the Reorganization and
Offering; (iii) the FDIC issues a notice of non-objection to the Reorganization
and Offering, approves the merger portion of the Reorganization under the Bank
Merger Act, and approves deposit insurance for the Stock Bank and the de novo
savings bank (the "De Novo") to be organized to effect the Reorganization; (iv)
the Division authorizes the Reorganization and Offering and approves the merger
portion of the Reorganization and the Massachusetts Board of the Bank
Incorporation ("BBI") approves the charter of the Stock Bank and the De Novo
organized to facilitate the reorganization; and (v) the FRB approves
applications by the Mutual Company and the Company under the Bank Holding
Company Act to acquire direct or indirect control of the Bank. The Bank's
corporators have voted to approve the Plan. However, the regulatory approvals
referred to have not yet been obtained and there can be no assurances that the
required regulatory approvals will be obtained. Moreover, the Reorganization and
Offering cannot be completed until 15 days following approval by the FDIC and
FRB of the merger application and holding company applications, respectively.
Accordingly, the Reorganization and Offering are unlikely to be completed prior
to March __, 1998. Approvals, nonobjections, and authorizations by the FDIC, the
FRB, the Division or the BBI do not constitute recommendations or endorsements
of the Reorganization by such entities.
BROOKLINE BANCORP, MHC
The Bank has applied to the Division to form the Mutual Company, and
has also applied to the FRB for approval of the Mutual Company to indirectly own
or control the Bank. No final approvals of the Division or the FRB have been
received as of the date of this Prospectus. As part of the Reorganization, the
Mutual Company will become a Massachusetts-chartered mutual holding company with
the powers set forth in its Charter and Bylaws and under Massachusetts law. The
Mutual Company will own at least 51% of the voting stock of the Company so long
as the Mutual Company remains in existence. The Bank will capitalize the Mutual
Company with approximately $250,000 in cash. The Mutual Company will be subject
to regulation and supervision by the FRB and the Division. See
"Regulation--Holding Company Regulation." Immediately after the consummation of
the Reorganization, the Mutual Company is not expected to engage in any business
activity other than to hold at least 51% of the Company's Common Stock and to
invest any liquid assets of the Mutual Company. The Mutual Company's offices
will be located at 160 Washington Street, Brookline, Massachusetts 02197, and
its telephone number at that address will be (617) 730-3500.
BROOKLINE BANCORP, INC.
Brookline Bancorp, Inc. was recently organized at the direction of the
Board of Trustees of the Bank for the purpose of acquiring all of the capital
stock of the Bank upon completion of the Reorganization and the Offering. The
Bank has applied to the Division to form the Company, and also has applied to
the FRB for the Company to own up to 100% of the voting stock of the Bank. No
final approvals of the Division or the FRB have been received as of the date of
this Prospectus. Upon completion of the Reorganization, the Company will be
subject to regulation and supervision by the Division and the FRB. See
"Regulation--General" and "--Holding Company Regulation." Upon completion of the
Reorganization, the Company will have no significant liabilities and no assets
other than 100% of the shares of the Bank's outstanding common stock, its loan
to the ESOP and up to 50% of the net proceeds of the Offering. The Company
intends to loan a portion of the net proceeds it retains to the ESOP to enable
the ESOP to purchase up to 4% of the stock issued in connection with the
Offering. See "Use of Proceeds." 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 certain officers who are currently 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. The Company's offices are located at the executive
offices of the Bank, at 160 Washington Street, Brookline, Massachusetts 02147.
Its telephone number is (617) 730-3500.
BROOKLINE SAVINGS BANK
The Bank was organized in 1871 as a Massachusetts-chartered mutual
savings bank. The Bank's deposits are insured by the Bank Insurance Fund
("BIF"), as administered by the FDIC, up to the maximum amount permitted by law
and by the Depositors Insurance Fund ("DIF") in excess of the maximum FDIC
insurance. The Bank conducts business from its home office in Brookline,
Massachusetts and its four other offices located in the Town of Brookline. At
August 31, 1997, the Bank had total assets of $680.3 million, total deposits of
$481.5 million,
21
<PAGE>
retained earnings of $125.4 million, and had a Tier 1 leverage capital ratio of
16.92% and a risk-based capital ratio of 20.95%. See "Regulation--Regulatory
Capital Requirements."
The Bank emphasizes the origination of multi-family and commercial real
estate mortgage loans, which constituted 71.6% of gross loans at August 31,
1997. The Bank also offers traditional deposit and single-family mortgage loan
products and, to a lesser extent, construction and development loans, home
equity loans and other consumer loans. The Bank also participates in short-term
commercial loans to national companies and organizations that are originated and
serviced primarily by money center banks. Of the Bank's total loan portfolio at
August 31, 1997, 42.9% consisted of loans secured by multi-family residential
properties, 28.7% were secured by commercial real estate, 13.1% consisted of
loans secured by one-to-four family residential properties, and 9.0% consisted
of commercial loans or participations in commercial loans. The Bank also invests
in securities and other short-term investments. At August 31, 1997, investment
securities and short-term investments amounted to $189.3 million, or 27.8% of
the Bank's assets.
The majority of the Bank's deposits are gathered from the general
public in the Town of Brookline, an urban/suburban community adjacent to the
City of Boston, and surrounding communities. The Bank's lending area is
concentrated primarily in the greater Boston metropolitan area and eastern
Massachusetts. This area benefits from the presence of numerous institutions of
higher learning and the corporate headquarters of several significant financial
service companies. Eastern Massachusetts also has many high technology companies
employing personnel with specialized skills. The presence of these factors
affects the demand for multi-family apartments, office buildings, shopping
centers, industrial warehouses and other commercial properties.
The Bank's executive office is located at 160 Washington Street,
Brookline, Massachusetts 02147. Its telephone number is (617) 730-3500.
22
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At August 31, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of August 31, 1997, on an actual 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 its shares
expected to be acquired by the Stock Plans are deducted from pro forma
regulatory capital. The FRB has adopted capital adequacy guidelines for bank
holding companies (on a consolidated basis) substantially similar to the FDIC
capital requirements for the Bank. On a pro forma basis after the Reorganization
and Offering, the Company's pro forma stockholders equity will exceed these
requirements. See "Regulation - Holding Company Regulation."
<TABLE>
<CAPTION>
Actual at
August 31, 1997
------------------------
Percent
of
Amount assets/(2)/
----------- -----------
(Dollars in thousands)
<S> <C> <C>
GAAP(3) Capital.............. $125,370 18.43%
======== ======
Leverage Capital:
Capital level(4)........... $114,413 16.95%
Requirement(5)............. 20,254 4.00
-------- ------
Excess..................... $ 94,159 12.95%
======== ======
Risk-Based Capital:
Capital level(4)(6)........ $121,297 22.25%
Requirement................ 43,615 8.00
-------- ------
Excess..................... $ 77,682 14.25%
======== ======
</TABLE>
<TABLE>
<CAPTION>
Pro forma at August 31, 1997 based upon the sale at $10.00 per share
------------------------------------------------------------------------------------------------------
13,674,650 shares
8,879,000 shares 10,340,000 shares 11,891,000 shares (15% above
(minimum of the (midpoint of the (maximum of the maximum of the
estimated estimated estimated estimated
price range) price range) price range) price range)/(1)/
----------------------- ------------------------- ------------------------ ------------------------
Percent Percent Percent Percent
of of of of
Amount assets/(2)/ Amount assets/(2)/ Amount assets/(2)/ Amount assets/(2)/
--------- ----------- ---------- ------------- ---------- ------------ ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP(3) Capital.............. $168,215 23.26% $175,970 24.08% $183,725 24.87% $192,643 25.77%
======== ===== ======== ===== ======== ===== ======== =====
Leverage Capital:
Capital level (4) ........ $157,258 21.90% $165,013 22.74% $172,768 23.55% $181,686 24.47%
Requirement (5) ........... 21,539 4.00 21,772 4.00 22,004 4.00 22,272 4.00
-------- ----- -------- ------ -------- ------ -------- -----
Excess..................... $135,719 17.90% $143,241 18.74% $150,764 19.55% $159,414 20.47%
======== ===== ======== ====== ======== ====== ======== =====
Risk-Based Capital:
Capital level(4)(6)........ $164,142 28.32% $171,897 29.35% $179,652 30.35% $188,570 31.48%
Requirement................ 46,362 8.00 46,859 8.00 47,356 8.00 47,928 8.00
-------- ----- -------- ------ -------- ------ -------- ------
Excess..................... $117,780 20.32% $125,038 21.35% $132,296 22.35% $140,642 23.48%
======== ===== ======== ====== ======== ====== ======== =====
</TABLE>
- -------------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Valuation Range of up to 15% as a
result of regulatory considerations or changes in market conditions or
general financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(3) GAAP is defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Offering Range. These levels also assume funding by the
Company of the Stock Plans equal to 4% of the Common Stock issued and
repayment of the Company's loan to the ESOP to enable the ESOP to purchase
4% of the Common Stock issued valued at the minimum, midpoint and maximum
of the Offering Range. See "Management of the Stock Bank--Compensation of
Officers and Trustees through Benefit Plans" for a discussion of the Stock
Plans and ESOP.
(5) The current leverage capital requirement for banks is 3% of total adjusted
assets for banks that receive the highest supervisory rating for safety and
soundness and that are not experiencing or anticipating significant growth.
The current leverage capital ratio applicable to all other banks is 4% to
5%. Management of the Bank believes that the applicable leverage capital
requirement for the Bank is 3% of total adjusted assets. See "Regulation--
Regulatory Capital Requirements."
(6) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of August 31,
1997.
23
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds from the sale of the Common Stock will be
between $85.7 million and $116.7 million (or $134.5 million if the Offering
Range is increased by 15%). See "Pro Forma Data" and "The Reorganization and
Offering--Stock Pricing and the Number of Shares to be Offered in the Offering"
as to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offering until the consummation of the
Offering.
The Company will contribute 50% of the net proceeds of the Offering to
the Bank, or $42.8 million to $58.4 million at the minimum and maximum of the
Offering Range, respectively. Such portion of net proceeds received by the Bank
from the Company will be added to the Bank's general funds which the Bank
currently intends to use for general corporate purposes, including investments
in short- and medium-term, investment grade debt securities and marketable
equity securities. Depending on market conditions, the Bank also intends to use
funds to increase its origination of multi-family, commercial real estate and
one-to-four family real estate mortgage loans. The Bank may also use funds for
the expansion of its facilities and to expand operations through acquisitions of
other financial institutions, branch offices or other financial services
companies. However, the Company and the Bank have no current arrangements,
understandings or agreements regarding any such transactions. To the extent that
the stock-based benefit programs which the Company or the Bank intend to adopt
subsequent to the Offering are not funded with authorized but unissued common
stock of the Company, the Company or Bank may use net proceeds from the Offering
to fund the purchase of stock to be awarded under such stock benefit programs.
Assuming that the amount of stock to be purchased under the Stock Plan is 4% of
the anticipated maximum of Common Stock issued in connection with the Offering
and that the shares are purchased in the open market at $10.00 per share, the
amount of net proceeds to be used in connection with the Stock Plan would be
$4,756,400. However, the actual amount to be paid cannot be estimated at this
time because the market value of the Common Stock at the time of purchase cannot
be anticipated. See "Risk Factors--Stock-Based Benefits to Management,
Employment Agreements and Change in Control Payments" and "Management of the
Stock Bank--Compensation of Officers and Trustees through Benefit Plans--Stock
Option Plan" and "--Compensation of Officers and Trustees through Benefit
Plans--Stock Plan."
The Company intends to use a portion of the net proceeds it retains to
make a loan directly to the ESOP to enable the ESOP to purchase in the Offering,
or in the open market to the extent Common Stock is not available to fill the
ESOP's subscription, 4% of the Common Stock issued in connection with the
Offering. Based upon the sale of 8,789,000 shares or 11,891,000 shares at the
minimum and maximum of the Offering Range, the amount of the loan to the ESOP
(assuming the ESOP purchases Common Stock at the Purchase Price in the
Subscription Offering) would be $3.5 million or $4.8 million, respectively (or
$5.5 million if the Offering Range is increased by 15%). The Company and the
Bank may alternatively choose to fund the ESOP's stock purchases through a loan
by a third party financial institution. See "Management of the Stock
Bank--Compensation of Officers and Trustees through Benefit Plans--Employee
Stock Ownership Plan and Trust." The remaining net proceeds retained by the
Company will be invested initially in short- and medium-term fixed-income
securities.
Upon completion of the Offering, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. The FDIC may prohibit the holding company of a
state-chartered savings bank which has converted from the mutual to stock form
of ownership from repurchasing its capital stock within one year following the
date of its conversion to stock form, except that stock repurchases of no
greater than 5% of outstanding capital stock may be made during this one-year
period where compelling and valid business reasons are established to the
satisfaction of the FDIC. The regulations of the Division also restrict stock
repurchases by mutual holding company subsidiaries within three years of a stock
issuance unless the repurchase (i) is part of a pro rata offer made to all
stockholders and approved by the Division, (ii) is limited to the repurchase of
qualifying shares of a director, (iii) is made in the open market by an employee
stock benefit plan of the subsidiary savings bank or subsidiary holding company
in an amount reasonable or necessary to fund such plan; or (iv) is limited to 5%
of the outstanding capital stock of the subsidiary savings bank or subsidiary
holding company and the Division is satisfied that valid and compelling business
reasons exist for the repurchase.
Based upon facts and circumstances following the Offering 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
the purchase of shares by the ESOP in the event the ESOP is unable to acquire
shares in the Subscription Offering, or to fund the Stock Plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Purchase Price in the Offering. Any stock repurchases will be subject to the
determination of the Board of Directors that both the Company and the Bank
24
<PAGE>
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 Reorganization and Offering--Procedure for Purchasing
Shares."
DIVIDEND POLICY
Although no decision has been made yet regarding the payment of
dividends, the Company will consider a policy of paying quarterly cash dividends
on the Common Stock, with the first such dividend to be declared and paid
following the first full quarter after consummation of the Offering. There can
be no assurance that dividends will be paid or if paid, what the amounts of
dividends will be, or whether such dividends, once paid, will continue to be
paid. In addition, the source of funds for the Company's payment of dividends
will, in part, depend upon dividends from the Bank, in addition to the net
proceeds retained by the Company and earnings thereon. The Mutual Company may,
from time to time, waive the receipt of dividends declared and paid by the
Company, subject to regulatory approval. Under the FRB policy, a bank holding
company should pay dividends only to the extent that the holding company's net
income for the past year is sufficient to cover both the payment of the dividend
and a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. See "Regulation--
Holding Company Regulation--Dividends."
The Bank will not be permitted to pay dividends on its common stock if
its stockholders equity would be reduced below the amount required for its
liquidation account. See "The Reorganization and Offering - Liquidation Rights."
In addition, the Bank's ability to pay cash dividends on its common stock is
subject to various other federal and state restrictions. Under FDIC regulations,
the Bank would be prohibited from paying dividends if, among other things, the
Bank was not in compliance with applicable regulatory capital requirements.
Under Massachusetts law, a stock-form savings bank may pay dividends only out of
its net profits and only to the extent it does not impair its capital and
surplus accounts. Provided that the Bank can meet these requirements,
Massachusetts law permits net profits of a bank to be distributed as a dividend
so long as, after such distribution, either (i) the capital and surplus accounts
of the bank equal at least 10% of its deposit liabilities, or (ii) the surplus
account of the bank equals 100% of its capital account, subject to certain
statutory exceptions. Dividends or any repurchase by the Bank of its stock in
excess of the Bank's current and accumulated earnings could result in the
realization by the Bank of taxable income. See "Federal and State Taxation--
Federal Taxation."
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "BRKL" subject to the completion of the
Offering and compliance with certain conditions including the presence of at
least three registered and active market makers. The Company will seek to
encourage and assist at least three market makers to make a market in its Common
Stock. Although under no obligation to do so, Ryan Beck has indicated its
intention to act as market maker for the Common Stock following consummation of
the Offering. Making a market involves maintaining bid and ask quotations and
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements. There can be no assurance that the Common Stock will be able to
meet the applicable listing criteria in order to maintain its quotation on the
Nasdaq National Market 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 Offering. See "Risk
Factors--Absence of Market for Common Stock."
25
<PAGE>
CAPITALIZATION
The following table presents the actual capitalization of the Bank at
August 31, 1997 and the pro forma consolidated capitalization of the Company
after giving effect to the Offering 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 the sale at $10.00 per share
-----------------------------------------------------
13,674,650
8,789,000 10,340,000 11,891,000 shares
shares shares shares 15% above
(minimum (midpoint (maximum maximum
of the of the of the of the
Bank estimated estimated estimated estimated
actual price range) price range) price range) price range(1)
------ ------------ ------------ ------------ --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(2)................................................... $481,467 $481,467 $481,467 $481,467 $481,467
Borrowed funds................................................ 61,815 61,815 61,815 61,815 61,815
-------- ------- -------- -------- --------
Total deposits and borrowed funds........................... $543,282 $543,282 $543,282 $543,282 $543,282
======== ======== ======== ======== ========
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none to be issued...................... $ - $ - $ - $ - $ -
Common Stock, $.01 par value, 45,000,000 shares authorized(3) - 88 103 119 137
Additional paid-in capital(3)............................... - 85,602 101,097 116,591 134,410
Retained earnings(4)........................................ 114,413 114,413 114,413 114,413 114,413
Net unrealized gain on securities available for sale, net of
taxes...................................................... 10,957 10,957 10,957 10,957 10,957
Less:
Common Stock acquired by the ESOP(5)........................ - (3,516) (4,136) (4,756) (5,470)
Common Stock acquired by the Stock Plans(6)................. - (3,516) (4,136) (4,756) (5,470)
-------- ------- ------- -------- --------
Total stockholders' equity.................................... $125,370 $204,028 $218,298 $232,568 $248,977
======== ======== ======== ======== ========
</TABLE>
- ----------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering 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 and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offering. No effect has been
given to the issuance of additional shares of Common Stock pursuant to the
Company's proposed Stock Option Plans intended to be adopted by the
Company and presented for approval of stockholders at a meeting of
stockholders following the Offering. The Stock Option Plans would provide
the grant of stock options to purchase an amount of Common Stock equal to
10% of the shares of Common Stock issued in the Offering. See "Management
of the Stock Bank--Compensation of Officers and Trustees through Benefit
Plans--Stock Option Plan."
(4) The retained earnings of the Bank will be restricted at the time of the
Offering. See "Description of Capital Stock Offering of the
Company--Common Stock--Liquidation or Dissolution."
(5) Assumes that 4% of the shares issued in connection with the Offering will
be purchased by the ESOP and the funds used to acquire the ESOP shares
will be borrowed from the Company. The Common Stock acquired by the ESOP
is reflected as a reduction of stockholders' equity. See "Management of
the Stock Bank--Compensation of Officers and Trustees through Benefit
Plans--Employee Stock Ownership Plan and Trust" and "--Compensation of
Officers and Trustees through Benefit Plans--Stock Plan."
(6) Assumes that, subsequent to the Offering, an amount equal to at least 4%
of the shares of Common Stock issued in the Offering, is purchased by the
Stock Plans through open market purchases. The Common Stock purchased by
the Stock Plans is reflected as a reduction of stockholders' equity. See
Footnote 2 to the tables under "Pro Forma Data" and "Management of the
Stock Bank--Compensation of Officers and Trustees through Benefit Plans--
Stock Plan."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $85.7 million and $116.7 million based upon the
assumption that estimated expenses for the Reorganization and Offering will be
$2.2 million, including a fee to Ryan Beck of $1.0 million. Actual Offering
expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the eight months
ended August 31, 1997 and for the year ended December 31, 1996 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 5.56% and 5.49%,
respectively (the one year U.S. Treasury bill rate as of August 31, 1997 and
December 31, 1996, respectively). The tables do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock. The pro
forma after-tax yield for the Company and the Bank is assumed to be 3.50% for
the eight months ended August 31, 1997 and 3.46% for the year ended December 31,
1996 (in both cases, based on an assumed tax rate of 37.0%). Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the purchase of shares by the ESOP. No effect has been given in
the pro forma stockholders' equity calculations for the assumed earnings on the
net proceeds. As discussed under "Use of Proceeds," for the purposes of these
calculations, the Company is assumed to retain 50% of the net Offering proceeds.
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 greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following tables summarize actual data of the Bank and pro forma
data of the Company at or for the eight months ended August 31, 1997 and at or
for the year ended December 31, 1996, based on the assumptions set forth above
and in the tables and should not be used as a basis for projections of market
value of the Common Stock following the Offering. The tables give effect to the
Stock Plans, which are expected to be adopted by the Company following the
Offering and presented to stockholders for approval at a meeting of
stockholders. See Footnote 2 to the tables and "Management of the Stock
Bank--Compensation of Officers and Trustees through Benefit Plans--Stock Plan."
No effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to the Stock Option Plans 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 as presented give
any effect to the liquidation account to be established for the benefit of
Eligible Account Holders or 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, "Description of Capital Stock
of the Company--Common Stock--Liquidation or Dissolution" and "Management of the
Stock Bank--Compensation of Officers and Trustees through Benefit Plans--Stock
Option Plan."
27
<PAGE>
<TABLE>
<CAPTION>
At or for the eight months ended August 31, 1997
--------------------------------------------------
13,674,650
8,789,000 10,340,000 11,891,000 shares
shares shares shares sold at
sold at sold at sold at $10.00
$10.00 $10.00 $10.00 per share
per share per share per share (15%
(minimum (midpoint (maximum above maximum
of offering of offering of offering of offering
range) range) range) range)(7)
----------- ----------- ----------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds.................................................... $ 87,890 $ 103,400 $ 118,910 $ 136,747
Less: estimated Offering expenses................................. (2,200) (2,200) (2,200) (2,200)
---------- ---------- --------- ---------
Estimated net proceeds.......................................... 85,690 101,200 116,710 134,547
Less: Common Stock acquired by the ESOP........................... (3,516) (4,136) (4,756) (5,470)
Less: Common Stock acquired by the Stock Plans.................... (3,516) (4,136) (4,756) (5,470)
---------- ---------- --------- ---------
Estimated net investable proceeds............................... $ 78,658 $ 92,928 $ 107,198 $ 123,607
========= ========= ========= =========
Net income:
Actual for the eight months ended August 31, 1997............... $ 9,126 $ 9,126 $ 9,126 $ 9,126
Pro forma income on estimated net investable proceeds........... 1,835 2,168 2,501 2,884
Pro forma ESOP adjustment(1).................................... (211) (248) (285) (328)
Pro forma Stock Plans adjustment(2)............................. (295) (347) (400) (459)
---------- ---------- --------- ---------
Pro forma net income........................................ $ 10,455 $ 10,699 $ 10,942 $ 11,223
========= ========= ========= =========
Net income per share:
Actual for the eight months ended August 31, 1997............... $ 0.50 $ 0.42 $ 0.37 $ 0.32
Pro forma income on estimated net investable proceeds........... 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment(1).................................... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock Plans adjustment(2)............................. (0.02) (0.02) (0.02) (0.02)
--------- -------- --------- ---------
Pro forma net income per share.............................. $ 0.57 $ 0.49 $ 0.44 $ 0.39
========= ======== ========= =========
Stockholders' equity:
Actual at August 31, 1997....................................... $ 125,370 $125,370 $ 125,370 $ 125,370
Estimated net proceeds.......................................... 85,690 101,200 116,710 134,547
Less: Common Stock acquired by the ESOP......................... (3,516) (4,136) (4,756) (5,470)
Less: Common Stock acquired by the Stock Plans.................. (3,516) (4,136) (4,756) (5,470)
---------- --------- --------- ---------
Pro forma stockholders' equity per share(2)(3)(4)........... $ 204,028 $ 218,298 $ 232,568 $ 248,977
========= ========= ========= =========
Stockholders' equity per share(5):
Actual at August 31, 1997....................................... $ 6.71 $ 5.70 $ 4.96 $ 4.31
Net proceeds.................................................... 4.58 4.60 4.61 4.63
Less: Common Stock acquired by the ESOP......................... (0.19) (0.19) (0.19) (0.19)
Less: Common Stock acquired by the Stock Plans.................. (0.19) (0.19) (0.19) (0.19)
--------- --------- --------- ---------
Pro forma stockholders' equity per share.................... $ 10.91 $ 9.92 $ 9.19 $ 8.56
========= ========= ========= =========
Offering price as a percentage of
pro forma stockholders' equity per share...................... 91.66% 100.81% 108.81% 116.82%
Offering price as a multiple of pro forma
net income per share(6)....................................... 11.70x 13.61x 15.15x 17.09x
</TABLE>
- -------------------------
(1) It is assumed that 4% of the shares of Common Stock issued in the Offering
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 Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The pro forma net income assumes: (i) that the ESOP
shares are released over seven years; (ii) that 33,484, 39,392, 45,301 and
52,096 shares at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, were committed to be released during the eight
months ended August 31, 1997 at an average fair value of $10.00 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 income per share calculations. See "Management of the
Stock Bank--Compensation of Officers and Trustees through Benefit
Plans--Employee Stock Ownership Plan and Trust."
(2) Gives effect to the Stock Plans expected to be adopted by the Company
following the Offering and presented for approval at a meeting of
stockholders. The Stock Plans intend to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock sold in the Offering or 351,560,
413,600, 475,640 and 546,986 shares of Common Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Offering 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. In calculating the pro forma effect of the Stock
Plans, it is assumed that the shares were acquired by the Stock Plans at
the beginning of the period presented in open market purchases at the
Purchase Price and that
28
<PAGE>
13.3% 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 Plans instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 1.8%
and pro forma net earnings per share would be $0.56, $0.49, $0.44 and
$0.39 at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively, and pro forma stockholders' equity per share would be
$10.81, $9.92, $9.21 and $8.58 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively. There can be no assurance
that the actual purchase price of the shares granted under the Stock Plans
will be equal to the Purchase Price. See "Management of the Stock
Bank--Compensation of Officers and Trustees through Benefit Plans--Stock
Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Offering. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. Under the Stock
Option Plans, an amount equal to 10% of the Common Stock issued in the
Offering, or 878,900, 1,034,000, 1,189,100 and 1,367,465 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Offering
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock Option Plans. The
issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plans will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the beginning of the
period at an exercise price of $10.00 per share, the pro forma net income
per share would be $0.54, $0.47, $0.42 and $0.37, respectively, and the
pro forma stockholders' equity per share would be $10.41, $9.49, $8.80 and
$8.20, respectively. See "Management of the Stock Bank--Compensation of
Officers and Trustees through Benefit Plans--Stock Option Plan."
(4) The retained earnings of the Bank will continue to be restricted after the
Offering. See "Dividend Policy," "Description of Capital Stock of the
Company--Common Stock--Liquidation or Dissolution", "Regulation and
Supervision--Massachusetts Bank Regulation," and "The Reorganization and
Offering - Liquidation Rights."
(5) Stockholders' equity per share data is based upon 18,700,000, 22,000,000,
25,300,000 and 29,095,000 shares outstanding representing shares sold in
the Offering, and shares purchased by the ESOP and Stock Plans.
(6) Based on annualization of pro forma net income for the eight months ended
August 31, 1997.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Independent Valuation and the
Offering 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 and Community Offerings.
29
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended December 31, 1996
----------------------------------------------------
13,674,650
8,789,000 10,340,000 11,891,000 shares
shares shares shares sold at
sold at sold at sold at $10.00
$10.00 $10.00 $10.00 per share
per share per share per share (15%
(minimum (midpoint (maximum above maximum
of offering of offering of offering of offering
range) range) range) range)(6)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Gross proceeds.................................................... $ 87,890 $ 103,400 $ 118,910 $ 136,747
Less: estimated Offering expenses................................. (2,200) (2,200) (2,200) (2,200)
--------- --------- --------- ---------
Estimated net proceeds.......................................... 85,690 101,200 116,710 134,547
Less: Common Stock acquired by the ESOP........................... (3,516) (4,136) (4,756) (5,470)
Less: Common Stock acquired by the Stock Plans.................... (3,516) (4,136) (4,756) (5,470)
--------- --------- --------- ---------
Estimated net investable proceeds............................... $ 78,658 $ 92,928 $ 107,198 $ 123,607
========= ========= ========= =========
Net income:
Actual for the year ended December 31, 1996..................... $ 11,937 $ 11,937 $ 11,937 $ 11,937
Pro forma income on net proceeds................................ 2,722 3,215 3,709 4,277
Pro forma ESOP adjustment(1).................................... (316) (372) (428) (492)
Pro forma Stock Plans adjustment(2)............................. (443) (521) (599) (689)
--------- --------- --------- ---------
Pro forma net income........................................ $ 13,900 $ 14,259 $ 14,619 $ 15,033
========= ========= ========= =========
Net income per share:
Actual for the year ended December 31, 1996..................... $ 0.65 $ 0.55 $ 0.48 $ 0.42
Pro forma income on estimated net investable proceeds........... 0.15 0.15 0.15 0.15
Pro forma ESOP adjustment(1).................................... (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Plans adjustment(2)............................. (0.02) (0.02) (0.02) (0.02)
--------- --------- --------- ---------
Pro forma net income........................................ $ 0.76 $ 0.66 $ 0.59 $ 0.53
========= ========= ========= =========
Stockholders' equity(5):
Actual at December 31, 1996..................................... $ 113,947 $ 113,947 $ 113,947 $ 113,947
Estimated net proceeds.......................................... 85,690 101,200 116,710 134,547
Less: Common Stock acquired by the ESOP......................... (3,516) (4,136) (4,756) (5,470)
Less: Common Stock acquired by the Stock Plans.................. (3,516) (4,136) (4,756) (5,470)
--------- --------- --------- ---------
Pro forma stockholders' equity(2)(3)(4)..................... $ 192,605 $ 206,875 $ 221,145 $ 237,554
========= ========= ========= =========
Stockholders' equity per share(5):
Actual at December 31, 1996..................................... $ 6.10 $ 5.18 $ 4.51 $ 3.92
Net proceeds.................................................... 4.58 4.60 4.61 4.62
Less: Common Stock acquired by the ESOP......................... (0.19) (0.19) (0.19) (0.19)
Less: Common Stock acquired by the Stock Plans.................. (0.19) (0.19) (0.19) (0.19)
--------- --------- --------- ---------
Pro forma stockholders' equity.............................. $ 10.30 $ 9.40 $ 8.74 $ 8.16
========= ========= ========= =========
Offering price as a percentage of
pro forma stockholders' equity per share...................... 97.09% 106.38% 114.42% 122.55%
Offering price as a multiple of pro forma
net income per share.......................................... 13.16x 15.15x 16.95x 18.87x
</TABLE>
- -------------------------
(1) It is assumed that 4% of the shares of Common Stock issued in the Offering
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 Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The pro forma net income assumes: (i) that the ESOP
shares are released over seven years; (ii) that 50,223, 59,086, 67,943 and
78,143 shares at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, were committed to be released during the year
ended December 31, 1996 at an average fair value of $10.00 per share in
accordance with SOP 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net income per
share calculations. See "Management of the Stock Bank--Compensation of
Officers and Trustees through Benefit Plans--Employee Stock Ownership Plan
and Trust."
(2) Gives effect to the Stock Plans expected to be adopted by the Company
following the Offering and presented for approval at a meeting of
stockholders. The Stock Plans intend to acquire an amount of Common Stock
equal to 4% of the shares of Common Stock issued with the Offering, or
351,560, 413,600, 475,640 and 546,986 shares of Common Stock at the
minimum, midpoint, maximum and 15% above the maximum of the Offering
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. In calculating the pro forma effect of the Stock
Plans, it is assumed that the shares were acquired by the Stock Plans at
the beginning of the period presented in open market purchases at the
Purchase Price and that
30
<PAGE>
20.0% 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 Plans instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 1.8%
and pro forma net income per share would be $0.75, $0.65, $0.58 and $0.52
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, and pro forma stockholders' equity per share would be
$10.29, $9.41, $8.76 and $8.20 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively. There can be no assurance
that the actual purchase price of the shares granted under the Stock Plans
will be equal to the Purchase Price. See "Management of the Stock
Bank--Compensation of Officers and Trustees through Benefit Plans--Stock
Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Offering. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. Under the Stock
Option Plans, an amount equal to 10% of the Common Stock issued in the
Offering, or 878,900, 1,034,000, 1,189,100 and 1,367,465 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Offering
Range, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock Option Plans. The
issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plans will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the beginning of the
period at an exercise price of $10.00 per share, the pro forma net income
per share would be $0.71, $0.62, $0.56 and $0.50, respectively, and the
pro forma stockholders' equity per share would be $9.84, $9.00, $8.38 and
$7.84, respectively. See "Management of the Stock Bank--Compensation of
Officers and Trustees through Benefit Plans--Stock Option Plan."
(4) The retained earnings of the Bank will continue to be restricted after the
Offering. See "Dividend Policy," "Description of Capital Stock of the
Company--Common Stock--Liquidation or Dissolution" and "Regulation and
Supervision--Massachusetts Bank Regulation."
(5) Stockholders' equity per share data is based upon 18,700,000, 22,000,000,
25,300,000 and 29,095,000 shares outstanding representing shares sold in
the Offering, and shares purchased by the ESOP and Stock Plans.
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Independent Valuation and the
Offering 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 and Community Offerings.
31
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended December 31, 1996 have been audited by
Grant Thornton LLP, independent certified public accountants, whose report
thereon appears elsewhere in this Prospectus. With respect to information for
the eight months ended August 31, 1997 and 1996, which is unaudited, in the
opinion of management, all adjustments necessary for a fair presentation of such
periods have been included and are of a normal recurring nature. Results for the
eight months ended August 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. These statements
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>
Eight months ended
August 31, Year ended December 31,
------------------ ------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans....................................................... $29,350 $27,230 $41,251 $38,949 $31,711
Debt securities............................................. 5,778 5,320 8,115 8,963 7,189
Marketable equity securities................................ 472 476 697 678 566
Restricted equity securities................................ 147 124 191 185 203
Short-term investments...................................... 372 413 765 145 274
------- ------- ------- ------- -------
Total interest income 36,119 33,563 51,019 48,920 39,943
------- ------- ------- ------- -------
Interest expense:
Deposits.................................................... 14,463 14,530 21,775 20,910 15,835
Borrowed funds.............................................. 2,741 2,329 3,683 3,028 1,926
------- ------- ------- ------- -------
Total interest expense................................... 17,204 16,859 25,458 23,938 17,761
------- ------- ------- ------- -------
Net interest income........................................... 18,915 16,704 25,561 24,982 22,182
Provision (credit) for loan losses............................ - - - - (477)
------- ------- ------- ------- -------
Net interest income after provision (credit) for loan losses.. 18,915 16,704 25,561 24,982 22,659
------- ------- ------- ------- -------
Non-interest income:
Fees and charges............................................. 525 729 957 759 722
Gains on sales of securities net............................. 74 464 464 877 4
Other real estate owned income (expense), net................ 158 186 299 (40) (741)
Other income................................................. 72 110 120 9 94
------- ------- ------- ------- -------
Total non-interest income................................. 829 1,489 1,840 1,605 79
------- ------- ------- ------- -------
Non-interest expense:
Compensation and employee benefits........................... 3,500 2,974 4,513 4,395 4,017
Occupancy.................................................... 473 409 627 579 591
Equipment and data processing................................ 720 606 892 882 878
Deposit insurance premiums................................... 47 7 11 561 1,023
Other........................................................ 998 811 1,670 1,033 1,187
------- ------- ------- ------- -------
Total non-interest expense 5,738 4,807 7,713 7,450 7,696
------- ------- ------- ------- -------
Income before income taxes..................................... 14,006 13,386 19,688 19,137 15,042
Provision for income taxes..................................... 4,880 5,191 7,751 7,409 5,942
------- ------- ------- ------- -------
Net income..................................................... $ 9,126 $ 8,195 $11,937 $11,728 $ 9,100
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE>
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 depend primarily on its
net interest income, which is the difference between the income earned on the
Bank's loan and securities 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, income and expenses pertaining
to other real estate owned, gains and losses from sales of securities, and
non-interest expenses. The Bank's non-interest expenses consist principally of
compensation and employee benefits, occupancy, equipment and data processing,
federal deposit insurance premiums and other operating expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, changes in interest rates, as well as government policies and
actions of regulatory authorities. Future changes in applicable law, regulations
or government policies may materially affect the Company and the Bank.
Management Strategy
Historically, the Bank has focused on offering deposit products in the
Town of Brookline and surrounding communities. The Bank's lending activities are
concentrated primarily in the greater Boston metropolitan area and eastern
Massachusetts. The Bank generates its profitability primarily by originating
loans, investing in debt and equity securities, attracting and retaining
deposits by paying competitive interest rates, borrowing from the Federal Home
Loan Bank of Boston ("FHLB") and maintaining a lower operating expense ratio in
comparison to banks of similar size. Depending on demand and overall market
conditions, the Bank intends to continue to emphasize multi-family and
commercial real estate lending and to pursue opportunities for growth in these
areas of business. While this type of lending typically generates higher yields,
it is also involves greater credit risk. As a consequence, in future periods,
the Bank may increase the level of its provision for loan losses depending on
market conditions, the level of non-performing loans and other factors.
Management of Credit Risk
Management considers credit risk to be the most important risk factor
affecting the financial condition and operating results of the Bank. The
potential for loss associated with this risk factor is managed through a
combination of policies established by the Bank's Board of Trustees, the
monitoring of compliance with these policies, and the periodic reporting and
evaluation of loans with problem characteristics. Policies relate to the maximum
amount that can be granted to a single borrower and his or her related
interests, the aggregate amount of loans outstanding by type in relation to
total assets and capital, loan concentrations, loan to collateral value ratios,
approval limits and other underwriting criteria. Policies also exist with
respect to performing credit reviews by an officer not involved in loan
origination, the rating of loans, when loans should be placed in a
non-performing status and the factors that should be considered in establishing
the Bank's allowance for loan losses. See "Business of the Bank--Lending
Activities."
Management of Interest Rate Risk
Another important risk factor affecting the financial condition and
operating results of the Bank is interest rate risk. This risk is managed by
periodic evaluation of the interest rate risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given the
Bank's capital and liquidity requirements, business strategy, performance
objectives and operating environment, and maintenance of such risks within
guidelines approved by the Board of Trustees. Through such management, the Bank
seeks to reduce the vulnerability of its operations to changes in interest
rates. The Bank's Asset/Liability Committee, comprised of senior management, is
responsible for managing interest rate risk and reviewing with the Board of
Trustees on a quarterly basis its activities and strategies, the effect of those
strategies on the Bank's operating results, the Bank's interest rate risk
position, and the effect changes in interest rates would have on the Bank's net
interest income. The extent of movement of interest
33
<PAGE>
rates is an uncertainty that could have a negative impact on the earnings of the
Bank. See "Risk Factors--Sensitivity to Changes in Interest Rates."
The principal strategies used by the Bank to manage interest rate risk
include (1) emphasizing on the origination and retention of adjustable-rate
loans or loans with maturities matched with those of the deposits and borrowings
funding the loans, (2) investing in debt securities with relatively short
maturities and (3) classifying of a significant portion of the Bank's investment
portfolio as available for sale so as to provide sufficient flexibility in
liquidity management.
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
or liability is deemed 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 August 31, 1997, the Bank's cumulative one-year gap
position, 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, was a negative 9.81%. 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 generally would not be in as favorable
a position, compared to an institution with a positive gap, to invest in higher
yielding assets. The resulting yield on the institution's assets generally would
increase at a slower rate than the increase in its cost of interest-bearing
liabilities. Conversely, during a period of falling interest rates, an
institution with a negative gap would tend to experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, would generally result in its net interest income growing at a
faster rate than an institution with a positive gap position.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at August 31, 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
August 31, 1997, on the basis of contractual maturities, anticipated prepayments
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 and anticipated prepayments of adjustable-rate and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
The annual prepayment rate for real estate mortgage loans is assumed to be 7.5%.
See "Business of the Bank--Lending Activities," "--Investment Activities" and
"--Sources of Funds."
34
<PAGE>
<TABLE>
<CAPTION>
At August 31, 1997
----------------------------------------------------------------------
More More More
More More than than than
than three than six one three five
Three months to months to year years years More
months six one to three to five to ten than
or less months year years years years ten years
--------- ---------- ----------- ---------- --------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Short-term investments.................... $ 7,495 $ - $ - $ - $ - $ - $ -
Debt and equity securities(2)............. 29,603 15,117 30,833 79,243 218 579 489
Mortgage loans(3)......................... 172,844 29,292 49,822 138,821 42,261 7,951 201
Commercial participation loans............ 36,500 - - - - - -
Other loans............................... 5,846 39 169 1,454 151 34 -
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets.......... 252,288 44,448 80,824 219,518 42,630 8,564 690
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
NOW accounts.............................. 37,786 - - - - - -
Savings accounts.......................... 14,399 - - - - - -
Money market savings accounts............. 157,782 - - - - - -
Certificate of deposit accounts........... 74,928 59,521 75,352 43,503 8,079 - -
Borrowed funds............................ 6,850 3,000 11,600 25,015 15,350 - -
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities..... 291,745 62,521 86,952 68,518 23,429 - -
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap(4)................. $(39,457) $(18,073) $ (6,128) $151,000 $ 19,201 $ 8,564 $ 690
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap......... $(39,457) $(57,530) $(63,658) $ 87,342 $106,543 $115,107 $115,797
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap
as a percentage of total assets........... (5.80)% (8.46)% (9.36)% 12.84% 15.66% 16.92% 17.02%
Cumulative interest sensitivity
gap as a percentage of total
interest-earning assets................... (6.08)% (8.86)% (9.81)% 13.46% 16.42% 17.74% 17.84%
Cumulative interest-earning
assets as a percentage of
cumulative interest-bearing
liabilities............................... 86.48% 83.76% 85.57% 117.14% 119.98% 121.59% 121.72%
<CAPTION>
Total
-----
(Dollars in thousands)
<S> <C>
Interest-earning assets(1):
Short-term investments.................... $ 7,495
Debt and equity securities(2)............. 156,082
Mortgage loans(3)......................... 441,192
Commercial participation loans............ 36,500
Other loans............................... 7,693
---------
Total interest-earning assets.......... 648,962
---------
Interest-bearing liabilities:
NOW accounts.............................. 37,786
Savings accounts.......................... 14,399
Money market savings accounts............. 157,782
Certificate of deposit accounts........... 261,383
Borrowed funds............................ 61,815
---------
Total interest-bearing liabilities..... 533,165
---------
Interest sensitivity gap(4)................. $ 115,797
=========
</TABLE>
- -------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Debt and equity securities include all debt securities and $1.5 million of
auction rate preferred stock, the maturities of which have been assumed to
be the date on which they are next auctioned (3 months or less). All other
marketable equity securities and restricted equity securities are
excluded.
(3) For purposes of the gap analysis, the allowance for loan losses, deferred
loan fees, unearned discounts and non-performing loans have been excluded.
(4) Interest sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities, expressed as a
percentage.
Certain shortcomings are inherent in the method of analysis
presented in the GAP Table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing,
they may react in 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 changes 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.
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 on the relative amounts of
interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on them.
35
<PAGE>
Average Balance Sheet. The following table sets forth certain
information relating to the Bank at August 31, 1997, for the eight months ended
August 31, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994.
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 and reflect annualized yields and costs.
Average balances are derived from average daily balances. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
Eight months ended August 31,
-------------------------------------------------
At August 31, 1997 1997
-------------------------- -------------------------------------------------
Average Average
yield/ Average yield/
Balance cost balance Interest/(1)/ cost
--------- ------- --------- -------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Interest-earnings assets:
Short-term investments............ $ 7,495 5.47% $ 10,332 $ 372 5.40%
Debt securities (2)............... 154,700 6.02 144,171 5,778 6.01
Equity securities (2)............. 27,145 4.72 24,858 792 4.78
Mortgage loans (3)(4)............. 441,320 8.91 434,363 26,072 9.00
Commercial participation loans (3) 36,500 5.69 51,017 1,916 5.63
Other commercial loans (3)........ 6,359 9.64 5,911 380 9.64
Consumer loans (3)................ 1,336 10.37 1,052 74 10.55
--------- --------- -------
Total interest-earning assets 674,855 7.88 671,704 35,384 7.90
----- ------- -----
Allowance for loan losses........... (12,443) (12,417)
Non-interest earning assets......... 17,904 15,830
--------- ---------
Total assets.................. $ 680,316 $ 675,117
========= =========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts.................. $ 37,786 1.75% $ 37,606 $ 430 1.72%
Savings accounts (5).......... 14,399 2.50 15,327 252 2.47
Money market savings accounts 157,782 3.81 158,618 4,066 3.85
Certificate of deposit
accounts.................... 261,383 5.64 262,009 9,715 5.56
--------- --------- -------
Total deposits............. 471,350 4.62 473,560 14,463 4.58
Borrowed funds.................... 61,815 6.44 63,019 2,741 6.52
--------- --------- -------
Total interest-bearing
liabilities 533,165 4.83 536,579 17,204 4.81
----- -----
Non-interest-bearing demand
checking accounts................. 10,356 9,723
Other liabilities................... 11,425 9,367
--------- ---------
Total liabilities.......... 554,946 555,669
Retained earnings................... 125,370 119,448
--------- ---------
Total liabilities and
retained earnings....... $ 680,316 $ 675,117
========= =========
Net interest income (tax equivalent
basis)/interest rate spread (6) 3.05% 18,180 3.09%
===== =====
Less adjustment of tax exempt income 173
-------
Net interest income (4)............. $18,007
=======
Net interest margin (7)............. 4.06%
=====
Ratio of interest-earning assets to
interest-bearing liabilities...... 126.58% 125.18%
====== ======
<CAPTION>
Eight months ended August 31,
---------------------------------------
1996
---------------------------------------
Average
Average yield/
balance Interest/(1)/ cost
-------- ------------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earnings assets:
Short-term investments............ $ 11,836 $ 413 5.23%
Debt securities (2)............... 131,828 5,320 6.05
Equity securities (2)............. 21,788 774 5.33
Mortgage loans (3)(4)............. 412,337 24,850 9.04
Commercial participation loans (3) 56,585 2,097 5.56
Other commercial loans (3)........ 3,172 195 9.22
Consumer loans (3)................ 1,138 88 11.60
-------- -------
Total interest-earning assets 638,684 33,737 7.92
------- ------
Allowance for loan losses........... (12,296)
Non-interest earning assets......... 15,975
--------
Total assets.................. $642,363
========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts.................. $ 36,649 $ 423 1.73%
Savings accounts (5).......... 17,818 290 2.44
Money market savings accounts 152,979 3,925 3.85
Certificate of deposit
accounts.................... 262,203 9,892 5.66
-------- -------
Total deposits............. 469,649 14,530 4.64
Borrowed funds.................... 52,645 2,329 6.64
-------- -------
Total interest-bearing
liabilities.............. 522,294 16,859 4.84
------- ------
Non-interest-bearing demand
checking accounts................. 9,439
Other liabilities................... 5,469
--------
Total liabilities.......... 537,202
Retained earnings................... 105,161
--------
Total liabilities and
retained earnings....... $642,363
========
Net interest income (tax equivalent
basis)/interest rate spread (6) 16,878 3.08%
======
Less adjustment of tax exempt income 174
-------
Net interest income (4)............. $16,704
=======
Net interest margin (7)............. 3.96%
======
Ratio of interest-earning assets to
interest-bearing liabilities...... 122.28%
======
</TABLE>
- --------------------
(1) Tax exempt income on equity securities is included on a tax equivalent
basis.
(2) Average balances include unrealized gains on securities available for
sale. Equity securities include marketable equity securities (preferred
and common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in the average balances.
(4) Excluded from interest income for the eight months ended August 31, 1997
is $908 collected from a borrower whose loans were on non-accrual and
which relates to interest earned in periods prior to January 1, 1997.
(5) Savings accounts include interest-bearing mortgagors' escrow
accounts.
(6) Net interest spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(7) Net interest margin (annualized) represents net interest income (tax
equivalent basis) divided by average interest-earning assets.
36
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1996 1995
------------------------------------- ------------------------------------
Average Average
Average yield/ Average yield/
balance Interest/(1)/ cost balance Interest/(1)/ cost
--------- ----------- ----------- ----------- ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments........... $ 14,562 $ 765 5.25% $ 2,511 $ 145 5.77%
Debt securities (2).............. 135,039 8,115 6.01 154,736 8,963 5.79
Equity securities (2)............ 21,746 1,142 5.25 18,387 1,110 6.04
Mortgage loans (3)............... 415,054 37,765 9.10 392,509 36,366 9.27
Commercial participation
loans (3)...................... 54,076 3,007 5.56 35,766 2,166 6.06
Other commercial loans (3)....... 3,792 345 9.10 2,624 271 10.33
Consumer loans (3)............... 1,098 134 12.20 1,338 146 10.91
--------- ------- --------- -------
Total interest-earning assets. 645,367 51,273 7.94 607,871 49,167 8.09
------- ------ ------- --------
Allowance for loan losses............ (12,319) (12,247)
Non-interest earning assets......... 15,863 18,857
--------- ---------
Total assets.................. $ 648,911 $ 614,481
========= =========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits
NOW accounts.................. $ 37,095 $ 641 1.73% $ 35,787 $ 620 1.73%
Savings accounts (4).......... 17,302 426 2.46 20,460 498 2.43
Money market savings accounts. 154,541 5,957 3.85 151,334 5,665 3.74
Certificate of deposit
Accounts 262,007 14,751 5.63 252,985 14,127 5.58
--------- ------- --------- -------
Total deposits.............. 470,945 21,775 4.62 460,566 20,910 4.54
Borrowed funds................... 55,497 3,683 6.64 46,172 3,028 6.56
--------- ------- --------- -------
Total interest-bearing liabilities.... 526,442 25,458 4.84 506,738 23,938 4.72
------- ------ ------- -----
Non-interest-bearing demand
checking accounts................. 9,595 8,266
Other liabilities................... 5,808 6,553
--------- ---------
Total liabilities............. 541,845 521,557
Retained earnings................... 107,066 92,924
--------- ---------
Total liabilities and retained
earnings................. $ 648,911 $ 614,481
========= =========
Net interest income (tax equivalent
basis)/interest rate spread (5).. 25,815 3.10% 25,229 3.37%
====== =====
Less adjustment of tax exempt
income............................ 254 247
------- -------
Net interest income................. $25,561 $24,982
======= =======
Net interest margin (6)............. 4.00% 4.15%
====== =====
Ratio of interest-earning assets to
interest-bearing liabilities..... 122.59% 119.96%
====== ======
<CAPTION>
Year Ended December 31,
-------------------------------------
1994
-------------------------------------
Average
Average yield/
balance Interest/(1)/ cost
--------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments........... 6,745 $ 274 4.06%
Debt securities (2).............. 142,504 7,189 5.04
Equity securities (2)............ 14,130 976 6.91
Mortgage loans (3)............... 361,061 29,730 8.23
Commercial participation loans (3) 37,259 1,691 4.54
Other commercial loans (3)....... 2,380 160 6.72
Consumer loans (3)............... 1,318 130 9.86
-------- ------ -------
Total interest-earning assets. 565,397 40,150 7.10
====== =======
Allowance for loan losses........... (12,741)
Non-interest earning assets......... 21,010
---------
Total assets.................. $ 573,666
=========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits
NOW accounts..................... $ 37,226 $ 657 1.76%
Savings accounts (4)............. 25,673 628 2.45
Money market savings accounts.... 172,859 5,278 3.05
Certificate of deposit accounts.. 211,066 9,272 4.39
--------- -------
Total deposits................. 446,824 15,835 3.54
Borrowed funds...................... 32,904 1,926 5.85
--------- -------
Total interest-bearing liabilities..... 479,728 17,761 3.70
--------- ------- ------
Non-interest-bearing demand
checking accounts.................... 7,678
Other liabilities...................... 6,013
---------
Total liabilities.............. 493,419
Retained earnings...................... 80,247
---------
Total liabilities and
retained earnings............ $ 573,666
=========
Net interest income (tax equivalent
basis)/interest rate spread (5)..... 22,389 3.40%
=====
Less adjustment of tax exempt income... 207
-------
Net interest income.................... $22,182
=======
Net interest margin (6)................ 3.96%
=====
Ratio of interest-earning assets to
interest-bearing liabilities........ 117.86%
======
</TABLE>
(1) Tax exempt income on equity securities is included on a tax equivalent
basis.
(2) Average balances include unrealized gains on securities available for
sale. Equity securities include marketable equity securities (preferred
and common stocks) and restricted equity securities.
(3) Loans on non-accrual status are included in the average balances.
(4) Savings accounts include interest-bearing mortgagors' escrow
accounts.
(5) Net interest spread represents the difference between the yield on
interest-earning assets and interest-bearing liabilities.
(6) Net interest margin (annualized) represents annualized net interest income
(tax equivalent basis) divided by average interest-earning assets.
37
<PAGE>
Rate/Volume Analysis. The following table presents, on a tax equivalent
basis, the extent to which changes in interest rates and changes in 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 proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Eight months ended Year ended
August 31, 1997 December 31, 1996
compared to compared to
eight months ended year ended
August 31, 1996 December 31, 1995
----------------------------------- -----------------------------------
Increase (decrease) Increase (decrease)
due to due to
---------------------- ----------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments............... $ (64) $ 23 $ (41) $ 634 $ (14) $ 620
Debt securities...................... 529 (71) 458 (1,174) 326 (848)
Equity securities.................... 149 (131) 18 187 (155) 32
Mortgage loans....................... 1,416 (194) 1,222 2,060 (661) 1,399
Commercial participation loans....... (234) 53 (181) 1,031 (190) 841
Other commercial loans............... 176 9 185 109 (35) 74
Consumer loans....................... (6) (8) (14) (28) 16 (12)
--------- --------- ------- ------- ------ --------
Total interest-earning assets...... 1,966 (319) 1,647 2,819 (713) 2,106
--------- --------- ------- ------- ------ --------
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ 14 $ (7) $ 7 $ 23 $ (2) $ 21
Savings accounts................... (44) 6 (38) (78) 6 (72)
Money market savings accounts 148 (7) 141 122 170 292
Certificate of deposit accounts.... (7) (170) (177) 507 117 624
--------- --------- ------- ------- ------ --------
Total deposits..................... 111 (178) (67) 574 291 865
Borrowed funds....................... 487 (75) 412 618 37 655
--------- --------- ------- ------- ------ --------
Total interest-bearing liabilities. 598 (253) 345 1,192 328 1,520
--------- --------- ------- ------- ------ --------
Net change in net interest income....... $ 1,368 $ (66) $ 1,302 $ 1,627 $(1,041) $ 586
========= ========= ======= ======= ====== ========
<CAPTION>
Year ended
December 31, 1995
compared to
year ended
December 31, 1994
-----------------------------------
Increase (decrease)
due to
----------------------
Volume Rate Net
--------- --------- ---------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments............... $ (215) $ 86 $ (129)
Debt securities...................... 651 1,123 1,774
Equity securities.................... 268 (134) 134
Mortgage loans....................... 2,722 3,914 6,636
Commercial participation loans....... (70) 545 475
Other commercial loans............... 18 93 111
Consumer loans....................... 4 12 16
------- -------- --------
Total interest-earning assets...... 3,378 5,639 9,017
------- -------- --------
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits:
NOW accounts....................... $ (25) $ (12) $ (37)
Savings accounts................... (127) (3) (130)
Money market savings accounts...... (710) 1,097 387
Certificate of deposit accounts.... 2,053 2,802 4,855
------- -------- --------
Total deposits..................... 1,191 3,884 5,075
Borrowed funds....................... 849 253 1,102
------- -------- --------
Total interest-bearing liabilities. 2,040 4,137 6,177
------- -------- --------
Net change in net interest income....... $ 1,338 $ 1,502 $ 2,840
======= ======== ========
</TABLE>
Comparison of Financial Condition at August 31, 1997 and December 31, 1996
Total assets increased by $13.3 million, or 2.0%, from $667.0 million
at December 31, 1996 to $680.3 million at August 31, 1997. This growth was due
primarily to a $7.0 million, or 3.8%, increase in investments and a $4.7
million, or 1.0%, increase in net loans. Asset growth was funded primarily by an
$11.4 million, or 10.0%, increase in retained earnings.
The Bank's investment strategy between December 31, 1996 and August 31,
1997 was to reduce excess liquidity and slightly extend the maturity of its
investments. As a result, short-term investments decreased by $12.4 million and
investments in debt securities increased by $16.1 million. The change in debt
securities included an $8.6 million increase in corporate obligations, a $7.7
million increase in U.S. Government and Agency obligations and a $204,000
decrease in mortgage-backed securities. Most of the debt securities purchased
had maturities in the range of two years.
The net increase in loans resulted from greater mortgage loan
originations which was partially offset by fewer purchases of commercial loan
participations. From December 31, 1996 to August 31, 1997, one-to-four family
mortgage loans increased by $7.5 million (13.0%), multi-family mortgage loans
increased by $13.7 million (6.8%) and commercial real estate mortgage loans
increased by $3.8 million (2.7%). These increases were offset by a reduction in
commercial loan participations from $53.0 million at December 31, 1996 to $36.5
million at August 31, 1997 and
38
<PAGE>
modest decreases in other loan categories. Commercial loan participations
represent purchases of a portion of loans to national companies originated and
serviced by money center banks. The participations generally mature between one
day and three months. The Bank views such participations as an alternative
investment to slightly lower yielding short-term investments.
Total deposits at August 31, 1997 were $481.5 million, a decrease of
$2.5 million, or 0.5%, compared to $484.0 million at December 31, 1996. The
modest decline in deposits was attributable to continuation of a low interest
rate environment wherein the Bank must compete against other instruments
available to the public such as mutual funds and annuities. Total borrowed funds
were $61.8 million at August 31, 1997 compared to $60.6 million at December 31,
1996, an increase of $1.2 million, or 2.1%. The increase in retained earnings of
$11.4 million to $125.4 million at August 31, 1997, or 18.4% of total assets,
resulted from net earnings of $9.1 million for the eight months ended August 31,
1997 and a $2.3 million increase in unrealized gains (net of taxes) on
securities available for sale, most of which pertained to the Bank's marketable
equity securities portfolio.
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
Total assets were $667.0 million at December 31, 1996 compared to
$632.8 million at December 31, 1995, an increase of $34.2 million, or 5.4%.
Substantially all of the growth was due to a $32.1 million, or 7.3%, increase in
net loans. Asset growth was funded primarily from increased deposits
($9.8 million), increased borrowings from the FHLB ($10.9 million) and increased
retained earnings ($13.4 million).
Total net loans increased from $448.6 million at December 31, 1995 to
$480.7 million at December 31, 1996. Between those dates, total mortgage loans
increased by $19.7 million, or 4.8%, to $431.1 million and total commercial
loans increased by $14.5 million, or 30.4%, to $62.2 million. The most
significant areas of mortgage loan growth were in commercial real estate loans
which increased by $14.1 million, or 11.2%, to $139.4 million and multi-family
loans which increased by $6.6 million, or 3.4%, to $200.4 million. While the
market in these lending areas was strong throughout the year, so too was the
competition for such business. Many borrowers took advantage of the increased
competition to refinance their properties. As a result, the Bank's net growth in
mortgage loans in 1996 ($19.7 million) was slightly less than that achieved in
1995 ($20.9 million), despite a higher level of loan originations in 1996 than
in 1995. Of the increase in commercial loans, $9.9 million was attributable to
commercial loan participations and $4.6 million to other commercial loans,
primarily to condominium associations.
While total investments increased modestly from $179.7 million at
December 31, 1995 to $182.3 million at December 31, 1996, the extent of change
within investment classifications was more significant. Short-term investments
increased $14.2 million, securities available for sale increased $35.6 million
and securities held to maturity decreased $47.7 million. In November 1995, in
accordance with the FASB interpretation regarding SFAS No. 115, the Bank
transferred debt securities having a carrying value and market value of
$26.0 million from its held to maturity portfolio to its available for sale
portfolio.
Total deposits increased 2.1% from $474.2 million at December 31, 1995
to $484.0 million at December 31, 1996. Substantially all of the growth came
from a $9.5 million increase in money market savings accounts to $158.1 million
at December 31, 1996. Total certificates of deposit increased slightly from
$260.9 million at December 31, 1995 to $261.8 million at December 31, 1996. The
modest inflow of deposits was caused primarily by customers opting to place
their funds in other instruments such as mutual funds and annuities rather than
in deposit products perceived to have less appealing returns. The Bank increased
its borrowings from the FHLB from $49.7 million at December 31, 1995 to
$60.6 million at December 31, 1996 as part of its management of interest rate
risk resulting from the origination and refinancing of multi-family and
commercial real estate loans at fixed interest rates for certain time intervals.
The increase in retained earnings of $13.4 million to $113.9 million at
December 31, 1996, or 17.1% of total assets, resulted from net earnings of
$11.9 million and a $1.4 million increase in unrealized gains (net of taxes) on
securities available for sale to $8.7 million.
39
<PAGE>
Comparison of Operating Results For the Eight Months Ended August 31, 1997 and
August 31, 1996
General. Net income increased by $931,000, or 11.4%, from $8.2 million
for the eight months ended August 31, 1996 to $9.1 million for the eight months
ended August 31, 1997. The improvement was attributable to higher net interest
income of $2.2 million and a $311,000 decrease in income tax expense resulting
from a lower effective income tax rate, partially offset by an increase of
$931,000 in non-interest expense due to higher operating costs and a $660,000
decline in non-interest income due in part to $390,000 less in gains from sales
of securities. The increase in net interest income was due primarily to growth
in average interest-earning assets and receipt of $908,000 in interest from a
borrower whose loans were on non-accrual and which related to interest earned in
periods prior to 1997.
Interest Income. Interest income for the eight months ended August 31,
1997 was $36.1 million, compared to $33.6 million for the eight months ended
August 31, 1996, an increase of $2.6 million, or 7.6%. Excluding the receipt of
$908,000 in interest income referred to in the preceding paragraph, the rate of
increase over the prior period was 4.9%. Subsequent discussion herein regarding
income from lending activities in 1997 excludes the effect of the $908,000 in
interest income. Substantially all of the increase in interest income resulted
from growth in average interest-earning assets of $33.0 million, or 5.2%. The
principal areas of growth related to mortgage loans (up $22.0 million, or 5.3%)
and debt securities (up $12.3 million, or 9.4%). Most of the mortgage loan
growth resulted from increased originations of one-to-four family, multi-family
and commercial real estate loans. The increase in debt securities resulted from
a decision to shift some of the Bank's liquid funds placed in short-term
investments and commercial loan participations into debt securities so as to
improve asset yield. Generally, debt securities with maturities in the two year
range earned approximately 30 to 50 basis points higher than the yields on
shorter term assets during the eight months ended August 31, 1997.
Interest Expense. Interest expense for the eight months ended
August 31, 1997 was $17.2 million, compared to $16.9 million for the eight
months ended August 31, 1996, an increase of $345,000, or 2.0%. This increase
resulted from a higher average balance of interest-bearing liabilities
($14.3 million, or 2.7%) which was partially offset by a 3 basis point reduction
in the average rate paid for funds. Average interest-bearing deposit balances
increased modestly ($3.9 million, or 0.8%) as a continued low rate environment
made it difficult to attract deposits at acceptable interest rate levels. The
Bank expanded its use of borrowings from the FHLB as part of its management of
interest rate risk. Interest expense on borrowed funds increased $412,000, or
17.7%, in the eight months ended August 31, 1997 due to a $10.4 million, or
19.7%, increase in the average balance of such funds to $63.0 million, which was
partially offset by a 12 basis point reduction in the average rate paid on
borrowed funds to 6.52% in the 1997 period compared to the 1996 period.
Provision for Loan Losses. The Bank did not provide for loan losses in
the eight month periods ended August 31, 1997 and 1996 based on continuation of
favorable trends in the various factors considered by management in evaluating
the adequacy of the Bank's allowance for loan losses. Non-performing loans
amounted to $1.4 million, or 0.3%, of total loans at August 31, 1997 and
$1.1 million, or 0.2%, at August 31, 1996. The allowance for loan losses was
$12.4 million at each of those dates, or 2.56% and 2.55%, respectively, of total
loans outstanding. During the eight months ended August 31, 1997, the Bank
experienced net recoveries of $117,000, compared to net recoveries of $66,000
for the eight months ended August 31, 1996. While management believes that,
based on information currently available, 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 level of the Bank's allowance will be
sufficient to cover future loan losses incurred by the Bank or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance. In addition to the periodic evaluations made by management, 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 provide additions to the allowance based upon judgments
different from those of management.
Non-Interest Income. Non-interest income is comprised of fees and
charges for Bank services, gains or losses from sales of assets, other real
estate owned activity and other income resulting from miscellaneous
transactions. Total non-interest income was $829,000 for the eight months ended
August 31, 1997 compared to $1.5 million for the eight months ended August 31,
1996, a decrease of $660,000, or 44.3%. The decrease resulted primarily from a
decline in
40
<PAGE>
Bank fees for services and charges and gains from sales of securities. Fees and
charges were reduced to $525,000 in the 1997 period from $729,000 in the 1996
period primarily because of $157,000 less in fees from loan prepayments and late
payments and $23,000 less in fees on deposit accounts where fees are not
assessed if customers maintain minimum deposit balances. Sales of marketable
equity securities resulted in gains of $74,000 in the 1997 period compared to
$464,000 in the 1996 period. Other real estate owned activity contributed income
of $158,000 and $186,000 for the eight months ended August 31, 1997 and 1996,
respectively. The 1997 income resulted from rental income exceeding related
property expenses while most of the 1996 income ($149,000) resulted from sales
of other real estate owned.
Non-Interest Expense. Non-interest expense increased by $931,000, or
19.4%, from $4.8 million for the eight months ended August 31, 1996 to
$5.7 million for the eight months ended August 31, 1997. Of this increase,
$526,000 related to compensation and employee benefits, which rose 17.7% to
$3.5 million for the eight months ended August 31, 1997. The higher level of
compensation and employee benefits was attributable to several factors: the
addition of a chief financial officer and another commercial loan officer,
increased use of temporary personnel from an outside agency because of personnel
turnover, increased accruals for supplemental executive retirement costs and
bonuses, a one-time charge for compensation-related costs pertaining to the
creation of a real estate investment trust, increased personnel benefit costs
and increased personnel training in connection with conversion to a new computer
system. While the rate of increase in compensation and employee benefits expense
is expected to be lower for the remainder of 1997, the Bank expects compensation
and employee benefits expense to increase significantly after the Offering,
primarily as a result of adoption of various employee benefit plans in
connection with the Offering. In this regard, the proposed ESOP, which intends
to purchase 4% of the Common Stock issued in connection with the Offering and
the Stock Plans which, if implemented, would purchase an amount of Common Stock
equal to 4% of the Common Stock issued in connection with the Offering, would
result in increased compensation and employee benefits expense as the
amortization of the ESOP loan and the Stock Plans awards would be reflected as
compensation expense. See "Management of the Stock Bank--Compensation of
Officers and Trustees through Benefit Plans--Employee Stock Ownership Plan and
Trust."
Occupancy expense increased $64,000, or 15.6%, to $473,000 for the
eight months ended August 31, 1997 primarily as a result of branch lease
renewals. Equipment and data processing expenses increased from $606,000 in the
1996 period to $720,000 in the 1997 period primarily as a result of the Bank's
conversion to a new computer system. The increase in other non-interest expense
from $811,000 in the 1996 period to $998,000 in the 1997 period was attributable
primarily to professional fees associated with the decision to establish a
mutual holding company, formation of a real estate investment trust subsidiary
and an increase in the accrual for annual audit costs.
Income Taxes. Total income tax expense for the eight months ended
August 31, 1997 was $4.9 million compared to $5.2 million for the eight months
ended August 31, 1996, resulting in effective tax rates of 34.8% and 38.8% for
the respective periods. The lower effective tax rate resulted from creation of a
real estate investment trust and continued utilization of a securities
investment subsidiary to substantially reduce state income taxes. See "Business
of the Bank--Subsidiary Activities". The rate of federal income taxes is
slightly less than the statutory rate as a result of the exemption from taxable
income of part of the Bank's dividend income on equity securities.
Comparison of Operating Results for the Years Ended December 31, 1996 and
December 31, 1995
General. Net income was $11.9 million in 1996 compared to $11.7 million
in 1995, an increase of $209,000, or 1.8%. Despite an increase in average
interest-earning assets of $37.5 million, or 6.2%, net interest income increased
by only $579,000, or 2.3%, from $25.0 million in 1995 to $25.6 million in 1996
caused by a reduction in the Bank's interest rate spread from 3.37% in 1995 to
3.10% in 1996. The other significant factor affecting the change in net income
was a $342,000 increase in the Bank's income tax expense from $7.4 million in
1995 to $7.8 million in 1996.
Interest Income. Interest income was $51.0 million in 1996, compared to
$48.9 million in 1995, an increase of $2.1 million, or 4.3%. A $2.8 million
improvement in interest income resulting from interest-earning asset growth was
partially offset by a $713,000 decline resulting from lower yields. The average
yield on mortgage loans declined from 9.27% in 1995 to 9.10% in 1996 as a result
of a lower prime rate and the fact that a significant portion of the Bank's
mortgage loans are tied to the prime rate. As the prime rate decreased, some of
the Bank's commercial real estate
41
<PAGE>
borrowers refinanced their loans at fixed rates for three to five year intervals
so as to lock in more favorable interest rates. Increased competition within the
Bank's market area facilitated the ability of borrowers to arrange such
refinancings. In recognition of this trend and to protect against possible
negative consequences that would result from further reductions in the prime
rate, in 1996, the Bank placed more funds in short-term investments and
commercial loan participations rather than longer-term debt securities. The
yields on such short-term assets were lower in 1996 than in 1995. The decline in
the yield on the Bank's equity securities from 6.04% in 1995 to 5.25% in 1996
was caused by the inclusion of the increased unrealized appreciation on those
securities in average asset balances.
Interest Expense. Interest expense increased by $1.5 million, or 6.3%,
from $23.9 million in 1995 to $25.4 million in 1996. The increase resulted from
a $19.7 million, or 3.9%, increase in average interest-bearing liabilities and a
12 basis point, or 2.5%, increase in the average rate paid on such liabilities.
Total average interest-bearing deposits increased by $10.4 million, or 2.3%,
with most of the increase occurring in certificates of deposit because of the
higher rates offered on such deposits in comparison to those offered on other
types of deposits. The strength of the stock market made investment in mutual
funds an attractive alternative deployment of funds for many customers. Because
of the level of loan refinancings at fixed rates for three-to-five year
intervals, the Bank increased its borrowings from the FHLB as part of interest
rate risk management. The average amount of borrowings outstanding increased by
$9.3 million, or 20.2%, from $46.2 million in 1995 to $55.5 million in 1996.
Provision for Loan Losses. The Bank made no provision for loan losses
in 1996 and 1995 as all the significant factors considered by management in
evaluating the adequacy of the Bank's allowance for loan losses remained
positive. Non-performing loans were $1.3 million at the end of 1996 and $748,000
at the end of 1995, or 0.28% and 0.17% of total loans outstanding at those
respective dates. Loan recoveries ($166,000) equaled loan charge-offs in 1996
and exceeded loan charge-offs ($240,000) by $52,000 in 1995. The allowance for
loan losses was $12.3 million at the end of 1996 and 1995, or 2.56% and 2.75% of
total loans outstanding at those respective dates.
Non-Interest Income. Total non-interest income was $1.8 million in
1996, an increase of $235,000, or 14.6%, from $1.6 million in 1995. The increase
in fees and charges from $759,000 in 1995 to $957,000 in 1996 was substantially
attributable to a $205,000 increase in prepayment fees caused by loan payments
and refinancings. Sales of marketable equity securities generated net gains of
$464,000 in 1996 compared to $877,000 in 1995. Other real estate owned activity
contributed income of $299,000 in 1996, compared to a loss of $40,000 in 1995,
as a result of gains from sales of properties ($149,000 in 1996 and none in
1995) and income from the rental of properties exceeding property expenses by
$150,000 in 1996, compared to a shortfall of $40,000 in 1995. Other income was
higher in 1996 than in 1995 primarily as a result of funds received in 1996 from
a settlement involving a loan-related dispute and the partial charge-off in 1995
of a miscellaneous receivable included in other assets.
Non-Interest Expense. Total non-interest expense was $7.7 million in
1996, compared to $7.4 million in 1995, an increase of $263,000, or 3.5%. This
increase resulted in part from a $550,000 reduction in premiums paid to the FDIC
for deposit insurance. Some of this benefit was offset by an increase in
professional fees resulting from implementation of a tax strategy involving
creation of a real estate investment trust and a diagnostic review of the Bank's
risk management process. The increase in other expenses in 1996 was also
attributable to higher advertising and promotion costs and expenses incurred in
connection with the Bank's conversion to a new data processing system.
Income Taxes. Total income tax expense was $7.8 million in 1996
compared to $7.4 million in 1995. The effective tax rate was higher in 1996
(39.4%) than in 1995 (38.7%) primarily because the Bank was able to use capital
loss carryforwards in 1995 to reduce part of the tax due on gains from sales of
equity securities.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General. Net income increased by $2.6 million, or 28.9%, from
$9.1 million in 1994 to $11.7 million in 1995. Contributing to the increase in
net income was a $2.8 million, or 12.6%, improvement in net interest income,
$873,000 more in gains from sales of marketable equity securities, $701,000 less
in expenses relating to other real estate owned and a $462,000 reduction in
premiums paid to the FDIC for deposit insurance. Partially offsetting these
additions to income was a $1.5 million increase in the provision for income
taxes and a credit of $477,000 for loan losses in 1994.
42
<PAGE>
Interest Income. Interest income was $48.9 million in 1995, compared to
$39.9 million in 1994, an increase of $9.0 million, or 22.5%. Of this increase,
$5.6 million resulted from higher asset yields and $3.4 million from a higher
volume of interest-earning assets. The 99 basis point, or 13.9%, increase in the
average yield on interest-earning assets was caused by the upward movement in
the prime rate throughout 1994 and most of 1995. This movement was beneficial to
the Bank since much of its loan portfolio was priced off of the prime rate and
its investment portfolio had relatively short maturities. Maturing investments
were replaced with somewhat similar instruments earning higher interest rates.
In addition, the Bank shifted some of its funds from short-term investments and
commercial loan participations into debt securities. Total average
interest-earning assets increased by $42.5 million, or 7.5%, to $607.9 million
in 1995. Most of the growth was in mortgage loans (up $31.4 million, or 8.7%)
and in debt securities (up $12.2 million, or 8.6%). Improved economic conditions
resulted in an increased level of loan originations in the multi-family and
commercial real estate sectors.
Interest Expense. Interest expense was $23.9 million in 1995, compared
to $17.7 million in 1994, an increase of $6.2 million, or 34.8%. Of this
increase, $4.1 million resulted from higher rates paid on deposits and borrowed
funds and $2.1 million from higher levels of deposits and borrowed funds. While
average interest-bearing deposits increased by only $13.7 million, or 3.1%,
significant shifts in the mix of deposits took place as interest rates rose in
1994 and 1995. The average balance of certificates of deposit increased by
$41.9 million, or 19.9%, from $211.1 million in 1994 to $253.0 million in 1995.
The average balances of money market savings accounts and regular savings
accounts declined by $21.5 million (12.5%) and $5.2 million (20.3%),
respectively, from 1994 to 1995. As a result of these changes, the average rate
paid on all interest-bearing deposits increased by 100 basis points, or 28.2%,
from 3.54% in 1994 to 4.54% in 1995. The average balance of borrowed funds
increased 40.3% from $32.9 million in 1994 to $46.2 million in 1995 as part of
the Bank's management of interest rate risk. The average rate paid on borrowed
funds was 6.56% in 1995, compared to 5.85% in 1994, an increase of 71 basis
points, or 12.1%.
Provision for Loan Losses. In 1994, the Bank reduced its allowance for
loan losses by $477,000 and credited expense by the same amount. No provision
for loan losses was recorded in 1995. Correspondingly, in 1994, the Bank
established a valuation allowance for losses on other real estate owned by a
$541,000 charge to income. The reduction in the allowance for loan losses was
deemed appropriate by management after its review of all significant factors
normally considered in its evaluation process. Non-performing loans declined
from $3.4 million, or 0.89% of total loans outstanding at the end of 1993, to
$1.3 million, or 0.30% of loans outstanding at the end of 1994, and $748,000, or
0.17% of total loans outstanding at the end of 1995. During 1995 and 1994, loan
recoveries exceeded loan charge-offs by $52,000 and $6,000, respectively.
Non-Interest Income. Non-interest income increased to $1.6 million in
1995 from $79,000 in 1994, primarily as a result of transactions involving
investment securities and other real estate owned. Sales of marketable equity
securities generated gains of $877,000 in 1995 compared to $4,000 in 1994. Other
real estate owned activity resulted in net charges to income of $40,000 in 1995
compared to $741,000 in 1994. The higher level in 1994 resulted from the
establishment of a valuation allowance by a $541,000 charge to income, property
expenses exceeding income from the rental of properties by $200,000 in 1994
compared to $40,000 in 1995 and the lack of gains from sales of properties in
1994 compared to $149,000 of gains in 1995. Write-downs of $84,000 and $138,000
were charged to the valuation allowance in 1995 and 1994, respectively. Other
sources of income, primarily fees and charges, did not change significantly
between 1995 and 1994.
Non-Interest Expense. Total non-interest expense was $7.5 million in
1995, compared to $7.7 million in 1994, a decrease of $246,000, or 3.2%. The
decrease was attributable to a $462,000 reduction in premiums paid to the FDIC
for deposit insurance, from $1.0 million in 1994 to $561,000 in 1995.
Compensation and employee benefits increased by $378,000, or 9.4%, to
$4.4 million in 1995. The increase resulted from a higher provision for
supplemental executive retirement benefits ($160,000), increased postretirement
benefit expense ($68,000) and general salary increases. Other operating expense
categories did not change significantly between 1995 and 1994, except for legal
fees which declined from $153,000 in 1994 to $54,000 in 1995.
43
<PAGE>
Income Taxes. Income tax expense was $7.4 million in 1995 and
$5.9 million in 1994, an increase of $1.5 million, or 24.7%. The effective tax
rate declined from 39.5% in 1994 to 38.7% in 1995 primarily as a result of the
availability of capital loss carryforwards to reduce part of the tax due on
gains from sales of equity securities.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and debt securities and borrowings from the FHLB.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by interest
rate trends, economic conditions and competition.
Total assets increased by $13.3 million, $34.2 million, $25.1 million
and $57.7 million for the eight months ended August 31, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively. These increases included
$4.8 million, $32.1 million, $26.6 million and $44.0 million, respectively, of
growth in the loan portfolio.
During the past few years, the combination of generally low interest
rates on deposit products and the attraction of alternative investments such as
mutual funds and annuities has significantly affected deposit flows. The Bank
experienced a $2.5 million net deposit outflow for the eight months ended
August 31, 1997 and net deposit inflows of $9.8 million, $2.4 million and
$27.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The Bank expanded the use of borrowings from the FHLB as part of
its management of interest rate risk. Such borrowings increased by $1.3 million,
$10.9 million, $6.4 million and $16.3 million, during the eight months ended
August 31, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively. At August 31, 1997, total borrowings from the FHLB amounted to
$61.8 million and the Bank had the capacity to increase that total to
$244.9 million. Depending on market conditions and the Bank's liquidity and GAP
position, the Bank may continue to borrow from the FHLB.
The Bank's most liquid assets are cash and due from banks, short-term
investments, debt securities and commercial loan participations that generally
mature within 90 days. The levels of these assets are dependent on the Bank's
operating, financing, lending and investment activities during any given period.
At August 31, 1997, cash and due from banks, short-term investments, commercial
loan participations and debt securities maturing within one year amounted to
$121.8 million, or 17.9% of total assets.
At August 31, 1997, the Bank had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling
$47.9 million. The Bank anticipates that it will have sufficient funds available
to meets its current loan commitments. Certificates of deposit maturing within
one year from August 31, 1997 amounted to $209.8 million. The Bank expects that
substantially all of the maturing certificate accounts will be retained by the
Bank at maturity.
At August 31, 1997, the Bank exceeded all of its regulatory
requirements with a leverage capital of $114.4 million, or 17.0% of adjusted
assets, which is above the required level of $20.3 million, and risk-based
capital of $121.3 million, or 22.2% of adjusted assets, which is above the
required level of $43.6 million, or 8.00%. See "Regulation--Regulatory Capital
Requirements" and "--Insurance of Accounts and Regulation by the FDIC."
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 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 no necessarily move in
the same direction or to the same extent as the price of goods and services.
44
<PAGE>
Impact of New Accounting Standards
Accounting for Long-Lived Assets. In 1995, the FASB issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long Lived Assets to be Disposed of" ("SFAS No. 121"). This
Statement established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used for long-lived assets and certain identifiable intangibles
to be disposed of. This Statement became effective on January 1, 1996.
Adoption of this Statement did not have a material impact on the financial
position or operating results of the Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS No. 123"). This Statement established 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 plans, 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 is applicable 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 consummation of the
Offering.
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 Extinguishment 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 pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application of this Statement is not permitted. In December 1996,
the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral
of the Effective Date of Certain Provisions of SFAS No. 125" ("SFAS No. 127").
This Statement requires the deferral of implementation as it relates to
repurchase agreements, dollar-rolls, securities lending and similar transactions
until years beginning after December 31, 1997. Earlier or retroactive
application of this Statement is not permitted. Adoption of SFAS No. 125 and
SFAS No. 127 are not expected to have a material impact on the financial
position or operating results of the Bank.
Earnings Per Share. In February 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
This Statement, which supersedes APB Opinion 15, simplifies the reporting of
earnings per share by eliminating the presentation of primary earnings per share
and requiring the presentation of basic earnings per share. The calculation of
basic earnings per share excludes the effect of potential common shares to be
issued, thus resulting in no dilution. The Statement requires entities with
complex capital structures to present basic and diluted earnings per share on
the face of the income statement and eliminates the modified treasury stock
method of computing potential common shares. The Statement is effective for
financial
45
<PAGE>
statements issued for fiscal years ending after December 15, 1997. The Company
will follow the guidance of SFAS No. 128 when it is required to report earnings
per share.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This Statement requires entities presenting a complete set of
financial statements to include details of comprehensive income that arise in
the reporting period. Comprehensive income consists of net income or loss for
the current period and other comprehensive income consisting of revenue,
expenses, gains and losses that bypass the income statement and are reported
directly in a separate component of equity. Other comprehensive income includes,
for example, unrealized gains and losses on certain investment securities,
minimum pension liability adjustments and foreign currency items. SFAS No. 130
requires that components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. At August 31, 1997, the Bank's other comprehensive income consisted
of unrealized gains on securities classified as available for sale. This
Statement is effective for fiscal years beginning after December 31, 1997 and
requires restatement of prior period financial statements presented for
comparative purposes.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). This Statement changes the current practice for reporting segment
information under SFAS No. 14, "Financial Reporting for Segments of an
Enterprise." Public entities are required to report financial and descriptive
information about their reportable operating segments. An operating segment is a
component of an entity for which financial information is developed and
evaluated by the entity's chief operating decision maker to assess performance
and to make decisions about resource allocation. Disclosures about operating
segments should generally be based on the information used internally. This
Statement is effective for financial statements for periods beginning after
December 15, 1997. On adoption, comparative information for earlier years is to
be restated. Based on current operations, the Company does not believe adoption
of this Statement will have any impact on its public financial reporting.
BUSINESS OF THE COMPANY
General
As part of the Reorganization, the Company was established as a
majority-owned subsidiary of the Mutual Company. The Company is currently not an
operating company. Following the Reorganization and the Offering, in addition to
directing, planning and coordinating the business activities of the Bank, the
Company will initially invest up to 50% of the net proceeds primarily in short-
and medium-term fixed-income securities. The Company also intends to fund the
loan to the ESOP to enable the ESOP to subscribe for up to 4% of the Common
Stock issued in the Offering, although a third party lender may be utilized to
lend funds to the ESOP. In the future, the Company may acquire or organize other
operating subsidiaries, including other financial institutions and financial
services companies. See "Use of Proceeds." Currently, there are no agreements or
understandings for an expansion of the Company's operations. Initially, the
Company will neither own nor lease any property from any third party, 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 certain
officers of the Bank, who will not be separately provided cash compensation by
the Company. The Company may utilize support staff of the Bank from time to
time, if needed. Additional employees will be hired as appropriate to the extent
the Company expands its business in the future.
BUSINESS OF THE BANK
General
The Bank is a community-oriented mutual savings bank which was
originally chartered by the Commonwealth of Massachusetts in 1871. The Bank's
principal business consists of accepting retail deposits from the general public
through its branch offices and investing those deposits, together with funds
generated from operations and borrowings,
46
<PAGE>
primarily in real estate mortgage lending and various debt and equity
securities. The Bank emphasizes the origination of multi-family and commercial
real estate mortgage loans as well as one-to-four family residential mortgage
loans. The Bank also originates construction and development mortgage loans,
home equity loans, commercial participation loans, other commercial loans and
consumer loans. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Management Strategy."
Market Area
The Bank operates five full-service banking offices in the Town of
Brookline, an urban/suburban community adjacent to the City of Boston. The
Bank's deposits are gathered from the general public primarily in the Town of
Brookline and surrounding communities. The Bank's lending activities are
concentrated primarily in the greater Boston metropolitan area and eastern
Massachusetts. The greater Boston metropolitan area benefits from the presence
of numerous institutions of higher learning, medical care and research centers
and the corporate headquarters of several significant mutual fund investment
companies. Eastern Massachusetts also has many high technology companies
employing personnel with specialized skills. These factors affects the demand
for multi-family apartments and office buildings, shopping centers, industrial
warehouses and other commercial properties.
For many years, the Bank has emphasized multi-family and commercial
real estate mortgage lending. These types of loans typically generate higher
yields, but also involve greater credit risk than one-to four-family mortgage
loans. During the late 1980s and early 1990s, a regional recession caused a
significant decline in employment and in real estate values, ultimately
resulting in the failure of many financial institutions in Massachusetts and New
England. In the past few years, the prices and values of real estate have
increased in a number of segments. See "Risk Factors--Weakness in Local
Economy."
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may
originate are subject to federal and state law and regulations. Interest rates
charged by the Bank on loans are affected primarily by the demand for such
loans, the supply of money available for lending purposes and the rates offered
by competitors. These factors are, in turn, affected by national, regional and
local economic conditions, the levels of federal government spending and
revenue, monetary policies of the Federal Reserve Board, and tax policies.
The Bank's loan portfolio consists primarily of first mortgage loans
secured by multi-family, commercial and one-to-four family residential real
estate properties located in the Bank's primary lending area. Another component
of the loan portfolio consists of participations in commercial loans to national
companies and organizations originated and serviced primarily by money center
banks. Generally, the participations mature between one day and three months and
are viewed by the Bank as an alternative short-term investment for liquidity
management purposes rather than as traditional commercial loans. The Bank also
provides financing for construction and development projects, commercial lines
of credit primarily to condominium associations, home equity and second mortgage
loans and other consumer loans.
At August 31, 1997, the Bank's gross loan portfolio totaled
$498.6 million, of which $214.1 million, or 42.9% of gross loans, were multi-
family loans, $143.2 million, or 28.7% of gross loans, were commercial real
estate loans and $65.2 million, or 13.1% of gross loans, were one-to-four family
residential mortgage loans. Commercial loan participations were $36.5 million,
or 7.3% of gross loans. The remainder of the Bank's gross loans ($39.6 million,
or 8.0%) consisted of the other types of loans made by the Bank. If commercial
loan participations were excluded from gross loans, the percentages of multi-
family, commercial real estate and one-to-four family residential mortgage loans
to gross loans would increase to 46.3%, 31.0% and 14.1%, respectively.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percentages by type of loan at the dates
indicated.
47
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
At August 31, 1997 1996 1995
-------------------------- ------------------------ ------------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... $ 65,226 13.08% $ 57,725 11.68% $56,814 12.34%
Multi-family................ 214,062 42.93 200,368 40.54 193,812 42.11
Commercial real estate...... 143,187 28.72 139,430 28.21 125,363 27.24
Construction and development 7,849 1.57 7,261 1.47 10,288 2.24
Home equity................. 5,359 1.08 6,398 1.29 7,420 1.61
Second...................... 16,706 3.35 19,872 4.02 17,680 3.84
-------- ------- -------- ------- -------- --------
Total mortgage loans...... 452,389 90.73 431,054 87.21 411,377 89.38
-------- ------- -------- ------- -------- --------
Commercial loans:
Participations.............. 36,500 7.32 52,950 10.71 43,100 9.36
Other....................... 8,384 1.68 9,221 1.87 4,584 1.00
-------- ------- -------- -------- -------- --------
Total commercial loans.... 44,884 9.00 62,171 12.58 47,684 10.36
-------- ------- -------- -------- -------- --------
Consumer loans................ 1,336 0.27 1,023 0.21 1,192 0.26
-------- ------- -------- -------- -------- --------
Gross loans............... 498,609 100.00% 494,248 100.00% 460,253 100.00%
======= ======== ========
Less:
Unadvanced funds on loans... (11,812) (11,950) (9,879)
Deferred loan origination fees (1,272) (1,326) (1,012)
Unearned discounts.......... (10) (289) (731)
-------- --------- --------
Total loans............... $485,515 $480,683 $448,631
======== ======== ========
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1994 1993 1992
------------------------- ------------------------- ------------------------
Percent Percent Percent
Amount of total Amount of total Amount of total
--------- ---------- --------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... $ 57,792 13.39% $ 60,821 15.77% $63,904 16.64%
Multi-family................ 184,537 42.75 163,183 42.32 156,575 40.77
Commercial real estate...... 114,923 26.62 99,804 25.88 94,853 24.70
Construction and development 8,096 1.88 6,432 1.67 6,768 1.76
Home equity................. 7,791 1.80 9,098 2.36 9,826 2.56
Second...................... 17,369 4.02 16,426 4.26 16,881 4.39
-------- ------- -------- ------- ------- --------
Total mortgage loans...... 390,508 90.46 355,764 92.26 348,807 90.82
-------- ------- -------- ------- ------- --------
Commercial loans:
Participations.............. 36,400 8.43 25,800 6.69 31,500 8.20
Other....................... 3,062 .71 2,627 .68 2,002 .52
-------- ------- -------- ------- ------- --------
Total commercial loans.... 39,462 9.14 28,427 7.37 33,502 8.72
-------- ------- -------- ------- ------- --------
Consumer loans................ 1,722 0.40 1,428 0.37 1,743 0.46
-------- ------- -------- ------- ------- --------
Gross loans............... 431,692 100.00% 385,619 100.00% 384,052 100.00%
======= ======= ========
Less:
Unadvanced funds on loans... (8,158) (7,063) (5,186)
Deferred loan origination fees (767) (511) (453)
Unearned discounts.......... (731) - -
--------- -------- --------
Total loans............... $422,036 $378,045 $378,413
======== ======== ========
</TABLE>
48
<PAGE>
Loan Originations. Substantially all of the Bank's loan origination
activity is conducted by the Bank's loan personnel at its main office and, to a
lesser extent, at the Bank's other retail office locations. As of August 31,
1997, an Executive Vice President and four Vice Presidents were responsible for
originating and underwriting all loans other than one-to-four family residential
mortgage and consumer loans which were handled by other Bank personnel. The
President of the Bank and non-officer members of the Board of Trustees serving
on the Bank's Real Estate Committee and Board of Investment are also involved in
the loan approval process.
The Bank relies on community contacts as well as referrals from
existing customers, attorneys and other real estate professionals to generate
business within its lending area. In addition, existing borrowers are an
important source of business since many of its commercial real estate customers
have more than one loan outstanding with the Bank. A commissioned loan
originator on the staff of the Bank is also used to generate residential
mortgage loan business. The Bank's ability to originate loans depends on the
strength of the economy, trends in interest rates, customer demands and
competition. See "Risk Factors - Increased Lending Risks Associated With
Multi-Family, Commercial Real Estate and Construction and Development Lending."
Loan Sales and Servicing. Occasionally, the Bank originates large
multi-family and commercial real estate mortgage loans and sells a participation
in such loans to other financial institutions. This enables the Bank to
accommodate customers seeking larger loans without taking on credit risks beyond
policy guidelines. The sales are made on a non-recourse basis and the
institutions purchasing the participations are responsible for conducting their
own due diligence prior to the purchase. The Bank retains the servicing of all
loans sold on a participation basis. Sales of loans on a participation basis
amounted to $1.2 million for the eight months ended August 31, 1997 and $6.0
million, $3.0 million and $3.8 million for the years ended December 31, 1996,
1995 and 1994, respectively. At August 31, 1997, the balance of participation
loans serviced by the Bank for other financial institutions was $15.5 million.
No fees are collected by the Bank for servicing such loan participations.
Loan Purchases. The Bank purchases participations in commercial loans
to national companies and organizations primarily originated and serviced by
money center banks. The Bank only purchases participations in loans to companies
with commercial paper ratings by nationally recognized rating agencies that
generally meet the Bank's policy guidelines (A-2 rating by Moody's Investors
Services, Inc. or P-2 rating by Standard & Poor's). Purchases of such
participations amounted to $834.4 million for the eight months ended August 31,
1997 and $1,423.9 million, $603.7 million and $789.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively. At August 31, 1997, the Bank's
investment in such participations amounted to $36.5 million.
Occasionally, the Bank purchases participations in commercial real
estate loans originated by other financial institutions. Such purchases are made
only after the Bank performs the same underwriting procedures followed for
similar loans originated by the Bank. At August 31, 1997, the Bank owned
participations amounting to $4.7 million in seven loans originated and serviced
by other financial institutions. At that date, all of the loans were performing
in accordance with their original terms.
The Bank also purchases adjustable-rate one-to-four family mortgage
loans primarily secured by residential properties in the Bank's primary lending
area originated by mortgage companies. All loans are purchased at par and must
meet the underwriting standards applied to loans originated by the Bank. Such
loan purchases totaled $7.2 million for the eight months ended August 31, 1997
and $5.0 million, $2.4 million and none for the years ended December 31, 1996,
1995 and 1994, respectively.
49
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
------------------------- -----------------------------------
1997 1996 1996 1995 1994
---------- --------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at beginning of period............. $ 494,248 $ 460,253 $ 460,253 $ 431,692 $ 385,619
---------- --------- ---------- ---------- ----------
Loans originated:
Mortgage loans:
One-to-four family ......................... 6,207 4,863 6,463 5,758 7,710
Multi-family................................ 29,449 21,519 36,452 25,599 42,221
Commercial real estate...................... 17,737 23,724 34,214 18,399 20,130
Construction and development................ 7,186 9,850 9,850 10,638 3,762
Home equity................................. 3,034 3,366 4,995 6,322 5,007
Second mortgage............................. 1,400 2,150 2,200 1,765 895
---------- --------- ---------- ---------- ----------
Total mortgage loans.................... 65,013 65,472 94,174 68,481 79,725
Commercial loans................................ 1,466 4,254 5,728 2,395 845
Consumer loans.................................. 190 304 453 154 214
---------- --------- ---------- ---------- ----------
Total loans originated.................. 66,669 70,030 100,355 71,030 80,784
---------- --------- ---------- ---------- ----------
Purchases of one-to-four family mortgage loans....... 7,246 3,425 5,028 2,381 -
---------- --------- ---------- ---------- ----------
Commercial loan participations:
Purchases....................................... 834,418 1,029,905 1,423,850 603,700 789,515
Repayments...................................... (850,868) (1,009,255) (1,414,000) (597,000) (780,915)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in
commercial loan participations.............. (16,450) 20,650 9,850 6,700 8,600
---------- --------- ---------- ---------- ----------
Less:
Principal repayments............................ 51,615 51,869 74,011 48,215 38,769
Participations sold............................. 1,198 3,965 5,965 3,000 3,831
Transfers to other real estate owned............ 285 526 1,096 95 671
Principal charged-off........................... 6 94 166 240 40
---------- --------- ---------- ---------- ----------
Loans outstanding at end of period................... $ 498,609 $ 497,904 $ 494,248 $ 460,253 $ 431,692
========== ========= ========== ========== ==========
</TABLE>
50
<PAGE>
Loan Maturity and Repricing. The following table shows the contractual
maturity and repricing dates of the Bank's loan portfolio at August 31, 1997.
The table does not include prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization totaled $51.6 million for the
eight months ended August 31, 1997 and $74.0 million, $48.2 million and $38.8
million for the years ended December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
At August 31, 1997
------------------------------------------------------------------------------------------
Real estate mortgage loans
-------------------------------------------------------- Other
Home commercial
One-to- Commercial Construction equity and Commercial and
four Multi- real and second loan consumer Total
family family estate development mortgage participations loans loans
--------- --------- --------- ----------- -------- -------------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due(1):
Within one year................ $ 22,023 $ 99,390 $ 78,858 $ 4,241 $11,091 $36,500 $ 6,000 $ 258,103
-------- -------- -------- ------- ------- ------- ------- ---------
After one year:
More than one year to three years 40,366 56,082 35,520 - 6,512 - 1,370 139,850
More than three years to five years 1,542 41,939 21,090 - 1,771 - 195 66,537
More than five years to ten years 372 13,060 6,278 796 - - 130 20,636
More than ten years........... 766 456 449 - - - - 1,671
-------- -------- ------- ------- ------- ------- ------- --------
Total due after August 31, 1998 43,046 111,537 63,337 796 8,283 - 1,695 228,694
-------- -------- ------- ------- ------- ------- ------- --------
Total amount due............. $ 65,069 $210,927 $142,195 $ 5,037 $19,374 $36,500 $ 7,695 486,797
======== ======== ======== ======= ======= ======= =======
Less:
Deferred loan origination fees. (1,272)
Unearned discounts............. (10)
Allowance for loan losses...... (12,443)
---------
Net loans.................... $ 473,072
=========
</TABLE>
- ---------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth at August 31, 1997 the dollar amount of
gross loans contractually due or scheduled to reprice after August 31, 1998 and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After August 31, 1998
------------------------------------
Fixed Adjustable Total
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One-to-four family................................................... $ 1,300 $ 41,746 $ 43,046
Multi-family......................................................... 1,951 109,586 111,537
Commercial real estate............................................... 3,991 59,346 63,337
Construction and development......................................... - 796 796
Home equity and second mortgage...................................... - 8,283 8,283
---------- ---------- ----------
Total real estate mortgage loans.................................. 7,242 219,757 226,999
Consumer and commercial loans.......................................... 1,406 289 1,695
---------- ---------- ----------
Total loans....................................................... $ 8,648 $ 220,046 $ 228,694
========== ========== ==========
</TABLE>
Multi-family and commercial real estate loans with fixed interest rates
have fixed-rate periods ranging from one to ten years, with the most frequent
period being from three to five years. Depending on the size of the loan and the
term for which it is fixed, the Bank often borrows from the FHLB for a term that
matches the fixed interest rate period an amount equal to all or part of the
loan at the time of origination. In addition to normal fees collected upon loan
prepayments, fixed rate loans are also subject to "yield maintenance" fees when
such loans are paid prior to the maturity of their fixed-rate period.
51
<PAGE>
One-to-Four Family Loans. The Bank currently offers both fixed-rate and
adjustable-rate mortgage loans secured by one-to-four family residences located
in the Bank's primary lending area, with maturities up to thirty years.
One-to-four family mortgage loan originations are generally obtained by the
Bank's commissioned loan originator through relationships established with real
estate brokers within the Bank's market area and by personnel at the Bank's five
operating offices. The Bank does not originate fixed-rate one-to-four family,
owner-occupied loans for its own portfolio. The Bank offers fixed-rate loans
through third-party conduit lenders who typically are mortgage company
subsidiaries of other financial institutions. While the Bank initiates the
underwriting of these loans, the conduit lender completes the underwriting
process and determines whether a loan is approved or declined. Upon approval,
the conduit lender commits to fund and service the loan at the time of closing.
Although all loan documents are drawn in the name of the Bank, the documents are
assigned to the conduit lender upon loan funding at the time of closing. This
process enables the Bank to avoid the interest rate risk associated with fixed
rate lending. Loans originated through conduit lenders totaled $3.5 million for
the eight months ended August 31, 1997 and $2.4 million, $909,000 and
$3.7 million for the years ended December 31, 1996, 1995 and 1994, respectively.
At August 31, 1997, the Bank's one-to-four family mortgage loans totaled
$65.2 million, or 13.1% of gross loans.
The Bank currently offers the following adjustable-rate mortgage loan
programs: a one year adjustable-rate loan that reprices annually, a three year
adjustable-rate loan that reprices every third year and a "3-1" loan where the
interest rate is fixed for the first three years and is adjusted on an annual
basis thereafter. The interest rates on the one year adjustable-rate loan and
the 3-1 adjustable-rate loans are indexed to the weekly average of the one year
Constant Maturity Treasury ("CMT") Index. The three year adjustable-rate loans
are indexed to the weekly average of the three year CMT Index. The one year
adjustable-rate loan and the 3-1 adjustable-rate loans are subject to interest
rate caps of 2% for each adjustment period up to a maximum of 6% over the life
of the loan. The three year adjustable-rate loan is subject to a 3% cap for each
adjustment period up to a maximum of 6% over the life of the loan. As of
August 31, 1997, the interest rates offered by the Bank on the three types of
adjustable-rate loans were 2.75% above the Index rates. Depending on market
conditions, a rate less than 2.75% above the Index is charged from the time of
loan origination to the first interest rate adjustment.
The volume and type of adjustable-rate mortgage loans originated by the
Bank are affected by market factors such as interest rates, competition,
consumer preferences and the availability of funds. While the origination of
adjustable-rate loans helps reduce the Bank's exposure to increases in interest
rates, credit risk can increase if borrowers are unable to make the larger
payments that result from upward interest rate adjustments. Periodic and
lifetime caps on interest rate increases help to reduce the risks associated
with adjustable-rate loans but also limit the Bank's sensitivity to interest
rate risk.
One-to-four family residential mortgage loans are generally
underwritten in accordance with FNMA and FHLMC guidelines. Loans are originated
in amounts up to 95% of the lower of the appraised value or selling price of the
property securing the loan. The Bank requires private mortgage insurance to be
obtained for loans in excess of an 80% loan to value ratio.
The Bank provides financing for low and moderate income home buyers as
well as first time home buyers through participation in a program sponsored by
the Massachusetts Housing Finance Agency and through the Bank's first time home
buyer mortgage program. These programs generally provide low and moderate income
households with loans at interest rates below prevailing market rates and lower
down payments.
Multi-Family Lending. Origination of loans secured by multi-family
income properties is the Bank's most significant area of lending activity. The
loans are generally secured by five to one hundred unit apartment buildings
located in the Bank's primary lending area. It is the Bank's policy that
multi-family mortgage loans must comprise at least 50% of all income property
loans in its portfolio. Income property loans are defined by this policy as
multi-family and commercial real estate mortgage loans. At August 31, 1997,
multi-family mortgage loans totaled $214.1 million, or 42.9% of gross loans and
59.9% of income property loans.
Pursuant to the Bank's underwriting policies, a number of factors are
considered before a multi-family loan is made. The qualifications and financial
condition of the borrower, including credit history, profitability and
52
<PAGE>
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower for a multi-family
mortgage loan, the Bank considers the financial resources of the borrower, the
borrower's experience in owning or managing similar property and the borrower's
payment history with the Bank and other financial institutions. Factors
considered in evaluating the underlying property include the net operating
income of the mortgaged premises before debt service and depreciation, the debt
service coverage ratio (the ratio of net operating income to debt service) and
the ratio of the loan amount to the appraised value.
According to Bank policy, multi-family mortgage loans may be made in an
amount up to 75% of the lower of the appraised value (as determined by the Bank
or a qualified independent appraiser, whichever is lower) or the sales price of
the underlying property, provided the debt service coverage ratio is not less
than 125%. Non-owner occupied condominium loans are generally limited to 70% of
the appraised value. The appraisal process takes into consideration rents in
comparison to the market, tenant mix, geographic location, comparable sales,
vacancy rates, operating expenses and historic, current and projected economic
conditions. Appraisals are obtained from independent licensed and certified fee
appraisers for all loan requests in excess of $250,000.
Typically, multi-family mortgage loans are made for five to ten year
terms, with an amortization period of twenty to twenty-five years, and are
priced on an adjustable-rate basis with the borrower's option to fix the
interest rate for the first few years (most frequently two to five years). The
adjustable-rate is generally tied to the Prime Rate as published in the Wall
Street Journal. At the borrower's option, at the time of origination or later
during the term, the multi-family mortgage loan may be converted to a fixed-rate
loan for two to five years, provided the fixed-rate period selected by the
borrower does not exceed the original term of the loan. The Bank often will
partially fund loans originated or converted to fixed-rate loans through
fixed-rate borrowings from the Federal Home Loan Bank of Boston obtained for
periods that approximate the fixed-rate terms of the loans originated.
The Bank's policy does not permit prepayments of multi-family mortgage
loans in the first year following origination. After the first year, fixed and
adjustable-rate loans may be prepaid subject to a 1% prepayment penalty. In
addition, fixed-rate loans are subject to a yield maintenance fee in the event
of prepayment.
Many of the Bank's borrowers have done business with the Bank for many
years and have more than one loan outstanding. It is the Bank's current policy
that the aggregate amount of loans outstanding to any one borrower or related
entities may not exceed 10% of the Bank's unimpaired surplus (retained earnings
exclusive of unrealized gains or losses on securities available for sale, net of
income taxes). At August 31, 1997, the largest borrower had aggregate loans
outstanding of $8.0 million, or 7.0% of unimpaired surplus. Including this
borrower, there were 12 borrowers each with aggregate loans outstanding at
August 31, 1997 in excess of $5.0 million, the cumulative total of which was
$79.0 million, or 15.8% of gross loans. Most of this cumulative amount is
comprised of multi-family and commercial real estate mortgage loans.
Loans secured by apartment buildings and other multi-family residential
properties generally involve larger principal amounts and a greater degree of
risk than one-to-four family residential mortgage loans. Because payments of
loans secured by multi-family properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. See "Risk Factors--Lending Risks Associated with Multi-family and
Commercial Real Estate Mortgage Lending."
Commercial Real Estate Lending. Another significant segment of the
Bank's lending activities involves the origination of loans secured by
properties used for business purposes or a combination of residential and retail
purposes located in the Bank's primary lending area. Business purpose properties
are comprised primarily of office buildings and industrial warehouse and
distribution facilities. Retail purpose properties typically involve shopping
plazas with up to 15 stores. At August 31, 1997, commercial real estate mortgage
loans totaled $143.2 million, or 28.7% of gross loans.
53
<PAGE>
The Bank's underwriting policies and procedures for originating
commercial real estate mortgage loans are similar to those followed for
originating multi-family mortgage loans. The Bank considers the net operating
income of the property, the profitability of the business, and the borrower's
expertise and credit history. Generally, the Bank considers loans secured by
commercial real estate properties to involve greater risk than multi-family
mortgage loans since they are even more dependent on the ability of the
borrowers to profitably manage a business and are more susceptible to adverse
conditions in the real estate market and economy. As a result, to offset the
greater risk, the Bank may require a somewhat higher debt service coverage ratio
and, in some cases, a higher interest rate than for multi-family mortgage loans.
The Bank intends to continue to emphasize its multi-family and
commercial real estate lending activities in its primary lending area depending
on the demand for such loans and trends in the real estate market and the
economy.
Construction and Development Lending. The Bank provides funding for
construction and development projects involving residential and commercial
properties within its primary lending area. These loans may be for the
construction of new properties or the rehabilitation of existing properties. The
Bank's construction lending includes loans on properties to be owner-occupied as
well as properties to be sold or operated as income-producing properties.
Generally, the Bank underwrites construction loans for owner-occupied properties
using standard FNMA and FHLMC underwriting guidelines in anticipation that such
loans will become long-term loans once construction is completed. For this type
of construction loan, the Bank will lend up to 95% of the lesser of appraised
value upon completion of construction or the cost of construction, provided
private mortgage insurance coverage is obtained for any loan with a loan to
value or loan to cost ratio in excess of 80%. For loans on one-to-four family
properties being constructed for sale, the Bank lends up to 75% of the lesser of
completed value or project cost. Typically, loan proceeds are disbursed in
increments as construction progresses as determined by property inspections.
Different criteria are applied in underwriting construction loans for
which the primary source of repayment is the sale of the property than for
construction loans for which the primary source of repayment is the stabilized
cash flow from the completed project. For those loans where the primary source
of repayment is from resale of the property, in addition to the normal credit
analysis performed for other loans, the Bank also analyzes project costs, the
attractiveness of the property in relation to the market in which it is located
and demand within the market area. For those construction loans where the source
of repayment is the stabilized cash flow from the completed project, the Bank
analyzes not only project costs but also how long it might take to achieve
satisfactory occupancy and the reasonableness of projected rental rates in
relation to market rental rates. At August 31, 1997, total construction and
development loans outstanding amounted to $7.8 million, or 1.6% of gross loans,
and the Bank had committed to fund additional construction loans totaling $8.3
million. This amount is comprised of $3.0 million pertaining to construction of
one-to-four family residential homes and $4.9 million pertaining to construction
of commercial properties, $4.0 million of which is for construction of an office
building.
Construction and development financing is generally considered to
involve a higher degree of risk than long-term financing on improved, occupied
real estate. Risk of loss on a construction loan is largely dependent upon the
accuracy of the initial estimate of construction costs, the estimated time to
sell or rent the completed property at an adequate price or rate of occupancy,
and market conditions. If the estimates and projections prove to be inaccurate,
the Bank may be confronted with a project which, upon completion, has a value
that is insufficient to assure full loan repayment.
Home Equity and Second Mortgage Lending. The Bank offers home equity
lines of credit on one-to-four family owner occupied properties in its primary
lending area. Loans are offered in amounts up to 60% of the tax assessed value
of the property securing the loan less the balance of any first mortgage loan or
75% of the appraised value of property less the balance of any first loan.
Generally, appraisals are required on all home equity loan requests in excess of
$50,000. The loans are offered on an adjustable-rate basis tied to the Prime
Rate as published in the Wall Street Journal. At August 31, 1997, the Bank had
$5.4 million in home equity loans, or 1.1% of gross loans.
The Bank also makes second mortgage loans on multi-family and other
types of commercial real estate properties. Generally, the Bank makes second
mortgage loans only on properties where it holds the first mortgage.
54
<PAGE>
The underwriting criteria for these loans is similar to that followed in
underwriting first mortgage loans on multi-family and commercial real estate
loans. Debt service coverage of the combined first and second mortgage loan
balances is typically expected to be at least 125% and the loan to value ratio
of the combined first and second mortgage loan balances is expected to be no
higher than 75%. The repayment period for second mortgage loans is generally
shorter than that for first mortgage loans and the interest rate is usually
adjustable at a percent that is higher than the rate charged on the first
mortgage loan. Second mortgage loans totaled $16.7 million, or 3.4% of gross
loans, at August 31, 1997.
Commercial Loans. At August 31, 1997, the commercial loan portfolio was
$44.9 million, or 9.0% of gross loans. Of that amount, $36.5 million, or 7.3% of
gross loans, represented purchases of a portion of loans to national companies
and organizations primarily originated and serviced by money center banks. These
participations mature between one day and three months and are viewed by the
Bank as alternative short-term investments. See "Loan Purchases." The remainder
of the commercial loan portfolio at August 31, 1997, $8.4 million or 1.7% of
gross loans, represented loans originated by the Bank. Of this amount, $6.2
million relates to loans made to condominium associations for the purpose of
funding capital improvements. In general, the Bank considers loans to well
established condominium associations. Typically, the interest rate is set at a
percentage above the Prime Rate as published in the Wall Street Journal. In some
instances, a fixed-rate is offered on condominium association loans. The Bank
expects to continue to pursue this type of commercial lending.
Consumer Loans. The Bank offers consumers loans as a convenience to its
customers. Generally, the loans are secured by collateral. At August 31, 1997,
consumer loans totaled $1.3 million, or 0.3% of the Bank's gross loans.
Loan Approval Procedures and Authority. The Board of Trustees
establishes the lending policies and loan approval limits of the Bank. Certain
loans require the approval of the Board of Investment or the Real Estate
Committee of the Board. The Board of Investment is comprised of the President
and four outside trustees. The Real Estate Committee is a sub-committee of the
Board of Investment comprised of the President and two outside trustees who also
serve on the Board of Investment. The President or the Senior Lending Officer,
individually, may approve any home equity loan up to and including $50,000
provided the loan to value ratio of the combined first mortgage loan and
requested home equity loan does not exceed 70%. All home equity loan requests
exceeding $50,000 and all first mortgage and condominium loan requests up to and
including $400,000 can be approved by the President and one other Lending Vice
President, provided the loan to value ratio does not exceed 70%. Loans over
$400,000 but not exceeding $1 million, or loans for lesser amounts where the
loan to value ratio exceeds 70%, require the approval of the Real Estate
Committee. All loans in excess of $1 million require the approval of the Board
of Investment and a review of the loan file by the Credit Review Officer. The
Credit Review Officer also reviews the loan file in instances when a new loan to
a borrower with existing loans at the Bank brings the aggregate amount of loans
outstanding to that borrower in excess of $2 million. The review of loan files
typically includes an assessment of compliance with the Bank's underwriting
criteria and an analysis of the net operating income derived from income
producing properties and/or the financial capacity of the borrower and
guarantors.
Annually, the Board approves independent appraisers used by the Bank
and the Bank's appraisal policy. The Bank requires an environmental site
assessment to be performed by an independent professional for all
non-residential mortgage loans. It is the Bank's policy to require title and
hazard insurance on all mortgage loans. In addition, the Bank may require
borrowers to make payments to a mortgage escrow account for the payment of
property taxes. Any exceptions to the Bank's underwriting policies must be
approved by the Bank's Real Estate Committee for loans up to and including $1
million and by the Board of Investment for loans over $1 million.
Environmental Issues
The Bank encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on property securing
their loans. In addition, the existence of hazardous materials may make it
unattractive for a lender to foreclose on such properties. Although
environmental risks are usually associated with loans secured by commercial
55
<PAGE>
real estate, risks also may be substantial for loans secured by multi-family and
residential real estate if environmental contamination makes the property
unsuitable for use. This could also have a negative effect on nearby property
values. The Bank attempts to control its risk by requiring completion of a phase
one environmental assessment as part of its underwriting of all non-residential
real estate mortgage loans.
The Bank believes its procedures regarding the assessment of
environmental risk are adequate and, as of August 31, 1997, the Bank was unaware
of any environmental issues which would subject it to any material liability.
However, no assurance can be given that the values of properties securing loans
in the Bank's portfolio will not be adversely affected by unforeseen
environmental risks.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Delinquent Loans. Management performs a monthly review of all
delinquent loans and reports the results of its review to the Board of Trustees,
through its Watch Committee, on a quarterly basis. The Watch Committee is
comprised of the President and a non-officer member of the Board of Investment.
The Watch Committee reviews with the Bank's senior officers the status of the
loan portfolio, the classification of loans and the adequacy of the allowance
for loan losses. The actions taken by the Bank with respect to delinquencies
vary depending upon the nature of the loan and the period of delinquency.
Generally, the Bank requires that a delinquency notice be mailed no later than
the 16th day of delinquency. A late charge is assessed on multi-family and
commercial real estate loans where the scheduled payment is unpaid after 14 days
and on over-occupied residential first mortgage loans where the scheduled
payment is unpaid after 15 days. After mailing a delinquency notice, the Bank's
loan collection personnel call the borrower to ascertain the reasons for
delinquency and the prospects for payment. On loans secured by one-to-four
family owner occupied properties, the Bank attempts to work out a payment
schedule with the borrower in order to avoid foreclosure. If a satisfactory
arrangement is not achieved, the Bank refers the loan to legal counsel and
foreclosure procedures are initiated. At any time prior to a sale of the
property at foreclosure, foreclosure proceedings will be terminated if the
borrower and the Bank are able to work out a satisfactory payment plan. On loans
secured by multi-family and commercial real estate properties, the Bank also
seeks to reach a satisfactory payment plan so as to avoid foreclosure.
Generally, when a multi-family or commercial real estate mortgage loan become 30
days past due, the Bank exercises its right to take possession of the property
and to collect rents, and refers the loan to legal counsel for initiation of
foreclosure proceedings. Prior to foreclosure, the Bank requires an updated
appraisal of the property.
Other Real Estate Owned. Property acquired through foreclosure or
acceptance of a deed in lieu of foreclosure are classified in the Bank's
financial statements as other real estate owned ("OREO"). When a property is
placed in OREO, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Estimated fair value usually
represents the sales price a buyer would be willing to pay on the basis of
current market conditions, including normal loan terms from other financial
institutions, less estimated costs to sell the property. Management inspects all
OREO properties periodically. When a decline in estimated fair value of a
property is deemed to have taken place, management establishes an allowance for
such decline by a charge to income. The adequacy of the allowance for OREO is
evaluated by management and reviewed with the Watch Committee on a quarterly
basis, taking into consideration each property in the portfolio and current real
estate market conditions. At August 31, 1997, OREO consisted of two industrial
properties carried at $1.9 million and residential condominium units carried at
$320,000, net of a valuation allowance for OREO amounting to $186,000. For the
eight months ended August 31, 1997, the Bank collected income of $242,000 from
the rental of the two industrial buildings. The Bank expects to offer for sale
all properties in OREO at prices in excess of their carrying value. Ultimate net
proceeds from sales will depend on market conditions in effect at the time of
sale.
56
<PAGE>
Classified Assets. The Bank utilizes an internal rating system to
monitor and evaluate the credit risk inherent in its loan portfolio. At the time
of loan approval, all loans other than one-to-four family residential mortgage
loans, home equity loans and consumer loans, are assigned a rating based on all
the factors considered in originating the loan. In the latter part of 1996, the
Bank expanded the number of its loan ratings from five to eight. The initial
loan rating is recommended by the loan officer and approved by the individuals
or committee responsible for approving the loan. Loan officers are expected to
recommend to the Real Estate Committee changes in loan ratings when facts come
to their attention that warrant an upgrade or downgrade in a loan rating.
Problem and potential problem assets are assigned the three highest ratings.
Such ratings coincide with the "Substandard", "Doubtful" and "Loss"
classifications used by federal regulators in their examination of financial
institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligers and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all 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, 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 and/or charge-off is not warranted.
Assets which do not currently expose the insured financial institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "Special Mention." The Bank
assigns its fourth highest rating to loans meeting this designation.
On a quarterly basis, management reviews with the Watch Committee the
status of each asset assigned one of the Bank's four adverse internal ratings,
including the specific and general valuation allowances for losses deemed
prudent. General valuation allowances represent loss allowances established to
recognize the inherent risk associated with lending activities which, unlike
specific allowances, have not been allocated to particular problem assets.
Assets, or portions of assets, classified Loss are either charged-off against
valuation allowances or a specific allowance is established in an amount equal
to the amount classified Loss.
The Bank's classification of its assets and the amount of the valuation
allowances it sets aside for estimated losses is subject to review by the FDIC
and the Division. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances 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 a
financial institution's valuation methodology. Generally, the policy statement
recommends that financial institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable valuation processes
that meet the objectives set forth in the policy statement. While the Bank
believes that it has established adequate allowances for losses on loans and
OREO, there can be no assurance that the regulators, in reviewing the Bank's
loan portfolio and OREO, will not request the Bank to materially increase at
that time its allowances for losses, thereby negatively affecting the Bank's
financial condition and earnings at that time. Although management believes that
adequate specific and general loss allowances have been established, actual
losses are dependent upon future events and, as such, further additions to the
level of specific and general loss allowances may become necessary.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
the Bank's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, the risk characteristics of the types of loans in
the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs. The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses in its loan
portfolio which are deemed probable based on information currently known to
management. See "--Delinquent Loans, Other Real Estate Owned and Classified
Assets-Classified Assets."
For the past several years, a significant portion of the Bank's allowance for
loan losses has been categorized as unallocated rather than being allocated to
specific loan categories. The unallocated part of the allowance has been
maintained in recognition of the inherent risks resulting from the following
concentrations in the Bank's portfolio: the significance of loans pertaining to
multi-family apartment building and commercial real estate properties, the
geographic location of such properties and the aggregate amount of loans
outstanding to larger borrowers. The combination of these three concentrations
creates a higher than normal degree of risk in the Bank's loan portfolio. A
downturn in economic conditions in the Bank's primary lending area could have
adverse consequences on the collectibility of the loan portfolio in a relatively
short period of time. See "Risk Factors - Lending Risks Associated with
Multi-Family and Commercial Real Estate Landing - and - Geographic Concentration
of Loans" and "Business of the Bank - Lending Activities - Multi-Family Lending
and Commercial Real Estate Lending."
57
<PAGE>
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
Eight months
ended Year ended December 31,
August 31, -------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- --------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $ 12,326 $ 12,326 $ 12,274 $ 12,745 $ 11,775 $ 8,617
Provision (credit) for loan losses.......... - - - (477) 2,170 3,893
Charge-offs:
Mortgage loans:
One-to-four family...................... - - - 3 142 -
Multi-family............................ - - - 13 234 150
Commercial real estate.................. - 151 237 - 675 465
Construction and development............ - - - - - 103
Home equity............................. - - - - 109 6
Second mortgage......................... - - - - 22 -
Other commercial.......................... - - - - 24 -
Consumer loans............................ 6 15 3 24 - 11
--------- --------- --------- --------- -------- --------
Total charge-offs..................... 6 166 240 40 1,206 735
--------- --------- --------- --------- -------- --------
Recoveries:
Mortgage loans: -
Multi-family............................ 18 140 271 31 6 -
Commercial real estate.................. - - 6 5 - -
Construction and development............ 103 21 - - - -
Consumer loans............................ 2 5 15 10 - -
--------- --------- --------- --------- -------- --------
Total recoveries...................... 123 166 292 46 6 -
--------- --------- --------- --------- -------- --------
Net (charge-offs) recoveries................ 117 - 52 6 (1,200) (735)
--------- --------- --------- --------- -------- --------
Balance at end of period.................... $ 12,443 $ 12,326 $ 12,326 $ 12,274 $ 12,745 $ 11,775
========= ========= ========= ========= ======== ========
</TABLE>
At August 31, 1997, loans designated as Substandard and Special Mention
totaled $3.9 million and $2.2 million, respectively. No loans were designated as
Doubtful or Loss. The Substandard loans include two loans to one borrower
totaling $2.3 million that are secured by office buildings and have had interest
rates at a below market rate since 1994. Loan payments are current and the
estimated market value of the underlying collateral exceeds the loan balances.
Also included in Substandard loans are two other loans totaling $1.4 million
that are secured by an office building and a building comprised of retail space
and apartments. Payments on one of the loans is past due, but both of the loans
are adequately secured by the estimated values of the underlying properties.
Special Mention loans include a $1.9 million loan secured by an office building.
The loan is adequately secured and payments are current.
58
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At August 31, 1997 At December 31, 1996
----------------------------------------------- --------------------------------------------
60-89 days 90 days or more 60-89 days 90 days or more
--------------------- ------------------------ -------------------- ----------------------
Principal Principal Principal Principal
Number balance Number balance Number balance Number balance
of loans of loans of loans of loans of loans of loans of loans of loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family............ 1 $ 48 2 $ 657 1 $ 156 1 $ 428
Multi-family.................. - - 1 94 - - 2 253
Commercial real estate........ - - 1 526 1 282 2 646
Construction and development.. - - - - - - 1 6
Home equity and second
mortgage..................... 1 8 3 133 1 50 - -
Consumer loans................... 1 2 1 2 4 4 1 4
---- ----- ---- ------- ---- ----- ---- --------
Total....................... 3 $ 58 8 $ 1,412 7 $ 492 7 $ 1,337
==== ===== ==== ======= ==== ===== ==== ========
Delinquent loans to total loans.. 0.01% 0.29% 0.10% 0.28%
==== ======= ===== ========
<CAPTION>
At December 31, 1997 At December 31, 1994
----------------------------------------------- --------------------------------------------
60-89 days 90 days or more 60-89 days 90 days or more
--------------------- ------------------------ -------------------- ----------------------
Principal Principal Principal Principal
Number balance Number balance Number balance Number balance
of loans of loans of loans of loans of loans of loans of loans of loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family............ - $ - 4 $ 736 1 $ 43 4 $ 296
Multi-family.................. - - - - - - 1 120
Commercial real estate........ 1 570 - - - - - -
Construction and development.. - - 1 6 - - 2 763
Home equity and second
mortgage..................... 1 89 - - - - 2 98
Consumer loans................... - - 7 6 3 1 5 7
---- ---- ---- ------- ---- ----- ---- -------
Total....................... 2 $659 12 $ 748 4 $ 44 14 $ 1,284
==== ==== ==== ======= ==== ===== ==== =======
Delinquent loans to total loans.. 0.15% 0.17% 0.01% 0.30%
==== ======= ===== ========
</TABLE>
59
<PAGE>
Non-Accrual Loans, Non-Performing Assets and Restructured Loans. The
following table sets forth information regarding non-accrual loans and other
real estate owned.
<TABLE>
<CAPTION>
At December 31,
At August 31, ------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Mortgage loans:
One-to-four family....................................... $ 657 $ 428 $ 736 $ 296 $1,070 $1,616
Multi-family............................................. 94 253 - 120 291 244
Commercial real estate................................... 526 646 - - 1,310 1,744
Construction and development............................. - 6 6 763 584 983
Home equity.............................................. 133 - - 98 94 148
Other commercial............................................ - - - - - 31
Consumer.................................................... 2 4 6 7 11 2
------ ------ ------ ------ ------ ------
Total non-accrual loans.................................. 1,412 1,337 748 1,284 3,360 4,768
Other real estate owned, net (2).............................. 2,002 1,689 1,722 1,805 3,578 6,501
------ ------ ------ ------ ------ ------
Total non-performing assets.............................. $3,414 $3,026 $2,470 $3,089 $6,938 $11,269
====== ====== ====== ====== ====== =======
Restructured loans............................................ $2,288 $5,438 $10,922 $45,972 $43,984 $1,623
====== ====== ====== ====== ====== =======
Allowance for loan losses as a percent of total loans......... 2.56% 2.56% 2.75% 2.91% 3.37% 3.11%
Allowance for loan losses as a percent of total
non-performing loans(3)................................... 881.23 921.91 1,647.86 955.92 379.32 246.96
Non-performing loans as a percent of total loans.............. 0.29 0.28 0.17 0.30 0.89 1.26
Non-performing assets as a percent of total assets............ 0.50 0.45 0.39 0.51 1.26 2.07
</TABLE>
- -------------------
(1) Non-accrual loans include 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.
(2) Other real estate owned balances are shown net of related loss allowances.
(3) Non-performing loans are comprised of non-accrual loans.
Restructured loans represent performing multi-family and commercial
real estate mortgage loans for which concessions (such as reductions of interest
rates to below market terms and/or extension of repayment terms) have been
granted due to the borrowers financial condition.
The following tables set forth the Bank's percent of allowance by loan
category and the percent of loans to total loans in each of the categories
listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
At August 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 gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
--------- --------- --------- --------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................. $ 228 1.83% 13.08% $ 202 1.64% 11.68% $ 199 1.61% 12.34%
Multi-family........................ 3,100 24.91 42.93 2,725 22.11 40.54 3,177 25.78 42.11
Commercial real estate.............. 2,918 23.45 28.72 3,256 26.42 28.21 2,695 21.86 27.24
Construction and development........ 219 1.76 1.57 463 3.76 1.47 504 4.09 2.24
Home equity......................... 54 0.43 1.08 64 0.52 1.29 74 0.60 1.61
Second ............................ 84 0.68 3.35 99 0.80 4.02 133 1.08 3.84
Commercial participation loans........ - - 7.32 - 10.71 - - 9.36
Other commercial loans................ 101 0.81 1.68 110 0.89 1.87 92 0.75 1.00
Consumer loans........................ 13 0.11 0.27 10 0.08 0.21 12 0.10 0.26
Unallocated........................... 5,726 46.02 - 5,397 43.78 - 5,440 44.13 -
------- ------- ------ ------- ------ ------ ------- ------- ------
Total allowance for loan losses.. $12,443 100.00% 100.00% $12,326 100.00% 100.00% $12,326 100.00% 100.00%
======= ======= ====== ======= ====== ====== ======= ====== ======
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992
--------------------------------- ---------------------------- --------------------------
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 gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
--------- --------- --------- --------- --------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................. $ 202 1.65% 13.39% $ 224 1.76% 15.77% $ 224 1.90% 16.64%
Multi-family........................ 2,956 24.08 42.75 2,244 17.61 42.32 2,204 18.72 40.77
Commercial real estate.............. 2,534 20.64 26.62 1,960 15.38 25.88 2,108 17.90 24.70
Construction and development........ 445 3.63 1.88 415 3.26 1.67 413 3.51 1.76
Home equity......................... 78 0.63 1.80 91 0.71 2.36 103 0.87 2.56
Second ............................ 130 1.06 4.02 123 0.96 4.26 127 1.08 4.39
Commercial participation loans........ - - 8.43 - - 6.69 - - 8.20
Other commercial loans................ 61 0.50 0.71 53 0.41 0.68 40 0.34 0.52
Consumer loans........................ 17 0.14 0.40 14 0.11 0.37 17 0.15 0.45
Unallocated........................... 5,851 47.67 - 7,621 59.80 - 6,539 55.53 -
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for loan losses.. $12,274 100.00% 100.00% $12,745 100.00% 100.00% $11,775 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
Investment Activities
The investment policy of the Bank is reviewed and approved by the Board
of Trustees on an annual basis. The Bank views its investment portfolio as an
alternative earning asset vehicle into which to deploy excess funds during
periods of weak loan demand or perceived higher risks. The investment portfolio
provides asset diversification and the opportunity to achieve capital
appreciation through long-term investment in equity securities. Compliance with
the Bank's investment policy is the responsibility of the President. Based on
his guidance and direction, most investment purchases are initiated by the
Bank's Comptroller in accordance with specific guidelines and criteria specified
in the investment policy. No sales of investment securities can be made without
the prior permission of the President. All investment transactions are reported
to and reviewed by the Board of Investment on a monthly basis.
The Bank's current policy generally favors investment in U.S.
Government and Agency securities, corporate debt obligations and corporate
equities. The policy permits investment in mortgage-backed and mortgage-related
securities and allows the use of interest rate swaps, options and futures, but
only for purposes of hedging the interest or credit risk of specific Bank
assets. The notional value of hedges may not exceed 20% of retained earnings
without prior approval of the Board of Investment. The Bank has seldom used
hedging instruments and had no outstanding contracts involving such instruments
at August 31, 1997. The Bank's current investment strategy has emphasized the
purchase of U.S. Government and Agency obligations and corporate debt
obligations generally maturing within two years.
At August 31, 1997, the Bank had $181.8 million, or 26.7% of total
assets, in securities consisting primarily of U.S. Government and Agency
obligations ($77.7 million), corporate obligations ($74.4 million) and
marketable common and preferred equity securities ($23.6 million). Investment in
mortgage-backed securities was insignificant at that date ($2.6 million) and has
declined steadily over the past few years. Also included in investments is $3.5
million in restricted equity securities, $3.3 million of which is in the stock
of the FHLB. To avail itself of services offered by that organization, in
particular the ability to borrow funds, the Bank is required to invest in the
stock of the FHLB in an amount determined on the basis of the Bank's residential
mortgage loans and borrowings from the FHLB. The stock is redeemable at par and
earns dividends declared at the discretion of the FHLB.
SFAS No. 115 requires the Bank to designate its securities as held to
maturity, available for sale or trading depending on the Bank's intent regarding
its investments. The Bank does not currently maintain a trading portfolio of
securities. In accordance with the Special Report of the FASB regarding SFAS No.
115, in November 1995, the Bank transferred debt securities having a carrying
value and market value of $26.0 million from its held to maturity portfolio to
its available for sale portfolio. As of August 31, 1997, $128.5 million, or
70.7% of the portfolio, was classified as available for sale, $49.8 million, or
27.4% of the portfolio, was classified as held for investment and $3.5 million,
or
61
<PAGE>
1.9% of the portfolio, was invested in restricted equity securities. The net
unrealized gain on securities classified as available for sale was
$17.6 million, with $17.5 million of that amount attributable to marketable
equity securities. As of August 31, 1997, the weighted average life to maturity
of the Bank's $104.9 million of debt securities classified as available for sale
was eleven months and $49.8 million of debt securities classified as held to
maturity was two years.
U.S. Government and Agency Obligations. At August 31, 1997, the Bank's
U.S. Government and Agency securities portfolio totaled $77.7 million,
$73.7 million of which was classified as available for sale and $4.0 million of
which was classified as held to maturity. There were no structured notes in the
portfolio, but there were $3.3 million of callable debentures that mature within
one year.
Corporate Obligations. At August 31, 1997, the Bank's portfolio of
corporate obligations totaled $74.4 million, $31.2 million of which was
classified as available for sale and $43.2 million was classified as held to
maturity. The Bank's policy generally requires that investment in corporate
obligations of any issuer that exceed $1 million should meet one of the
following criteria: no more than $1 million of the investment should have a
maturity beyond one year, the issue should be rated "A" or better by at least
one nationally recognized rating agency at the time of purchase and investment
in bank issues should only be in banks followed by a particular investment
banking firm and that have a return on assets equal to at least 75 basis points.
The aggregate amount invested in any corporate issuer cannot exceed $2 million
without the prior approval of the President and $4 million without the prior
approval of the Board of Investment. The policy allows the purchase of
obligations rated "BBB" by at least one nationally recognized rating agency
provided the aggregate amount of such securities does not exceed 10% of the
Bank's retained earnings, they mature within two years and are only purchased at
the specific direction of the President. At August 31, 1997, the portfolio
included $1.0 million of corporate obligations with a "BBB" rating and
$1.1 million with a "BBB+" rating.
Marketable Equity Securities. At August 31, 1997, the Bank's marketable
equity securities portfolio totaled $23.6 million, $15.5 million of which was in
common stocks and $8.1 million in preferred stocks. The Bank's policy limits the
aggregate carrying value of marketable equity securities to no more than 30% of
the Bank's retained earnings. The purchase of an equity security with an initial
cost in excess of $100,000 requires the prior approval of the Board of
Investment. The aggregate carrying value of equity securities of any issuer
cannot exceed $500,000, excluding unrealized gains on such securities. The Bank
purchases marketable equity securities as long-term investments that can provide
the opportunity for capital appreciation and dividend income that is taxed on a
more favorable basis than operating income. There can be no assurance that
investment in marketable equity securities will achieve appreciation in value
and, therefore, such investments involve higher risk. Aggregate purchases of
marketable equity securities totaled $143,000 for the eight months ended
August 31, 1997 and $1.0 million in both 1996 and 1995. No purchases were made
in 1994. At August 31, 1997, net unrealized gains on common and preferred stocks
amounted to $13.0 million and $4.5 million, respectively. Of the net unrealized
gain on common stocks, $10.6 million relates to the Bank's investment in eight
national and regional money center banks and $1.5 million in three electric
utility companies. The net unrealized gain on preferred stocks is attributable
entirely to the Bank's investment in Freddie Mac senior preferred stock. See
"Regulation--Insurance of Accounts and Regulation by the FDIC."
62
<PAGE>
The following table sets forth the composition of the Bank's debt and
equity securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
At August 31, 1997 1996 1995 1994
------------------------- ------------------- ------------------- ---------------------
Percent Percent Percent Percent
Amount of total Amount of total Amount of total Amount of total
---------- ----------- ------- ---------- -------- ---------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and
Agency obligations..... $77,706 42.73% $ 70,055 43.12% $71,848 41.30% $ 75,485 43.69%
Corporate obligations.... 74,434 40.93 65,808 40.50 77,035 44.28 76,819 44.47
Mortgage-backed
securities............. 2,560 1.41 2,764 1.70 3,150 1.81 4,407 2.55
-------- ------ -------- ------ ------- ------ -------- ------
Total debt securities 154,700 85.07 138,627 85.32 152,033 87.39 156,711 90.71
Marketable equity securities 23,626 12.99 20,365 12.54 19,074 10.96 13,301 7.70
Restricted equity securities 3,519 1.94 3,481 2.14 2,868 1.65 2,754 1.59
-------- ------ -------- ------ -------- ------ -------- ------
Total securities....... $181,845 100.00% $162,473 100.00% $173,975 100.00% $172,766 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Debt and equity securities
available for sale....... $128,525 70.68% $117,372 72.24% $81,765 47.00% $ 44,886 25.98%
Debt securities held to
maturity................. 49,801 27.38 41,620 25.62 89,342 51.35 125,126 72.43
Restricted equity securities 3,519 1.94% 3,481 2.14 2,868 1.65 2,754 1.59
-------- ------ -------- ------ -------- ------ -------- ------
Total securities..... $181,845 100.00% $162,473 100.00% $173,975 100.00% $172,766 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
63
<PAGE>
The following table sets forth certain information regarding the
amortized cost and market values of the Bank's investment securities at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
At August 31, 1997 1996 1995 1994
---------------------- ----------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market Amortized Market
cost value cost value cost value cost value
--------- -------- -------- --------- -------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and
Agency obligations....... $73,610 $73,719 $57,089 $ 57,104 $42,646 $ 42,901 $ 32,206 $ 31,585
Corporate obligations...... 31,171 31,180 39,890 39,903 19,745 19,790 - -
------- ------- ------- -------- ------- -------- -------- --------
Total debt securities.... 104,781 104,899 96,979 97,007 62,391 62,691 32,206 31,585
------- ------- ------- -------- ------- -------- -------- --------
Marketable equity securities:
Common stocks.............. 2,551 15,545 2,443 12,423 2,712 11,154 5,469 11,060
Preferred stocks........... 3,617 8,081 4,260 7,942 5,210 7,920 821 2,241
------- ------- ------- -------- ------- -------- -------- --------
Total marketable
equity securities...... 6,168 23,626 6,703 20,365 7,922 19,074 6,290 13,301
------- ------- ------- -------- ------- -------- -------- --------
Total securities
available for sale..... 110,949 128,525 103,682 117,372 70,313 81,765 38,496 44,886
Net unrealized gains on
securities available for
sale...................... 17,576 - 13,690 - 11,452 - 6,390 -
------- ------- ------- -------- ------- -------- -------- --------
Total securities
available for sale,
net.................... $128,525 $128,525 $117,372 $117,372 $81,765 $ 81,765 $ 44,886 $ 44,886
======== ======== ======== ======== ======= ======== ======== ========
Securities held to maturity:
U.S. Government and
Agency obligations.......... $ 3,987 $ 3,991 $12,951 $ 12,953 $28,947 $ 29,072 $ 43,900 $ 43,143
Corporate obligations......... 43,254 43,350 25,905 25,935 57,245 57,485 76,819 75,294
Mortgage-backed securities.... 2,560 2,605 2,764 2,807 3,150 3,252 4,407 4,409
------- ------- ------- -------- ------- -------- -------- --------
Total securities held
to maturity.............. $49,801 $49,946 $41,620 $ 41,695 $89,342 $ 89,809 $125,126 $122,846
======= ======= ======= ======== ======= ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank
of Boston stock............. $ 3,266 $ 3,228 $ 2,615 $ 2,501
Massachusetts Savings Bank
Life Insurance Company
stock....................... 253 253 253 253
------- ------- ------- --------
Total restricted equity
securities............... $ 3,519 $ 3,481 $ 2,868 $ 2,754
======= ======= ======= ========
</TABLE>
64
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of August 31, 1997.
<TABLE>
<CAPTION>
At August 31, 1997
----------------------------------------------------------------------------
After one year After five years
One year or less through five years through ten years
----------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
----------- ----------- ---------- ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government Agency obligations ..... $ 29,849 5.69% $ 43,870 6.03% $ - -
Corporate obligations .................. 28,949 5.93 2,045 5.58 186 5.51
-------- -------- -----
Total debt securities ............... 58,798 5.81 45,915 6.01 186 5.51
-------- -------- -----
Marketable equity securities(1):
Common stocks ..........................
Preferred stocks .......................
Total marketable equity securities ..
Total securities available for sale .
Securities held to maturity:
U.S. Government and Agency obligations .... 997 5.69 2,990 5.85 - -
Corporate obligations ..................... 10,015 6.05 33,139 6.28 100 7.50
Mortgage-backed securities ................ - - - - 213 7.63
-------- -------- -----
Total securities held to maturity ... 11,012 6.02 36,129 6.24 313 7.59
-------- -------- -----
Restricted equity securities:
Federal Home Loan Bank of Boston stock ....
Massachusetts Savings Bank Life Insurance
Company stock(1) .....................
Total restricted equity securities(1)
-------- -------- -----
Total securities .................... $ 69,810 5.84% $ 82,044 6.11% $ 499 6.81%
======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
At August 31, 1997
--------------------------------------------------------
After ten years Total
------------------------ --------------------------
Weighted Weighted
Carrying average Carrying average
value yield value yield
----------- ----------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government Agency obligations ..... $ - - % $ 73,719 5.89%
Corporate obligations .................. - - 31,180 5.90
------- --------
Total debt securities ............... - - 104,899 5.89
------- --------
Marketable equity securities(1):
Common stocks .......................... 15,545 4.22
Preferred stocks ....................... 8,081 4.05
-------
Total marketable equity securities .. 23,626 4.16
-------
Total securities available for sale . 128,525 5.58
-------
Securities held to maturity:
U.S. Government and Agency obligations .... - - 3,987 5.81
Corporate obligations ..................... - - 43,254 6.23
Mortgage-backed securities ................ 2,347 7.95 2,560 7.92
------- --------
Total securities held to maturity ... 2,347 7.95 49,801 6.28
------- --------
Restricted equity securities:
Federal Home Loan Bank of Boston stock .... 3,266 6.50
Massachusetts Savings Bank Life Insurance
Company stock(1) ..................... 253 4.18
Total restricted equity securities(1) 3,519 6.33
------- --------
Total securities .................... $ 2,347 7.95% $181,845 5.79%
======= ========
</TABLE>
- ------------------
(1) The yields have been calculated on a tax equivalent basis.
65
<PAGE>
Sources of Funds
General. Deposits, repayments and prepayments of loans, proceeds from
sales of loans and securities, proceeds from maturing securities and cash flows
from operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes. The Bank utilizes borrowed funds from the
FHLB to fund its loans in connection with its management of the interest rate
sensitivity of its assets and liabilities.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of
non-interest-bearing checking accounts and interest-bearing NOW accounts,
savings accounts and money market savings accounts (referred to in the aggregate
as "transaction deposit accounts") and certificate of deposit accounts. The Bank
offers Individual Retirement Accounts ("IRAs") and other qualified plan
accounts. The Bank offers no fee checking and NOW accounts for persons under 18
and over 65 years of age as well as a low-cost checking account for low-income
customers.
At August 31, 1997, the Bank's deposits of $481.5 million were
comprised of $10.4 million in non-interest-bearing checking accounts and $471.1
million of interest-bearing deposit accounts. Interest-bearing deposits were
88.4% of total interest-bearing liabilities at that date. Transaction deposit
accounts amounted to $220.3 million, or 45.7% of total deposits at August 31,
1997. The percentage of average transaction deposit accounts to total average
deposits was 45.8% for the eight months ended August 31, 1997 and 45.5%, 46.0%
and 53.6% for the years ended December 31, 1996, 1995 and 1994, respectively.
The higher percentage in 1994 was attributable to the lower interest rates
offered on certificate of deposit accounts during that year. Of the $261.4
million of certificate of deposit accounts at August 31, 1997, $209.8 million,
or 80.3%, were scheduled to mature within one year. While this percentage is
significant, based on its monitoring of historical trends in deposit flows and
its current pricing strategy for deposits, management believes the Bank will
retain a large portion of its certificate of deposit accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Bank's deposits are obtained predominantly from the Town of Brookline and
surrounding communities. The Bank relies primarily on competitive pricing of its
deposit products and 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 transit and print media, and
generally does not solicit deposits from outside its market area. The Bank does
not use brokers to obtain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Eight months ended
August 31, Year ended December 31,
------------------------ -----------------------------------
1997 1996 1996 1995 1994
---------- --------- --------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals)..................... $ (16,998) $(16,763) $(13,073) $ (18,334) $ 11,379
Interest credited on deposit accounts.......... 14,449 14,559 22,874 20,738 15,584
--------- -------- -------- --------- ---------
Total increase (decrease) in deposit accounts.. $ (2,549) $ (2,204) $ 9,801 $ 2,404 $ 26,963
========== ========= ======== ========= =========
</TABLE>
66
<PAGE>
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 average daily balances.
<TABLE>
<CAPTION>
Eight months ended August 31, 1997 Year ended December 31, 1996
---------------------------------- ---------------------------------
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>
NOW accounts........................................... $ 37,606 7.74% 1.72% $ 37,095 7.69% 1.73%
Savings accounts....................................... 15,327 3.16 2.47 17,302 3.59 2.46
Money market savings accounts.......................... 158,618 32.67 3.85 154,541 32.03 3.85
Non-interest-bearing demand checking accounts.......... 11,955 2.46 - 11,472 2.38 -
--------- ------- --------- -------
Total transaction deposit accounts................. 223,506 46.03 3.19 220,410 45.69 3.18
--------- ------- --------- -------
Certificate of deposit accounts:
Six months or less................................... 67,982 14.00 5.17 67,402 13.97 5.20
Over six through 12 months........................... 108,730 22.40 5.41 107,064 22.19 5.60
Over 12 months through 24 months..................... 28,579 5.89 5.79 32,298 6.70 5.84
Over 24 months....................................... 56,718 11.68 6.21 55,243 11.45 6.09
--------- ------- --------- -------
Total certificate of deposit accounts.............. 262,009 53.97 5.56 262,007 54.31 5.63
--------- ------- --------- -------
Total average deposits............................. $ 485,515 100.00% 4.47% $ 482,417 100.00% 4.51%
========= ======= ========= =======
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1994
---------------------------------- ---------------------------------
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>
NOW accounts........................................... $ 35,787 7.60% 1.73% $ 37,226 8.17% 1.76%
Savings accounts....................................... 20,460 4.35 2.43 25,673 5.63 2.45
Money market savings accounts.......................... 151,334 32.16 3.74 172,859 37.91 3.05
Non-interest-bearing demand checking accounts.......... 10,050 2.13 - 9,128 2.00 -
--------- ------- --------- -------
Total transaction deposit accounts................. 217,631 46.24 3.11 244,886 53.71 2.68
--------- ------- --------- -------
Certificate of deposit accounts:
Six months or less................................... 68,921 14.64 5.57 53,736 11.79 3.89
Over six through 12 months........................... 93,925 19.96 5.63 74,236 16.28 3.98
Over 12 months through 24 months..................... 35,184 7.48 5.29 33,436 7.33 4.62
Over 24 months....................................... 54,955 11.68 5.72 49,658 10.89 5.40
--------- ------- --------- -------
Total certificate of deposit accounts.............. 252,985 53.76 5.58 211,066 46.29 4.39
--------- ------- --------- -------
Total average deposits............................. $ 470,616 100.00% 4.44% $ 455,952 100.00% 3.47%
========= ======= ========= =======
</TABLE>
67
<PAGE>
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated:
<TABLE>
<CAPTION>
Period to maturity from August 31, 1997
-----------------------------------------------------
Less Three Four
than One to Two to to to At At
one two three four five August 31, December 31,
year years years years years 1997 1996
--------- --------- --------- --------- --------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit accounts:
4.01% to 5.00%............................ $ 13,337 $ 1,123 $ - $ - $ - $ 14,460 $ 14,619
5.01% to 6.00%............................ 185,477 21,185 5,542 1,678 1,692 215,574 212,312
6.01% to 7.00%............................ 8,972 25 4,077 1,355 3,354 17,783 21,696
7.01% to 7.50%............................ 2,015 - 11,551 - - 13,566 13,153
-------- ------- ------- ------- ------- -------- --------
Total.................................. $209,801 $22,333 $21,170 $ 3,033 $ 5,046 $261,383 $261,780
======== ======= ======= ======= ======= ======== ========
</TABLE>
At August 31, 1997, the Bank had outstanding $41.8 million in certificate
of deposit accounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
Weighted
Amount average rate
------ ------------
(Dollars in thousands)
Maturity Period
---------------
<S> <C> <C>
Three months or less................... $ 12,326 5.39%
Over three through six months.......... 10,089 5.51
Over six through twelve months......... 9,962 5.69
Over twelve months..................... 9,406 6.50
---------
$ 41,783 5.74%
=========
</TABLE>
Borrowings. The Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. The advances are collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in the stock of
the FHLB. 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 August 31,
1997, the Bank had $61.8 million in outstanding advances from the FHLB and had
the capacity to increase that amount to $244.9 million. The Bank expects to
continue to utilize borrowings from the FHLB as part of its management of the
interest sensitivity of its assets and liabilities.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
<TABLE>
<CAPTION>
Eight months ended
August 31, Year ended December 31,
---------------------- -----------------------------------
1997 1996 1996 1995 1994
--------- -------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Advances from the FHLB:
Average balance outstanding................................. $ 63,019 $ 52,645 $ 55,497 $ 46,172 $ 32,904
Maximum amount outstanding at any month end
during the period........................................ 65,315 58,665 62,665 50,665 43,265
Balance outstanding at end of period........................ 61,815 58,665 60,565 49,665 43,265
Weighted average interest rate during the period............ 6.52% 6.64% 6.64% 6.56% 5.85%
Weighted average interest rate at end of period............. 6.44% 6.55% 6.49% 6.52% 6.32%
</TABLE>
68
<PAGE>
Subsidiary Activities
BBS Investment Corporation. BBS Investment Corporation ("BBS") is a
wholly-owned subsidiary of the Bank established in 1985 as a Massachusetts
security corporation for the purpose of buying, selling and holding investment
securities on its own behalf and not as a broker. The income earned on BBS's
investment securities is subject to a significantly lower rate of state tax than
that assessed on income earned on investment securities maintained at the Bank.
At August 31, 1997, BBS had total assets of $91.8 million, $90.0 million of
which was in investment securities.
160 Associates, Inc. 160 Associates, Inc. ("Associates") is a
wholly-owned subsidiary established in 1980 that engaged in marketing services
at insignificant levels of activity through the end of 1996. In January 1997,
Associates' articles of organization were restated to allow it, among other
things, to acquire and hold stock in any subsidiary engaged in business that
qualifies as a real estate investment trust. The amount of capital Associates
invests in such activity cannot exceed $200 million. At August 31, 1997, its
investment in such activity amounted to $180.3 million.
Brookline Preferred Capital Corporation. Brookline Preferred Capital
Corporation ("BPCC") was established in January 1997 to engage in real estate
business activities (including the acquisition and holding of securities and
mortgage loans) that enable it to be taxed as a real estate investment trust for
federal and Massachusetts tax purposes. At August 31, 1997, BPCC had total
assets of $190.7 million, $179.5 million of which were mortgage loans originated
by and acquired from the Bank. BPCC is a 99.9% owned subsidiary of Associates.
Competition
The Bank faces significant competition both in making loans and in
attracting deposits. The Boston metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, insurance companies and
other financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, savings and loan
associations and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Competition may also
increase as a result of the lifting of restrictions on the interstate operations
of financial institutions.
Year 2000 Issue
Many computer programs in use today can only distinguish the final two
digits of the year entered, and so can be expected to read entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or can be expected to be unable to compute payment, interest or
delinquency. Rapid and accurate data processing is essential to the operation of
the Bank.
All of the material data processing of the Bank that could be affected
by this problem is provided by a third party service bureau. The service bureau
has advised the Bank that it expects to resolve this potential problem before
the year 2000. However, if the service bureau is unable to resolve this
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operation of the Bank.
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Properties
The Bank currently conducts its business through five full service
banking offices. The following table sets forth the Bank's offices as of August
31, 1997.
<TABLE>
<CAPTION>
Net book value of
property or
Original year leasehold
Leased or leased or Year of lease improvements at
Location owned acquired expiration August 31, 1997
- -------------------------------- ------------- ---------------- ----------------- ------------------
(In thousands)
<S> <C> <C> <C> <C>
Corporate/Main Office:
160 Washington Street Owned 1921 Not Applicable $151
Brookline, MA 02147
Operations Center:
24 Webster Place Leased 1986 2001 165
Brookline, MA 02147
Other Branch Offices:
Coolidge Corner Office Leased 1977 2001 204
1330-1340 Beacon Street
Brookline MA 02147
South Brookline Office
1018 West Roxbury Parkway Leased 1952 2006 158
Brookline MA 02147
Longwood Office
1014 Beacon Street Leased 1956 2008 1
Brookline MA 02147
Washington Square Office
1661 Beacon Street Leased 1975 2001 27
Brookline MA 02147
</TABLE>
Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Bank.
Personnel
As of August 31, 1997, the Bank had 84 full-time employees and eight
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 Stock Bank--Compensation of Officers and Trustees
through Benefit Plans" for a description of certain compensation and benefit
programs offered to the Bank's employees.
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FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Company, the Company and the Bank will be subject
to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports it income and expenses on the accrual method of accounting and
uses a fiscal year ending October 31 for filing its consolidated federal income
tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995 (after
October 31, 1996 in the case of the Bank).
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge-off method in computing its bad debt deduction beginning with
its fiscal year 1997 federal tax return. In addition, the federal legislation
requires the recapture (over a six year period) of the excess of tax bad debt
reserves accumulated after October 31, 1988. The amount of such reserve subject
to recapture by the Bank as of November 1, 1996 was $543,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to November 1, 1988 were subject to recapture into
taxable income should the Bank fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a bank charter. At October 31, 1996, the Bank's total federal pre-1988
reserve was $1.8 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1996. At August 31, 1997, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, it is expected that the Mutual Company will own less than 80% of the
outstanding Common Stock of the Company. As such, the Mutual Company will not be
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
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State Taxation
Massachusetts State Taxation. For Massachusetts income tax purposes, a
consolidated tax return cannot be filed. Instead, the Bank and each of its
subsidiaries file an annual income tax return. The Bank is subject to an annual
Massachusetts excise tax at a rate of 11.72% of its net income currently and
declining in increments to 10.50% for the fiscal year ending October 31, 2000.
In addition, one of the Bank's wholly-owned subsidiaries (160 Associates, Inc.)
is subject to an excise tax at the rate of 9.50% of its net income plus a tax on
its net worth. BBS Investment Corporation, the Bank's other wholly-owned
subsidiary, is a securities corporation and, accordingly, is subject to an
excise tax at the rate of 1.32% of its gross income. For these purposes,
Massachusetts net income is defined as gross income from all sources without any
exclusions, less the following deductions: all deductions (but not credits)
which are allowable under the Code except for those deductions under the Code
relating to (1) dividends received, (2) losses sustained in other taxable years
and (3) taxes on or measured by income, franchise taxes for the privilege of
doing business and capital stock taxes imposed by any state of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, any territory
or possession of the United States or any foreign country, or a political
subdivision of any of the foregoing. The Bank is not permitted to carry its
losses forward or back for Massachusetts tax purposes. The Company intends to
apply to the Massachusetts Department of Revenue to be classified as a
Massachusetts security corporation. Bank holding companies that are so
classified are subject to a state tax rate of 0.33% of gross income.
In January 1997, the Bank incorporated Brookline Preferred Capital
Corporation ("BPCC") which has elected to be taxed as a real estate investment
trust ("REIT"). Shareholders of a REIT that are subject to the Massachusetts
corporate excise tax are entitled to a 95% dividends-received deduction. A REIT
corporation shareholder subject to Massachusetts corporate taxation will,
therefore, pay income tax on only 5% of the dividends received from the REIT.
For the eight months ended August 31, 1997, Massachusetts excise tax expense was
reduced by $1.1 million as a result of the REIT.
REGULATION
General
The Bank is a Massachusetts-chartered mutual savings bank and its
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
("BIF") of the FDIC and by the Depositors Insurance Fund. The Bank is subject to
extensive regulation by the Massachusetts Division of Banks (the "Division"), as
its chartering agency, and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Division concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston and is subject
to certain limited regulation by the Board of Governors of the Federal Reserve
System ("FRB"). Both the Company and the Mutual Company, as bank holding
companies, will be subject to regulation by the FRB and the Division and will be
required to file reports with such regulatory bodies. Any change in such
regulations, whether by the Division, the FDIC, or the FRB could have a material
adverse impact on the Bank, the Company, or the Mutual Company. Certain of the
regulatory requirements applicable to the Bank, the Company and the Mutual
Company are referred to below or elsewhere herein.
Massachusetts Bank Regulation
As a Massachusetts-chartered savings bank, the Bank is subject to
supervision, regulation and examination by the Division and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings, and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Division's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain other
activities.
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In response to a Massachusetts law enacted in 1996, the Massachusetts
Commissioner of Banks (the "Commissioner") adopted rules that generally give
Massachusetts banks powers equivalent to those of national banks. The
Commissioner also has adopted procedures reducing regulatory burdens and expense
and expediting branching by well-capitalized and well-managed banks.
Investment Activities. As a Massachusetts-chartered savings bank, the
Bank may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, a
Massachusetts-chartered savings bank may invest up to 7% of its deposits in
investments not otherwise legally permitted, provided that any such amounts
which exceed 3% of deposits must be invested in companies organized for the
purpose of acquiring, constructing, rehabilitating, leasing, financing and
disposing of housing, and no investment in the equity securities or debt
securities of any one issuer made pursuant to such authority may exceed 2% of
the bank's deposits.
Regulatory Enforcement Authority. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its
charter. The Commissioner may under certain circumstances suspend or remove
officers or directors who have violated the law, conducted the Bank's business
in a manner which is unsafe, unsound or contrary to the depositors' interests,
or been negligent in the performance of their duties. In addition, upon finding
that a bank has engaged in an unfair or deceptive act or practice, the
Commissioner may issue an order to cease and desist and impose a fine on the
bank concerned. Finally, Massachusetts consumer protection and civil rights
statutes applicable to the Bank permit private individual and class action law
suits and provide for the rescission of consumer transactions, including loans,
and the recovery of statutory and punitive damages and attorneys' fees in the
case of certain violations.
Depositors Insurance Fund. All Massachusetts-chartered savings banks
are required to be members of the Depositors Insurance Fund (the "DIF"), a
corporation that insures savings bank deposits not covered by federal deposit
insurance. The DIF is authorized to charge savings banks an annual assessment of
up to 1/16th of 1% of a savings bank's deposits.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
charges deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a risk to the insurance fund. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Commissioner an opportunity to take such action, and may terminate deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
In September 1995, the BIF achieved its statutorily mandated reserve
levels. As a result, in 1995 the FDIC issued a final rule effective with respect
to the semi-annual premium assessment beginning January 1, 1996, which reduced
deposit insurance premiums for BIF member institutions to zero basis points
(subject to an annual minimum of $2,000) for institutions in the lowest risk
category. Deposit insurance premiums for Savings Association Insurance Fund
("SAIF") members were maintained at 23 basis points for institutions in the
lowest risk category because the SAIF had not achieved its required statutory
reserve levels.
On September 30, 1996, legislation was enacted to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF to the required ratio of 1.25% of insured deposits. The
legislation provided (i) that the holders of SAIF-assessable deposits pay a
one-time special assessment to recapitalize the SAIF, (ii) for the merger of the
BIF and the SAIF, with such merger being conditioned upon the prior elimination
of the thrift charter, and (iii) that BIF-insured institutions would share in
part in the obligation to repay
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Financing Corporation bonds that were issued in 1987 to help finance losses to
the former insurance fund for state and federal savings associations.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. From 1997 through 1999,
FDIC-insured institutions will pay approximately 1.3 basis points of their
BIF-assessable deposits and 6.4 basis points of their SAIF-assessable deposits
to fund the Financing Corporation bonds. The Bank's insurance premium, which had
amounted to the minimum $2,000 annual fee for its BIF-insured deposits, was
increased to 1.3 basis points.
Regulatory Capital Requirements
FDIC-insured savings banks are subject to risk-based capital guidelines
that establish a framework for making regulatory capital requirements more
sensitive to the risk profiles of each institution. The Bank is required to
maintain certain levels of regulatory capital in relation to risk-weighted
assets. The ratio of such regulatory capital to risk-weighted assets is referred
to as the Bank's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio equal to at least 8% of risk-weighted assets, of which at least 4%
must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage capital ratio (Tier I capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier I
leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a Tier
I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
Savings banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
The FDIC has also proposed that a bank's interest rate risk exposure
should be quantified using either the measurement system set forth in the
proposal or the institution's internal model for measuring such exposure.
Management of the Bank has not determined what effect, if any, the proposed
interest rate risk component would have on the Bank's capital if adopted as
proposed.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. 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 standards set forth
in the Guidelines address internal controls and information systems; internal
audit program; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. 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
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with the standard, as required by federal law. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Massachusetts law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement
the system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or to dismiss directors or officers, and restrictions
on interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things: (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership, the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for
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insured depository institutions; and (iv) acquiring or retaining, through a
subsidiary, up to 10% of the voting shares of a depository institution if
certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the
foregoing limitations. For example, certain state-chartered banks, such as the
Bank, may continue to invest, up to certain limits, in common or preferred stock
listed on a National Securities Exchange or the National Market System of
NASDAQ, and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to sell
savings bank life insurance. As of August 31, 1997, the Bank had marketable
equity securities with a carrying value of $23.6 million pursuant to this
exception.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate; the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances or letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
Holding Company Regulation
General. Upon consummation of the Reorganization, the Company, as the
sole shareholder of the Bank, and the Mutual Company, as the indirect
controlling shareholder of the Bank, will become bank holding companies. Bank
holding companies are subject to comprehensive regulation and regular
examinations by the FRB and the Division. The FRB also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices. As a savings
bank, the Bank may elect to have the Company and the Mutual Company regulated as
savings and loan holding companies
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by the Office of Thrift Supervision ("OTS"). Regulation as a savings and loan
holding company would require application to, and prior approval of, the OTS.
After consummation of the Reorganization and Offering, the Company will
be subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC for the
Bank. On a pro forma consolidated basis after the Reorganization and Offering,
the Company's pro forma stockholder's equity will exceed these requirements.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary bank. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
A bank holding company must obtain Board of Bank Incorporation and FRB
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company and the Mutual Company have no
present plans to engage in any of these activities.
Interstate Banking and Branching. Federal law allows the FRB to approve
an application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The FRB is prohibited from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Individual states continue to
have authority to limit the percentage of total insured deposits in the state
which may be held or controlled by a bank or bank holding company to the extent
such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit referred to above.
Additionally, beginning on June 1, 1997, the federal banking agencies
were authorized to approve interstate merger transactions without regard to
whether such transactions are prohibited by the law of any state, unless the
home state of one of the banks "opted out" by adopting a law which applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches are permitted
only if the law of the state in which the branch is located permits such
acquisitions.
In 1996, the Massachusetts legislature enacted a new interstate banking
statute pursuant to which an out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts bank
that has been in existence for at least three years, (ii) acquiring a branch or
branches of a Massachusetts bank without acquiring the entire bank, or (iii)
opening such branches de novo. Massachusetts banks' ability to exercise similar
interstate banking powers in other states depend upon the laws of the other
states. For example, according to the law of the bordering state of New
Hampshire, out-of-state banks may acquire New Hampshire banks by merger, but may
not acquire individual branches or establish de novo bank branches in New
Hampshire.
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<PAGE>
Federal law authorizes the FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The appropriate federal banking agencies are required
to prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and FRB have adopted such regulations. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve. Should the FDIC determine that a bank's interstate
branch is not reasonably helping to meet the credit needs of the communities
serviced by the interstate branch, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized." See "--Regulatory Capital
Requirements."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the consolidated net worth of the bank
holding company. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, FRB order, or any condition imposed by, or
written agreement with, the FRB. This notification requirement does not apply to
any company that meets the well-capitalized standard for commercial banks, has a
safety and soundness examination rating of at least a "2" and is not subject to
any unresolved supervisory issues.
Dividend Waivers by the Mutual Company. It has been the policy of many
mutual holding companies to waive the receipt of dividends declared by their
savings institution subsidiary. In connection with its approval of mutual
holding company reorganizations since 1994, however, the FRB has imposed certain
conditions on the waiver of dividends by mutual holding companies declared on
the common stock of subsidiary savings banks, and the Mutual Company expects
that the FRB will impose such conditions on any dividend waivers by the Mutual
Company on the Common Stock of the Company.
In particular, it is expected that the FRB will require that the
amount of any waived dividends will not be available for payment to Minority
Stockholders and will be excluded from capital for purposes of calculating
dividends payable to Minority Stockholders. Moreover, the cumulative amount of
waived dividends must be maintained in a restricted capital account which would
be added to any liquidation account of the Bank in the event of a conversion of
the Mutual Company to stock form (a "Conversion Transaction"), and would not be
available for distribution to Minority Stockholders. The restricted capital
account and liquidation account amounts would not be reflected in the Bank's
financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of Thrift
Supervision except that such rules would be administered by the FRB, and any
other rules and regulations adopted by the FRB. The Plan also provides that if
the Mutual Company converts to stock form in the future, any waived dividends
may reduce the Minority Ownership Interest following such Conversion
Transaction. See "The Reorganization and Offering--Conversion of the Mutual
Company to Stock Form."
If the Mutual Company decides that it is in its best interest to waive
a particular dividend to be paid by the Company, and the FRB and the Division
approve such waiver, then the Company would pay such dividend only to Minority
Stockholders, and the amount of the dividend waived by the Mutual Company would
be treated in the manner described above. The Mutual Company's decision as to
whether or not to waive a particular dividend, if such waiver is approved by the
FRB and the Division, will depend on a number of factors, including the Mutual
Company's capital needs, the investment alternatives available to the Mutual
Company as compared to those available to the Company, and regulatory approvals.
There can be no assurance (i) that after the Reorganization the Mutual Company
will waive dividends paid by the Company, (ii) that the FRB and the Division
will approve any dividend waivers by the Mutual Company or (iii) of the terms
that may be imposed by the FRB or the Division on any dividend waiver.
Federal Securities Law
The common stock of the Company to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration, unless such Common Stock is sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal Reserve System
The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At August
31, 1997, the Bank was in compliance with these reserve requirements. Savings
banks are authorized to borrow from the Federal Reserve Bank "discount window,"
but FRB regulations require savings banks to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before borrowing from
the Federal Reserve Bank.
Community Reinvestment Act
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not
78
<PAGE>
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the FDIC, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution, including
applications to acquire branches and other financial institutions. The CRA
requires the FDIC to provide a written evaluation of an institution's CRA
performance utilizing a four-tiered descriptive rating system. The Bank's latest
CRA rating was "satisfactory."
Massachusetts has its own statutory counterpart to the Community
Reinvestment Act which is also applicable to the Bank. The Massachusetts version
is generally similar to the Community Reinvestment Act but utilizes a
five-tiered descriptive rating system. Massachusetts law requires the
Commissioner to consider, but not be limited to, a bank's record of performance
under Massachusetts law in considering any application by the bank to establish
a branch or other deposit-taking facility, to relocate an office, or to merge or
consolidate with or acquire the assets and assume the liabilities of any other
banking institution. The Bank's most recent rating under the Massachusetts law
was "satisfactory."
Consumer Protection and Fair Lending Regulations
The Bank is subject to a variety of federal and Massachusetts statutes
and regulations that are intended to protect consumers and prohibit
discrimination in the granting of credit. These statutes and regulations provide
for a range of sanctions for non-compliance, including imposition of
administrative fines and remedial orders, and referral to the Attorney General
for prosecution of a civil action for actual and punitive damages and injunctive
relief. Certain of these statutes authorize private individual and class action
lawsuits and the award of actual, statutory and punitive damages and attorneys'
fees for certain types of violations.
79
<PAGE>
Federal Home Loan Bank System
The Bank is a member of the FHLB of Boston, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Boston. At August 31, 1997, the Bank owned $3.3 million of FHLB stock.
In past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 6.41% for the year ended December 31, 1996. No
assurance can be given that such dividends will continue in the future at such
levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
80
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company currently consists of 15 members,
each of whom is currently serving as a trustee of the Bank. The current trustees
of the Bank are as follows:
<TABLE>
<CAPTION>
DATED
ELECTED
TO BANK'S
AGE AT TERM BOARD
NAME AUGUST 31, 1997 EXPIRES OF TRUSTEES
----------------------- --------------- ------- -----------
<S> <C> <C> <C>
Oliver F. Ames 76 2000 1973
Dennis S. Aronowitz 66 2000 1991
George C. Caner, Jr. 71 1999 1966
David C. Chapin 61 1998 1989
Richard P. Chapman, Jr. 62 1999 1972
William G. Coughlin 65 2000 1976
John L. Hall, II 57 1998 1983
Charles H. Peck 56 1998 1995
Hollis W. Plimpton, Jr. 67 1998 1974
Edward D. Rowley 79 1999 1966
Joseph J. Slotnik 61 2000 1970
William V. Tripp, III 59 1999 1975
Rosamond B. Vaule 59 1998 1989
Peter O. Wilde 58 1999 1993
Franklin Wyman, Jr. 76 1998 1974
</TABLE>
Each director of the Company has served as such since the Company's
incorporation in November 1997. Directors of the Company will serve three-year
staggered terms so that approximately one-third of the Directors will be elected
at each annual meeting of stockholders.
The Reorganization will not result initially in an increase in the total
compensation currently paid to trustees of the Bank. Such compensation, however,
will be paid in part by the Mutual Company, the Company and the Stock Bank based
on the services performed by such individuals for such entities. Subsequent to
the Reorganization, compensation of the directors of the Company may be
increased to reflect the additional responsibilities of directors of a stock
company with public stockholders.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of the Stock Bank--
Biographical Information."
<TABLE>
<CAPTION>
NAME AGE* POSITION
- ------------------------- ---- ---------
<S> <C> <C>
Richard P. Chapman, Jr. 62 President and Chief Executive Officer
Charles H. Peck 56 Executive Vice President
Paul R. Bechet 55 Senior Vice President and Chief Financial
Officer
Susan M. Ginns 52 Senior Vice President and Treasurer
George C. Caner, Jr. 71 Secretary
</TABLE>
________________
*As of August 31, 1997
81
<PAGE>
The Board of Directors of the Company shall appoint a President, a Chief
Executive Officer, one or more Vice Presidents, and a Secretary after the annual
meeting of stockholders. The Board of Directors may appoint such other officers
from time to time as it may deem proper.
Since the formation of the Company, none of the executive officers has
received remuneration from the Company. It is not anticipated that the
executive officers of the Company will initially receive any remuneration in his
or her capacity as an executive officer. For information concerning
compensation of executive officers of the Bank, see "Management of the Stock
Bank."
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Articles of Organization of the Company provide that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by Massachusetts law against all expenses, liability and loss
reasonably incurred or suffered by such person in connection with his activities
as a director or officer or as a director or officer of another company, if the
director or officer held such position at the request of the Company.
Massachusetts law requires that such director, officer, employee or agent, in
order to be indemnified, must have acted in good faith and in a manner
reasonably believed to be not opposed to the best interests of the Company and,
with respect to any criminal action or proceeding, either had reasonable cause
to believe such conduct was lawful or did not have reasonable cause to believe
his conduct was unlawful.
The Articles of Organization and Massachusetts law also provide that the
Company may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under Massachusetts law. The
Company intends to obtain such insurance.
Finally, the Articles of Organization provide that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director notwithstanding any
provision of law imposing such liability, provided that the Articles of
Organization do not eliminate or limit any liability of a director (i) for
breach of such director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) with respect to any transaction
from which the director derived an improper personal benefit, (iv) for voting to
approve the loan of Company assets to Company officers or directors, unless such
loan could reasonably be expected to benefit the Company, or (v) for voting to
authorize a distribution to stockholders or a repurchase or redemption of Common
Stock if such distribution, repurchase or redemption violates the Articles of
Organization or renders the Company insolvent.
MANAGEMENT OF THE STOCK BANK
DIRECTORS OF THE STOCK BANK
Upon completion of the Reorganization, the initial directors of the Stock
Bank will consist of those persons who currently serve on the Board of
Investment and the Auditing Committee of the Board of Trustees of the Bank. The
directors of the Stock Bank will have three year terms which will be staggered
to provide for the election of approximately one-third of the board members each
year. Directors of the Stock Bank will be elected by the Company as sole
stockholder of the Stock Bank. The proposed directors of the Stock Bank are as
follows:
<TABLE>
<CAPTION>
DIRECTOR AGE* OCCUPATION TERM EXPIRES
- -------- ---- ---------- ------------
<S> <C> <C> <C>
Oliver F. Ames 76 Trustee/Director 2000
David C. Chapin 61 President; Cameron Properties 1998
Richard P. Chapman, Jr. 62 President and Chief Executive Officer;
Brookline Savings Bank 1999
William G. Coughlin 65 Private investor in commercial real estate 2000
Joseph J. Slotnik 61 Private investor 2000
William V. Tripp, III 59 Attorney; Sherburne, Powers and Needham, P.C. 1999
Peter O. Wilde 58 Managing Director; Beckwith Bemis Incorporated 1999
Franklin Wyman, Jr. 76 Chairman and Treasurer; O'Conor, Wright, Wyman, Inc. 1998
</TABLE>
- --------------
*As of August 31, 1997
82
<PAGE>
EXECUTIVE OFFICERS OF THE STOCK BANK
The following table sets forth certain information regarding the executive
officers of the Stock Bank, all of whom currently serve in their indicated
position as executive officers of the Bank.
<TABLE>
<CAPTION>
NAME AGE* POSITION
- ---- ---- --------
<S> <C> <C>
Richard P. Chapman, Jr. 62 President and Chief Executive Officer
Charles H. Peck 56 Executive Vice President
Paul R. Bechet 55 Senior Vice President and Chief Financial Officer
Susan M. Ginns 52 Senior Vice President and Treasurer
George C. Caner, Jr. 71 Clerk
</TABLE>
______________
*As of August 31, 1997
The Chief Executive Officer and Treasurer of the Stock Bank will be elected
annually by the Board of Directors at its first meeting following the first
annual meeting of stockholders of the Stock Bank after the Reorganization. The
Clerk will be elected by the stockholders of the Stock Bank at annual meetings
of the stockholders of the Stock Bank. Other officers will be elected by the
Board of Directors of the Bank and will serve at its pleasure.
BIOGRAPHICAL INFORMATION
Trustees of the Bank
OLIVER F. AMES has served as a Trustee of the Bank since 1973 and a member
of the Board of Investment of the Bank since 1974. Mr. Ames serves on the board
of directors of a number of civic and charitable organizations. From 1962
through 1970, Mr. Ames served as a State Senator.
DENNIS S. ARONOWITZ has served as a Trustee of the Bank since 1991. In
1996, Mr. Aronowitz, an attorney, retired from Boston University where he served
on the faculty of the Law School since 1967 and was Director of the Banking Law
Center and Graduate Banking Law programs. He also is a trustee of a number of
John Hancock mutual funds.
GEORGE C. CANER, JR. has served as a Trustee of the Bank since 1966 and
also serves as the Clerk of the Bank. Mr. Caner is an attorney at the law firm
of Ropes & Gray, where he was a partner from 1965 through 1996. Mr. Caner
currently is Of Counsel at the firm.
DAVID C. CHAPIN has served as a Trustee of the Bank since 1989. Mr. Chapin
is President of Cameron Properties, a real estate investment, property appraisal
and management company, and has served in that capacity since 1975.
RICHARD P. CHAPMAN, JR. has served as a Trustee of the Bank since 1972 and
has also served as President of the Bank since 1973 and Chief Executive Officer
since 1975. Mr. Chapman is also a trustee of a number of John Hancock mutual
funds, a director of Lumber Insurance Cos. and a trustee of Northeastern
University.
WILLIAM G. COUGHLIN has served as a Trustee of the Bank since 1976 and
became a member of the Board of Investment in 1997. Mr. Coughlin is a private
investor in commercial real estate.
JOHN L. HALL, II has served as a Trustee of the Bank since 1983. Mr. Hall
is President of Hall Properties, Inc., a real estate investment, management and
development company, and has served in that capacity since 1989.
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<PAGE>
CHARLES H. PECK has served as a Trustee of the Bank since 1995. Mr. Peck
also is an Executive Vice President of the Bank and has served as the Senior
Loan Officer of the Bank since 1970.
HOLLIS W. PLIMPTON, JR. has served as a Trustee of the Bank since 1974.
Reverend Plimpton is Rector of St. George's Anglican Church.
EDWARD D. ROWLEY has been a Trustee of the Bank since 1966 and also serves
as the Assistant Clerk of the Bank. Prior to his retirement, Mr. Rowley was
associated with a retail merchandising firm and served in an administrative
position at the Harvard Business School.
JOSEPH J. SLOTNIK has served as a Trustee of the Bank since 1970 and a
member of the Board of Investment since 1974. Mr. Slotnik is a private investor
and previously was managing partner of the Boston office of a brokerage and
investment firm.
WILLIAM V. TRIPP, III has served as a Trustee since 1975. Mr. Tripp is an
attorney and partner at Sherburne, Powers and Needham, P.C., and has been with
that firm since 1968.
ROSAMOND B. VAULE has served as a Trustee of the Bank since 1989. Ms.
Vaule is active in volunteer work for various educational and charitable
organizations.
PETER O. WILDE has served as a Trustee of the Bank since 1993. In 1997,
Mr. Wilde became Managing Director of Beckwith Bemis Incorporated, a coatings
and finishing company. Previously, he was Vice President of Finance and
Administration at Ran Demo, Inc., a materials technology company, and served in
that position since 1991.
FRANKLIN WYMAN, JR. has served as a Trustee of the Bank since 1974 and
became a member of the Board of Investment in 1979. Mr. Wyman is Chairman and
Treasurer of O'Conor, Wright, Wyman, Inc., a consulting firm providing advisory
services in mergers and acquisitions, where he has been since 1984. He is also
a director of Unitil Corporation, an electric utility company in New Hampshire,
and a director of Fitchburg Gas & Electric Company.
Executive Officers of the Bank Who Are Not Trustees
SUSAN M. GINNS is Senior Vice President and Treasurer of the Bank, a
position she has held since 1987. Her primary areas of responsibility include
retail banking, marketing and personnel.
PAUL R. BECHET is Senior Vice President and Chief Financial Officer of the
Bank, a position he has held since June 1997. Mr. Bechet is a certified public
accountant who, prior to joining the Bank, was a partner at KPMG Peat Marwick
LLP since 1972. His primary areas of responsibility include financial reporting
and risk management.
MEETINGS AND COMMITTEES OF THE BOARD OF THE BANK
The Board of Trustees of the Bank meets quarterly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1996, the Board held four meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the Board or Board committees on which such trustee served for the year ended
December 31, 1996. The Board of Trustees of the Bank has a Board of Investment
as well as the following standing committees of the Board of Trustees: Audit
Committee, CRA Committee, Real Estate Committee and Watch Committee.
BOARD OF DIRECTORS AND COMMITTEES OF THE STOCK BANK AND THE COMPANY AFTER THE
REORGANIZATION
Following the Reorganization, the Board of Directors of the Stock Bank will
meet monthly, or more often as may be necessary. The Board of Directors
initially is expected to have an Audit Committee, an Executive
84
<PAGE>
Committee, a Loan Committee and a Watch Committee. The Board of Directors may,
by resolution, designate one or more additional committees to be comprised of
those directors elected by the Board of Directors.
The Audit Committee initially will consist of the following directors of
the Stock Bank: Messrs. Chapin, Tripp and Wilde. The Audit Committee is expected
to meet at least quarterly to review the contents of and conclusions in the
audit reports prepared by the independent auditors and Internal Auditor of the
Stock Bank, to review and approve the annual engagement of the Stock Bank's
independent auditors and to review the internal audit function and internal
accounting controls of the Stock Bank.
The CRA Committee initially will consist of the following directors of the
Stock Bank: Messrs. Ames and Aronowitz and Ms. Vaule. The CRA Committee is
expected to meet quarterly to review the status of the Bank's CRA program and
any reports issued by regulators resulting from their examination of the Bank's
compliance with CRA regulations.
The Executive Committee initially will consist of the following directors
of the Stock Bank: Messrs. Ames, Chapman, Coughlin, Slotnik and Wyman. The
Executive Committee is expected to meet monthly to exercise general control and
supervision of all matters pertaining to the interests of the Stock Bank,
subject at all times to the direction of the Board of Directors.
The Loan Committee initially will consist of the following directors of the
Stock Bank: Messrs. Chapman, Coughlin and Wyman. The Loan Committee is expected
to meet weekly to review and approve all loan requests of $400,000 and over.
The Watch Committee initially will consist of the following directors of
the Stock Bank: Messrs. Chapman and Slotnik. The Watch Committee is expected to
meet quarterly to review the status of the loan portfolio and OREO properties,
the classification of loans and the adequacy of the allowance for losses on
loans and OREO.
The Nominating Committee initially will consist of the following directors
of the Stock Bank: Messrs. Coughlin, Wilde and Wyman. The Nominating Committee
is expected to meet on an annual basis to identify, evaluate and recommend to
the Board of Directors potential candidates for election as directors and
appointments to the Board's committees.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Articles of Organization of the Company provide that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by Massachusetts law against all expenses, liability and loss
reasonably incurred or suffered by such person in connection with his activities
as a director or officer or as a director or officer of another company, if the
director or officer held such position at the request of the Company.
Massachusetts law requires that such director, officer, employee or agent, in
order to be indemnified, must have acted in good faith and in a manner
reasonably believed to be not opposed to the best interests of the Company and,
with respect to any criminal action or proceeding, either had reasonable cause
to believe such conduct was lawful or did not have reasonable cause to believe
his conduct was unlawful.
The Articles of Organization and Massachusetts law also provide that the
Company may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under Massachusetts law. The
Company intends to obtain such insurance.
Finally, the Articles of Organization provide that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director notwithstanding any
provision of law imposing such liability, provided that the Articles of
Organization do not eliminate or limit any liability of a director (i) for
breach of such director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) with respect to any transaction
from which the director derived an improper personal benefit, (iv) for voting to
approve the loan of Company assets to Company officers or directors, unless such
loan could reasonably be expected to benefit the Company, or (v) for voting to
authorize a distribution to stockholders or a repurchase or redemption of Common
Stock if such distribution, repurchase or redemption violates the Articles of
Organization or renders the Company insolvent.
COMPENSATION OF TRUSTEES AND DIRECTORS
Executive officers of the Bank receive no fees for service on the Board of
Trustees of the Bank or any committees of the Board. Trustees of the Bank
receive fees of $500 for each meeting attended, and the Clerk of the Bank
receives an additional $600 per meeting. Members of the Bank's Board of
Investment are paid a quarterly retainer of $2,000 and a $500 fee for each
meeting attended. The vice-chairman of the Board of Investment is paid an
additional quarterly retainer of $875. Trustees who are not members of the Board
of Investment but attend meetings of the Board of Investment are paid $500 for
each meeting they attend.
Members of the Bank's Real Estate Committee receive a quarterly retainer of
$3,750. Members of the Bank's Audit Committee receive a quarterly retainer of
$750. The chairman of the Audit Committee receives an additional $375 quarterly
retainer. Members of the Bank's CRA Committee receive a fee of $500 per
quarterly meeting. Members of the Bank's Watch Committee receive a quarterly
retainer of $1,750.
Subsequent to the consummation of the Reorganization, it is expected that
the level and structure of compensation paid to the Boards of Directors of the
Company and the Stock Bank and committees of such Boards will be reviewed in
light of the levels and structure of compensation paid to Boards of Directors
and committees of similarly-situated publicly traded financial institutions.
After such review, the amount of compensation paid to Board and committee
members may be adjusted.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1996 to the Chief Executive Officer of the Bank and the two other executive
officers of the Bank who received total annual compensation in excess of
$100,000 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
-------------------------------- ---------------------- ------
YEAR OTHER OPTIONS/ ALL
ENDED ANNUAL RESTRICTED SARS OTHER
NAME AND 12/31 COMPENSATION STOCK (#) LTIP COMPENSATION
PRINCIPAL POSITION (1) SALARY BONUS (2) AWARDS(3) (4) PAYOUTS (5)
- ------------------------- ----- -------- ------- ------------ ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard P. Chapman, Jr. 1996 $300,000 $82,500 - - - - $246,806
President and Chief
Executive Officer
Charles H. Peck 1996 152,000 35,000 - - - - 63,368
Executive Vice
President
Susan M. Ginns 1996 115,000 26,500 - - - - 18,619
Senior Vice President
and Treasurer
</TABLE>
__________________
(1) In accordance with the rules on executive officer and director compensation
disclosure adopted by the SEC, Summary Compensation information is excluded
for the years ended December 31, 1995 and 1994, as the Bank was not a
public company during such periods.
(2) The Bank also provides certain members of senior management with the use of
an automobile, club membership dues and certain other personal benefits,
the aggregate value of which did not exceed the lesser of $50,000 or 10% of
the total annual salary and bonus reported for each officer.
(3) Does not include awards pursuant to the Stock Plans, as such awards were
not earned or granted in 1996. For a discussion of the terms of the Stock
Plans which are intended to be adopted by the Company, see "--Compensation
of Officers and Trustees through Benefit Plans--Stock Award Plan."
(4) No stock options or SARs were earned or granted in 1996. For a discussion
of the Stock Option Plan which is intended to be adopted by the Company,
see "--Compensation of Officers and Trustees through Benefit Plans--Stock
Option Plan."
(5) Other compensation includes supplemental retirement benefits of $237,759,
and group term life insurance of $8,592 for Mr. Chapman. Supplemental
retirement benefits of $57,960 and group term life insurance of $5,253 for
Mr. Peck and supplemental retirement benefits of $15,728 and group term
life insurance of $2,736 for Ms. Ginnf.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Employment Agreements. The Bank has entered into substantially identical
employment agreements with Messrs. Chapman and Peck. Each of the agreements
has a term of 36 months. On each anniversary date, the agreement may be
extended for an additional twelve months, so that the remaining term shall be 36
months. If the agreement is not renewed, the agreement will expire 36 months
following the anniversary date. Under the agreements, the current Base Salaries
for Messrs. Chapman and Peck are $330,000 and $165,000, respectively. The
Base Salary may be increased but not decreased. In addition to the Base Salary,
the agreement provides for, among other things, participation in retirement
plans and other employee and fringe benefits applicable to executive personnel.
The agreement provides for termination by the Bank for cause at any time. In the
event the Bank terminates the executive's employment for reasons other than for
cause, or in the event of the executive's resignation from the Bank upon (i)
failure to re-elect the executive to his current offices, (ii) a material change
in the executive's functions, duties or responsibilities, or relocation of his
principal place of employment by more than 30 miles, (iii) liquidation or
dissolution of the Bank, (iv) a breach of the agreement by the Bank, or (v)
following a change in control of the Bank or the Company, the executive, or in
the event of death, his beneficiary, would be entitled to severance pay in an
amount equal to three times the Base Salary and the highest bonus paid during
any of the last three years. Messrs. Chapman and Peck would receive $1,260,000
and $609,000, respectively pursuant to their employment agreements upon a change
of control of the Bank or the Company, based upon current levels of
compensation. The Bank would also continue the executive's life, health, dental
and disability coverage for 36 months from the date of termination. In the event
the payments to the executive would
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<PAGE>
include an "excess parachute payment" as defined by Code Section 280G (relating
to payments made in connection with a change in control), the payments would be
reduced in order to avoid having an excess parachute payment.
Under the agreement, the executive's employment may be terminated upon his
retirement in accordance with any retirement policy established on behalf of the
executive and with his consent. Upon the executive's retirement, he will be
entitled to all benefits available to him under any retirement or other benefit
plan maintained by the Bank. In the event of the executive's disability for a
period of six months, the Bank may terminate the agreement provided that the
Bank will be obligated to pay him his Base Salary for the remaining term of the
agreement or one year, whichever is longer, reduced by any benefits paid to the
executive pursuant to any disability insurance policy or similar arrangement
maintained by the Bank. In the event of the executive's death, the Bank will
pay his Base Salary to his named beneficiaries for one year following his death,
and will also continue medical, dental, and other benefits to his family for one
year. The employment agreement provides that, following his termination of
employment, the executive will not compete with the Bank for a period of one
year.
Severance Agreements. Upon completion of the Offering, it is anticipated
that the Bank will enter into Severance Agreements (the "Severance Agreements")
with certain executive officers of the Bank which would provide certain benefits
in the event of a change in control of the Bank or the Company. The Severance
Agreements would provide for up to a three-year term. Commencing on each
anniversary date, the Board of Directors may extend any Severance Agreement for
an additional year. The Severance Agreements would enable the Bank to offer to
designated officers certain protections against termination without cause in the
event of a "change in control." For these purposes, a "change in control" is
defined generally to mean: (i) consummation of a plan of reorganization, merger
or sale of substantially all of the assets of the Bank or the Company where the
Bank or the Company is not the surviving entity; (ii) changes to the Board of
Directors of the Bank or the Board of Directors of the Company whereby
individuals who constitute the current Board cease to constitute a majority of
the Board, subject to certain exceptions; (iii) a change in "control" as defined
by the BHCA, in effect on the date of the Severance Agreement; (iv) a
transaction or occurrence whereby any person becomes the beneficial owner of 25%
or more of the voting securities of the Company; and (v) a tender offer is made
for 25% or more of the voting securities of the Company and 25% or more of the
shareholders have tendered their shares. These protections against termination
without cause in the event of a change in control are frequently offered by
other financial institutions, and the Bank may be at a competitive disadvantage
in attracting and retaining key employees if it does not offer similar
protections. Although the Severance Agreements may have the effect of making a
takeover more expensive to an acquiror, the Bank believes that the benefits of
enhancing the Bank's ability to attract and retain qualified management persons
by offering the Severance Agreements outweighs any disadvantage of such
agreements.
Following a change in control of the Company or the Bank, an officer would
be entitled to a payment under the Severance Agreement if the officer
voluntarily or involuntarily terminates employment during the term of such
agreement, other than for cause, as defined. In the event that an officer who
is a party to a Severance Agreement is entitled to receive payments pursuant to
the Severance Agreement, he would receive a cash payment up to a maximum of
three times the average of the three preceding years' annual base salary and
bonuses. In addition to the severance payment, each covered officer would be
entitled to receive life, health, dental and disability coverage for a period of
up to 36 months from the date of termination. Notwithstanding any provision to
the contrary in the Severance Agreement, payments under the Severance Agreements
are limited so that they will not constitute an excess parachute payment under
Section 280G of the Internal Revenue Code.
COMPENSATION OF OFFICERS AND TRUSTEES THROUGH BENEFIT PLANS
The Bank's current tax-qualified employee pension benefit plans consist of
a defined benefit pension plan and a profit sharing plan with a salary deferral
feature under section 401(k) of the Code. As a result of the Reorganization,
the Company and the Bank will be able to compensate employees with stock-based
compensation pursuant to the ESOP, the Stock Plans and the Stock Option Plan
described below.
Medical, Dental, Life and Other Similar Employee Benefit Plans. The Bank
provides eligible employees (i.e., generally full-time employees and employees
who work more than 17 1/2 hours per week) with group life (after
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<PAGE>
three months of employment), accidental death and dismemberment, and long term
disability coverage. For its eligible employees, the Bank pays 80% of the
monthly premiums for group health coverage and 50% of the monthly premiums for
individual and family dental coverage. The Bank pays 100% of the monthly
premiums for group life insurance coverage after the employee has completed one
year of service. The Bank also sponsors a flexible benefits plan under which
employees can pay their ratable share of health insurance premiums on a pre-tax
basis and a medical expense reimbursement plan under which employees can defer
their salary on a pre-tax basis to cover the costs of certain medical expenses
not reimbursed through insurance or otherwise.
Disability/Death Benefit Plan. The Bank has entered into a non-qualified
plan providing death and disability benefits to Mr. Chapman if he dies or
becomes disabled prior to his retirement date, i.e., his 65th birthday. In the
event of Mr. Chapman's death prior to his retirement date, his beneficiary will
be entitled to a benefit equal to 50% of the average three highest total annual
amounts of compensation paid to Mr. Chapman during the last five years of his
employment (the "Annual Benefit"), reduced by any distribution from the Bank's
tax-qualified defined benefit pension plan and one-half of any social security
benefits that any beneficiary derives through Mr. Chapman. The annual benefit
will be payable for 180 months. In the event of Mr. Chapman's disability prior
to his retirement date, the Bank will pay to Mr. Chapman a disability benefit
equal to the Annual Benefit, reduced by amounts paid to Mr. Chapman under any
disability income policy provided by the Bank. Any disability benefits paid to
Mr. Chapman under this plan will cease when Mr. Chapman attains his retirement
date.
Defined Benefit Pension Plan. The Bank maintains the Savings Banks
Employees Retirement Association Pension Plan, which is a qualified, tax-exempt
defined benefit plan ("Retirement Plan"). All employees age 21 or older who have
worked at the Bank for a period of one year and have been credited with 1,000 or
more hours of service with the Bank during the year are eligible to accrue
benefits under the Retirement Plan. The Bank annually contributes an amount to
the Retirement Plan necessary to satisfy the actuarially determined minimum
funding requirements in accordance with the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
At the normal retirement age of 65, the plan is designed to provide a
single life annuity. For a married participant, the normal form of benefit is an
actuarially reduced joint and survivor annuity where, upon the participant's
death, the participant's spouse is entitled to receive a benefit equal to 100%
of that paid during the participant's lifetime. The joint and survivor annuity
will be actuarially equivalent to the single life annuity. The retirement
benefit provided is an amount equal to 1.25% of a participant's average
compensation based on the average of the three consecutive years providing the
highest average multiplied by the participant's years of service (up to a
maximum of 25 years) plus .6% of such average compensation in excess of covered
compensation multiplied by the participant's total number of years of service
(up to a maximum of 25 years). Retirement benefits are also payable upon
retirement due to early and late retirement, disability or death. A reduced
benefit is payable upon early retirement at age 62, at or after age 55 and the
completion of ten years of service with the Bank, or at age 50 and the
completion of 15 years of service. Upon termination of employment other than as
specified above, a participant who was employed by the Bank for a minimum of
five years is eligible to receive his or her accrued benefit commencing,
generally, on such participant's normal retirement date. Benefits under the
Retirement Plan are payable in various annuity forms as well as in the form of a
single lump sum payment. As of October 31, 1996, the most recent date for which
information is available, the market value of the Retirement Plan assets equaled
$4.8 million. No contribution was made to the Retirement Plan for the plan year
ended October 31, 1996.
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<PAGE>
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
FINAL YEARS OF SERVICE AND BENEFIT PAYABLE AT RETIREMENT
------------------------------------------------------
AVERAGE
COMPENSATION 15 20 25 30 /2/ 35 /2/ 40 /2/
- ----------------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
$50,000 $ 9,375 $12,500 $15,625 $15,625 $15,625 $15,6255
100,000 18,750 25,000 31,250 31,250 31,250 31,2500
150,000 28,125 37,500 46,875 46,875 46,875 46,8755
200,000/1/ 37,500 50,000 62,500 62,500 62,500 62,5000
250,000/1/ 46,875 62,500 78,125 78,125 78,125 78,125
</TABLE>
___________________
/1/ Under present law, a retirement benefit cannot be funded based on
-
compensation in excess of $160,000. Prior to 1994, retirement benefits
could be funded based on compensation of up to $235,840. If a participant
had accrued a larger retirement benefit based on the law before 1994, the
participant would be entitled to the larger benefit.
/2/ Benefits under the Retirement Plan are calculated based on a
-
participant's average compensation over a 3 year period and years of
service, up to 25 years. Benefits do not increase due to years of service
in excess of 25.
At December 31, 1996, the approximate years of service for the named
executive officers were as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
<S> <C>
Richard P. Chapman 25
Charles H. Peck 31
Susan M. Ginns 21
</TABLE>
Supplemental Retirement Income Agreement. The Bank has entered into non-
qualified supplemental retirement income agreements ("SRIA") for the benefit of
Mr. Richard P. Chapman, Mr. Charles H. Peck, and Ms. Susan M. Ginns. The SRIA
for Mr. Chapman and Mr. Peck provide them with benefits generally equal to 70%
of their average compensation for the three calendar years with the highest rate
of compensation in the ten calendar year period prior to retirement, reduced by
any distribution they are entitled to receive from the Bank's pension plan and
one-half of any Social Security benefits. The SRIA for the benefit of Ms. Ginns
provides for a benefit at normal retirement equal to $3,000 per month.
Retirement Benefits under the SRIA are generally payable as a monthly
benefit or, at the election of the Bank, as a lump sum benefit. The monthly
benefits are payable on early or normal retirement or disability and continue
until the later of the executive's death or 15 years from the executive's
retirement (20 years in the case of Mr. Chapman). Monthly benefits are provided
for designated beneficiaries of participants who do not survive until retirement
commencing on the date of death and ending on the earlier of (1) the date the
executive would have attained his standard life expectancy or (2) 15 years from
the date of death (20 years in the case of the death of Mr. Chapman). Under the
SRIAs for Messrs. Chapman and Peck, in the case of a change in control, the
executive (or in the event of the executive's death, his beneficiary) is
irrevocably entitled to elect a lump sum benefit equal to the actuarial
equivalent of the monthly benefit to which the executive is entitled at such
time. The SRIA is considered an unfunded plan for tax and ERISA purposes. All
obligations under the SRIA are payable from the general assets of the Bank.
401(k) Plan. The Bank maintains the Savings Banks Employees Retirement
Association 401(k) Plan which is a qualified, tax-exempt profit sharing plan
with a salary deferral feature under Section 401(k) of the Code (the "401(k)
Plan"). All employees who have attained age 21 and have completed one year of
employment during which they worked at least 1,000 hours are eligible to
participate.
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<PAGE>
Under the 401(k) Plan, participants are permitted to make salary reduction
contributions equal to the lesser of 15% of compensation or $9,500 (as indexed
annually). For these purposes, "compensation" includes wages reported on
federal income tax form W-2, but does not include compensation in excess of the
Code Section 401(a)(17) limits (i.e., $160,000 for plan years beginning in
1997). All employee contributions and earnings thereon are fully and immediately
vested. A participant may withdraw salary reduction contributions in the event
the participant suffers a financial hardship. The 401 (k) Plan permits
employees to direct the investment of their own accounts into various investment
options.
Plan benefits will be paid to each participant in the form of a life
annuity (or joint and survivor annuity if married) upon retirement or death
unless an alternate form of distribution (lump sum or equal payments over a
fixed period) is selected. If a participant terminates employment prior to
retirement, his vested benefit will be held by the 401(k) Plan until the
participant elects to receive his benefit from the plan. If a participant (and
the participant's spouse, if married) elects to receive benefits after
termination of employment prior to normal or early retirement age, benefits will
be paid in a lump sum. Normal retirement age under the plan is age 65. Early
retirement age is the earliest of age 62, age 55 with ten years of service, or
the date on which a claim for Social Security disability income benefits is
approved.
Employee Stock Ownership Plan and Trust. The Bank intends to implement an
Employee Stock Ownership Plan (the "ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank
and who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 4% of the Common Stock to be
issued in the Offering. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of not less than ten
years. It is anticipated that the interest rate for the loan either will be
indexed to the prime rate published in The Wall Street Journal ("Prime Rate")
from time to time, or will be a fixed rate loan set at the Prime Rate on the
date of closing of the Offering. Shares purchased by the ESOP will be held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation.
Participants in the ESOP will receive credit for up to 4 years of service prior
to the effective date of the ESOP. Benefits generally vest over a seven year
period. Benefits generally vest at the rate of 20% per year beginning in the
third year of service until a participant is 100% vested after seven years or
upon normal retirement (as defined in the ESOP), disability or death of the
participant or a change in control (as defined in the ESOP). A participant who
terminates employment for reasons other than death, retirement or disability
prior to seven years of credited service will forfeit the nonvested portion of
his benefits under the ESOP. Benefits will be payable in the form of Common
Stock and cash upon death, retirement, early retirement, disability or
separation from service. The Bank's contributions to the ESOP are discretionary,
subject to the loan terms and tax law limits and, therefore, benefits payable
under the ESOP cannot be estimated. The Bank is required to record compensation
expense in an amount equal to the fair market value of the shares released from
the suspense account.
The Bank will establish a committee of non-employee directors to administer
the ESOP. The Bank will either appoint its non-employee directors or an
independent financial institution to serve as trustee of the ESOP. 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
participating employees. Under the ESOP, nondirected shares and shares held in
the suspense account will be voted in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock so long as such vote is in accordance with the provisions of
ERISA.
Stock Option Plan. At a meeting of the Company's shareholders to be held
no earlier than six months after the completion of the Offering, the Board of
Directors intends to submit for shareholder approval the Stock Option Plan for
directors and officers of the Bank and of the Company. The Company's current
intention is to implement the Stock Option Plan one year after completion of the
Offering. If approved by the shareholders and by the Division. Common Stock in
an aggregate amount equal to 10% of the shares issued in the Offering would be
reserved for issuance by the Company
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<PAGE>
upon the exercise of the stock options granted under the Stock Option Plan. Ten
percent of the shares issued in the Offering would amount to 878,900 shares,
1,034,000 shares, 1,189,100 shares or 1,367,465 shares at the minimum, mid-
point, maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. No options would be granted under the Stock Option Plan until the
date on which shareholder approval is received.
The exercise price of the options granted under the Stock Option Plan will
be equal to the fair market value of the shares on the date of grant of the
stock options. If the Stock Option Plan is adopted within one year following the
Offering, options will become exercisable at a rate of 20% at the end of each 12
months of service with the Bank after the date of grant. Options granted under
the Stock Option Plan would be adjusted for capital changes such as stock splits
and stock dividends. Notwithstanding the foregoing, awards will be 100% vested
upon termination of employment due to death or disability, and if the Stock
Option Plan is adopted more than 12 months after the Offering, awards would be
100% vested upon normal retirement or a change in control of the Bank or the
Company. Unless the Company decides to call an earlier special meeting of
shareholders, the date of grant of these options is expected to be the date of
the Company's annual meeting of shareholders to be held at least six months
after the Offering. Under FDIC rules, if the Stock Option Plan is adopted
within the first 12 months after the Offering, no individual officer may receive
more than 25% of the awards under the plan, no non-employee director may receive
more than 5% of the awards under the plan, and all non-employee directors as a
group can receive no more than 30% of the awards under the plan in the
aggregate.
The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees may be "incentive" stock options, to the extent
permitted under the Code, designed to result in a beneficial tax treatment to
the employee but no tax deduction to the Company. Non-qualified stock options
may also be granted to employees under the Stock Option Plan, and will be
granted to the non-employee directors who receive stock options. In the event an
option recipient terminated his employment or service as an employee or
director, the options would terminate during certain specified periods.
Stock Plan. At a meeting of the Company's stockholders to be held at least
six months after the completion of the Offering, the Board of Directors also
intends to submit a Recognition and Retention Plan (the "Stock Plan") for
stockholder approval. The Company's current intention is to implement the Stock
Plan one year after completion of the Offering. The Stock Plan will provide the
Bank's directors and officers an ownership interest in the Company in a manner
designed to encourage them to continue their service with the Bank. The Bank
will contribute funds to the Stock Plan from time to time to enable it to
acquire an aggregate amount of Common Stock equal to up to 4% of the shares of
Common Stock issued in the Offering or 351,560 shares, 413,600 shares, 475,640
or 546,986 shares at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively. The Stock Plan may acquire the
shares either directly from the Company or in open market purchases. In the
event that additional authorized but unissued shares would be acquired by the
Stock Plan after the Offering, the interests of existing stockholders would be
diluted. The executive officers and directors will be awarded Common Stock under
the Stock Plan without having to pay cash for the shares. No awards under the
Stock Plan would be made until the date the Stock Plan is approved by the
Company's stockholders and the Division.
Awards under the Stock Plan would be nontransferable and nonassignable, and
during the lifetime of the recipient could only be earned by him. Under FDIC
rules, if the Stock Plan is adopted within one year following the Offering, the
shares which are subject to an award would vest and be earned by the recipient
at a rate of 20% of the shares awarded at the end of each full 12 months of
service with the Bank after the date of grant of the award. Awards would be
adjusted for capital changes such as stock dividends and stock splits.
Notwithstanding the foregoing, awards would be 100% vested upon termination of
employment or service due to death or disability, and if the Stock Plan is
adopted more than 12 months after the Offering, awards would be 100% vested upon
normal retirement or a change in control of the Bank or the Company. If
employment or service were to terminate for other reasons, the award recipient
would forfeit any nonvested award. If employment or service is terminated for
cause (as defined in the Stock Plan), shares not already delivered under the
Stock Plan would be forfeited. Under FDIC rules, if the Stock Plan is adopted
within 12 months after the Offering, no individual officer may receive more than
25% of the awards under the plan, no non-employee trustee may receive more than
5% of the awards under the plan, and all non-employee trustees as a group may
receive no more than 30% of the awards under the plan in the aggregate.
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<PAGE>
When shares become vested under the Stock Plan, the participant will
recognize income equal to the fair market value of the Common Stock earned,
determined as of the date of vesting, unless the recipient makes an election
under (S) 83(b) of the Code to be taxed earlier. The amount of income recognized
by the participant would be a deductible expense for tax purposes for the
Company. If the Stock Plan is adopted within one year following the Offering,
dividends and other earnings will accrue and be payable to the award recipient
when the shares vest. If the Stock Plan is adopted within one year following
the Offering, shares not yet vested under the Stock Plan will be voted by the
trustee of the Stock Plan, taking into account the best interests of the
recipients of the Stock Plan awards. If the Stock Plan is adopted more than one
year following the Offering, dividends declared on unvested shares will be
distributed to the participant when paid, and the participant will be entitled
to vote the unvested shares.
INDEBTEDNESS OF MANAGEMENT
The Bank makes loans to non-officer trustees. Such loans are made on the
same terms and conditions as those of comparable transactions with the general
public and do not present more than the normal risk of collectibility.
PURCHASES BY MANAGEMENT
The following table sets forth information regarding intended Common Stock
purchases by each of the trustees and executive officers of the Bank and their
associates and by all trustees and executive officers as a group. In the event
the individual maximum purchase limitation is increased, persons subscribing for
the maximum amount may increase their purchase orders. This table excludes
shares to be purchased by the ESOP or proposed restricted stock awards under the
proposed Stock Plan or proposed option grants pursuant to the proposed Stock
Option Plan. See "Management of the Bank." The trustees and executive officers
of the Bank have indicated their intention to purchase in the Offering an
aggregate of $3,406,000 of Common Stock, equal to 3.9%, 3.3%, 2.9%, and 2.5% of
the number of shares to be issued in the Offering, at the minimum, midpoint,
maximum and 15% above the maximum of the Offering Range, respectively.
<TABLE>
<CAPTION>
AGGREGATE NUMBER PERCENT
PURCHASE OF AT
NAME PRICE SHARES MIDPOINT
- ---- ----- ------ --------
<S> <C> <C> <C>
Oliver F. Ames $ 350,000 35,000 *
Dennis S. Aronowitz 50,000 5,000 *
Paul R. Bechet 400,000 40,000 *
George C. Caner, Jr. 100,000 10,000 *
David C. Chapin 85,000 8,500 *
Richard P. Chapman, Jr. 500,000 50,000 *
William G. Coughlin 300,000 30,000 *
Susan M. Ginns 60,000 6,000 *
John L. Hall, II 300,000 30,000 *
Charles H. Peck 125,000 12,500 *
Hollis W. Plimpton, Jr. 1,000 100 *
Edward D. Rowley 10,000 1,000 *
Joseph J. Slotnik 200,000 20,000 *
William V. Tripp, III 100,000 10,000 *
Rosamond B. Vaule 375,000 37,500 *
Peter O. Wilde 50,000 5,000 *
Franklin Wyman, Jr. 400,000 40,000 *
------------ -------
All trustees and executive officers $ 3,406,000 340,600 3.3%
as a group (17 persons)
Brookline Bancorp, MHC $120,006,000 12,000,600 54.5%
and all trustees, directors and
executive officers of the Mutual
Company and of the Bank as a group (17 persons)
</TABLE>
_____________________
*less than 1%
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<PAGE>
THE REORGANIZATION AND OFFERING
THE DIVISION HAS APPROVED THE PLAN AND THE OFFERING OF THE COMMON STOCK
SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE DIVISION.
REGULATORY APPROVAL OF THE OFFERING, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE OFFERING OR THE PLAN BY THE DIVISION.
THE REORGANIZATION
The Board of Trustees of the Bank has unanimously adopted the Plan and the
Division has approved the Plan. Pursuant to the Plan, the Bank will reorganize
into a two-tier mutual holding company structure. The two-tier mutual holding
company structure will consist of: (i) a Massachusetts mutual holding company
(the Mutual Company); (ii) a Massachusetts stock holding company (the Company)
that will offer up to 47% of its Common Stock for sale in the Offering, with the
remaining 53% of its Common Stock owned by the Mutual Company; and (iii) a
Massachusetts-chartered stock savings bank (the Stock Bank), which will be the
successor to the Bank in its current mutual form and which will be wholly-owned
by the Company.
The Reorganization will be effected as follows, or in any other manner
approved by the Commissioner that is consistent with the purposes of the Plan
and applicable laws and regulations.
(i) The Bank will cause a Massachusetts-chartered de novo mutual savings
bank (the De Novo) to be organized;
(ii) The De Novo will reorganize into the Mutual Company and will form a
de novo stock savings bank subsidiary (the Stock Bank), and all of
the assets and liabilities of the De Novo will be transferred to the
Stock Bank;
(iii) The Bank will merge with and into the Stock Bank with the Stock Bank
as the resulting entity;
(iv) The Mutual Company will organize a Massachusetts-chartered stock
company (the Company) as a separate wholly-owned subsidiary of the
Mutual Company;
(v) The Mutual Company will contribute all of the shares of common stock
of the Stock Bank to the Company, which will result in the Mutual
Company owning 100% of the Common Stock of the Company and the
Company owning 100% of the common stock of the Stock Bank; and
(vi) The Company will offer to sell 47% of its Common Stock in the
Subscription Offering, the Community Offering and, if applicable,
the Syndicated Community Offering.
Upon consummation of the Reorganization, the legal existence of the Bank
will not terminate, but the Stock Bank will be a continuation of the Bank by
virtue of the merger (step (iii) above), and all property of the Bank of
whatsoever kind and nature, will vest in the Stock Bank. The Stock Bank will
continue to have, succeed to, and be responsible for all the rights, liabilities
and obligations of the Bank and will maintain its headquarters and operations at
the Bank's present locations. The Company expects to retain up to 50% of the net
proceeds of the Offering and to contribute the remaining net proceeds to the
Stock Bank. The Bank has applied to the Commissioner to capitalize the Mutual
Company with approximately $250,000. Each deposit account in the Bank
immediately prior to the consummation of the Reorganization will upon completion
of the Reorganization become a deposit account in the Stock Bank in the same
amount and on the same terms and conditions, and will continue to be federally
insured up to the legal maximum by the FDIC and the remaining amounts will be
continued to be insured by the DIF in the same manner as the deposit account
existed in the Bank immediately prior to the Reorganization. Upon consummation
of the Reorganization, all loans and other borrowings from the Bank shall retain
the same status with the Stock Bank after the Reorganization as they had with
the Bank immediately prior to the Reorganization.
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Upon completion of the Reorganization, the Stock Bank will be authorized to
exercise any and all powers, rights and privileges of, and will be subject to
all limitations applicable to, stock savings banks under Massachusetts law. The
Stock Bank will be wholly-owned by the Company which, as the sole holder of the
outstanding capital stock of the Stock Bank, shall have exclusive voting rights
in the Stock Bank. The Company will be wholly-owned by its stockholders who
initially will consist of the Mutual Company and the persons who purchase Common
Stock in the Offering.
The Company will have the power to issue shares of capital stock to persons
other than the Mutual Company. However, so long as the Mutual Company is in
existence, the Mutual Company will be required to own at least 51% of the voting
stock of the Company. The Company may issue any amount of non-voting stock to
persons other than the Mutual Company subject to applicable regulatory
approvals.
LIQUIDATION RIGHTS
At the completion of the Reorganization, the Stock Bank or the Company will
establish a liquidation account for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain deposit accounts
with the Stock Bank following the Reorganization. The amount of the liquidation
account will be equal to the Minority Ownership Interest multiplied by the net
worth of the Bank as set forth in the most recent statement of financial
condition contained in this Prospectus. In the unlikely event of a complete
liquidation of the Stock Bank and the Company (and only in such event), each
such account holder will be entitled to receive a liquidating distribution from
the liquidation account in the amount of the then-adjusted account balances for
such person's deposit accounts then held, following all liquidation payments to
creditors.
The initial account balance for each 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 Qualifying Deposits held by such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or the
Supplemental Eligibility Record Date, respectively, and the denominator of which
is the aggregate amount of all Qualifying Deposits on such dates. For deposit
accounts in existence on both dates, separate account balances shall be
determined on the basis of the Qualifying Deposits in such deposit accounts on
such dates.
If, however, on the last day of any fiscal year of the Stock Bank
commencing after the Eligibility Record Date or Supplemenatl Eligibility Record
Date, as the case may be, the deposit balance in any deposit account of an
Eligible Account Holder or Supplemental Eligible Account Holder is less than
either (i) the amount of Qualifying Deposits of such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, or (ii) the deposit
balance in such deposit account at the close of business on the last day of any
previous fiscal year of the Stock Bank commencing after the Eligibility Record
Date or the Supplemental Eligibility Record Date, then such Eligible Account
Holder's or Supplemental Eligible Account Holder's account balance would be
reduced in an amount equal to the reduction in such deposit balance, and such
account balance will cease to exist if such deposit account is closed. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the deposit balances of any Eligible Account Holder
or Supplemental Eligible Account Holder. Any assets remaining after the above
liquidation rights of Eligible Account Holders and Subsequent Eligible Account
Holders are satisfied would be distributed to the stockholders of the Stock
Bank.
Neither the Stock Bank nor the Company shall be required to set aside funds
for the purpose of establishing the liquidation account, and the creation and
maintenance of the account will not operate to restrict the use or application
of any of the net worth accounts of the Stock Bank, except that neither the
Stock Bank nor the Company, as the case may be, shall declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect would cause
its net worth to be reduced below the amount required for the liquidation
account.
REASONS FOR THE REORGANIZATION
The Reorganization will structure the Bank in the stock form of ownership,
which is the corporate form used by commercial banks, most major businesses and
a large number of savings institutions. The primary purpose of the
Reorganization is to establish a holding company and to convert the Bank to the
stock form of ownership in order to compete and expand more effectively in the
financial services marketplace. The Reorganization also will enable employees,
management and trustees to have an equity ownership interest in the Bank, which
management believes will enhance long-term growth and performance of the Bank
and the Company by enabling the Bank to attract and retain qualified employees
who have a more direct interest in the financial success of the Bank. The
Reorganization will permit the Company to issue capital stock, which is a source
of capital not available to mutual savings banks. Since the Company will not be
offering all of its Common Stock for sale to depositors and the public in the
Offering, the Reorganization will result in less capital raised in comparison to
a standard mutual-to-stock conversion. The Reorganization, however, also will
allow the Bank to raise additional capital in the future because a majority of
the Company's Common Stock will be available for sale in the event of a
conversion of the Mutual Company to stock form. The Reorganization also will
provide the Bank with greater flexibility to structure and finance the expansion
of its operations, both directly and through the Company, including the
potential acquisition of other financial institutions, and to diversify into
other financial services, to the extent permissible by applicable law and
regulation. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Company will be in a position
after the Reorganization, subject to regulatory limitations and the Company's
financial position, to take advantage of any such opportunities that may arise.
Lastly, the Reorganization will enable the Bank to better manage its capital by
providing broader investment opportunities through the holding company structure
and by enabling the Company to repurchase its common stock as market conditions
permit. Although the Reorganization and Offering will create a stock savings
bank and stock holding company, only a minority of the Common Stock will be
offered for sale in the Offering.
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The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure to Minority Stockholders,
which may include: (i) the inability of stockholders other than the Mutual
Company to obtain majority ownership of the Company and the Bank, which may
result in the perpetuation of the management and Board of Directors of the Bank
and the Company; and (ii) that the mutual holding company structure is a
relatively new form of corporate ownership, and new regulatory policies relating
to the mutual interest in the Mutual Company that may be adopted from time-to-
time may have an adverse impact on Minority Stockholders. A majority of the
voting stock of the Company will be owned by the Mutual Company, which is a
mutual institution that will be controlled by the existing Board of Trustees of
the Bank. While this structure will permit management to focus on the Company's
and the Bank's long-term business strategy for growth and capital redeployment
without undue pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual Company will be able
to elect all members of the Board of Directors of the Company, and will be able
to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters, such as the approval
of the stock plans and the stock option plans, that, if established within the
first year after the conclusion of the Offering, must be approved by a majority
of the shares of the Minority Stockholders of the Company. No assurance can be
given that the Mutual Company will not take action adverse to the interests of
the Minority Stockholders. For example, the Mutual Company could revise the
dividend policy, prevent the sale of control of the Company, or defeat a
candidate for the Board of Directors of the Company or other proposals put forth
by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Company
from the mutual to stock form of organization which would be effected through a
merger of the Mutual Company into the Company or the Bank. In a Conversion
Transaction, the shares of Common Stock owned by the Mutual Company would be
cancelled and shares of Common Stock of the Company would be offered for sale to
eligible depositors and others in a subscription and community offering in
accordance with applicable regulations. Regulations of the Division prohibit a
Conversion Transaction for three years following the Offering, subject to a
waiver by the Division for supervisory reasons or for compelling and valid
business reasons established to the satisfaction of the Division. The Division
has not yet adopted regulations governing the conversion of Massachusetts-
chartered mutual holding companies to stock form. Accordingly, there can be no
assurance that the Mutual Company will convert to stock form or of the
conditions that the Division would impose on a stock conversion by the Mutual
Company. However, the Plan provides that any conversion shall be fair and
equitable to Minority Stockholders and establishes a formula for readjusting the
Minority Stockholders' ownership interest (if required by applicable banking
regulators) if the Mutual Company has significant assets other than its
ownership of the Common Stock of the Company or if the Mutual Company waives the
receipt of dividends declared by the Company. See "--Conversion of Mutual
Company to Stock Form."
THE OFFERING
The Offering of between 8,789,000 and 11,891,000 shares of the Common Stock
(subject to adjustment to up to 13,674,650 shares in the event the estimated pro
forma market value of the Bank increases immediately prior to the conclusion of
the Offering) is being made concurrently with the Reorganization. The shares of
Common Stock that will be sold in the Offering will constitute no more than 47%
of the shares that will be outstanding after the Offering (the "Minority
Ownership Interest"). Following the Reorganization and the Offering, the
Company also will be authorized to issue additional common stock or preferred
stock to persons other than the Mutual Company, without prior approval of the
holders of the Common Stock.
The shares of Common Stock are being offered for sale at a fixed price of
$10.00 per share in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) holders of deposit accounts with a
balance of $50 or more on September 30, 1996 ("Eligible Account Holders"); (ii)
holders of deposit accounts with a balance of $50 or more on [ ], 1997
("Supplemental Eligible Account Holders"); (iii) the Bank's ESOP; and (iv)
employees, officers and trustees of the Bank. Concurrently, and subject to the
prior rights of holders of subscription rights, any shares of Common Stock not
subscribed for in the Subscription Offering are being offered in the Community
Offering at $10.00 per share to certain members of the general public with a
preference given to residents of the Bank's community. Subscription rights will
expire if not exercised by 11:00 a.m., Boston time, on February ___, 1998 unless
extended by the Bank and the Company.
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STOCK PRICING AND THE NUMBER OF SHARES TO BE OFFERED IN THE OFFERING
The shares of Common Stock will be issued at an aggregate purchase price
equal to the estimated pro forma market value of such stock based on an
independent appraisal of the Company and the Bank prepared by Feldman Financial,
an independent appraisal firm. Feldman Financial determined that the estimated
pro forma market value of the Common Stock as of November 7, 1997 (the
"Independent Valuation") ranged from $187.0 million to $253.0 million, with a
midpoint of $220.0 million (the "Valuation Range"). The shares of Common Stock
being sold in the Offering represent a minority ownership interest in the
outstanding Common Stock of the Company equal to 47.0% of the estimated pro
forma market value of the Common Stock based on the Independent Valuation. The
aggregate Purchase Price of the Common Stock to be sold in the Offering will
range from $87.9 million to $118.9 million (the "Offering Range") at a purchase
price of $10.00 per share. Following the commencement of the Subscription
Offering, the maximum of the Valuation Range may be increased by up to 15% to up
to $291.0 million, which would result in a corresponding increase in the maximum
of the Offering Range to up to 13,674,650 shares, to reflect changes in market
and financial conditions, without a resolicitation of subscribers. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless the gross proceeds from the sale
of the Common Stock are less than the minimum or more than 15% above the maximum
of the Offering Range. Any adjustment of shares will have a corresponding effect
on the estimated net proceeds of the Offering and the pro forma capitalization
and per share data of the Company. In addition to the shares of Common Stock to
be sold in the Offering, 53% of the shares of Common Stock outstanding upon the
closing of the Reorganization and the Offering will be issued to the Mutual
Company.
Depending on market and financial conditions at the time of the completion
of the Offering, the Bank may increase or decrease the number of shares to be
issued in the Offering. If the change in the number of shares to be issued in
the Offering results in fewer than 8,789,000 shares or more than 11,891,000
shares being sold in the Offering, the Bank may also elect to terminate the
Offering. In the event that the Bank elects to terminate the Offering,
subscribers will receive a prompt refund of their purchase orders, together with
interest earned thereon, at the Bank's current passbook rate from the date of
receipt to the date of termination of the Offering, and all authorizations for
withdrawals of deposits will be canceled. In the event the Bank receives orders
for fewer than 8,789,000 shares, at the discretion of the Board of Trustees and
subject to the approval of the Division and the FDIC, if necessary, the Bank may
establish a new Offering Range and resolicit subscribers. In the event of such a
resolicitation, subscribers will be permitted to modify or cancel their purchase
orders. Any adjustments in the pro forma market value of the Bank and the
Company as a result of market and financial conditions, or a resolicitation of
prospective subscribers would be subject to Division approval. A resolicitation,
if any, following conclusion of the Offering would not extend beyond the
Expiration Date, without prior approval of the Division and the FDIC, if
necessary.
Pursuant to the Plan, the number of shares of Common Stock to be offered in
the Offering is based upon the estimated pro forma market value of the Common
Stock as determined by the Independent Valuation, and the purchase price of the
Common Stock as determined by the Bank. Based on factors including the size of
the Offering, marketability of the shares to be sold in the Offering, expected
liquidity of the shares in the aftermarket, and community preference, the Bank
determined that the shares should be sold in the Offering for $10.00 per share.
Based on the Independent Valuation and the Purchase Price, the Company will
issue up to 11,891,000 shares in the Offering. The number of shares issued will
change in the event the Independent Valuation changes when it is updated
immediately prior to the conclusion of the Offering, but the Purchase Price is
fixed at $10.00 per share and will not change if the Independent Valuation
changes.
Feldman Financial, which is experienced in the valuation and appraisal of
business entities, including savings institutions, has been retained by the Bank
to prepare the Independent Valuation. Feldman Financial will receive a fee of
$40,000 for its appraisal, including subsequent updates, plus its reasonable
out-of-pocket expenses incurred in connection with the Independent Valuation.
The Bank has agreed to indemnify Feldman Financial under certain circumstances
against liabilities and expenses (including certain legal fees) arising from or
based upon the services provided by Feldman Financial, except where the
liability is adjudicated to have resulted from Feldman Financial's negligence or
willful misconduct.
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The Independent Valuation was prepared by Feldman Financial in reliance
upon the information contained herein, including the consolidated financial
statements. The appraisal contains an analysis of a number of factors
including, but not limited to, the Bank's financial condition and operating
trends, the competitive environment within which the Bank operates, operating
trends of certain thrift institutions and savings and loan holding companies,
relevant economic conditions both nationally and in Massachusetts that affect
the operations of thrift institutions, and stock market values of certain
institutions. Feldman Financial has advised the Bank that it also has
considered the effect of the Minority Ownership Interest represented by the
Common Stock in the Offering in terms of liquidity of the Common Stock in the
after-market, marketability of the Common Stock, the proposed dividend policy,
the possibility of conversion of the Mutual Company to stock form, and other
factors considered relevant. In addition, Feldman Financial has advised the
Bank that it has considered and will consider the effect of the additional
capital raised by the sale of the Common Stock in the Offering on the estimated
aggregate pro forma market value of such shares.
On the basis of the foregoing, Feldman Financial has determined that as of
November 7, 1997, the estimated aggregate pro forma market value of the Common
Stock to be issued by the Company was $220.0 million. The Company and the Bank
have determined to offer the shares in the Offering at a price of $10.00 per
share. The Company and the Bank expect to sell a maximum of 47% of the Common
Stock, or 11,891,000 shares, in the Offering. The Bank's Board of Trustees and
the Company's Board of Directors reviewed the appraisal prepared by Feldman
Financial, and, in determining the reasonableness and adequacy of such appraisal
in consideration of FDIC and Massachusetts regulations and policies, has
reviewed the methodology and reasonableness of the assumptions utilized by
Feldman Financial in the preparation of such appraisal. The Board of Trustees of
the Bank and the Board of Directors of the Company have also considered the
implied pricing of the shares based on the appraised value and the range of the
number of shares offered in the Offering. In determining the Offering Range, the
Boards reviewed Feldman Financial's appraisal and, in particular, considered (i)
the Bank's financial condition and results of operations for the year ended
December 31, 1996 and the eight months ended August 31, 1997, (ii) financial
comparisons of the Bank in relation to financial institutions of similar size
and asset quality and (iii) stock market conditions generally and in particular
for financial institutions, all of which are set forth in the appraisal. The
Board also reviewed the methodology and the assumptions used by Feldman
Financial in preparing its appraisal. As discussed above in this section, such
number of shares are subject to change if the Independent Valuation changes at
the conclusion of the Offering.
The Independent Valuation will be updated at the time of the completion of
the Offering, and the shares to be issued in the Offering may increase or
decrease to reflect the changes in market conditions, the estimated pro forma
market value of the Bank and the Company, or both. If the updated estimate of
the pro forma market value of the Bank and the Company immediately upon
conclusion of the Offering changes, there will be a corresponding change to the
number of shares to be issued in the Offering. Subscribers will not be given
the opportunity to change or withdraw their orders unless the Independent
Valuation changes by more than 15%, or if more than 13,674,650 shares or fewer
than 8,789,000 shares are sold in the Offering. Any adjustment of shares of
Common Stock sold will have a corresponding effect on the estimated net proceeds
of the Offering and the pro forma capitalization and per share data of the
Company.
THE INDEPENDENT VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON
STOCK. IN PREPARING THE INDEPENDENT VALUATION, FELDMAN FINANCIAL HAS RELIED
UPON AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL
INFORMATION PROVIDED BY THE BANK. FELDMAN FINANCIAL DID NOT INDEPENDENTLY
VERIFY THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR
DID FELDMAN FINANCIAL VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE
BANK. THE INDEPENDENT VALUATION CONSIDERS THE BANK ONLY AS A GOING CONCERN AND
SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK.
MOREOVER, BECAUSE SUCH INDEPENDENT VALUATION IS BASED UPON ESTIMATES AND
PROJECTIONS ON A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME
TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING THE COMMON STOCK WILL
BE ABLE TO SELL SUCH SHARES AT A PRICE EQUAL TO OR GREATER THAN THE PURCHASE
PRICE.
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No sale of shares of Common Stock may be consummated unless, prior to such
consummation, Feldman Financial confirms to the Bank, the FDIC and the Division
that, to the best of its knowledge, nothing of a material nature has occurred
that, taking into account all relevant factors, would cause Feldman Financial to
conclude that the Independent Valuation is incompatible with its estimate of the
pro forma market value of the Common Stock of the Company at the conclusion of
the Offering. Any change that would result in an aggregate Purchase Price that
is below the minimum or 15% above the maximum of the Offering Range would be
subject to Division and FDIC approval. If such confirmation is not received,
the Bank may extend the Offering, reopen or commence a new offering, establish a
new Offering Range and commence a resolicitation of all purchasers with the
approval of the Division and the FDIC or take such other actions as permitted by
the Division and the FDIC in order to complete the Offering.
SUBSCRIPTION OFFERING
Subject to the paragraph below and the limitations set forth in the "--
Limitations upon Purchases of Common Stock" section, the priorities for the
purchase of Common Stock in the subscription offering are as follows:
Priority 1: Eligible Account Holders. Each Eligible Account Holder shall
be given the opportunity to purchase up to $300,000 of Common Stock offered in
the Offering; provided that the Company may, in its sole discretion and without
further notice to or solicitation of subscribers or other prospective
purchasers, increase such maximum purchase limitation to up to 5% of the maximum
number of shares offered in the Offering or decrease such maximum purchase
limitation to as low as 0.1% of the maximum number of shares offered in the
Offering, subject to the overall purchase limitation set forth in the section
herein titled "Limitations upon Purchases of Common Stock." If there are
insufficient shares available to satisfy all subscriptions of Eligible Account
Holders, shares will be allocated to Eligible Account Holders so as to permit
each such subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated pro rata to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each such subscriber's
aggregate deposit account balances as of the Eligibility Record Date
("Qualifying Deposits") bears to the total amount of Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unfilled.
Subscription rights to purchase Common Stock received by executive officers and
trustees of the Bank including associates of executive officers and trustees,
based on their increased deposits in the Bank in the one year preceding the
Eligibility Record Date, shall be subordinated to the subscription rights of
other Eligible Account Holders. To ensure proper allocation of stock, each
Eligible Account Holder must list on his subscription order form all deposit
accounts in which he had an ownership interest as of the Eligibility Record
Date.
Priority 2: Supplemental Eligible Account Holders. To the extent there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to $300,000 of Common Stock offered in the Offering;
provided that the Company may, in its sole discretion and without further notice
to or solicitation of subscribers or other prospective purchasers, increase such
maximum purchase limitation to up to 5% of the maximum number of shares offered
in the Offering or decrease such maximum purchase limitation to as low as 0.1%
of the maximum number of shares offered in the Offering subject to the overall
purchase limitations set forth in the section herein titled "Limitations Upon
Purchases of Common Stock." In the event Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders, exceed available shares, the shares of Common Stock
will be allocated among subscribing Supplemental Eligible Account Holders so as
to
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permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the same proportion that such
subscriber's aggregate deposit account balances as of the Supplemental
Eligibility Record Date ("Supplemental Qualifying Deposits") bear to the total
amount of Supplemental Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unfilled.
Priority 3: Employee Stock Ownership Plan. The ESOP shall be given the
opportunity to purchase up to 8% of the Common Stock issued in the Offering. In
the event of an oversubscription in the Offering, subscriptions for shares by
the ESOP may be satisfied, in whole or in part, through open market purchases,
by the ESOP subsequent to the closing of the offerings subject to the maximum
purchase limitations set forth in the section herein titled "Limitations Upon
Purchases of Common Stock."
Priority 4: Employees, Officers and Trustees. To the extent there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, Supplemental Eligible Account Holders, and the ESOP each
employee, officer and trustee shall have the opportunity to purchase up to
$300,000 of Common Stock offered in the Offering; provided that the aggregate
subscription rights granted to employees, officers and trustees shall be limited
to up to 25% of the total number of shares of Common Stock sold in the Offering.
Shares purchased under this section shall be aggregated with shares purchased
under the preceding priority categories when calculating the 25% purchase
limitation applicable to purchases by such persons. Shares purchased under this
section are also subject to purchase limitations on management persons set forth
in the section herein titled "Limitations Upon Purchases of Common Stock." For
purposes of this paragraph, trustees shall not be deemed to be associates or a
group acting in concert solely as a result of their membership on the Board of
Trustees of the Bank. In the event that employees, officers and trustees
subscribe under this section for more shares of Common Stock than are available
for purchase by them, the shares of Common Stock available for purchase will be
allocated by the Board of Trustees among such subscribing persons on a equitable
basis, such as by giving weight to the period of service, compensation and
position of the individual subscriber, provided that no fractional shares will
be allocated or issued.
The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates" or "acting in concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank and may be
based on whatever evidence the Bank chooses to use in making any such
determination.
COMMUNITY OFFERING
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, and shall commence concurrently with, during or
promptly after the Subscription Offering. The Common Stock will be offered and
sold in the Community Offering, in accordance with FDIC and Division
regulations, so as to achieve the widest distribution of the Common Stock. No
person, by himself, or with an associate or group of persons acting in concert,
may subscribe for or purchase more than $300,000 of Common Stock offered in the
Community Offering.
In the event of an oversubscription for shares in the Community Offering,
shares may be allocated (to the extent shares remain available) first to to
cover orders of natural persons residing in the Bank's local community,
consisting of the Town of Brookline, the City of Newton and the contiguous
Boston neighborhoods of Allston and Brighton, and certain abutting census tracts
of the Fenway, Jamaica Plain, Mission Hill and West Roxbury (the "Community"),
then to cover the orders of any other person subscribing for shares in the
Community Offering so that each such person may receive up to 1,000 shares, and
thereafter, on a pro rata basis to such persons based on the amount of their
respective subscriptions.
The terms "residence," "reside," or "residing" as used herein with respect
to any person shall mean any person who occupies a dwelling within the Bank's
Community, has an intent to remain in the Community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the Community together with an indication that such presence in
the Community is something other than merely transitory in nature. To the
extent the person is a corporation or other business entity, the principal place
of business or headquarters shall be in the Community. To the extent a person
is a personal benefit plan, the circumstances of the beneficiary shall apply
with respect to this definition. In the case of all other benefit plans, the
circumstances of the
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trustee shall be examined for purposes of this definition. The Bank may utilize
deposit or loan records or such other evidence provided to it to make a
determination as to whether a person is a resident. In all cases, however, such
a determination shall be in the sole discretion of the Bank.
The Bank and the Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person in the Community
Offering.
SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers to be managed by Ryan Beck in a Syndicated
Community Offering, subject to terms, conditions and procedures as may be
determined by the Bank and the Company in a manner that is intended to achieve
the widest distribution of the Common Stock subject to the rights of the Company
to accept or reject in whole or in part all orders in the Syndicated Community
Offering. It is expected that the Syndicated Community Offering will commence
as soon as practicable after termination of the Subscription Offering and the
Community Offering, if any. The Syndicated Community Offering shall be
completed within 45 days after the termination of the Subscription Offering,
unless such period is extended as provided herein.
If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Community Offering, if any, the Boards of
Directors of the Company and the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to
the approval of the Division and the FDIC and to compliance with applicable
state and federal securities laws.
RESTRICTIONS ON AGREEMENTS OR UNDERSTANDINGS REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING
Prior to the completion of the Offering, no depositor may transfer or enter
into an agreement or understanding to transfer the legal or beneficial ownership
of the shares of Common Stock to be purchased by such person in the Offering.
Each depositor who submits an Order Form will be required to certify that the
purchase of Common Stock by such person is solely for the purchaser's own
account and there is no agreement or understanding regarding the sale or
transfer of such shares. The Bank intends to pursue any and all legal and
equitable remedies in the event it becomes aware of any such agreement or
understanding, and will not honor orders reasonably believed by the Bank to
involve such an agreement or understanding.
PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order forms may only be distributed with a Prospectus.
Expiration Date. The Offering will terminate at 11:00 a.m. Boston Time on
February __, 1998 (the "Expiration Date"), unless extended by the Bank and the
Company for up to an additional 45 days (i.e., until April __, 1998) or, if
approved by the Division and the FDIC, if necessary, for an additional period
after such extension. The Bank is not required to give purchasers notice of any
extension unless the offering period is extended beyond April __, 1998, in which
event purchasers will be given the right to increase, decrease, confirm or
rescind their orders. If the minimum number of shares offered in the Offering
(8,789,000 shares) is not sold by the Expiration Date, the Bank may terminate
the Offering and promptly refund all orders for Common Stock. If the number of
shares is reduced below the minimum of the Offering Range, purchasers will be
given an opportunity to increase, decrease or rescind their orders.
Use of Order Forms. In order to purchase the Common Stock, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any
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person receiving an Order Form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 11:00 a.m. Boston Time on February __, 1998. ONCE
TENDERED, AN ORDER FORM CANNOT BE MODIFIED OR REVOKED WITHOUT THE CONSENT OF THE
BANK. Each person ordering shares is required to represent that he is purchasing
such shares for his own account. The interpretation by the Bank of the terms and
conditions of the Plan and of the acceptability of the Order Forms will be
final. The Bank is not required to accept copies of Order Forms.
Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from
deposit accounts maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal without penalty, and the remaining balance will earn interest
at the Bank's passbook rate subsequent to the withdrawal. In the case of
payments made by check or money order, such funds will be placed in a segregated
savings account and interest will be paid by the Bank at the Bank's passbook
rate, which was [2.50%] on the date of this Prospectus, from the date payment is
received until the Offering is completed or terminated. Such interest will be
paid by check, on all funds held, including funds accepted as payment for shares
of Common Stock, promptly upon completion or termination of the Offering. An
executed Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank, unless the Offering is not completed
by April __, 1998, in which event purchasers may be given the opportunity to
increase, decrease, confirm or rescind their orders for a specified period of
time.
Depending on market conditions, the Common Stock may be offered for sale to
the general public on a best efforts basis in the Syndicated Community Offering
by a selling group (the "Selling Group") of broker-dealers ("Selected Dealers")
to be managed by Ryan Beck. Ryan Beck, in its discretion, will instruct
Selected Dealers as to the number of shares to be allocated to each Selected
Dealer. Only upon allocation of shares to Selected Dealers may Selected Dealers
take orders from their customers. Investors who desire to purchase shares in
the Community Offering directly through a Selected Dealer, which may include
Ryan Beck, are advised that the members of the Selling Group are required either
(a) upon receipt of an executed Order Form or direction to execute an Order Form
on behalf of an investor, to forward the appropriate purchase price to the Bank
for deposit in a segregated account on or before twelve noon, prevailing time,
of the business day next following such receipt or execution; or (b) upon
receipt of confirmation by such member of the Selling Group of an investor's
interest in purchasing shares, and following a mailing of an acknowledgment by
such member to such investor on the business day next following receipt of
confirmation, to debit the account of such investor on the fifth business day
next following receipt of confirmation and to forward the appropriate purchase
price to the Bank for deposit in the segregated account on or before 12:00 noon,
Boston time, of the business day next following such debiting. Payment for any
shares purchased pursuant to alternative (a) above must be made by check in full
payment therefor. Payment for shares purchased pursuant to alternative (b)
above may be made by wire transfer to the Bank.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offering. Individuals who are participants in
self-directed tax qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts to
purchase shares of Common Stock in the Offering. In addition, the provisions of
ERISA and IRS regulations require that executive officers, trustees and 10%
stockholders who use self-directed IRA funds and/or Keogh Plan accounts to
purchase shares of Common Stock in the Offering, make such purchase for the
exclusive benefit of the IRA and/or Keogh Plan participant.
If the ESOP purchases shares of the Common Stock, such plan will not be
required to pay for such shares until consummation of the Offering, provided
that there is in force from the time the order is received a loan
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commitment to lend to the ESOP the amount of funds necessary to purchase the
number of shares ordered.
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned
as undeliverable will be held by the Bank until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for the Common Stock are available and delivered to
purchasers, purchasers may not be able to sell the shares of stock which they
ordered.
PLAN OF DISTRIBUTION AND SELLING COMMISSIONS
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by Ryan Beck. All prospective purchasers must send payment directly
to the Bank, where such funds will be held in a segregated special escrow
account and not released until the Offering is completed or terminated.
To assist in the marketing of the Common Stock, the Bank and the Company
have retained Ryan Beck, which is a broker-dealer registered with the NASD.
Ryan Beck will assist the Bank in the Offering as follows: (i) in training and
educating the Bank's employees regarding the mechanics and regulatory
requirements of the Offering; (ii) in conducting informational meetings for
employees, customers and the general public; and (iii) in coordinating the
selling efforts in the Bank's local communities. Ryan Beck has agreed to use
its best efforts to assist the Bank in the solicitation of subscription and
purchase orders for shares of Common Stock in the Offering. For these services,
Ryan Beck will receive an advisory and marketing fee of $1.0 million and a
management fee of 5.5% of the aggregate dollar amount of the Common Stock sold
in the Syndicated Community Offering by NASD member firms (which may include
Ryan Beck) under selected dealer agreements.
The Bank also will reimburse Ryan Beck for its reasonable out-of-pocket
expenses (including legal fees up to a maximum of $55,000) associated with its
marketing effort. The maximum of Ryan Beck's out-of-pocket expenses to be
reimbursed by the Bank is $15,000 (excluding legal fees). The Bank has made an
advance payment to Ryan Beck in the amount of $25,000 upon commencement of the
Offering. If the Plan is terminated by the Bank, the Offering is not completed
by June 30, 1998, or if Ryan Beck terminates its agreement with the Bank in
accordance with the provisions of the agreement, Ryan Beck is entitled to
receive a fee of $25,000 for its advisory and administrative services, plus
reimbursement of its reasonable out-of-pocket expenses. The Bank will indemnify
Ryan Beck against liabilities and expenses (including legal fees) incurred in
connection with certain claims or litigation arising out of or based upon untrue
statements or omissions contained in the offering material for the Common Stock,
including liabilities under the Securities Act of 1933.
Trustees and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Exchange Act, so as to permit officers, trustees and employees to
participate in the sale of the Common Stock. No officer, trustee or employee of
the Bank will be compensated for his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
A Stock Information Center will be established at the Bank's main office,
in an area separated from the Bank's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information Center
and will provide such persons with the telephone number of the Center.
Other Restrictions. Notwithstanding any other provision of the Plan, no
person is entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal or state law or regulation (including state
"blue-sky" laws and regulations), or would violate regulations or policies of
the NASD, particularly those
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regarding free riding and withholding. The Bank and/or its agents may ask for an
acceptable legal opinion from any purchaser as to the legality of such purchase
and may refuse to honor any such purchase order if such opinion is not timely
furnished. The Plan prohibits the Bank from lending funds or extending credit to
any persons to purchase Common Stock in the Offering.
LIMITATIONS UPON PURCHASES OF COMMON STOCK
The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan.
A. The aggregate amount of outstanding Common Stock of the Company owned
or controlled by persons other than the Mutual Company may not exceed
49% of the Company's total outstanding Common Stock.
B. No Person or group of persons Acting in Concert, may purchase more
than $1.0 million of Common Stock offered in the Offering, except
that: (i) the Company may, in its sole discretion and without further
notice to or solicitation of subscribers or other prospective
purchasers, increase such maximum purchase limitation to up to 5% of
the number of shares offered in the Offering; (ii) Tax-Qualified
Employee Plans may purchase up to 10% of the shares offered in the
Offering; and (iii) for purposes of this paragraph shares to be held
by any Tax-Qualified Employee Plan and attributable to a person shall
not be aggregated with other shares purchased directly by or otherwise
attributable to such person.
C. The aggregate amount of Common Stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any stock
acquired by such persons in the secondary market, shall not exceed 25%
of the outstanding shares of Common Stock of the Company held by
persons other than the Mutual Company at the close of the Offering. In
calculating the number of shares held by Management Persons and their
Associates under this paragraph or under the provisions of paragraph D
below, shares held by any Tax-Qualified Employee Benefit Plan or any
Non-Tax-Qualified Employee Benefit Plan of the Bank that are
attributable to such persons shall not be counted.
D. The aggregate amount of Common Stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any Common Stock
acquired by such persons in the secondary market, shall not exceed 25%
of the stockholders' equity of the Bank. In calculating the number of
shares held by Management Persons and their Associates under this
paragraph or under the provisions of paragraph C of this section,
shares held by any Tax-Qualified Employee Benefit Plan or any Non-Tax-
Qualified Employee Benefit Plan of the Bank that are attributable to
such persons shall not be counted.
E. With the approval of the Division, the Boards of Directors of the Bank
and the Company may, in their sole discretion, increase the maximum
purchase limitation set forth in paragraph B to up to 9.9%, provided
that orders for Common Stock in excess of 5% of the number of shares
of Common Stock offered in the Offering shall not in the aggregate
exceed 10% of the total shares of Common Stock offered in the Offering
(except that this limitation shall not apply to purchases by Tax-
Qualified Employee Plans). If such 5% limitation is increased,
subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Company and the Bank may be,
given the opportunity to increase their subscriptions up to the then
applicable limit. Requests to purchase additional shares of Common
Stock under this provision will be determined by the Board of
Directors of the Company, in its sole discretion.
F. In the event of an increase in the total number of shares offered in
the Subscription Offering due to an increase in the maximum of the
Offering Range of up to 15% (the "Adjusted Maximum"), the additional
shares will be issued in the following order of priority: (i) to fill
the ESOP
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subscription to the Adjusted Maximum; (ii) in the event that there is
an oversubscription in the Eligible Account Holder, Supplemental
Eligible Account Holder or employee, officer and trustee categories,
to fill unfulfilled subscriptions of such subscribers according to
their respective priorities set forth in the Plan.
G. Notwithstanding any other provision of the Plan, no person shall be
entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal law or state law or regulation or
would violate regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free riding and
withholding. The Company and/or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such purchase
and may refuse to honor any purchase order if such opinion is not
timely furnished.
H. The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose
representations the Board of Directors believes to be false or who it
otherwise believes, either alone or acting in concert with others, is
violating, circumventing or intends to violate, evade or circumvent
the terms and conditions of the Plan.
The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the Common Stock in states in
which the offers and sales comply with such states' securities laws. However,
no person will be offered or allowed to purchase any Common Stock under the Plan
if he resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to purchase shares under the Plan reside in such state or
foreign country; (ii) the offer or sale of shares of Common Stock to such
persons would require the Bank or its employees to register, under the
securities laws of such state or foreign country, as a broker or dealer or to
register or otherwise qualify its securities for sale in such state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise.
FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION
Consummation of the Reorganization is conditioned on prior receipt by the
Bank of (i) either an IRS ruling or an opinion of counsel with respect to the
federal income tax consequences of the Reorganization and (ii) either a ruling
from the Massachusetts Department of Revenue or an opinion of counsel or tax
advisor with respect to the Massachusetts tax consequences of the
Reorganization. Unlike private letter rulings, opinions of counsel are not
binding on the IRS or the Massachusetts Department of Revenue, and either agency
could disagree with such opinions. In the event of such disagreement, there can
be no assurance that the Stock Bank or the members would prevail in a judicial
proceeding.
In the following discussion, "Mutual Bank" refers to the Bank before the
Reorganization and "Stock Bank" refers to the Bank after the Reorganization.
The Mutual Bank will receive an opinion of counsel from Luse Lehman Gorman
Pomerenk & Schick, A Professional Corporation, to the effect that, for federal
income tax purposes, (1) the conversion of the De Novo Bank into the Mutual
Company, a Massachusetts mutual holding company, will qualify as a tax-free
reorganization under Code Section 368(a)(1)(F); (2) provided that the merger of
the Mutual Bank into the Stock Bank qualifies as a merger under Massachusetts
law, the merger of the Bank into the Stock Bank with the Stock Bank as the
survivor and the transfer of the depositors' equity interest in the Bank to the
Mutual Company in exchange for equity interests in the Mutual Company qualifies
as a tax-free reorganization described in Code Sections 368(a)(1)(A) and
368(a)(2)(D). The Bank, the Stock Bank and the Mutual Company are each "a party
to the reorganization," as defined in Code Section 368(b); (3) the Bank will
recognize no gain or loss upon the transfer of substantially all its assets to
the Stock Bank solely in exchange for equity interests (voting and liquidation
rights) in the Mutual Company and the Stock Bank's assumption of its
liabilities, if any; (4) neither the Stock Bank nor the Mutual Company will
recognize gain or loss upon the receipt by the Stock Bank of substantially all
of the assets of the Bank in exchange for equity interests in the Mutual Company
and the Stock Bank's assumption of the Bank's liabilities; (5) the Mutual
Company's basis in the stock of the Stock Bank will increase by an amount equal
to the Bank's net basis in the property transferred to the Stock Bank; (6) the
Stock Bank's basis in the property received from
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the Bank will be the same as the basis of such property in the hands of the Bank
immediately prior to the Reorganization; (7) the Stock Bank's holding period for
the property received from the Bank will include the period during which such
property was held by the Bank; (8) subject to the conditions and limitations set
forth in Code Sections 381, 382, 383 and 384 and the Treasury regulations
promulgated thereunder, the Stock Bank will succeed to and take into account the
items of the Bank described in Code Section 381(c); (9) no gain or loss will be
recognized by the depositors of the Bank on the receipt of equity interests with
respect to the Mutual Company in exchange for their equity interests surrendered
therefor; (10) each depositor's aggregate basis, if any, in the Mutual Company
equity interest received in the exchange will equal the aggregate basis, if any,
of each depositor's equity interest in the Bank; (11) the holding period of the
Mutual Company equity interests received by the depositors of the Bank will
include the period during which the Bank equity interests surrendered in
exchange therefor were held; (12) the Mutual Company and the Minority
Stockholders of the Company will recognize no gain or loss upon the transfer of
the Stock Bank stock and cash, respectively, to the Company in exchange for
stock of the Company; (13) the Company will recognize no gain or loss upon its
receipt of property from the Mutual Company and Minority Stockholders in
exchange for Common Stock of the Company; and (14) the Mutual Company will
increase its basis in its shares of Company Common Stock by the Mutual Company's
basis in its Stock Bank stock.
CONVERSION OF MUTUAL COMPANY TO STOCK FORM
Although Massachusetts law permits mutual holding companies to convert to
stock form, implementing regulations have not been adopted by the Division as of
this time. Moreover, regulations of the Division would prohibit a mutual holding
company from converting to stock form for three years after its initial minority
stock offering, except for supervisory reasons or for compelling and valid
business reasons established to the satisfaction of the Division. There can be
no assurance when, if ever, a Conversion Transaction will occur, and the board
of trustees has no current intention or plan to undertake a Conversion
Transaction. See "Risk Factors - Conversion of Mutual Company to stock form." In
a Conversion Transaction, the Mutual Company would merge with and into the Bank
or the Company, with the Bank or the Company as the resulting entity, and the
shares of Common Stock held by the Mutual Company would be canceled and reissued
by the Company for sale on a priority basis to eligible depositors of the Bank
and others as described below.
Any Conversion Transaction shall be fair and equitable to Minority
Stockholders. In any Conversion Transaction, Minority Stockholders will be
entitled, without additional consideration, to maintain the same percentage
ownership interest in the Common Stock of the Company after the Conversion
Transaction as their ownership interest in the Common Stock of the Company
immediately prior to the Conversion Transaction (i.e., the Minority Ownership
Interest), subject only to the following adjustments (if required by federal
law, regulation, or regulatory policy) to reflect: (i) the cumulative effect of
the aggregate amount of dividends waived by the Mutual Company; and (ii) the
market value of assets of the Mutual Company (other than Common Stock of the
Company).
The adjustment referred to in clause (i) of the immediately preceding
paragraph above would require that the Minority Ownership Interest be adjusted
by multiplying the Minority Ownership Interest by the following fraction:
(Company stockholders' equity immediately preceding the Conversion Transaction)
- -------------------------------------------------------------------------------
- (aggregate amount of dividends waived by Mutual Company)
----------------------------------------------------------
Company stockholders' equity immediately preceding the Conversion Transaction
The adjustment referred to in clause (ii) above would further adjust the
Minority Ownership Interest by multiplying the result obtained in the preceding
paragraph by the following fraction:
(pro forma market value of Company) - (market value of assets of Mutual Company
- -------------------------------------------------------------------------------
other than Company common stock)
--------------------------------
pro forma market value of Company
At the sole discretion of the Board of Trustees of the Mutual Company and
the Board of Directors of the Company, a Conversion Transaction may be effected
in any other manner necessary to qualify the Conversion Transaction as a tax-
free reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders as set forth in the preceding paragraphs. If a Conversion
Transaction does not occur, the Mutual Company will always own a majority of the
voting stock of the Company.
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A Conversion Transaction would require the approval of applicable bank
regulators, and would be presented to a vote of the corporators of the Mutual
Company and the stockholders of the Company as of a voting record date prior to
the completion of the Conversion Transaction. Federal and state regulatory
policy requires that in any Conversion Transaction the depositors of the Stock
Bank will be accorded the same stock purchase priorities as if the Mutual
Company were a mutual savings bank converting to stock form.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
Although the Board of Directors of the Bank and the Company are not aware
of any effort that might be made to obtain control of the Company following the
Reorganization, the Board of Directors, as discussed below, believes that it is
appropriate to include certain provisions in the Company's Articles of
Organization and Bylaws to protect the interests of the Company and its
stockholders from takeovers which the Board of Directors of the Company might
conclude are not in the best interest of the Bank, the Company, or the Company's
stockholders. Even though the Mutual Company will own a minimum of 51% of the
Common Stock and may, therefore, prevent any takeover proposal simply by voting
its stock against any such a proposal, the Mutual Company may convert to the
stock form of ownership in the future, although it has no present intention to
do so. Accordingly, the Company is not assured that the Mutual Company will
always control the Company by virtue of its ownership of the majority of the
Common Stock. In addition, these provisions will increase protections available
to the Company against transactions that, although not resulting in an
acquisition of a majority of the Company's stock, nevertheless may harm the
Company and its stockholders by disrupting the Bank's operations and management,
and by causing the Company to incur substantial expenses.
The following discussion is a general summary of the material provisions of
the Company's Articles of Organization and Bylaws and certain other regulatory
provisions which may be deemed to have an "anti-takeover" effect. The following
description of certain of these provisions is necessarily general and, with
respect to provisions contained in the Company's Articles of Organization and
Bylaws and the Bank's proposed stock Charter and Bylaws, reference should be
made in each case to the document in question, each of which is part of the
Bank's application to the Commissioner and the Company's Registration Statement
filed with the SEC. See "Additional Information."
PROVISIONS OF THE COMPANY'S ARTICLES OF ORGANIZATION AND BYLAWS
Directors. Certain provisions of the Company's Articles of Organization
and Bylaws will impede changes in control of the Board of Directors. The
Company's Articles of Organization provide that the Board of Directors of the
Company will be divided into three classes, with directors in each class elected
for three-year staggered terms except for the initial directors. Thus, it would
take two annual elections to replace a majority of the Company's Board. The
Company's Articles of Organization provide that the size of the Board of
Directors may be increased or decreased only by a majority vote of the Board.
The Articles of Organization also provide that any vacancy occurring in the
Board of Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the Articles of Organization and
Bylaws impose certain notice and information requirements in connection with the
nomination by stockholders of candidates for election to the Board of Directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The Articles of Organization provide that a director may only be removed
for cause by the affirmative vote of 80% of the shares eligible to vote.
Removal for "cause" is limited to the grounds for termination in the federal
regulations that apply to employment contracts of federally insured savings
institutions.
Restrictions on Call of Special Meetings. The Articles of Organization
provide that a special meeting of stockholders may be called by a majority of
the authorized Board of Directors of the Company or pursuant to a resolution
adopted by a majority of the Board of Directors. Stockholders are not
authorized to call a special meeting of stockholders.
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Absence of Cumulative Voting. The Articles of Organization provide that
there shall be no cumulative voting for the election of directors.
Authorization of Preferred Stock. The Articles of Organization authorize
5,000,000 shares of serial preferred stock, par value $0.01 per share (the
"Preferred Stock"). The Company is authorized to issue Preferred Stock from
time to time in one or more series subject to applicable provisions of law, and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be multiple or as a separate class).
In the event of a proposed merger, tender offer or other attempt to gain control
of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
Preferred Stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors
has no present plan or understanding to issue any Preferred Stock.
Other Control Considerations. The Articles of Organization further provide
that the Board of Directors of the Company, when determining whether the
interests of the Company and its stockholders will be served by any (i) exchange
or tender offer, (ii) merger or consolidation or (iii) sale of substantially all
of the assets of the Company, may consider the interests of the Company's
employees, suppliers, creditors and customers, the economy of the state, region
and nation, community and societal considerations and the long-term and short-
term interests of the Company and its stockholders, including the possibility
that these interests will be best served by the continued independence of the
Company.
Procedures for Certain Business Combinations. The Articles of Organization
require that certain business combinations between the Company (or any majority-
owned subsidiary thereof) and a 10% or greater stockholder either (i) be
approved by at least 80% of the total number of outstanding voting shares of the
Company or (ii) be approved by a majority of certain directors unaffiliated with
such 10% or greater stockholder or (iii) involve consideration per share
generally equal to the higher of (A) the highest amount paid by such 10%
stockholder or its affiliates in acquiring any shares of the Common Stock or (B)
the "Fair Market Value" (generally, the highest closing bid paid on the Common
Stock during the 30 days preceding the date of the announcement of the proposed
business combination or on the date the 10% or greater stockholder became such,
whichever is higher).
Amendment to Articles of Organization and Bylaws. The Articles of
Organization may be amended by the affirmative vote of at least 80% of the total
votes eligible to be cast by stockholders; provided, however, that if at least
two-thirds of the Directors then in office recommend approval of an amendment,
then such amendment shall require the affirmative vote of a majority of the
total votes eligible to be cast by stockholders.
The bylaws may be amended by the affirmative vote of the total number of
directors of the Company or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Company's Articles of
Organization and Bylaws. At least 51% of the Common Stock of the Mutual Company
will be controlled by the Mutual Company. Moreover, management believes that
under current policy of the FDIC and other federal regulators, the Mutual
Company could not be acquired without first converting the Mutual Company to
stock form. As a result, it is very unlikely that the Company could be
acquired so long as it is in a mutual holding company structure.
Notwithstanding the foregoing, the Mutual Company may convert to stock form in
the future and the Board of Directors believes that the provisions described
above are prudent and will reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the Bank
in the orderly deployment of the Offering proceeds into productive assets during
the initial period after the Offering. The Board of Directors believes these
provisions are in the best interests of the Bank, the Company and its
stockholders. Attempts to acquire control of financial institutions and their
holding companies have become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and its stockholders, with due consideration given to matters
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such as the management and business of the acquiring corporation and maximum
strategic development of the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then-
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous or retaining their investment in an enterprise
which is under different management and the objectives of which may not be
similar to those of the remaining stockholders.
Potential Anti-Takeover Effects. Despite the belief of the Bank and the
Company as to the benefits to stockholders of these provisions of the Company's
Articles of Organization and Bylaws, these provisions, as well as the mutual
holding company structure, will have the effect of discouraging any takeover
attempt which would not be approved either by regulatory policy or by the
Company's Board, but pursuant to which stockholders 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
any opportunity to do so. Such provisions will also make it more difficult to
remove the Company's Board of Directors and management. The Boards of Directors
of the Bank and the Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Offering, the Company may adopt additional provisions to
its Articles of Organization regarding the acquisition of its equity securities
that would be permitted to a Massachusetts corporation. The Company and the
Bank do not presently intend to propose the adoption of further restrictions on
the acquisition of the Company's equity securities.
PROVISIONS OF THE STOCK BANK'S CHARTER AND BYLAWS
Limitation on Voting Rights. The Stock Bank's Charter provides that, for a
period of three years from the date of the Reorganization, no person shall
directly or indirectly offer to acquire beneficial ownership of more than 4.9%
of the outstanding shares of any class of equity securities of the Stock Bank
and, after such three year period, no person shall directly offer to acquire
beneficial ownership of more than 10% of the outstanding shares of any class of
equity securities of the Stock Bank. Shares beneficially owned in violation of
these stock ownership restrictions shall not be counted as shares entitled to
vote, shall not be voted or counted as voting shares in connection with any
matter submitted to the stockholders for a vote, and shall not be counted as
outstanding for purposes of determining the affirmative vote necessary to
approve any matter submitted to the Stock Bank's stockholders for a vote.
Additionally, the Stock Bank's Board of Directors may cause all securities
beneficially owned in excess of these limitations to be transferred to an
independent trustee for sale to the Stock Bank or on the open market.
Directors. Like the Company's Articles of Organization, the Stock Bank's
Charter provides that the Board of Directors of the Stock Bank will be divided
into three classes, with directors in each class elected for three-year
staggered terms except for the initial directors. Thus, it would take two
annual elections to replace a majority of the Stock Bank's Board of Directors.
Additionally, Directors of the Stock Bank may only be removed from office for
cause and only by the affirmative vote of the holders of at least 80% of the
Stock Bank's outstanding voting stock, voting together as a single class.
Authorization of Preferred Stock. The Stock Bank's Charter authorizes
5,000,000 shares of serial preferred stock, par value $1.00 per share (the "Bank
Preferred Stock"). The Bank is authorized to issue Bank Preferred Stock from
time to time in one or more series subject to applicable provisions of law, and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be multiple or as a separate class).
In the event of a proposed merger, tender offer or other attempt to gain control
of the Stock Bank that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
Bank Preferred Stock with rights and preferences that would impede the
completion of such a transaction. An effect of the possible issuance of Bank
Preferred Stock, therefore, may be to deter a future takeover attempt. The
Board of Directors has no present plans of understanding for
108
<PAGE>
the issuance of any Bank Preferred Stock but it may issue any Bank Preferred
Stock on terms which the Board deems to be in the best interests of the Company
and its stockholders.
MUTUAL HOLDING COMPANY STRUCTURE
Under Massachusetts law, at least 51% of the Company's voting shares must
be owned by the Mutual Company, and the Mutual Company will be controlled by its
Board of Trustees who will consist initially of the current members of the Board
of Trustees of the Bank. The Mutual Company, acting through its Board of
Trustees, will be able to control the business and operations of the Company and
the Bank and will be able to prevent any challenge to the ownership or control
of the Company by Minority Stockholders.
FRB REGULATIONS
The Change in Bank Control Act and the BHCA, together with the FRB
regulations under those acts, require that the consent of the FRB be obtained
prior to any person or company acquiring "control" of a bank holding company.
Control is conclusively presumed to exist if an individual or company acquires
more than 25% of any class of voting stock of the bank holding company. Control
is rebuttably presumed to exist if the person acquires more than 10% of any
class of voting stock of a bank holding company if either (i) the Company has
registered securities under Section 12 of the Exchange Act or (ii) no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure to rebut
the rebuttable control presumption. Since the Company's Common Stock will be
registered under Section 12 of the Exchange Act, any acquisition of 10% or more
of the Company's Common Stock will give rise to a rebuttable presumption that
the acquiror of such stock controls the Company, requiring the acquiror, prior
to acquiring such stock, to rebut the presumption of control to the satisfaction
of the FRB or obtain FRB approval for the acquisition of control. Restrictions
applicable to the operations of bank holding companies may deter companies from
seeking to obtain control of the Company. See "Regulation."
MASSACHUSETTS BANKING LAW
Massachusetts banking law also prohibits any "company," defined to include
banking institutions as well as corporations, from directly or indirectly
controlling the voting power of 25% or more of the voting stock of two or more
banking institutions without the prior approval of the Board of Bank
Incorporation. Additionally, an out-of-state company which already directly or
indirectly controls voting power of 25% or more of the voting stock of two or
more banking institutions may not also acquire direct or indirect ownership or
control of more than 5% of the voting stock of a Massachusetts banking
institution without the prior approval of the Board of Bank Incorporation.
Finally, for a period of three years following completion of a conversion to
stock form, no person may directly or indirectly offer to acquire or acquire
beneficial ownership of more than 10% of any class of equity security of a
converting mutual savings bank without prior written approval of the Board of
Bank Incorporation.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 45 million shares of Common Stock having
a par value of $.01 per share and 5 million shares of serial Preferred Stock
having a par value of $.01 per share. The Company currently expects to issue
between 8,789,000 and 11,891,000 shares, with an adjusted maximum of 13,674,650
shares, of Common Stock and no shares of Preferred Stock in the Offering. Each
share of the Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of the 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, validly issued and non-
assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE AND WILL NOT BE INSURED BY THE FDIC
OR THE DIF.
109
<PAGE>
COMMON STOCK
Voting Rights. Under Massachusetts law, the holders of the Common Stock
will possess exclusive voting power in the Company. Each stockholder will be
entitled to one vote for each share held on all matters voted upon by
stockholders, except as discussed in "Restrictions on Acquisition of the Company
and the Bank." There are no cumulative voting rights in the election of
directors of the Company. If the Company issues Preferred Stock subsequent to
the Offering, holders of the Preferred Stock may also possess voting rights.
Dividends. Upon consummation of the Reorganization and the Offering, the
Company's assets will consist of the Bank's Common Stock and up to 50% of the
net proceeds of the Offering. The payment of dividends by the Company is
subject to limitations which are imposed by law and applicable regulation. See
"Dividends." The holders of Common Stock 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.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive--after payment or provision for payment of all debts and liabilities of
the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon the closing
of the Reorganization and the Offering for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders who continue their deposit
accounts at the Bank--all assets of the Company available for distribution, in
cash or in kind. If preferred stock is issued subsequent to the Offering, the
holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
Preferred Stock. None of the 5 million authorized shares of Preferred
Stock of the Company will be issued in the Offering. The Company Board of
Directors is authorized, without stockholder approval but subject to applicable
regulatory approval, to issue serial preferred stock and to fix and state voting
powers, designations, preferences or other special rights of such shares. If and
when issued, the serial preferred stock may rank senior to the Common Stock as
to dividend rights, liquidation preferences, or both, and may have full, limited
or no voting rights. Accordingly, the issuance of preferred stock could
adversely affect the voting and other rights of holders of Common Stock.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company, New York, New York, will act as
the transfer agent and registrar for the Common Stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization and the Offering will be passed upon for the Bank and the
Company by Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C. The
Massachusetts state income tax consequences of the Reorganization and the
Offering will be passed upon for the Bank and the Company by Foley, Hoag & Eliot
LLP, Boston, Massachusetts. Luse Lehman Gorman Pomerenk & Schick, P.C. and
Foley, Hoag & Eliot LLP have consented to the references herein to their
opinions. Certain legal matters will be passed upon for Ryan Beck by Peabody &
Brown, Boston, Massachusetts and Washington, D.C.
110
<PAGE>
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 appearing in
this Registration Statement have been audited by Grant Thornton LLP, independent
certified public accountants, as stated in their reports appearing elsewhere
herein, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
Feldman Financial Advisors, Inc. has consented to the publication herein of
the summary of its report to the Bank and the Company setting forth its opinion
as to the estimated pro forma market value of the Common Stock upon
Reorganization and its valuation with respect to Subscription Rights.
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, NW, Washington, D.C. 20549, and copies of such material can
be obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein 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 but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.
The Bank has filed an Application for Offering with the Division with
respect to the Reorganization. Pursuant to the rules and regulations of the
Division, this Prospectus omits certain information contained in that
Application, including the Plan and the Independent Valuation. The Application
may be examined at the office of the Division, 100 Cambridge Street, Boston,
Massachusetts and at the main office of the Bank at 160 Washington Street,
Brookline, Massachusetts, without charge.
In connection with the Stock Offering, the Company will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its Common 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 Offering.
A copy of the Articles of Organization and Bylaws of the Company are
available without charge from the Bank by contacting Linda J. Rosen, Executive
Secretary, 160 Washington Street, Brookline, Massachusetts (617) 730-3500.
111
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants................................................... F-2
Consolidated Balance Sheets as of August 31, 1997 (unaudited) and
December 31, 1996 and 1995 ..................................................................... F-3
Consolidated Statements of Income for the eight months ended August 31, 1997 and 1996
(unaudited) and the years ended December 31, 1996, 1995 and 1994 ............................... 33
Consolidated Statements of Changes in Retained Earnings for the eight months ended
August 31, 1997 and 1996 (unaudited) and the years ended December 31, 1996, 1995 and 1994....... F-4
Consolidated Statements of Cash Flows for the eight months ended August 31, 1997 and 1996
(unaudited) and the years ended December 31, 1996, 1995 and 1994................................F-5 to F-6
Notes to Consolidated Financial Statements...........................................................F-7 to F-28
</TABLE>
All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
notes thereto.
The financial statements of Brookline Bancorp, Inc. have been omitted
because Brookline Bancorp, Inc. has not yet issued any stock, has no assets
and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Trustees
Brookline Savings Bank:
We have audited the accompanying consolidated balance sheets of
Brookline Savings Bank and subsidiaries (the Bank) as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in retained
earnings and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Brookline Savings Bank and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Boston, Massachusetts
February 13, 1997
F-2
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................................ $ 8,021 $ 6,465 $ 5,980
Short-term investments................................................. 7,495 19,870 5,698
Securities available for sale.......................................... 128,525 117,372 81,765
Securities held to maturity (market value of $49,946,
$41,695 and $89,809, respectively).................................... 49,801 41,620 89,342
Restricted equity securities........................................... 3,519 3,481 2,868
Loans.................................................................. 485,515 480,683 448,631
Allowance for loan losses.............................................. (12,443) (12,326) (12,326)
--------- --------- ---------
Net loans......................................................... 473,072 468,357 436,305
--------- --------- ---------
Accrued interest receivable............................................ 5,923 5,106 5,593
Bank premises and equipment, net....................................... 1,354 1,442 1,122
Other real estate owned, net........................................... 2,002 1,689 1,722
Deferred income tax asset, net......................................... - 875 1,676
Other assets........................................................... 604 711 717
--------- --------- ---------
Total assets...................................................... $ 680,316 $ 666,988 $ 632,788
========= ========= =========
LIABILITIES AND RETAINED EARNINGS
Deposits............................................................... $ 481,467 $ 484,016 $ 474,215
Borrowed funds......................................................... 61,815 60,565 49,665
Mortgagors' escrow accounts............................................ 2,348 2,777 2,374
Income taxes payable................................................... 3,825 1,399 1,997
Deferred income tax liability, net..................................... 554 - -
Accrued expenses and other liabilities................................. 4,937 4,284 3,954
--------- --------- ---------
Total liabilities................................................. $ 554,946 $ 553,041 $ 532,205
--------- --------- ---------
Commitments and contingencies
Retained earnings:
Retained earnings.................................................... 114,413 105,287 93,350
Net unrealized gain on securities available for sale,
net of taxes........................................................ 10,957 8,660 7,233
--------- --------- ---------
Total retained earnings........................................... 125,370 113,947 100,583
--------- --------- ---------
Total liabilities and retained earnings........................... $ 680,316 $ 666,988 $ 632,788
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Eight months ended August 31, 1997 (unaudited) and
years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Net
unrealized gain
on securities
available
Retained for sale,
earnings net of taxes Total
------------ --------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993.............................. $ 72,522 $ - $ 72,522
Effect of change in accounting for securities available
for sale at January 1, 1994 - net unrealized gain,
net of taxes............................................ - 5,291 5,291
Net income for the year ended December 31, 1994........... 9,100 - 9,100
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1994....................................... - (1,191) (1,191)
---------- --------- -----------
Balance at December 31, 1994.............................. 81,622 4,100 85,722
Net income for the year ended December 31, 1995........... 11,728 - 11,728
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1995....................................... - 3,133 3,133
---------- -------- ----------
Balance at December 31, 1995.............................. 93,350 7,233 100,583
Net income for the year ended December 31, 1996........... 11,937 - 11,937
Change in net unrealized gain on securities
available for sale, net of taxes for the year ended
December 31, 1996....................................... - 1,427 1,427
---------- -------- ----------
Balance at December 31, 1996.............................. 105,287 8,660 113,947
Net income for the eight months ended
August 31, 1997 (unaudited)............................. 9,126 - 9,126
Change in net unrealized gain on securities available
for sale, net of taxes for the eight months ended
August 31, 1997 (unaudited)............................. - 2,297 2,297
---------- -------- ----------
Balance at August 31, 1997 (unaudited).................... $ 114,413 $ 10,957 $ 125,370
========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- ----------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 9,126 $ 8,195 $ 11,937 $ 11,728 $ 9,100
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (credit) for loan losses......................... - - - - (477)
Provision for other real estate owned...................... - - - - 541
Depreciation and amortization.............................. 296 180 261 227 205
Amortization, net of accretion, of securities premiums
and discounts............................................ 389 542 526 1,226 1,696
Accretion of deferred loan origination fees
and unearned discounts................................... (512) (537) (619) (151) (90)
Net gains from sales of securities......................... (74) (464) (464) (877) (4)
Net gains from sales of other real estate owned............ - (149) (149) - -
Deferred income taxes...................................... (107) 128 (21) 272 (39)
(Increase) decrease in:
Accrued interest receivable.............................. (817) 516 487 (629) (772)
Other assets............................................. 75 32 6 198 21
Increase (decrease) in:
Income taxes payable..................................... 2,374 (1,387) (598) (49) 177
Accrued expenses and other liabilities................... 653 340 330 606 1,142
--------- -------- -------- --------- ---------
Net cash provided by operating activities............. 11,403 7,396 11,696 12,551 11,500
--------- -------- -------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale............. 752 2,712 2,712 1,256 4
Proceeds from redemptions and maturities of securities
available for sale............................................ 20,997 16,482 25,583 20,943 -
Proceeds from redemptions and maturities of securities
held to maturity.............................................. 18,607 61,902 110,400 48,159 61,352
Purchase of securities available for sale........................ (29,119) (38,766) (61,316) (27,241) (19,229)
Purchase of securities held to maturity.......................... (27,001) (10,333) (63,077) (39,499) (52,520)
Purchase of Federal Home Loan Bank of Boston stock............... (38) (318) (613) (113) -
Net increase in loans............................................ (22,136) (19,863) (28,644) (22,787) (37,797)
Proceeds from sales of participations in loans................... 1,198 3,965 5,965 3,000 3,831
Purchase of bank premises and equipment.......................... (193) (193) (570) (218) (250)
Capital expenditures on other real estate owned.................. (43) - (17) (49) -
Proceeds from sales of other real estate owned................... 32 683 1,284 219 1,903
--------- -------- -------- --------- ---------
Net cash provided by (used for) investing activities.. (36,944) 16,271 (8,293) (16,330) (42,706)
--------- -------- -------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in demand deposits and NOW, savings and
money market savings accounts................................. (2,152) 8,515 8,918 (18,987) (15,162)
Increase (decrease) in certificates of deposit................... (397) (917) 883 21,391 42,125
Proceeds from Federal Home Loan Bank of Boston advances.......... 11,492 10,206 22,796 19,900 22,265
Repayment of Federal Home Loan Bank of Boston advances........... (10,242) (1,206) (11,896) (13,500) (6,000)
Increase (decrease) in mortgagors' escrow accounts............... (429) (471) 403 114 301
--------- -------- -------- --------- ---------
Net cash provided by (used for) financing activities.. 1,728 6,127 21,104 8,918 43,529
--------- -------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (27,269) 39,794 24,507 5,139 12,323
Cash and cash equivalents at beginning of period................... 79,285 54,778 54,778 49,639 37,316
--------- -------- -------- --------- ---------
Cash and cash equivalents at end of period......................... $ 52,016 $ 94,572 $ 79,285 $ 54,778 $ 49,639
========= ======== ======== ========= =========
</TABLE>
F-5
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- ----------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds.................. $ 17,187 $ 16,840 $ 26,491 $ 23,727 $ 17,398
Income taxes............................................. 2,480 6,468 8,361 7,190 5,804
Non-cash activities:
Transfers from loans to other real estate owned.......... 285 526 1,096 95 671
Transfer of investment securities from held to maturity
to available for sale................................. - - - 25,952 19,267
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies and Related Matters
Brookline Savings Bank and its subsidiaries (collectively the "Bank") operate
five full service banking offices located in Brookline, Massachusetts. The
Bank's primary activities include acceptance of deposits from the general
public, origination of mortgage loans on residential and commercial real estate
located principally in Massachusetts, and investment in debt and equity
securities. The Bank is subject to competition from other financial and
non-financial institutions. As a Massachusetts chartered savings bank whose
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") and
the Deposit Insurance Fund, the activities of the Bank are subject to
regulation, supervision and examination by federal and state authorities.
(a) Principles of Consolidation and Basis of Financial Statement
Presentation
The consolidated financial statements include the accounts of Brookline Savings
Bank and its wholly-owned subsidiaries, 160 Associates, Inc. ("Associates") and
BBS Investment Corporation ("BBS"). Through 1996, Associates engaged in
marketing services at immaterial levels of activity. In 1997, Brookline
Preferred Capital Corporation ("BPCC") was established as a 99.9% owned
subsidiary of Associates. BPCC is a real estate investment trust that owns and
manages real estate mortgage loans originated by the Bank. BBS is engaged in
buying, selling and holding investment securities. All significant intercompany
transactions and balances are eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expenses.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on unanticipated changes in
economic conditions, particularly in the Boston metropolitan area and eastern
Massachusetts. In addition, the FDIC and the Massachusetts Division of Banks, as
an integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
(b) Cash Equivalents
For purposes of reporting cash flows, cash equivalents include highly liquid
assets with an original maturity of three months or less. Highly liquid assets
include cash and due from banks, short-term investments and commercial loan
participations.
(c) Securities
Effective January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS No. 115, marketable equity securities and debt
securities are classified as either trading account securities, held to maturity
securities (applicable only to debt securities) or available for sale
securities. Management determines the classification of securities at the time
of purchase.
F-7
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
Trading account securities are carried at estimated fair value with unrealized
gains and losses included in earnings. None of the securities purchased by the
Bank have been classified as trading account securities.
Debt securities for which the Bank has the positive intent and ability to hold
to maturity are classified as held to maturity and carried at amortized cost.
Those securities held for indefinite periods of time and not intended to be held
to maturity are classified as available for sale. Securities held for indefinite
periods of time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates or other business factors. Securities available for sale are
carried at estimated fair value. Unrealized gains (losses) are reported as a
separate component of retained earnings, net of related income taxes. Restricted
equity securities are carried at cost.
In November 1995, FASB issued an implementation guide for SFAS No. 115 that
allowed banks a one-time opportunity from mid-November 1995 to December 31, 1995
to reassess investment classifications and reclassify securities in the held to
maturity and available for sale categories without tainting the remainder of the
portfolio not reclassified. In connection with this opportunity, the Bank
reclassified $26.0 million of debt securities from the held to maturity category
to the available for sale category. Retained earnings increased by $62,000 as a
result of the reclassification.
Premiums and discounts on debt securities are amortized to expense and accreted
to income over the estimated life of the respective security using a method
which approximates the interest method. Security transactions are recorded on
the trade date. Realized gains and losses are determined using the specific
identification method. Security valuations are reviewed and evaluated
periodically by management. If the decline in the value of any security is
deemed to be other than temporary, the security is written down to a new cost
basis and the resulting loss is charged to income.
(d) Loans
Loans are reported at the principal amount outstanding, reduced by net deferred
loan origination fees, unearned discounts and unadvanced funds due mortgagors on
uncompleted loans.
Loan origination fees and direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the interest method.
Deferred amounts are recognized for fixed rate loans over the contractual life
of the loans and for adjustable rate loans over the period of time required to
adjust the contractual interest rate to a yield approximating a market rate at
origination date.
Accrual of interest on loans is discontinued either when reasonable doubt exists
as to the full timely collection of interest and principal or when a loan
becomes past due 90 days. All interest previously accrued and not collected is
reversed against interest income. Interest payments received on non-accrual and
impaired loans are recognized as income unless further collections are doubtful,
in which case the payments are applied as a reduction of principal. Loans are
generally returned to accrual status when principal and interest payments are
current, full collectibility of principal and interest is reasonably assured and
a consistent record of performance (generally six months) has been achieved.
Effective January 1, 1995, the Bank prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." Under SFAS No. 114, a loan is considered impaired when, based on
current information and events,
F-8
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
it is probable that a creditor will be unable to collect principal or interest
due according to the contractual terms of the loan. Impaired loans are measured
and reported based on one of three methods: 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. If the measure is less than an impaired loan's recorded
investment, an impairment loss is recognized as part of the allowance for loan
losses. The adoption of SFAS No. 114 and SFAS No. 118 did not affect the Bank's
overall allowance for loan losses.
(e) Allowance for Loan Losses
The allowance for loan losses is based on a periodic analysis of the loan
portfolio by management of the amount deemed necessary to adequately provide for
losses in the loan portfolio. Factors considered in making the evaluation
include growth of the loan portfolio, the risk characteristics of the types of
loans in the portfolio, geographic and large borrower concentration, current
regional economic and real estate market conditions that could affect the
ability of borrowers to pay, the value of underlying collateral and trends in
borrowers to loan delinquencies and charge-offs. Provisions for losses are
charged to income. Loans are charged off against the allowance when the
collectibility of principal is unlikely. Recoveries of loans previously charged
off are credited to the allowance.
(f) Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated depreciation
and amortization, except for land which is carried at cost. Bank premises and
equipment are depreciated using the straight-line method over the estimate
useful life of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the improvements.
(g) Other Real Estate Owned
Other real estate owned is comprised of properties acquired through foreclosure
or acceptance of a deed in lieu of foreclosure. Such properties are recorded
initially at estimated fair value less costs to sell. When a property is
acquired, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. An allowance for losses on other real
estate owned is established by a charge to income when, upon periodic evaluation
by management, further declines in the estimated fair value of properties have
occurred. Such evaluations are based on an analysis of individual properties as
well as a general assessment of current real estate market conditions.
Holding costs and rental income on properties are included in current operations
while certain costs to improve such properties are capitalized. Gains and losses
from the sale of properties are reflected in operating results when realized.
(h) Employee Benefits
The Bank accounts for pension and post-retirement benefits on the net periodic
cost method. This method recognizes the compensation cost of employee benefits
over each employee's estimated service life. Pension costs are funded based on
the maximum amount that can be deducted for federal income tax purposes.
F-9
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(i) Income Taxes
The Bank utilizes the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) New Accounting Pronouncements
Effective January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for
Transfers of Financial Assets and Extinguishment of Liabilities." This Statement
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. However, SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125," requires the deferral of implementation as it
relates to repurchase agreements, dollar-rolls, securities lending and similar
transactions until years beginning after December 31, 1997. Earlier or
retroactive application of this Statement is not permitted. Adoption of SFAS No.
125 is not expected to have a significant effect on the Bank's financial
position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This Statement requires entities
presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income consisting of revenue, expenses, gains and losses that bypass the income
statement and are reported directly in a separate component of equity. Other
comprehensive income includes, for example, unrealized gains and losses on
certain investment securities, minimum pension liability adjustments and foreign
currency items. This Statement requires that components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. At August 31, 1997, the Bank's other
comprehensive income consisted of unrealized gains on securities classified as
available for sale. This Statement is effective for fiscal years beginning after
December 31, 1997 and requires restatement of prior period financial statements
presented for comparative purposes.
(2) Cash and Short-Term Investments (In Thousands)
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of $1,311, $1,155 and $1,268 were maintained to satisfy federal
regulatory requirements at August 31, 1997 and December 31, 1996 and 1995,
respectively.
Short-term investments are summarized as follows:
<TABLE>
<CAPTION>
December 31,
August 31, ------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Money market funds..................................................... $ 6,645 $ 15,870 $ 5,620
Federal funds.......................................................... 850 4,000 78
-------- --------- -------
$ 7,495 $ 19,870 $ 5,698
======== ========= ========
</TABLE>
F-10
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
Short-term investments are stated at cost which approximates market. Money
market funds are invested in a mutual fund whose assets are comprised primarily
of U.S. Treasury obligations, commercial paper and certificates of deposit with
average maturities of 90 days or less.
(3) Investment Securities (In Thousands)
Securities available for sale and held to maturity are summarized below:
<TABLE>
<CAPTION>
At August 31, 1997
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations...................... $ 73,610 $ 140 $ 31 $ 73,719
Corporate obligations....................................... 31,171 53 44 31,180
--------- -------- ----- ---------
Total debt securities.................................... 104,781 193 75 104,899
Marketable equity securities.................................... 6,168 17,530 72 23,626
--------- -------- ----- ---------
Total securities available for sale...................... $ 110,949 $ 17,723 $ 147 $ 128,525
========= ======== ===== =========
Securities held to maturity:
U.S. Government and Agency obligations.......................... $ 3,987 $ 5 $ 1 $ 3,991
Corporate obligations........................................... 43,254 108 12 43,350
Mortgage-backed securities...................................... 2,560 54 9 2,605
--------- -------- ----- ---------
Total securities held to maturity........................ $ 49,801 $ 167 $ 22 $ 49,946
========= ======== ===== =========
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations...................... $ 57,089 $ 101 $ 86 $ 57,104
Corporate obligations....................................... 39,890 73 60 39,903
--------- -------- ----- ---------
Total debt securities.................................... 96,979 174 146 97,007
Marketable equity securities.................................... 6,703 13,750 88 20,365
--------- -------- ----- ---------
Total securities available for sale...................... $ 103,682 $ 13,924 $ 234 $ 117,372
========= ======== ===== =========
Securities held to maturity:
U.S. Government and Agency obligations.......................... $ 12,951 $ 3 $ 1 $ 12,953
Corporate obligations........................................... 25,905 45 15 25,935
Mortgage-backed securities...................................... 2,764 54 11 2,807
--------- -------- ----- ---------
Total securities held to maturity........................ $ 41,620 $ 102 $ 27 $ 41,695
========= ======== ===== =========
</TABLE>
F-11
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and Agency obligations...................... $ 42,646 $ 262 $ 7 $ 42,901
Corporate obligations....................................... 19,745 104 59 19,790
--------- -------- ----- ---------
Total debt securities.................................... 62,391 366 66 62,691
Marketable equity securities.................................... 7,922 11,210 58 19,074
--------- -------- ----- ---------
Total securities available for sale...................... $ 70,313 $ 11,576 $ 124 $ 81,765
========= ======== ===== =========
Securities held to maturity:
U.S. Government and Agency obligations.......................... $ 28,947 $ 132 $ 7 $ 29,072
Corporate obligations........................................... 57,245 303 63 57,485
Mortgage-backed securities...................................... 3,150 105 3 3,252
--------- -------- ----- ---------
Total securities held to maturity........................ $ 89,342 $ 540 $ 73 $ 89,809
========= ======== ===== =========
</TABLE>
Restricted equity securities are as follows:
<TABLE>
<CAPTION>
December 31,
August 31, -------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Federal Home Loan Bank of Boston stock................................. $ 3,266 $ 3,228 $ 2,615
Massachusetts Savings Bank Life
Insurance Company stock.............................................. 253 253 253
-------- -------- -------
$ 3,519 $ 3,481 $ 2,868
======== ======== =======
</TABLE>
As a voluntary member of the Federal Home Loan Bank of Boston ("FHLB"), the Bank
is required to invest in $100 par value stock of the FHLB in an amount equal to
1% of its outstanding home loans or 5% of its outstanding advances from the
FHLB, whichever is higher. As and when such stock is redeemed, the Bank would
receive from the FHLB an amount equal to the par value of the stock. At its
discretion, the FHLB may declare dividends on the stock. Such dividends amounted
to $139 and $116 for the eight months ended August 31, 1997 and 1996 and $183,
$178 and $194 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F-12
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The maturities of the investments in debt securities at August 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Available for sale
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 58,752 $ 58,798
After 1 year through 5 years........................................... 45,832 45,915
After 5 years through 10 years......................................... 197 186
---------- ----------
$ 104,781 $ 104,899
========== ==========
<CAPTION>
Held to maturity
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 11,012 $ 11,035
After 1 year through 5 years........................................... 36,129 36,206
After 5 years through 10 years......................................... 313 304
Over 10 years.......................................................... 2,347 2,401
--------- ---------
$ 49,801 $ 49,946
========= =========
</TABLE>
The maturities of the investments in debt securities at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Available for sale
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 50,666 $ 50,731
After 1 year through 5 years........................................... 45,998 45,971
After 5 years through 10 years......................................... 315 305
--------- ---------
$ 96,979 $ 97,007
========= =========
<CAPTION>
Held to maturity
--------------------------
Amortized Estimated
Maturity cost fair value
- -------- --------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 19,066 $ 19,083
After 1 year through 5 years........................................... 19,790 19,805
After 5 years through 10 years......................................... 239 227
Over 10 years.......................................................... 2,525 2,580
--------- ---------
$ 41,620 $ 41,695
========= =========
</TABLE>
F-13
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The maturities of the investments in debt securities at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Available for sale
---------------------------
Amortized Estimated
Maturity cost fair value
- -------- ---------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 14,518 $ 14,532
After 1 year through 5 years........................................... 46,442 46,737
After 5 years through 10 years......................................... 1,431 1,422
--------- ---------
$ 62,391 $ 62,691
========= =========
<CAPTION>
Held to maturity
---------------------------
Amortized Estimated
Maturity cost fair value
- -------- ---------- ----------
<S> <C> <C>
Within 1 year.......................................................... $ 79,686 $ 80,008
After 1 year through 5 years........................................... 6,007 6,047
After 5 years through 10 years......................................... 499 502
Over 10 years.......................................................... 3,150 3,252
--------- ---------
$ 89,342 $ 89,809
========= =========
</TABLE>
Mortgage-backed securities are included above based on their contractual
maturities (primarily in excess of 10 years); the expected lives, however, are
expected to be shorter due to anticipated payments.
Sales of investment securities, all of which were marketable equity securities,
are summarized as follows:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Proceeds from sales.................................. $ 752 $ 2,712 $ 2,712 $ 1,256 $ 4
Gross gains from sales............................... 74 469 469 1,006 4
Gross losses from sales.............................. - 5 5 129 -
</TABLE>
F-14
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(4) Loans (In Thousands)
A summary of loans follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Mortgage loans:
One-to-four family ................................................ $ 65,226 $ 57,725 $ 56,814
Multi-family....................................................... 214,062 200,368 193,812
Commercial real estate............................................. 143,187 139,430 125,363
Construction and development....................................... 7,849 7,261 10,288
Home equity........................................................ 5,359 6,398 7,420
Second............................................................. 16,706 19,872 17,680
---------- ---------- ----------
Total mortgage loans........................................... 452,389 431,054 411,377
---------- ---------- ----------
Commercial loans:
Participations..................................................... 36,500 52,950 43,100
Other.............................................................. 8,384 9,221 4,584
---------- ---------- ----------
Total commercial loans......................................... 44,884 62,171 47,684
---------- ---------- ----------
Consumer loans....................................................... 1,336 1,023 1,192
---------- ---------- ----------
Total gross loans.............................................. 498,609 494,248 460,253
Unadvanced funds on loans............................................ (11,812) (11,950) (9,879)
Deferred loan origination fees....................................... (1,272) (1,326) (1,012)
Unearned discounts................................................... (10) (289) (731)
---------- ---------- ----------
$ 485,515 $ 480,683 $ 448,631
========== ========== ==========
</TABLE>
The Bank's portfolio, other than commercial loan participations, is
substantially concentrated within Massachusetts. Commercial loan participations
represent purchases of a portion of loans to national companies originated and
serviced by money center banks. Such participations generally mature between one
day and three months.
Non-accrual loans amounted to $1,412, $1,337 and $748 at August 31, 1997 and
December 31, 1996 and 1995, respectively. If interest payments on all
non-accrual loans for the eight months ended August 31, 1997 and 1996 and the
years ended December 31, 1996, 1995 and 1994 had been made in accordance with
original loan agreements, interest income of $92, $88, $201, $90 and $110 would
have been recognized on the loans compared to interest income actually
recognized of $12, $13, $39, $38 and $18, respectively.
Restructured loans amounted to $2,288, $5,438 and $10,922 at August 31, 1997 and
December 31, 1996 and 1995, respectively. Restructured loans represent
performing multi-family commercial real estate mortgage loans for which
concessions (such as reductions of interest rates to below market terms and/or
extension of repayment terms) have been granted due to the borrower's financial
condition. At August 31, 1997, there were no outstanding commitments to lend
additional funds to borrowers with restructured loans. If interest payments on
all restructured loans for the eight months ended August 31, 1997 and 1996 and
the years ended December 31, 1996, 1995 and 1994 had been made in accordance
with original loan agreements, interest income of $180, $683, $993, $989 and
$447 would have been recognized on the loans compared to interest income
actually recognized of $77, $579, $1,080, $653 and $340, respectively.
F-15
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The recorded investment in impaired loans, as defined by SFAS No. 114 at the
dates indicated, is as follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Multi-family mortgage loans.......................................... $ 135 $ 768 $ 6,855
Commercial real estate mortgage loans................................ 2,038 5,097 8,762
Construction and development loans................................... - 687 685
-------- --------- ---------
$ 2,173 $ 6,552 $ 16,302
======== ========= =========
Average recorded investment in impaired loans for the
eight months ended August 31, 1997 and the years
ended December 31, 1996 and 1995................................... $ 4,363 $ 11,427 $ 12,307
======== ========= =========
</TABLE>
Impaired loans for which an allowance for impairment was not required primarily
due to prior charge-offs and/or the sufficiency of collateral values amounted to
$2,173, $1,527 and $1,637 at August 31, 1997 and December 31, 1996 and 1995,
respectively. The remaining impaired loans of $0, $5,025 and $14,665 at those
dates had an allowance for impairment of $0, $1,009 and $1,915, respectively,
all of which were included in the overall allowance for loan losses.
Interest income recognized on impaired loans, all of which was recorded on a
cash basis, was $124 and $310 for the eight months ended August 31, 1997 and
1996 and $844, $1,099 and $665 for the years ended December 31, 1996, 1995 and
1994, respectively.
A portion of certain commercial real estate loans originated and serviced by the
Bank are sold periodically to other banks on a non-recourse basis. The balance
of loans acquired by other banks amounted to $14,701, $17,277 and $16,756 at
August 31, 1997 and December 31, 1996 and 1995, respectively. No fees are
collected by the Bank for servicing such loan participations.
In the ordinary course of business, the Bank makes loans to its Trustees and
their related interests, generally at the same prevailing terms as those of
other borrowers. A summary of related party activity follows:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 571 $ 827 $ 827 $ 842 $ 854
Repayments........................................... 8 225 256 15 12
----- ------ ------ ------ ------
Balance at end of period............................. $ 563 $ 602 $ 571 $ 827 $ 842
===== ====== ====== ====== ======
</TABLE>
F-16
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(5) Allowance for Loan Losses (In Thousands)
An analysis of the allowance for loan losses for the periods indicated follows:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
------------------- ---------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 12,326 $ 12,326 $ 12,326 $ 12,274 $ 12,745
Provision (credit) for loan losses................... - - - - (477)
Charge-offs.......................................... (6) (94) (166) (240) (40)
Recoveries........................................... 123 160 166 292 46
--------- --------- -------- --------- ---------
Balance at end of period............................. $ 12,443 $ 12,392 $ 12,326 $ 12,326 $ 12,274
========= ========= ======== ========= =========
</TABLE>
(6) Bank Premises and Equipment (In Thousands)
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Land ............................................................... $ 62 $ 62 $ 62
Office building and improvements..................................... 1,863 1,815 1,803
Furniture, fixtures and equipment.................................... 1,643 1,495 1,582
-------- -------- --------
3,568 3,372 3,447
Accumulated depreciation and amortization............................ 2,214 1,930 2,325
-------- -------- --------
$ 1,354 $ 1,442 $ 1,122
======== ======== ========
</TABLE>
(7) Other Real Estate Owned (In Thousands)
The composition of other real estate owned as of the dates indicated is as
follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Commercial real estate............................................... $ 1,868 $ 1,840 $ 1,693
Residential.......................................................... 320 70 348
-------- -------- ---------
2,188 1,910 2,041
Valuation allowance.................................................. 186 221 319
-------- -------- ---------
$ 2,002 $ 1,689 $ 1,722
======== ======== =========
</TABLE>
F-17
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
An analysis of the valuation allowance for the periods indicated follows:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $ 221 $ 319 $ 319 $ 403 $ -
Provision for losses................................. - - - - 541
Write-downs.......................................... (35) (82) (98) (84) (138)
------ ----- ----- ----- ------
Balance at end of period............................. $ 186 $ 237 $ 221 $ 319 $ 403
====== ===== ===== ===== ======
</TABLE>
Net other real estate owned income (expense) for the periods indicated is
comprised of the following:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
-------------------- --------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Rental income........................................ $ 242 $ 139 $ 272 $ 168 $ 291
Provision for losses................................. - - - - (541)
Operating and foreclosure expenses................... (84) (102) (122) (208) (491)
Gains from sales..................................... - 149 149 - -
------ ----- ----- ----- -------
$ 158 $ 186 $ 299 $ (40) $ (741)
====== ===== ===== ===== =======
</TABLE>
(8) Deposits (Dollars In Thousands)
A summary of deposits follows:
<TABLE>
<CAPTION>
August 31, 1997 December 31, 1996 December 31, 1995
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
average average average
Amount rate Amount rate Amount rate
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand checking accounts.................... $ 10,356 0.00% $ 9,988 0.00% $ 9,461 0.00%
NOW accounts................................ 37,786 1.75 38,560 1.75 36,885 1.75
Savings accounts............................ 14,160 2.50 15,578 2.50 18,373 2.50
Money market savings accounts............... 157,782 3.81 158,110 3.85 148,599 3.83
--------- --------- --------
Total transaction deposit accounts.... 220,084 3.19 222,236 3.22 213,318 3.19
--------- --------- --------
Certificate of deposit accounts maturing:
Within six months....................... 134,449 5.43 121,116 5.30 131,566 5.70
After six months but within 1 year...... 75,352 5.64 74,709 5.55 68,410 5.65
After 1 year but within 2 years......... 22,333 5.70 36,917 5.85 24,050 6.01
After 2 years but within 3 years........ 21,170 6.75 13,135 6.18 18,838 6.17
After 3 years........................... 8,079 6.12 15,903 6.76 18,033 6.86
--------- --------- --------
Total certificate of deposit accounts 261,383 5.64 261,780 5.58 260,897 5.83
--------- --------- --------
$ 481,467 4.52% $ 484,016 4.50% $474,215 4.64%
========= ========= ========
</TABLE>
Certificate of deposit accounts issued in amounts of $100,000 or more totaled
$41,783, $38,251 and $33,183 at August 31, 1997 and December 31, 1996 and 1995,
respectively.
F-18
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
----------------------- ---------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NOW accounts......................................... $ 430 $ 423 $ 641 $ 620 $ 657
Savings accounts..................................... 252 290 426 498 628
Money market savings accounts........................ 4,066 3,925 5,957 5,665 5,278
Certificate of deposit accounts...................... 9,715 9,892 14,751 14,127 9,272
--------- --------- --------- -------- ---------
$ 14,463 $ 14,530 $ 21,775 $ 20,910 $ 15,835
========= ========= ========= ======== =========
</TABLE>
(9) Borrowed Funds (Dollars In Thousands)
Borrowed funds are comprised of the following advances from the FHLB:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
August 31, 1997 1996 1995
-------------------------- ------------------------ ----------------------
Weighted Weighted Weighted
average average average
Maturity Amount rate Amount rate Amount rate
- -------- --------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Within 1 year............................... $ 21,450 6.25% $ 15,100 6.97% $ 8,600 6.94%
Over 1 year to 2 years...................... 12,615 6.29 20,665 5.98 15,100 6.97
Over 2 years to 3 years..................... 12,400 6.66 10,550 6.83 17,565 5.88
Over 3 years to 4 years..................... 5,350 6.73 4,900 6.13 3,500 7.31
Over 4 years to 5 years..................... 10,000 6.59 9,350 6.65 4,900 6.13
--------- --------- ---------
$ 61,815 6.44% $ 60,565 6.49% $ 49,665 6.52%
========= ========= =========
</TABLE>
The advances are secured by all the Bank's stock and deposits in the FHLB and a
general lien on one-to-four family residential mortgage loans and U.S.
Government and Agency obligations in an aggregate amount equal to outstanding
advances.
F-19
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(10) Income Taxes (Dollars in Thousands)
Provision for income taxes are comprised of the following amounts:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
----------------------- ---------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current:
Federal......................................... $ 4,899 $ 4,090 $ 5,957 $ 5,855 $ 4,446
State........................................... 88 1,229 1,773 1,826 1,457
-------- -------- ------- ------- --------
4,987 5,319 7,730 7,681 5,903
-------- -------- ------- ------- --------
Deferred:
Federal......................................... 198 (138) (31) (238) 27
State........................................... 91 10 52 (34) 12
-------- -------- ------- ------- --------
(107) (128) 21 (272) 39
-------- -------- ------- ------- --------
$ 4,880 $ 5,191 $ 7,751 $ 7,409 $ 5,942
======== ======== ======= ======= ========
</TABLE>
The reduction in state income tax expense for the eight months ended August 31,
1997 is attributable primarily to the establishment of a real estate investment
trust.
Total income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate (between 34% and 35% for the periods
presented) to income before tax expense as a result of the following:
<TABLE>
<CAPTION>
Eight months
ended August 31, Year ended December 31,
----------------------- ---------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Expected income tax expense at
statutory federal tax rate......................... $ 4,862 $ 4,685 $ 6,891 $ 6,583 $ 5,144
State taxes, net of federal income tax benefit....... 116 818 1,204 1,183 969
Dividend income received deduction................... (118) (115) (167) (163) (137)
Change in federal tax rate applied to deferred
income taxes....................................... - (123) (123) - -
Utilization of capital loss carryforward............. - - - (124) -
Other, net........................................... 20 (74) (54) (70) (34)
-------- -------- ------- ------- --------
$ 4,880 $ 5,191 $ 7,751 $ 7,409 $ 5,942
======== ======== ======= ======= ========
Effective income tax rates........................... 34.8% 38.8% 39.4% 38.7% 39.5%
======== ======== ======= ======= ========
</TABLE>
F-20
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at the dates indicated are as
follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses.......................................... $ 5,208 $ 5,253 $ 5,177
Pension and postretirement benefits................................ 1,257 1,026 741
Loan origination fees.............................................. 1 80 178
Other.............................................................. 60 8 32
------- ------- --------
Total gross deferred tax assets................................ 6,526 6,367 6,128
------- ------- --------
Deferred tax liabilities:
Unrealized gain on available for sale securities................... 6,619 5,031 4,209
Post-1987 bad debt reserves........................................ 227 256 3
Savings Bank Life Insurance Company stock.......................... 108 108 106
Other.............................................................. 126 97 134
------- ------- --------
Total gross deferred tax liabilities........................... 7,080 5,492 4,452
------- ------- --------
Net deferred tax asset (liability)............................. $ (554) $ 875 $ 1,676
======= ======= ========
</TABLE>
For income tax purposes, the Bank uses October 31 as its fiscal year end date.
Historically, the Bank has been subject to special provisions in the tax law
regarding allowable tax bad debt deductions and related reserves. Bad debt
deductions were determined based on loss experience or a percentage of taxable
income. The bad debt reserve balance represents allowable deductions in excess
of actual losses and consists of a defined base-year amount (accumulated through
October 31, 1988) and additional amounts accumulated after that date.
Tax law changes were enacted in August 1996 that eliminated use of the
percentage of taxable income method for tax years after 1995 (after October 31,
1996 in the case of the Bank) and required recapture into taxable income over a
six year period all bad debt reserves accumulated after October 31, 1988. The
Bank had previously recorded a deferred tax liability with respect to these
post-1987 reserves and, therefore, this new requirement had no effect on the
Bank's income tax expense or net income.
The tax law changes also require recapture of pre-1988 bad debt reserves into
taxable income if the Bank makes "non-dividend distributions." Non-dividend
distributions is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation.
The amount of additional taxable income from a non-dividend 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 Conversion, the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Bank does not intend to
pay dividends that would result in recapture of any portion of its bad debt
reserves, and accordingly, has not provided for any portion of the $772
liability relating to the balance of its pre-1988 bad debt reserves.
F-21
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(11) Employee Benefits (Dollars In Thousands)
Pension Plan
The Bank sponsors a non-contributory defined benefit pension plan that covers
all employees who meet specific age and length of service requirements, which is
administered by the Savings Banks Employees Retirement Association ("SBERA").
The plan provides for benefits to be paid to eligible employees at retirement
based primarily upon their years of service with the Bank and the average of
their three highest consecutive years of compensation. The Bank's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attained to date, but also for those expected to be earned in the future. The
plan assets are invested primarily in U.S. Government obligations, corporate
bonds and equity securities.
The following table sets forth the funded status of the plan for the years ended
October 31, the plan's latest valuation dates, as determined by the plan's
actuary:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,997 and $3,014............................................ $ 3,060 $ 3,090
========= ========
Projected service obligation for service rendered to date......... $ 4,338 $ 4,683
Plan assets at fair value......................................... 4,833 4,070
--------- --------
Plan assets greater (less) than projected benefit obligation.... 495 (613)
Unamortized transition assets..................................... (61) (65)
Unrecognized net gain............................................. (1,615) (239)
--------- --------
Accrued pension expense......................................... $ (1,181) $ (917)
========= ========
</TABLE>
Net pension expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Service cost-benefits earned during the year......................... $ 276 $ 207 $ 227
Interest cost on projected benefit obligation........................ 328 325 267
Actual return on plan assets......................................... (618) (695) (202)
Amortization of net (gains) losses................................... 279 385 (47)
------- ------- -----
Net pension expense................................................ $ 265 $ 222 $ 245
======= ======= =====
</TABLE>
Net pension expense for the eight months ended August 31, 1997 and 1996 amounted
to $60 and $176, respectively.
Assumptions used in determining the actuarial present value of projected benefit
obligations and pension expenses follow:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Discount rate........................................................ 7.00% 8.00% 8.00%
Rate of increase in compensation..................................... 6.00 7.00 7.00
Expected long-term rate of return on assets.......................... 8.00 7.00 7.00
</TABLE>
F-22
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
Supplemental Executive Retirement Agreements
The Bank maintains agreements that provide supplemental retirement benefits to
certain executive officers. Total expenses for benefits payable under the
agreements amounted to $438 and $209 for the eight months ended August 31, 1997
and 1996 and $311, $284 and $153 for the years ended December 31, 1996, 1995 and
1994, respectively. Aggregate benefits payable included in accrued expenses and
other liabilities at August 31, 1997 and December 31, 1996 and 1995 amounted to
$1,483, $1,045 and $734, respectively.
401(K) Plan
The Bank has an employee tax deferred thrift incentive plan under Section 401(k)
of the Internal Revenue Code. All employees who meet specified age and length of
service requirements are eligible for voluntary participation in the plan. The
plan is administered by SBERA and the Bank makes no contribution to the Plan.
Other Postretirement Benefits
The Bank provides for part of the annual expense of health insurance for certain
retired employees and their dependents. The Bank accrues the cost of these
benefits over the years employees provide service to the date of their
eligibility for such benefits. The transition obligation for future benefits is
being amortized over a twenty year period.
The following is a reconciliation of the postretirement benefit obligations and
the amount of accrued postretirement benefit cost included in the consolidated
balance sheet as of October 31, the latest valuation date.
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of postretirement benefit obligations:
Retirees............................................................ $ 111 $ 141
Fully eligible employees............................................ 54 56
Other active employees.............................................. 201 204
------ ------
Accumulated postretirement benefit obligation (unfunded)......... 366 401
Unamortized net transition obligation............................... (317) (344)
Unrecognized net gain............................................... 76 -
------ ------
Total accrued postretirement benefit cost........................ $ 125 $ 57
====== ======
</TABLE>
The components of postretirement benefit expense for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Service cost-benefits earned during the year........................... $ 24 $ 23
Interest cost on accumulated postretirement benefit obligation......... 26 27
Amortization of transition obligation.................................. 18 18
------ ------
Net postretirement benefit expense.................................. $ 68 $ 68
====== ======
</TABLE>
Net postretirement expense for the eight months ended August 31, 1997 and 1996
amounted to $46 and $46, respectively, and $10 for the year ended December 31,
1994 (on a pay-as-you-go basis).
F-23
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The discount rate used to determine the accumulated postretirement benefit
obligations was 7.50% in 1996 and in 1995. The assumed health care trend rate
used to measure the accumulated postretirement benefit obligation at December
31, 1996 was 8.0% initially, decreasing gradually to 5.0% in 2001 and
thereafter. A 1% point increase in the assumed health care cost trend rate would
have increased the 1996 postretirement benefit expense by $12 and would have
increased the accumulated postretirement benefit obligation at December 31, 1996
by $69.
(12) Commitments and Contingencies (In Thousands)
Off-Balance Sheet Financial Instruments
The Bank is party to off-balance sheet risk in the normal course of business to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated balance sheet. The contract
amounts reflect the extent of the involvement the Bank has in particular classes
of these instruments. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument is represented by
the contractual amount of those instruments. The Bank uses the same policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments.
Financial instruments with off-balance sheet risk at the dates indicated
follows:
<TABLE>
<CAPTION>
December 31,
August 31, -----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to originate loans:
Residential mortgage........................................... $ 263 $ 4,506 $ 2,395
Multi-family mortgage.......................................... 5,159 4,954 11,147
Commercial real estate mortgage................................ 9,090 7,315 10,723
Construction and development................................... 8,250 1,400 2,145
Commercial..................................................... 2,910 2,280 400
Unadvanced portion of loans........................................ 11,812 11,950 9,879
Unused lines of credit:
Equity......................................................... 9,043 8,272 8,903
Other.......................................................... 1,384 1,455 1,407
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee by the customer. Since some 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 credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if any, is based on management's credit evaluation of the borrower.
F-24
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
Lease Commitments
The Bank leases certain office space under various noncancellable operating
leases. A summary of future minimum rental payments under such leases at the
dates indicated follows:
<TABLE>
<CAPTION>
Year ending August 31, December 31,
December 31, 1997 1996
------------ ------------- ------------
<S> <C> <C>
1997................................................... $ 98 $ 284
1998................................................... 295 295
1999................................................... 295 295
2000................................................... 292 292
2001................................................... 254 254
</TABLE>
The leases contain escalation clauses for real estate taxes and other
expenditures. Total rental expense was $204 and $167 for the eight months ended
August 31, 1997 and 1996 and $258, $232 and $236 for the years ended December
31, 1996, 1995 and 1994, respectively.
Legal Proceedings
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consulting with legal counsel,
the consolidated financial position and results of operations of the Bank will
not be affected materially by the outcome of such proceedings.
(13) Regulatory Capital Requirements
The Bank is subject to a capital based supervisory system that applies to all
insured depository institutions. The category into which the Bank's capital
ratios fall determines the degree of regulatory supervision to which the Bank
could be subjected. Capital categories consist of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized. " An institution is deemed to be "well
capitalized" if (a) its risk based capital is 10% or greater, (b) its Tier 1
risk based capital ratio is 6% or greater, and (c) its leverage ratio is 5% or
greater. At August 31, 1997, the Bank is "well capitalized."
When an insured institution's capital ratios fall below the "well capitalized"
level, it becomes subject to a series of increasingly restrictive supervisory
actions, to the point where a conservator or receiver must be designated for a
"critically undercapitalized" institution unless certain conditions are made by
the appropriate regulatory agencies. An institution is deemed to be "critically
undercapitalized" if its ratio of Tier I capital to total assets is 2% or less.
F-25
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(14) Fair Value of Financial Instruments (In Thousands)
The following is a summary of the carrying values and estimated fair values of
the Bank's significant financial and non-financial instruments as of the dates
indicated:
<TABLE>
<CAPTION>
August 31, 1997
----------------------------
Carrying Estimated
value fair value
----------- ----------
<S> <C> <C>
Financial assets:
Cash and due from banks................................................ $ 8,021 $ 8,021
Short-term investments................................................. 7,495 7,495
Securities............................................................. 181,845 181,990
Loans, net............................................................. 473,072 473,441
Accrued interest receivable............................................ 5,923 5,923
Financial liabilities:
Demand, NOW, savings and money market savings deposit accounts......... 220,084 220,084
Certificate of deposit accounts........................................ 261,383 260,745
Borrowed funds......................................................... 61,815 61,592
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks..................... $ 6,465 $ 6,465 $ 5,980 $ 5,980
Short-term investments...................... 19,870 19,870 5,698 5,698
Securities.................................. 162,473 162,548 173,975 174,442
Loans, net.................................. 468,357 466,666 436,305 436,287
Accrued interest receivable................. 5,106 5,106 5,593 5,593
Financial liabilities:
Demand, NOW, savings and money
market savings deposit accounts........... 222,236 222,236 213,318 213,318
Certificate of deposit accounts............. 261,780 262,023 260,897 261,959
Borrowed funds.............................. 60,565 60,583 49,665 50,234
</TABLE>
SFAS No. 107 requires disclosures about fair values of financial instruments for
which it is practicable to estimate fair value. Fair value is defined in SFAS
No. 107 as the amount that a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced liquidation
sale. Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. These instruments are highly subjective and
require judgments regarding significant matters such as the amount and timing of
future cash flows and the selection of discount rates that may appropriately
reflect market and credit risks. Changes in these judgments often have a
material impact on the fair value estimates. In addition, since these estimates
are as of a specific point in time, they are susceptible to material near-term
changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect
any premium or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect the possible tax
ramifications or estimated transaction costs.
F-26
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
The following is a description of the principal valuation methods used by the
Bank to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based principally on market prices and dealer
quotes. Certain fair values were estimated using pricing models or were based on
comparisons to market prices of similar securities. The fair value of stock in
the FHLB equals its carrying amount since such stock is only redeemable at its
par value.
Loans
The fair value of performing loans, other than commercial participation loans,
is estimated by discounting the contractual cash flows using interest rates
currently being offered for loans with similar terms to borrowers of similar
quality. The fair value of commercial participation loans is considered to equal
their carrying amounts since such loans generally are repayable within 90 days.
For non-performing loans where the credit quality of the borrower has
deteriorated significantly, fair values are estimated by discounting cash flows
at a rate commensurate with the risk associated with those cash flows.
Deposit Liabilities
In accordance with SFAS No. 107, the fair values of deposit liabilities with no
stated maturity (demand, NOW, savings and money market savings accounts) are
equal to the carrying amounts payable on demand. The fair value of time deposits
represents contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities. The
fair value estimates for deposits do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost of
alternative forms of funding ("deposit based intangibles").
Borrowed Funds
The fair value of borrowings from the FHLB represent contractual repayments
discounted using interest rates currently available for borrowings with similar
characteristics and remaining maturities.
Other Financial Assets and Liabilities
Cash and due from banks, short-term investments and accrued interest receivable
have fair values which approximate the respective carrying values because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk.
Off-Balance Sheet Financial Instruments
In the course of originating loans and extending credit, the Bank will charge
fees in exchange for its commitment. While these commitment fees have value, the
Bank has not estimated their value due to the short-term nature of the
underlying commitments and their immateriality.
F-27
<PAGE>
BROOKLINE SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
August 31, 1997 and 1996 (unaudited) and December 31, 1996, 1995 and 1994
(15) Plan of Reorganization
On October 8, 1997, the Board of Trustees of the Bank adopted a Plan of
Reorganization ("the Plan") whereby the Bank will be reorganized from a state
chartered mutual savings bank into a mutual holding structure, subject to
approval by regulatory authorities and the Corporators of the Bank. As part of
the Plan, the Bank will establish a state chartered mutual holding company
("MHC") and a capital stock holding company incorporated in Massachusetts, ("the
Company"). The Bank will become a state chartered capital stock bank wholly
owned by the Company. The Company plans to offer for sale 47% of the shares of
its common stock (the "Minority Ownership Interest") in a subscription offering
initially to Bank depositors, employee benefit plans of the Bank and other
certain eligible subscribers ("the Offering"). Any shares of common stock not
sold in the Offering are expected to be sold to underwriters for resale to the
public. After completion of the Offering, the MHC will be the 53% owner of the
Company.
As part of the Offering, the Bank will establish a liquidation account in an
amount equal to the Minority Ownership Interest multiplied by the net worth of
the Bank as of the date of the latest consolidated balance sheet appearing in
the final prospectus. The liquidation account will be maintained for the benefit
of eligible account holders and supplemental eligible account holders who
maintain their accounts at the Bank after the Offering. The liquidation account
will be reduced annually to the extent that such account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible account holder will be entitled
to receive balances for accounts then held.
Subsequent to the Offering, the Company and the Bank may not declare or pay
dividends on and the Company may not, repurchase, any of its shares of common
stock if the effect thereof would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such declaration,
payment or repurchase would otherwise violate regulatory requirements.
Offering costs will be deferred and reduce the proceeds from the shares sold in
the Offering. If the Offering is not completed, all costs will be expensed. As
of August 31, 1997, Offering costs of $30 have been incurred and are included in
other assets.
F-28
<PAGE>
================================================================================
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 Brookline Bancorp, Inc., Brookline Savings Bank or Ryan Beck &
Co., Inc. 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 Brookline Bancorp, Inc. or Brookline Savings
Bank since any of the dates as of which information is furnished herein or since
the date hereof.
___________
TABLE OF CONTENTS
Page
----
Summary of Reorganization and Offering..........................................
Description of Reorganization...................................................
Selected Consolidated Financial and Other Data of the Bank......................
Risk Factors....................................................................
Brookline Bancorp, MHC..........................................................
Brookline Bancorp, Inc..........................................................
Brookline Savings Bank..........................................................
Regulatory Capital Compliance...................................................
Use of Proceeds.................................................................
Dividend Policy.................................................................
Market for Common Stock.........................................................
Capitalization..................................................................
Pro Forma Data..................................................................
Consolidated Statements of Income...............................................
Management's Discussion and Analysis of Financial...............................
Condition and Results of Operations............................................
Business of the Company.........................................................
Business of the Bank............................................................
Federal and State Taxation......................................................
Regulation......................................................................
Management of the Company.......................................................
Management of the Stock Bank....................................................
Participation by Management.....................................................
The Reorganization and Offering.................................................
Restrictions on Acquisition of the Company and the Bank.........................
Description of Capital Stock of the Company.....................................
Transfer Agent and Registrar....................................................
Legal and Tax Matters...........................................................
Experts.........................................................................
Additional Information..........................................................
Index to Consolidated Financial Statements......................................
___________
Until _______________, 1998, or 25 days after commencement of a broker
assisted public 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 a Prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
================================================================================
11,891,000 SHARES
(ANTICIPATED MAXIMUM)
BROOKLINE
BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
BROOKLINE SAVINGS BANK)
COMMON STOCK
PAR VALUE $.01 PER SHARE
________________________________
PROSPECTUS
________________________________
RYAN, BECK & CO.
January ___, 1998
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) LIST OF EXHIBITS
1.1 Engagement Letter between Brookline Savings Bank and Ryan, Beck & Co.,
Inc. **
1.2 Form of Agency Agreement among Brookline Bancorp, Inc., Brookline Savings
Bank, and Ryan, Beck and Co., Inc.
2 Plan of Reorganization **
3.1 Articles of Organization of Brookline Bancorp, Inc. (Incorporated herein
by reference to Exhibit B of the Plan of Reorganization)
3.2 Bylaws of Brookline Bancorp, Inc. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)
3.3 Proposed Stock Charter of Brookline Savings Bank (Incorporated herein by
reference to Exhibit A of the Plan of Reorganization)
3.4 Proposed Stock Bylaws of Brookline Savings Bank (Incorporated herein by
reference to Exhibit A of the Plan of Reorganization)
4 Form of Common Stock Certificate of Brookline Bancorp, Inc. **
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered ***
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. ***
8.2 State Tax Opinion of Foley, Hoag & Elliot LLP ***
8.3 Letter from Feldman Financial Advisors, Inc. with respect to Subscription
Rights **
10.1 Form of Employment Agreement **
10.2 Form of Severance Agreement **
10.3 Supplemental Retirement Income Agreement with Richard P. Chapman, Jr.
**
10.4 Supplemental Retirement Income Agreement with Susan M. Ginns **
10.5 Supplemental Retirement Income Agreement with Charles H. Peck **
10.6 Employee Stock Ownership Plan **
21 Subsidiaries of the Registrant **
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Grant Thornton LLP
23.3 Consent of Feldman Financial Advisors, Inc. **
23.4 Consent of Foley, Hoag & Elliot LLP (contained in opinion filed as Exhibit
8.2)
23.5 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 8.1)
<PAGE>
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule **
99.1 Appraisal Agreement between Brookline Savings Bank and Feldman Financial
Advisors, Inc. **
99.2 Appraisal Report of Feldman Financial Advisors, Inc. **
99.3 Information Statement **
99.4 Marketing Materials **
99.5 Order and Acknowledgment Form **
____________________________
*To be filed supplementally or by amendment.
**Previously filed.
***As amended from previous filing.
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant 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
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant 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
<PAGE>
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Brookline, Massachusetts on January
8, 1998.
BROOKLINE BANCORP, INC.
By: /s/ Richard P. Chapman, Jr.
---------------------------
Richard P. Chapman, Jr.
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Brookline Bancorp, Inc. (the
"Company") hereby severally constitute and appoint Richard P. Chapman, Jr. as
our true and lawful attorney and agent, to do any and all things in our names in
the capacities indicated below which said Richard P. Chapman, Jr. may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form S-1
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Richard P. Chapman, Jr. shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Richard P. Chapman, Jr. Chairman, President, and Chief January 8, 1998
- -----------------------------
Richard P. Chapman, Jr. Executive Officer (Principal
Executive Officer)
/s/ Charles H. Peck Executive Vice President and January 8, 1998
- -----------------------------
Charles H. Peck Director
/s/ Paul R. Bechet Senior Vice President and January 8, 1998
- -----------------------------
Paul R. Bechet Chief
Financial Officer (Principal
Financial and Accounting
Officer)
/s/ Oliver F. Ames Director January 8, 1998
- -----------------------------
Oliver F. Ames
/s/ Dennis S. Aronowitz Director January 8, 1998
- -----------------------------
Dennis S. Aronowitz
/s/ George C. Caner, Jr. Director January 8, 1998
- -----------------------------
George C. Caner, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ David C. Chapin Director January 8, 1998
- -----------------------------
David C. Chapin
/s/ William G. Coughlin Director January 8, 1998
- -----------------------------
William G. Coughlin
/s/ John L. Hall, II Director January 8, 1998
- -----------------------------
John L. Hall, II
/s/ Hollis W. Plimpton, Jr. Director January 8, 1998
- -----------------------------
Hollis W. Plimpton, Jr.
/s/ Edward D. Rowley Director January 8, 1998
- -----------------------------
Edward D. Rowley
/s/ Joseph J. Slotnik Director January 8, 1998
- -----------------------------
Joseph J. Slotnik
/s/ William V. Tripp, III Director January 8, 1998
- -----------------------------
William V. Tripp, III
/s/ Rosamond B. Vaule Director January 8, 1998
- -----------------------------
Rosamond B. Vaule
/s/ Peter O. Wilde Director January 8, 1998
- -----------------------------
Peter O. Wilde
/s/ Franklin Wyman, Jr. Director January 8, 1998
- -----------------------------
Franklin Wyman, Jr.
</TABLE>
<PAGE>
As filed with the Securities and Exchange Commission on January 12, 1998
Registration No. 333-40471
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
ON
FORM S-1
_________________________
BROOKLINE BANCORP, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between Brookline Savings Bank and Ryan, Beck & Co.,
Inc.**
1.2 Form of Agency Agreement among Brookline Bancorp, Inc., Brookline Savings
Bank, and Ryan, Beck and Co., Inc.
2 Plan of Reorganization**
3.1 Articles of Organization of Brookline Bancorp, Inc. (Incorporated herein
by reference to Exhibit B of the Plan of Reorganization)
3.2 Bylaws of Brookline Bancorp, Inc. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)
3.3 Proposed Stock Charter of Brookline Savings Bank (Incorporated herein by
reference to Exhibit A of the Plan of Reorganization)
3.4 Proposed Stock Bylaws of Brookline Savings Bank (Incorporated herein by
reference to Exhibit A of the Plan of Reorganization)
4 Form of Common Stock Certificate of Brookline Bancorp, Inc.**
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered***
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C.***
8.2 State Tax Opinion of Foley, Hoag & Elliot LLP***
8.3 Letter from Feldman Financial Advisors, Inc. with respect to Subscription
Rights**
10.1 Form of Employment Agreement**
10.2 Form of Severance Agreement**
10.3 Supplemental Retirement Income Agreement with Richard P.
Chapman, Jr.**
10.4 Supplemental Retirement Income Agreement with Susan M. Ginns**
10.5 Supplemental Retirement Income Agreement with Charles H. Peck**
10.6 Employee Stock Ownership Plan**
21 Subsidiaries of the Registrant**
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consent of Grant Thornton LLP
23.3 Consent of Feldman Financial Advisors, Inc.**
23.4 Consent of Foley, Hoag & Elliot LLP (contained in opinion filed as
Exhibit 8.2)
23.5 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 8.1)
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule**
99.1 Appraisal Agreement between Brookline Savings Bank and Feldman Financial
Advisors, Inc.**
99.2 Appraisal Report of Feldman Financial Advisors, Inc.**
<PAGE>
99.3 Information Statement**
99.4 Marketing Materials**
99.5 Order and Acknowledgment Form**
______________________
/*/ To be filed supplementally or by amendment.
/**/ Previously filed
/***/ Amended from previous filing
<PAGE>
BROOKLINE BANCORP, INC.
(A MASSACHUSETTS CORPORATION)
11,891,000 (Anticipated Maximum) Shares
of Common Stock
(par value $.01 per share)
AGENCY AGREEMENT
----------------
_____________ __, 1998
Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039-5817
Ladies and Gentlemen:
Brookline Bancorp, Inc., a Massachusetts corporation (the "Company"), and
Brookline Savings Bank, a Massachusetts-chartered mutual savings bank (the
"Bank"), hereby confirm their agreement with Ryan, Beck & Co., Inc. ("Ryan,
Beck"), as follows:
Introductory. The Bank is reorganizing from a Massachusetts-chartered
------------
mutual savings bank to a Massachusetts-chartered stock savings bank (the
"Reorganization") in accordance with the laws of the Commonwealth of
Massachusetts and the regulations of the Massachusetts Division of Banks (the
"Division"), the Massachusetts Board of Bank Incorporation (the "Bank Board"),
the Federal Deposit Insurance Corporation (the "FDIC") and the Board of
Governors of the Federal Reserve System (the "FRB") (such laws and the
regulations of the Division, the Bank Board, the FDIC and the FRB, collectively,
the "Reorganization Regulations"). A Combined Application for Mutual Holding
Company Reorganization and Merger and Stock Issuance (the "MHC Application") has
been filed with the Division; a Combined Application to Establish De Novo Mutual
and Stock Savings Banks/Bank Holding Company Application (the "Bank Board
Application") has been filed with the Bank Board; a Notice of Intent to Convert
(the "Conversion Notice"), a Bank Merger Act Application (the "BMA
Application"), an Application for Interim Deposit Insurance (the "Insurance
Application") and a Request for Waiver of Depositor Vote (the "Waiver Request")
have been filed with the FDIC; and a Bank Holding Company Application on Form FR
Y-3 (the "Holding Company Application") has been filed with the FRB (the MHC
Application, the Bank Board Application, the Conversion Notice, the BMA
Application, the Insurance Application, the Waiver Request and the Holding
Company Application, collectively, the "Reorganization Applications"); and all
amendments to the Reorganization Applications required to the date hereof have
also been filed. The MHC Application includes, among other things, the Bank's
Plan of Reorganization From a Mutual Savings Bank to a Mutual Holding Company
and Stock Issuance Plan (the "Plan"). As part of the Reorganization and the
Plan, the Bank will establish (i) Brookline Savings
<PAGE>
Bank, a Massachusetts-chartered stock savings bank that will succeed to all of
the rights and obligations of the Bank as set forth in the Plan, (ii) Brookline
Bancorp, MHC, a Massachusetts-chartered mutual holding company (the "Mutual
Company"), and (iii) the Company. The Mutual Company will own at least 51% of
the voting shares of the Company for so long as the Mutual Company remains in
existence. The Bank will be a wholly-owned subsidiary of the Company. References
herein to the Bank shall include the Bank in its current mutual form or its
post-Reorganization stock form as indicated by the context.
Upon consummation of the Reorganization, the Company will be authorized to
issue 50,000,000 shares of capital stock, of which 45,000,000 shares shall be
common stock having a par value of $.01 per share (the "Common Stock"), and
5,000,000 shares shall be preferred stock having a par value of $.01 per share.
The Company, in accordance with the Plan, is offering, in a subscription
offering by way of nontransferable subscription rights, Common Stock (the
"Shares") for a purchase price of $10.00 per share (the "Purchase Price") in
descending order of priority to (i) the Bank's Eligible Account Holders (defined
as holders of deposit accounts totaling $50 or more as of September 30, 1996);
(ii) the Bank's Employee Stock Ownership Plan and Trust (the "ESOP") (for a
total of up to 4% of the shares issued in the Offering, as defined below); (iii)
the Bank's Supplemental Eligible Account Holders (defined as holders of deposit
accounts totaling $50 or more as of December 31, 1997); and (iv) the Bank's
employees, officers and trustees (the "Subscription Offering"). Concurrently,
and subject to the prior rights of holders of subscriptions in categories (i)
through (iv) above, the Company is offering the shares of Common Stock not
subscribed for in the Subscription Offering for sale in a direct community
offering to certain members of the general public (the "Community Offering").
Shares not subscribed for in the Subscription and Community Offerings may be
offered for sale to certain members of the general public in a syndicated
community offering (the "Syndicated Community Offering"). It is acknowledged
that the Company reserves the right, in its absolute discretion, to accept or
reject, in whole or in part, any or all orders in the Community Offering and
Syndicated Community Offering. The Subscription Offering, the Community
Offering and the Syndicated Community Offering are referred to collectively
herein as the "Offering." Except for the ESOP, no Eligible Account Holder,
Supplemental Eligible Account Holder or employee, officer or trustee, in their
respective capacities as such, may purchase in the Subscription Offering more
than $300,000 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 $300,000 of Common Stock; and no person,
together with associates and persons acting in concert with such person, may
purchase in the aggregate more than $1.0 million of Common Stock in the
Offering; provided that the Bank may, in its sole discretion and without further
notice to or solicitation of subscribers or other prospective purchasers,
increase or decrease such maximum purchase limitation.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-______) (the
"Registration Statement") containing a prospectus relating to the Offering for
the registration of the Shares under the Securities Act of 1933, as amended (the
"1933 Act"),
-2-
<PAGE>
and has filed such amendments thereto and such amended prospectuses as may have
been required to the date hereof. The prospectus, as amended, on file with the
Commission at the time the Registration Statement becomes effective is
hereinafter called the "Prospectus," except that if the Prospectus filed by the
Company pursuant to Rule 424(b) of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations") differs from the prospectus on
file at the time the Registration Statement becomes effective, the term
"Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b) from
and after the time such prospectus is filed with or mailed to the Commission for
filing.
SECTION 1. Appointment of Ryan, Beck; Compensation to Ryan, Beck. Subject
-----------------------------------------------------
to the terms and conditions set forth below, the Bank and the Company hereby
appoint Ryan, Beck as their agent to consult with and advise the Bank and the
Company, and to solicit subscriptions and purchase orders for Shares on behalf
of the Bank and the Company, in connection with the Company's offering of Common
Stock in the Offering. On the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein set
forth, Ryan, Beck accepts such appointment and agrees to consult with and advise
the Bank and the Company as to the matters set forth in Section 3 of the
Engagement Letter between Ryan, Beck and the Bank dated July 29, 1997, included
as Exhibit A attached hereto, and to use its best efforts to solicit
subscriptions and purchase orders for Shares in accordance with this Agreement;
provided, however, that Ryan, Beck shall not be responsible for obtaining
subscriptions or purchase orders for any specific number of Shares, shall not be
required to purchase any Shares and shall not be obligated to take any action
which is inconsistent with any applicable law, regulation, decision or order.
Subject to the prior approval of the Company and the Bank, Ryan, Beck may
also assemble and manage a selling group of broker dealers ("Selling Group")
that are members of the National Association of Securities Dealers, Inc.
("NASD"), to participate in the solicitation of purchase orders for the Shares
under a selected dealers' agreement (the "Selected Dealers' Agreement"), the
form of which is set forth as Exhibit B to this Agreement.
In addition to the reimbursement of the expenses specified in Sections 6, 7
and 8 hereof, Ryan, Beck shall receive and the Company and the Bank shall pay an
advisory and marketing fee of $1,000,000 (the "Advisory and Marketing Fee").
Should a Selling Group (which may include Ryan, Beck) under a Selected Dealers'
Agreement be implemented, the Bank shall pay a fee to selected dealers
("Selected Dealers' Fee") of 5.5% of the dollar amount of the Shares sold by
such dealers. The Advisory and Marketing Fee and the Selected Dealers' Fee are
hereinafter collectively referred to as the "Sales Compensation." It is
acknowledged that the Bank paid Ryan, Beck $25,000 of the Advisory and Marketing
Fee upon execution of the Engagement Letter.
If (i) the Plan is abandoned or terminated by the Company and the Bank;
(ii) the Offering is not consummated by June 30, 1998; (iii) Ryan, Beck
terminates this Agreement because there has been a material adverse change in
the financial condition or operations
-3-
<PAGE>
of the Bank since June 30, 1997; (iv) immediately prior to the commencement of
the Offering, Ryan, Beck terminates this Agreement because, in its reasonable
judgment, the Company and the Bank have failed to satisfactorily disclose all
relevant information in the Registration Statement, the Prospectus and the
Reorganization Applications or Ryan, Beck determines that market conditions
exist which might render the sale of the Shares by the Company inadvisable; or
(v) the Company and the Bank terminate this Agreement because, in their
reasonable judgment, they determine that an event has occurred that materially
and adversely impacts the ability of Ryan, Beck to perform its obligations
hereunder, Ryan, Beck shall receive a fee of $25,000 for its advisory and
administrative services as set forth in Exhibit A hereto in lieu of the Sales
Compensation, in addition to reimbursement of its reasonable out-of-pocket
expenses as set forth in Section 6 hereof; [provided, however, if the Company
abandons or terminates the Offering prior to the filing of the MHC Application,
Ryan, Beck shall not be entitled to receive a fee of $25,000 for its advisory
and administrative services]. If there is (i) a resolicitation of subscriptions
for any reason or (ii) a material delay in the Offering or other unforeseen
developments, and Ryan, Beck is required to provide significant additional
services or expend significant additional time, the parties agree to negotiate
in good faith an agreement to cover Ryan, Beck's additional fees and expenses in
connection therewith, including attorneys' fees and expenses.
The compensation specified above shall be payable (to the extent not
already paid) to Ryan, Beck in next day clearinghouse funds on the earlier of
the Closing Date (as hereinafter defined), a determination by the Company and
the Bank to terminate or abandon the Plan or the termination of this Agreement
by Ryan, Beck or the Company and the Bank in accordance with the preceding
paragraph. The Bank and the Company agree to reimburse Ryan, Beck from time to
time for the costs and expenses specified in Sections 6, 7 and 8 hereof, to the
extent such costs and expenses are reasonably incurred by Ryan, Beck, promptly
upon receiving a reasonable accounting of such costs and expenses.
SECTION 2. Closing Date; Release of Funds and Delivery of Certificates.
-----------------------------------------------------------
If all conditions precedent to the consummation of the Reorganization and the
Offering, including, without limitation, the sale of all the Shares required by
the Plan to be sold, are satisfied, the Company agrees to issue or have issued
the Shares sold in the Offering and to release for delivery certificates
evidencing such Shares on the Closing Date against payment therefor by release
of funds from the special, interest-bearing account referred to in Section 5(q)
hereof and by the authorized withdrawal of funds from deposit accounts at the
Bank in accordance with the Plan; provided, however, that no such funds shall be
released to the Company or withdrawn until the conditions specified in Section 9
hereof shall have been complied with to the reasonable satisfaction of Ryan,
Beck and its counsel. Such release, withdrawal and payment shall be made on the
Closing Date, on a business day and at a time and place selected by Ryan, Beck,
which date and place shall be acceptable to the Bank and the Company, on at
least two business days prior notice to the Bank and the Company (it being
understood that such business day shall not be more than ten business days after
the termination of the Offering), or such other time or place as shall be agreed
upon by Ryan, Beck, the Bank and the Company. Certificates evidencing
-4-
<PAGE>
the Shares sold in the Offering shall be delivered directly to the purchasers
thereof or in accordance with their directions. The hour and date upon which the
Company shall release or deliver the Shares sold in the Offering in accordance
with the terms hereof are called the "Closing Date."
SECTION 3. Prospectus; Offering. The Shares are to be offered in the
--------------------
Offering at $10.00 per share, as set forth on the cover page of the Prospectus.
There will be a maximum and minimum number of Shares offered. The number of
Shares offered may be changed by the Company after consultation with Ryan, Beck,
subject to the provisions of the Plan, depending on market and financial
conditions.
SECTION 4. Representations and Warranties. The Company and the Bank
------------------------------
jointly and severally represent and warrant to Ryan, Beck as follows:
(a) The Registration Statement was declared effective by the
Commission on _______________, 1997. At the time the Registration
Statement, including the Prospectus contained therein, became effective,
the Registration Statement complied in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and the
Registration Statement, any preliminary or final Prospectus, any Blue Sky
Application (as defined in Section 7 hereof) or any Sales Information (as
defined in Section 7 hereof) authorized by the Company or the Bank for use
in connection with the Offering did 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, in light of the
circumstances under which they were made, not misleading, and at the time
any Rule 424(b) Prospectus is filed with or mailed to the Commission for
filing and at the Closing Date referred to in Section 2, the Registration
Statement, any preliminary or final Prospectus, any Blue Sky Application or
any Sales Information authorized by the Company or the Bank for use in
connection with the Offering 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 light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this Section 4(a) shall not apply to statements in or
omissions from the Registration Statement, any preliminary or final
Prospectus, any Blue Sky Application or any Sales Information made in
reliance upon and in conformity with information furnished in writing to
the Company or the Bank by Ryan, Beck expressly regarding Ryan, Beck for
use under the captions "Summary of Reorganization and Offering-Marketing
Agent" and "The Reorganization and Offering-Plan of Distribution and
Selling Commissions" in the Prospectus.
(b) The Bank has filed with the Division the MHC Application,
including the Plan, the Registration Statement, the Prospectus and exhibits
and supplemental material, and an amendment or amendments thereto, as
required, and has published notice of such filing, as required, which
Application has been or prior to the Closing Date will be approved by the
Division; and the Plan has been adopted by the Board of Directors of the
Company, the Board of Trustees of the
-5-
<PAGE>
Bank and the corporators of the Bank (by a vote of at least two-thirds of
the corporators, including a majority of the Bank's "independent
corporators" constituting at least 60% of all corporators, at a meeting
specially called to consider the Plan).
(c) The Bank has filed with the Bank Board the Bank Board Application,
including the stock charter and By-Laws of the Bank and exhibits and
supplemental material, and an amendment or amendments thereto, as required,
and has published notice of such filing, as required, which Application has
been or prior to the Closing Date will be approved by the Bank Board.
(d) The Bank and the Company have filed with the FDIC the Conversion
Notice, the BMA Application, the Insurance Application and the Waiver
Request, including the Registration Statement, the Prospectus and exhibits
and supplemental material, and an amendment or amendments thereto, as
required, and have published notice of the filing of the BMA Application
and the Insurance Application, as required, and the FDIC has or prior to
the Closing Date will have issued a notice of non-objection to the
Conversion Notice and has or prior to the Closing Date will have approved
the BMA Application, the Insurance Application and the Waiver Request.
(e) The Company and the Mutual Company have filed with the FRB the
Holding Company Application, including exhibits and supplemental material,
and an amendment or amendments thereto, as required, and have published
notice of such filing, as required, which Application has been or prior to
the Closing Date will be approved by the FRB.
(f) At the Closing Date, the Reorganization and the Offering will have
been effected in the manner described in the Prospectus and in accordance
with the Plan, the Reorganization Regulations and all other applicable
material laws, regulations, decisions and orders, including in compliance
with all terms, conditions, requirements and provisions precedent to the
Reorganization and the Offering imposed upon the Company or the Bank by the
Commission, the Division, the Bank Board, the FDIC, the FRB, any state
regulatory or Blue Sky authority or any other regulatory authority.
(g) No order has been issued by the Commission, the Division, the Bank
Board, the FDIC, the FRB or any state regulatory or Blue Sky authority
preventing or suspending the use of the Prospectus, and no action by or
before any such governmental entity to revoke any approval, authorization
or order of effectiveness related to the Reorganization or the Offering is
pending or threatened.
(h) At the time of the approval of the Reorganization Applications by
the applicable regulatory authorities (including any amendment or
supplement thereto) and at all times subsequent thereto until the Closing
Date, the Reorganization Applications complied and will comply in all
material respects with the
-6-
<PAGE>
Reorganization Regulations. The prospectus contained in the Reorganization
Applications (including any amendment or supplement thereto), at the time
of the approval of the Reorganization Applications by the applicable
regulatory authorities and at all times subsequent thereto until the
Closing Date, complied and will comply in all material respects with the
Reorganization Regulations.
(i) Feldman Financial Advisors, Inc. ("Feldman Financial"), which
prepared the Independent Valuation dated as of November 7, 1997, described
in the Prospectus, is independent with respect to the Company and the Bank
within the meaning of the Plan and the Reorganization Regulations and is
believed by the Company and the Bank to be experienced and expert in the
valuation and the appraisal of business entities, including savings
institutions, and the Company and the Bank believe that Feldman Financial
has prepared the pricing information set forth in the Prospectus in
accordance with the requirements of the Reorganization Regulations.
(j) Grant Thornton LLP ("Grant Thornton"), the firm which certified
the financial statements filed as part of the Registration Statement, is,
with respect to the Company and the Bank, an independent certified public
accountant as required by the 1933 Act and the 1933 Act Regulations.
(k) The financial statements, together with the related schedules and
notes thereto, included in the Registration Statement and which are part of
the Prospectus present fairly the financial condition, results of
operations, changes in retained earnings and cash flows of the Bank at and
for the dates indicated and the periods specified and comply as to form in
all material respects with the applicable accounting requirements of the
1993 Act Regulations and the Reorganization Regulations. Such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
involved, present fairly in all material respects the information required
to be stated therein and are consistent with financial statements and other
reports filed by the Bank with the Division and the FDIC except to the
extent that accounting principles employed in such filings conform to the
requirements of such authorities and not necessarily to generally accepted
accounting principles. The other financial, statistical and pro forma
information and related notes thereto included in the Prospectus present
fairly the information shown therein on a basis consistent with the audited
financial statements of the Bank included in the Registration Statement and
which are part of the Prospectus, and as to the pro forma adjustments, such
adjustments have been properly applied on the basis described therein.
(l) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, except as may otherwise be stated
therein: (i) there has not been any material adverse change, financial or
otherwise, in the condition of the Company the Bank, BBS Investment
Corporation ("BBS"), 160 Associates, Inc. ("Associates"), or Brookline
Preferred Capital Corporation
-7-
<PAGE>
("BPCC"; BBS, Associates and BPCC also individually, a "Subsidiary" and
collectively, the "Subsidiaries") or of the Company, the Bank and the
Subsidiaries considered as one enterprise, or in the earnings, capital,
properties, affairs or prospects of the Company, the Bank or any Subsidiary
whether or not arising in the ordinary course of business, (ii) there has
not been any material increase in the long-term debt of the Bank, nor has
the Bank issued any securities or incurred any liability or obligations for
borrowing other than in the ordinary course of business, (iii) there have
not been any material transactions entered into by the Company, the Bank or
any Subsidiary, except those transactions entered into in the ordinary
course of business and those specifically contemplated by the Prospectus,
including the execution of loan documents pertaining to the ESOP, and (iv)
the capitalization, liabilities, assets, properties and business of the
Company, the Bank and the Subsidiaries conform in all material respects to
the descriptions thereof contained in the Prospectus. None of the Company,
the Bank or any Subsidiary has any material liability of any kind,
contingent or otherwise, except as set forth in the Prospectus.
(m) The Bank is now a Massachusetts-chartered mutual savings bank and
upon consummation of the Reorganization will become a Massachusetts-
chartered stock savings bank, in both instances duly authorized to conduct
its business and own its property as described in the Registration
Statement and Prospectus. The Company has been duly organized and is
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts with the corporate authority to conduct its business and own
its property as described in the Registration Statement and Prospectus.
The Company, the Bank and the Subsidiaries have obtained all licenses,
permits and other governmental authorizations currently required for the
conduct of their respective businesses; all such licenses, permits and
governmental authorizations are in full force and effect; the Company, the
Bank and the Subsidiaries are in all material respects complying with all
laws, rules, regulations and orders applicable to the operation of their
respective businesses; and none of the Company, the Bank or any Subsidiary
has received notice of any proceeding or action relating to the revocation
or modification of any such license, permit or governmental authorization
which, singly or in the aggregate, if subject to an unfavorable decision,
ruling or finding, might materially and adversely affect the conduct of the
business, or the condition, financial or otherwise, or the income, affairs
or prospects of the Company, the Bank or any Subsidiary. The Bank is in
good standing with the Division; the Bank's charter is in full force and
effect; no conservator or receiver has been appointed for the Company, the
Bank or any Subsidiary; and the Bank is operating as an insured depository
institution. Each of the Company and the Bank is duly qualified to transact
business and is in good standing in each jurisdiction in which its
ownership or leasing of property or the conduct of its business requires
such qualification, unless the failure to be so qualified in one or more of
such jurisdictions would not have a material adverse effect on the
condition, financial or otherwise, or the business, operations, income or
prospects of the Company and the Bank taken as a whole. Upon consummation
of the Reorganization and the Offering, all of the outstanding
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<PAGE>
capital stock of the Bank will be duly authorized and validly issued and
fully paid and nonassessable; all such stock will be owned directly by the
Company, free and clear of all liens, encumbrances, claims or other
restrictions; and the Company will have no direct subsidiaries other than
the Bank. The Bank does not own equity securities or any equity interest in
any other business enterprise except as described in the Prospectus; each
of the Subsidiaries has been duly organized and is validly existing and in
good standing under the laws of its jurisdiction of organization with the
authority to conduct its business and own its property as described in the
Registration Statement and the Prospectus; all of the outstanding stock of
each Subsidiary has been duly authorized and validly issued and is fully
paid and nonassessable; in the case of BBS and Associates, all such stock,
and in the case of BPCC, 99.9% of such stock, is owned directly by the Bank
free and clear of all liens, encumbrances, claims or other restrictions;
and each of the Subsidiaries is duly qualified to transact business and is
in good standing in each jurisdiction in which its ownership or leasing of
property or the conduct of its business requires such qualification, unless
the failure to be so qualified would not have a material adverse effect on
the operations of the Bank. The activities of the Subsidiaries are
permitted to subsidiaries of a Massachusetts-chartered mutual savings bank
by the rules, regulations, policies and practices of the Division, the FDIC
and any other state or federal authority having jurisdiction over such
matters, and such activities are permitted to subsidiaries of a
Massachusetts-chartered stock savings bank by the rules, regulations,
policies and practices of the Division, the FRB and any other state or
federal authority having jurisdiction over such matters.
(n) The deposit accounts of the Bank in mutual form are, and the
deposit accounts of the Bank in stock form will be, insured by the Bank
Insurance Fund (the "BIF"), as administered by the FDIC, and the Depositors
Insurance Fund (the "DIF"), as administered by the Mutual Savings Central
Fund, Inc., up to the maximum amounts allowed by law. Upon consummation of
the Reorganization, the liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders ("Liquidation
Account") will be duly established in accordance with the requirements of
the Reorganization Regulations.
(o) Upon consummation of the Reorganization and the Offering, the
authorized, issued and outstanding equity capital of the Company will be as
set forth in the Prospectus under the caption "Capitalization"; other than
in the Reorganization, no shares of Common Stock, or securities exercisable
into or exchangeable for Common Stock, will have been issued prior to the
Closing Date; the Shares and the shares of Common Stock to be issued to the
Mutual Company will have been duly and validly authorized for issuance and,
when issued and delivered by the Company pursuant to the Plan against
payment of the consideration therefor calculated as set forth in the Plan
and the Prospectus, will be duly and validly issued and fully paid and
nonassessable, and all such shares of Common Stock owned by the Mutual
Company will be owned directly by the Mutual Company free and clear of all
liens, encumbrances, claims or other restrictions; neither the issuance of
the Shares nor the issuance of the shares of Common Stock
-9-
<PAGE>
to the Mutual Company is subject to any preemptive rights; and the terms
and provisions of the Common Stock will conform in all material respects to
the description thereof contained in the Prospectus. Upon the issuance of
the Shares, good title to the Shares will be transferred from the Company
to the purchasers thereof against payment therefor, subject to such claims
as may be asserted against the purchasers thereof by third-party claimants.
(p) As of the date hereof and as of the Closing Date, none of the
Company, the Bank or any Subsidiary is or will be in violation of its
charter or By-Laws (and the Bank will not be in violation of its charter or
By-Laws in capital stock form upon consummation of the Reorganization) or
in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract, lease,
loan agreement, indenture or other instrument to which it is a party or by
which it or any of its property may be bound; the consummation of the
Reorganization, the execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated have been duly
and validly authorized by all necessary corporate action on the part of the
Company and the Bank and this Agreement has been validly executed and
delivered by the Company and the Bank and is the valid, legal and binding
agreement of the Company and the Bank enforceable in accordance with its
terms, except to the extent that rights to indemnity hereunder may be
limited under applicable law and subject to bankruptcy, insolvency,
reorganization or other laws related to or affecting the enforcement of
creditors' rights generally and equitable principles limiting the right to
obtain specific enforcement or similar equitable relief. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated will not (i) conflict with or constitute a breach of, or
default under, the charter or By-Laws of the Company, the Bank (in either
mutual or stock form) or any Subsidiary, or any material contract, lease or
other instrument to which the Company, the Bank or any Subsidiary is a
party or in which the Company, the Bank or any Subsidiary has a beneficial
interest, or any applicable law, rule, regulation or order; (ii) violate
any authorization, approval, judgment, decree, order, statute, rule or
regulation applicable to the Company, the Bank or any Subsidiary; or (iii)
result in the creation of any lien, charge or encumbrance upon any property
of the Company, the Bank or any Subsidiary.
(q) The Company and the Bank have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement and to carry out the provisions and conditions hereof, and the
Company has all such power, authority, authorizations and orders as may be
required to issue and sell the Shares as provided in the Plan and described
in the Prospectus, subject to the approval of the applicable regulatory
authorities and the satisfaction of any conditions of such approval.
(r) The Company, the Bank and the Subsidiaries have good and
marketable title to all properties and assets which are material to the
business of
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<PAGE>
the Company and the Bank taken as a whole, including those properties and
assets described in the Prospectus as owned by them, free and clear of all
liens, except such liens as are described in the Prospectus or are not
materially significant or important in relation to the business of the
Company, the Bank and the Subsidiaries on a consolidated basis; and all
leases and subleases which are material to the business of the Company and
the Bank taken as a whole under which the Company, the Bank or any
Subsidiary holds properties, including those leases and subleases described
in the Prospectus, are in full force and effect.
(s) As of the date hereof and as of the Closing Date, the Company and
the Bank are not and will not be in violation of any directive from the
Commission, the Division, the Bank Board, the FDIC, the FRB or any other
agency to make any material change in the method of conducting their
respective businesses so as to comply in all material respects with all
applicable statutes and regulations (including, without limitation,
regulations, decisions, directives and orders of the Commission, the
Division, the Bank Board, the FDIC and the FRB) and no suit or proceeding,
charge, investigation or action before or by any court, regulatory
authority or governmental agency or body is or will be pending or, to the
knowledge of the Company or the Bank, threatened, which might materially
and adversely affect the Reorganization, the performance of this Agreement
or the consummation of the transactions contemplated in the Plan and as
described in the Prospectus, or which might result in any material adverse
change in the condition (financial or otherwise), earnings, capital,
properties, affairs or prospects of the Company and the Bank taken as a
whole or which would materially affect their respective properties and
assets.
(t) The Bank is in compliance in all material respects with the
applicable financial record-keeping and reporting requirements of the
Currency and Foreign Transaction Reporting Act of 1970, as amended, and the
regulations and rules thereunder.
(u) The Bank has received an opinion of its counsel, Luse Lehman
Gorman Pomerenk & Schick, P.C., Washington, D.C., with respect to the
federal income tax consequences of the Reorganization and the Offering, and
an opinion of Foley, Hoag & Eliot, LLP, Boston, Massachusetts, with respect
to the Massachusetts state income tax consequences of the Reorganization
and the Offering; the opinion of Luse Lehman Gorman Pomerenk & Schick,
P.C., is accurately summarized in the MHC Application and the Prospectus.
The facts and representations upon which such opinions are based are
truthful, accurate and complete, and neither the Bank nor the Company will
take any action inconsistent therewith.
(v) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, on the part of the
Company, the Bank or any Subsidiary in the due performance and observance
of any term, covenant or condition of any indenture, mortgage, deed of
trust, note, bank loan or
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<PAGE>
credit agreement or any other instrument or agreement to which the Company,
the Bank or any Subsidiary is a party or by which any of them or any of
their respective property is bound or affected which, in any such case, is
material to the Company, the Bank or any Subsidiary; such agreements are in
full force and effect and no other party to any such agreement has
instituted or, to the knowledge of the Company or the Bank, threatened any
action or proceeding wherein the Company, the Bank or any Subsidiary would
or might be alleged to be in default thereunder.
(w) Subsequent to the date the Registration Statement is declared
effective by the Commission and prior to the Closing Date, except as
otherwise may be indicated or contemplated therein, none of the Company,
the Bank or any Subsidiary has or will have: (i) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, except borrowings from the same or similar sources indicated in the
Prospectus in the ordinary course of its business, or (ii) entered into any
transaction which is material in light of the business and properties of
the Company and the Bank taken as a whole. For purposes of this Section
4(w), obligations for borrowed money do not include deposits.
(x) The Company, the Bank and the Subsidiaries have filed all federal,
state and local tax returns required to be filed and have made timely
payment of all taxes due and payable in respect of such returns and no
deficiency has been asserted with respect thereto by any taxing authority.
(y) Except as disclosed in the Prospectus with respect to the ESOP,
none of the Company, the Bank, any Subsidiary or, to the knowledge of the
Company and the Bank, any employee of the Bank has made any payment of
funds of the Company, the Bank or any Subsidiary as a loan for the purchase
of the Shares 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.
(z) Prior to the Reorganization, the Bank was not authorized to issue
shares of capital stock; neither the Bank nor the Company has: (i) issued
any securities within the last 18 months (except for notes to evidence
other bank loans and reverse repurchase agreements); (ii) had any material
dealings within the 12 months prior to November __, 1997 with any member of
the NASD, or any person related to or associated with such member, other
than discussions and meetings relating to the Offering and routine
purchases and sales of securities for or from its portfolio; (iii) entered
into a financial or management consulting agreement, except as contemplated
hereunder; or (iv) engaged any intermediary between Ryan, Beck and the
Company or the Bank in connection with any offering of shares of its
capital stock, and no person is being compensated in any manner for such
service.
(aa) Neither the Company nor the Bank is required to be registered
under the Investment Company Act of 1940, as amended.
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<PAGE>
(bb) To the knowledge of the Company and the Bank, the Company has
taken all necessary action to make such filings and/or to qualify or
register the Shares for offer and sale in the Offering under the securities
or Blue Sky laws of all jurisdictions wherein such Shares will be offered
which require such filings and/or qualification or registration.
(cc) All Sales Information used by the Company in connection with the
Offering that is required by the Reorganization Regulations to be filed has
been filed with and approved by the applicable regulatory authority.
(dd) Except for information provided in writing to the Company or the
Bank by Ryan, Beck for use in the Prospectus, the Company and the Bank have
not relied upon Ryan, Beck or its legal or other advisors for any legal,
tax or accounting advice in connection with the Reorganization.
(ee) To the knowledge of the Company and the Bank, each of the
Company, the Bank and the Subsidiaries is in compliance with all laws,
rules and regulations relating to environmental protection, except where
such failure would not have a material adverse effect on the financial
condition of the Company and the Bank taken as a whole, and none of the
Company, the Bank or any Subsidiary has been notified or is otherwise aware
that any of them is potentially liable, or is considered potentially
liable, under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any similar state law. No actions,
suits, regulatory investigations or other proceedings are pending, or, to
the knowledge of the Company and the Bank, threatened against the Company,
the Bank or any Subsidiary relating to environmental protection, nor does
the Company or the Bank have any reason to believe any such proceedings may
be brought against any of such entities. To the knowledge of the Company
and the Bank, no disposal, release or discharge of hazardous or toxic
substances, pollutants or contaminants, including petroleum and gas
products, as any of such terms may be defined under federal, state or local
law, has occurred on, in, at or about any of the facilities or properties
owned, operated or leased by, or pledged to, the Company, the Bank or any
Subsidiary.
(ff) No labor dispute with the employees of the Company, the Bank or
any Subsidiary exists or, to the knowledge of the Company or the Bank, is
imminent.
(gg) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Bank included
in the Prospectus meet or are exempt from all requirements of federal,
state and local law pertaining to lending, including, without limitation,
truth in lending (including the requirements of Regulation Z and 12 C.F.R.
Part 226), 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 and the Bank taken as a whole.
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<PAGE>
Any certificate signed by an officer of the Bank or of the Company and
delivered to Ryan, Beck or its counsel that refers to this Agreement shall be
deemed to be a representation and warranty by the Bank or the Company to Ryan,
Beck as to the matters covered thereby with the same effect as if such
representation and warranty were set forth herein.
SECTION 5. Covenants of the Company and the Bank. The Company and the
-------------------------------------
Bank hereby jointly and severally covenant with Ryan, Beck as follows:
(a) None of the Company, the Bank and the Mutual Company will file any
amendment or supplement to the Registration Statement or any Reorganization
Application without notifying Ryan, Beck of its intention to do so and
providing Ryan, Beck and its counsel an opportunity to review such
amendment or supplement, nor will any of the Company, the Bank and the
Mutual Company file any such amendment or supplement to which Ryan, Beck or
its counsel shall reasonably object.
(b) The Company and the Bank will use their best efforts to cause each
Reorganization Application not heretofore approved to be approved by the
applicable regulatory authority and will immediately upon receipt of any
information concerning the events listed below notify Ryan, Beck: (i) of
the approval of any Reorganization Application not heretofore approved;
(ii) of the receipt of any comments from the Commission, the Division, the
Bank Board, the FDIC, the FRB or any other governmental entity with respect
to the Reorganization or the transactions contemplated by this Agreement;
(iii) of the request by the Commission, the Division, the Bank Board, the
FDIC, the FRB or any other governmental entity for any amendment or
supplement to the Registration Statement, the Prospectus or any
Reorganization Application or for additional information; (iv) of the
issuance by the Commission, the Division, the Bank Board, the FDIC, the FRB
or any other governmental entity of any order or other action suspending
the Reorganization or the use of the Registration Statement or the
Prospectus or any other filing of the Company and the Bank under the
Reorganization Regulations, the 1933 Act, 1933 Act Regulations or other
applicable law, or the threat of any such action; (v) of the issuance by
the Commission, the Division, the Bank Board, the FDIC, the FRB or any
other state governmental authority of any stop order suspending the
effectiveness of the Registration Statement or any Reorganization
Application or of the initiation or threat of any proceedings for such
purpose; or (vi) of the occurrence of any event mentioned in paragraph (f)
below. The Company and the Bank will make every reasonable effort to
prevent the issuance by the Commission, the Division, the Bank Board, the
FDIC, the FRB or any other governmental authority of any such order and, if
any such order shall at any time be issued, to obtain the lifting thereof
at the earliest possible time. The Company and the Bank will provide copies
of the foregoing comments, requests and orders to Ryan, Beck upon receipt
of such items.
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<PAGE>
(c) The Company and the Bank will deliver to Ryan, Beck and to its
counsel two conformed copies of each of the following documents, with all
exhibits: each Reorganization Application as originally filed and each
amendment or supplement thereto and the Registration Statement as
originally filed and each amendment thereto. In addition, the Company and
the Bank will also deliver to Ryan, Beck such number of copies of the
closing documents with respect to the Reorganization and the Offering as
Ryan, Beck may reasonably request.
(d) The Company will furnish to Ryan, Beck, from time to time during
the period when the Prospectus is required to be delivered under federal or
state securities laws or regulations or the applicable rules and
regulations of any other governmental entity, such number of copies of the
Prospectus (as amended or supplemented) as Ryan, Beck may reasonably
request for the purposes contemplated by such federal or state securities
laws or regulations or the applicable rules and regulations of any other
governmental entity. The Company authorizes Ryan, Beck to use the
Prospectus (as amended or supplemented) for any lawful manner in connection
with the sale of the Shares.
(e) The Company, the Bank and the Mutual Company will comply with any
and all terms, conditions, requirements and provisions with respect to the
Reorganization and the transactions contemplated thereby imposed by the
Commission, the Division, the Bank Board, the FDIC, the FRB, any state
regulatory or Blue Sky authority or any other governmental entity,
including the terms, conditions, requirements and provisions contained in
the Registration Regulations, the 1933 Act, the 1933 Act Regulations, the
Securities Exchange Act of 1934 (the "1934 Act") and the rules and
regulations of the Commission promulgated under the 1934 Act (the "1934 Act
Regulations").
(f) If, at any time during the period when the Prospectus is required
to be delivered, any event relating to or affecting the Company or the Bank
shall occur, as a result of which it is necessary or appropriate, in the
opinion of counsel for the Company and the Bank, to amend or supplement the
Registration Statement or the Prospectus in order to make the Registration
Statement or Prospectus not misleading in light of the circumstances
existing at the time it is delivered to a purchaser, the Company and the
Bank will, at their expense, forthwith prepare, file with the Commission
and furnish to Ryan, Beck a reasonable number of copies of an amendment or
amendments of, or a supplement or supplements to, the Registration
Statement or Prospectus (in form and substance satisfactory to Ryan, Beck
and its counsel after a reasonable time for review) which will amend or
supplement the Registration Statement or Prospectus so that as amended or
supplemented it 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 light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading.
(g) The Company and the Bank will take all necessary actions, in
cooperation with Ryan, Beck, and furnish to whomever Ryan, Beck may direct
such
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<PAGE>
information as may be required to qualify or register the Shares for the
Offering and sale by the Company under the applicable securities or Blue
Sky laws of such jurisdictions as Ryan, Beck may reasonably designate;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify to do business in any
jurisdiction in which it is not otherwise required to be so qualified. In
each jurisdiction where any of the Shares shall have been so qualified or
registered, the Company will make and file such statements and reports as
are or may be required by the laws of such jurisdiction.
(h) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 90 days after the Closing Date, without the
prior written consent of Ryan, Beck, any shares of, or any securities
convertible into or exercisable for shares of, Common Stock other than in
connection with any plan or arrangement described in the Prospectus.
(i) During the period in which the Company's Common Stock is
registered under the 1934 Act, the Company will furnish to its stockholders
as soon as practicable after the end of each fiscal year an annual report
(including a consolidated balance sheet and statements of consolidated
income, stockholders' equity and cash flow of the Company and the Bank as
at the end of and for such year, certified by independent public
accountants in accordance with Regulation S-X under the 1934 Act) and make
available as soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the first fiscal quarter
ending after the Closing Date) financial information of the Company and the
Bank for such quarter in reasonable detail. In addition, the Company's
annual results and quarterly results shall be made public through the
issuance of appropriate press releases.
(j) During the period of five years from the date hereof, the Company
will furnish to Ryan, Beck: (i) as soon as available, a copy of each report
of the Company furnished generally to stockholders of the Company or
furnished to or filed with the Commission under the 1934 Act or any
national securities exchange or system on which any class of securities of
the Company is listed or quoted (including, but not limited to, reports of
Forms 10-K, 10-Q and 8-K and all proxy statements and annual reports to
stockholders), a copy of each other report of the Company mailed to its
stockholders or filed with the Commission or any other supervisory or
regulatory authority or any national securities exchange or system on which
any class of securities of the Company is listed or quoted and each press
release and material news item and article released by the Company or the
Bank, and (ii) from time to time, such other public information concerning
the Company and the Bank as Ryan, Beck may reasonably request.
(k) The Company and the Bank will use the net proceeds from the sale
of the Shares substantially in the manner set forth in the Prospectus under
the caption "Use of Proceeds."
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<PAGE>
(l) Other than as permitted by the Reorganization Regulations, the
laws of the Commonwealth of Massachusetts, the 1933 Act, the 1933 Act
Regulations and the laws of any jurisdiction in which the Shares are
qualified for sale, neither the Company nor the Bank will distribute any
Prospectus or other Sales Information in connection with the offer and sale
of the Shares.
(m) 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 such Rule 158) of
the Registration Statement.
(n) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 of the 1933 Act Regulations and the
Company, the Bank and the Mutual Company will file with the applicable
regulatory authorities such post-Reorganization reports as may be required
pursuant to the Reorganization Regulations or such authorities' approval of
the Reorganization Applications.
(o) The Company will register the Common Stock under Section 12(g) of
the 1934 Act effective on or prior to the Closing Date.
(p) The Company will use its best efforts to obtain approval for,
effective on or prior to the Closing Date, and maintain quotation of the
Common Stock on the Nasdaq National Market System.
(q) The Company will maintain appropriate arrangements for depositing
all funds received from persons delivering orders to purchase Shares in the
Subscription and Community Offerings on an interest-bearing basis at the
rate described in the Prospectus until the Closing Date or until the
Offering is terminated in accordance with the Plan and as described in the
Prospectus. The Company will maintain such records of all funds received to
permit the funds of each subscriber to be separately insured by the BIF and
the DIF (to the maximum extent allowable) and to enable the Company to make
appropriate refunds of such funds in the event that such refunds are
required to be made in accordance with the Plan and as described in the
Prospectus.
(r) The Company will take such actions and furnish such information as
are reasonably requested by Ryan, Beck in order for Ryan, Beck to ensure
compliance with Article III, Section 1, of the NASD's Rules of Fair
Practice and the NASD's "Interpretation to Free Riding and Withholding."
(s) The Company and the Bank will conduct their respective businesses
in compliance in all material respects with all applicable federal and
state laws,
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<PAGE>
rules, regulations, decisions, directives and orders including, all
decisions, directives and orders of the Division, the FDIC and the FRB.
(t) The Bank will not amend the Plan without Ryan, Beck's prior
written consent in any manner that, in the opinion of Ryan, Beck, would
affect the sale of the Shares or the terms of this Agreement, which
approval shall not be unreasonably withheld.
(u) In each quarter in which the Company determines to pay a dividend
on the Common Stock and the Mutual Company determines to waive the receipt
of such dividend, the Mutual Company will notify the appropriate regulatory
authorities of its intention to waive such receipt.
(v) The Company and the Bank will use all reasonable efforts to comply
with, or cause to be complied with, the conditions precedent to the several
obligations of Ryan, Beck specified in Section 9 hereof.
SECTION 6. Payment of Expenses. The Company and the Bank jointly and
-------------------
severally agree to pay all expenses incident to the performance of the
obligations of the Company and the Bank under this Agreement, including the
following: (i) the preparation, printing, issuance and delivery of the
certificates evidencing the Shares sold to the purchasers in the Offering and
the printing and delivery of all other documents applicable to the
Reorganization; (ii) the fees and disbursements of the Company's and the Bank's
counsel, accountants and other advisors; (iii) the qualification of the Shares
under all applicable securities or Blue Sky laws, including filing fees and the
reasonable fees and disbursements of counsel in connection therewith and in
connection with the preparation of a Blue Sky Survey concerning such
jurisdictions as Ryan, Beck may reasonably designate; (iv) the printing and
delivery to Ryan, Beck in such quantities as Ryan, Beck shall reasonably request
of copies of the Registration Statement, the Prospectus and the Reorganization
Applications as originally filed and as amended or supplemented and all other
documents in connection with the Reorganization and this Agreement; (v) the
filing fees incurred in connection with the review of the Registration
Statement, the Reorganization Applications and any other application, form or
filing by the Commission, the Division, the Bank Board, the FDIC and the FRB;
(vi) the filing fees and the fees and disbursements of counsel incurred in
connection with the review of the Offering by the NASD; (vii) the fees for
listing the Shares on the Nasdaq National Market System; (viii) the fees and
expenses relating to the Independent Valuation; (ix) the fees and expenses
relating to advertising expenses, temporary personnel expenses, expenses related
to the Stock Information Center to be established at the Bank's main office,
investor meeting expenses and other miscellaneous expenses relating to the
marketing by Ryan, Beck of the Shares; and (x) the fees and charges of any
transfer agent, registrar or other agent. In the event that Ryan, Beck incurs
any such expenses on behalf of the Company or the Bank, the Company or the Bank
will pay or reimburse Ryan, Beck for such expenses regardless of whether the
Reorganization is successfully completed, and such reimbursements will not be
included in the expense limitations set forth in the following paragraph. Ryan,
Beck
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will not incur any single expense of more than $1,000 pursuant to this paragraph
without the prior approval of the Company or the Bank.
In addition, the Company and the Bank will reimburse Ryan, Beck for all
reasonable out-of-pocket expenses, including legal fees and expenses, incurred
by Ryan, Beck in connection with the services provided by Ryan, Beck to the
Company and the Bank pursuant to this Agreement. Such legal fees shall not
exceed $55,000 and such other out-of-pocket expenses shall not exceed $15,000.
Ryan, Beck will provide the Company and the Bank with a detailed accounting of
the out-of-pocket expenses referred to in this paragraph, which will be paid by
the Company and the Bank on the Closing Date. The parties hereto acknowledge
that the expense limitations set forth in this paragraph may be exceeded in the
event of a material delay in the Offering that requires an update of financial
information contained in the Registration Statement to a period later than
August 31, 1997.
SECTION 7. Indemnification.
---------------
(a) The Bank and the Company jointly and severally agree to indemnify
and hold harmless Ryan, Beck, its officers, directors, agents and employees
and each person, if any, who controls Ryan, Beck within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and
all loss, liability, claim, damage or expense whatsoever (including but not
limited to settlement expenses, subject to the limitation in the last
sentence of paragraph (c) below), joint or several, that Ryan, Beck or any
of such persons may suffer or to which Ryan, Beck or any such persons may
become subject under all applicable federal and state laws or otherwise,
and to promptly reimburse Ryan, Beck and any of such persons upon written
demand for any expenses (including reasonable fees and disbursements of
counsel) incurred by Ryan, Beck or any of such persons in connection with
investigating, preparing or defending any actions, proceedings or claims
(whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions: (i) arise out of or are based upon any
untrue statement, or alleged untrue statement, of any material fact
contained in any Reorganization Application (or any amendment or supplement
thereto), the Registration Statement (or any amendment or supplement
thereto), the Prospectus (or any amendment or supplement thereto), any Blue
Sky application or other instrument or document prepared, made or executed
by or on behalf of the Company or the Bank or based upon written
information or statements furnished or made by the Company or the Bank or
their respective representatives (including counsel) which is filed in any
jurisdiction to register or qualify any or all of the Shares under the
securities laws thereof (or any amendment or supplement thereto)
(collectively, the "Blue Sky Application") or any application or other
document, advertisement or communication prepared, made or executed by or
on behalf of the Company or the Bank or based upon written information or
statements furnished or made by the Bank or the Company or their respective
representatives (including counsel) whether or not filed in any
jurisdiction in order to register or qualify any or all of the Shares under
the securities law thereof (the "Sales Information"); (ii) arise out of or
are based upon
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the omission or alleged omission to state in any of the foregoing documents
or information a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; or (iii) arise from any theory of liability
whatsoever relating to or arising from or based upon any Reorganization
Application (or any amendment or supplement thereto), the Registration
Statement (or any amendment or supplement thereto), the Prospectus (or any
amendment or supplement thereto), the Blue Sky Application, the Sales
Information or other documentation prepared by the Bank or the Company and
distributed in connection with the Offering; except to the extent such
losses, claims, damages, liabilities or actions arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
in, or omission or alleged omission of a material fact from, any
Reorganization Application (or any amendment or supplement thereto), the
Registration Statement (or any amendment or supplement thereto), the
Prospectus (or any amendment or supplement thereto), the Blue Sky
Application, the Sales Information or other documentation prepared by the
Company or the Bank and distributed in connection with the Offering made in
reliance upon and in conformity with information furnished in writing to
the Company or the Bank by Ryan, Beck or its representatives (including
counsel) regarding Ryan, Beck expressly for use in the Prospectus, which
the Bank and the Company acknowledge includes only the information
contained in the Prospectus under the captions "Summary of Reorganization
and Offering-Marketing Agent" and "The Reorganization-Plan of Distribution
and Selling Commissions"; nor shall indemnification be required for
material oral misstatements to a purchaser of Shares made by Ryan, Beck
which are not based upon information provided by the Company or the Bank
orally or in writing or based upon information contained in any
Reorganization Application (or any amendment or supplement thereto), the
Registration Statement (or any amendment or supplement thereto), the
Prospectus (or any amendment or supplement thereto), the Blue Sky
Application or the Sales Information or other documentation prepared by the
Company or the Bank and distributed in connection with the Reorganization.
In addition, neither the Company nor the Bank will be liable under the
foregoing indemnification provisions to the extent that any loss, claim,
damage, liability or action is found in a final judgment by a court to have
resulted from Ryan, Beck's bad faith or negligence in performing the
services to be performed by Ryan, Beck under this Agreement.
Notwithstanding the foregoing, the indemnification provided for 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. For purposes of this Section 7, the
term "expense" shall include, but not be limited to, counsel fees and
costs, court costs, out-of-pocket costs and compensation for the time spent
by Ryan, Beck's directors, officers, employees and counsel at their normal
hourly billing rates. The indemnification provided in this paragraph shall
also extend to all affiliates of Ryan, Beck and their respective officers,
directors, agents, employees and controlling persons within the meaning of
the federal securities laws. The foregoing agreement to indemnify shall be
in addition to any liability of the Company or the Bank may otherwise have
to Ryan, Beck or the persons entitled to the benefit of these
indemnification provisions.
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(b) Ryan, Beck agrees to indemnify and hold harmless the Company and
the Bank, their respective officers, directors, agents and employees and
each person, if any, who controls the Bank or the Company within the
meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act
against any and all loss liability, claim, damage or expense whatsoever
(including but not limited to settlement expenses, subject to the
limitation in the last sentence of paragraph (c) below), joint or several,
that they or any of such persons may suffer or to which they or any such
persons may become subject under all applicable federal and state laws or
otherwise, and to promptly reimburse the Bank and the Company and any of
such persons upon written demand for any expenses (including reasonable
fees and disbursements of counsel) incurred by them or any of such persons
in connection with investigating, preparing or defending any actions,
proceedings or claims (whether commenced or threatened) to the extent such
losses, claims, damages, liabilities or actions: (i) arise out of or are
based upon any untrue statement, or alleged untrue statement, of a material
fact contained in any Reorganization Application (or any amendment or
supplement thereto), the Registration Statement (or any amendment or
supplement thereto), the Prospectus (or any amendment or supplement
thereto), the Blue Sky Application, the Sales Information or other
documentation prepared by the Company or the Bank and distributed in
connection with the Offering; or (ii) arise out of or which are based upon
the omission or alleged omission to state in any of the foregoing documents
or information a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that obligations of
Ryan, Beck under this paragraph shall exist only if and to the extent that
such untrue statement or alleged untrue statement was made in, or such
omission or alleged omission was from, any Reorganization Application (or
any amendment or supplement thereto), the Registration Statement (or any
amendment or supplement thereto), the Prospectus (or any amendment or
supplement thereto), the Blue Sky Application, the Sales Information or
other documentation prepared by the Bank or the Company and distributed in
connection with the Offering in reliance upon and in conformity with
information furnished in writing to the Company or the Bank by Ryan, Beck
or its representatives (including counsel) regarding Ryan, Beck expressly
for use in the Prospectus, which the Bank and the Company acknowledge
includes only the information contained in the Prospectus under the
captions "Summary of Reorganization and Offering-Marketing Agent" and "The
Reorganization-Plan of Distribution and Selling Commissions." In addition,
Ryan, Beck will not be liable under the foregoing indemnification
provisions to the extent that any loss, claim, damage, liability or action
is found in a final judgment by a court to have resulted from the Bank's or
the Company's bad faith or negligence.
(c) Each indemnified party shall give prompt written notice to each
indemnifying party of any action, proceeding, claim (whether commenced or
threatened) or suit instituted against it in respect of which indemnity may
be sought hereunder, but failure to so notify an indemnifying party shall
not relieve it from any liability which it may have on account of this
Section 7 and Section 8
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<PAGE>
herein. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable
time after receipt of such notice, an indemnifying party, jointly with any
other indemnifying parties receiving such notice, may assume the defense of
such action with counsel chosen by it and reasonably acceptable to the
indemnified parties that are defendants in such action, unless such
indemnified parties reasonably object to such assumption on the ground that
there may be legal defenses available to them that are different from or in
addition to those available to such indemnifying party. If an indemnifying
party assumes the defense of such action, the indemnifying parties shall
not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action, proceeding or
claim, other than reasonable costs of investigation. In no event shall the
indemnifying parties be liable for the fees and expenses of more than one
firm of attorneys for the indemnified parties (unless an indemnified party
or parties shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to those of
the other indemnified parties) in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings
or claims in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall be liable for any
settlement of any action, proceeding or suit effected without its prior
written consent.
(d) The agreement contained in this Section 7 and in Section 8 hereof
and the representations and warranties of the Bank and the Company set
forth in this Agreement shall remain operative and in full force and effect
regardless of: (i) any investigation made by or on behalf of Ryan, Beck or
its directors, officers, agents, employees or controlling persons or by or
on behalf of the Bank or the Company or their respective directors,
officers, agents, employees or controlling persons; (ii) delivery of and
payment hereunder for the Shares; or (iii) any termination of this
Agreement.
SECTION 8. Contribution. If the indemnification of an indemnified
------------
party provided for in Section 7 of this Agreement is for any reason held
unenforceable, the Bank and the Company, on the one hand, and Ryan, Beck, on the
other, agree to contribute to the losses, liabilities, claims, damages and
expenses for which such indemnification is held unenforceable: (i) in such
proportion as is appropriate to reflect the relative benefits to the Bank and
the Company, on the one hand, and Ryan, Beck, on the other, of the
Reorganization as contemplated (whether or not the Reorganization is
consummated), or (ii) if the application provided for in clause (i) is for any
reason held unenforceable, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) but also the relative fault
of the Bank and the Company, on the one hand, and Ryan, Beck, on the other, as
well as other equitable considerations. The Bank and the Company agree that for
the purposes of this Section 8, the relative benefits to the Bank and the
Company and Ryan, Beck of the Reorganization as contemplated shall be deemed to
be in the same proportion that the total net proceeds from the Reorganization
and the Offering received by the Bank and the Company in connection with the
Reorganization bear to the total fees paid or to be paid to Ryan, Beck under
this Agreement. No person found guilty of any
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<PAGE>
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not found guilty
of such fraudulent misrepresentation. For purposes of this Section 8, each of
Ryan, Beck's officers and directors and each person, if any, who controls Ryan,
Beck within the meaning of the 1933 Act and the 1934 Act shall have the same
rights to contribution as Ryan, Beck, and each of the Company's and the Bank's
officers and directors and each person, if any, who controls the Bank or the
Company within the meaning of the 1933 Act and the 1934 Act shall have the same
rights to contribution as the Bank and the Company. Any party entitled to
contribution shall, promptly after receipt of notice of commencement of any
action, suit, claim or proceeding against such party in respect to which a claim
for contribution may be made against another party, notify such other party, but
the omission to so notify such party shall not relieve the party from whom
contribution may be sought from any other obligation it may have hereunder or
otherwise than under this Section 8. The Bank, the Company and Ryan, Beck agree
that it would not be just and equitable if contribution pursuant to this Section
8 were determined by pro rata allocation or by other method of allocation that
does not take into account the equitable considerations referred to in this
Section 8. It is expressly agreed that Ryan, Beck shall not be required to
contribute to any loss, liability, claim, damage or expense in an amount that in
the aggregate exceeds the amount paid to Ryan, Beck under this Agreement.
SECTION 9. Conditions of Ryan, Beck's Obligations. The obligations of
--------------------------------------
Ryan, Beck hereunder as to the Shares to be delivered at the Closing Date are
subject, in the discretion of Ryan, Beck, to the condition that all
representations and warranties and other statements of the Bank and the Company
herein are, at and as of the commencement of the Offering and at and as of the
Closing Date, true and correct in all material respects, the condition that the
Bank and the Company shall have performed in all material respects all of their
respective obligations hereunder to be performed on or before such dates and to
the following conditions:
(a) The Registration Statement shall have been declared effective by
the Commission not later than 5:30 p.m. on the date of this Agreement, or
with the consent of Ryan, Beck at a later time and date; and at the Closing
Date no stop order suspending the effectiveness of the Registration
Statement or the consummation of the Reorganization shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by the
Commission or any state securities or Blue Sky authority, and no order or
other action suspending the effectiveness of the Prospectus or the
consummation of the Reorganization shall have been issued or proceedings
therefore initiated or threatened by the Division, the Bank Board, the FDIC
or the FRB.
(b) At the Closing Date, Ryan, Beck shall have received:
(1) The favorable opinions, dated as of the Closing Date
addressed to Ryan, Beck and for its and its counsel's benefit, of Luse
Lehman Gorman Pomerenk & Schick, P.C. ("Luse Lehman"), as to issues of
federal law set forth below, and of Foley, Hoag & Eliot, LLP ("Foley
Hoag"), as to
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matters of Massachusetts law set forth below. With respect to the
opinion of Foley Hoag, Luse Lehman shall also provide a letter addressed
to Ryan, Beck which states that, with respect to the opinion of Foley
Hoag, to Luse Lehman's knowledge, nothing has come to the attention of
Luse Lehman that would lead Luse Lehman to believe that Ryan, Beck and
its counsel are not reasonably justified in relying upon such opinion.
The opinions of Luse Lehman and Foley Hoag shall be in form and
substance 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
Commonwealth of Massachusetts. The Bank validly exists and is in
good standing with the Division. Each of the Subsidiaries has been
duly organized and is validly existing and in good standing under
the laws of its jurisdiction of organization.
(ii) Each of the Company, the Bank and the Subsidiaries has
the 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 each of the Company, the
Bank and the Subsidiaries is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in
which such qualification is required, unless the failure to be so
qualified in one or more of such jurisdictions would not have a
material adverse effect on the condition, financial or otherwise, or
the business, operations, income or prospects of the Company and the
Bank taken as a whole.
(iii) The Bank is a Massachusetts-chartered mutual savings
bank, and, at the Closing Date, will become a validly existing
Massachusetts-chartered stock savings bank, with corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus.
(iv) The activities of each Subsidiary were permitted to
subsidiaries of a Massachusetts-chartered mutual savings bank, and
such activities are permitted to subsidiaries of a Massachusetts-
chartered stock savings bank, by the rules, regulations, policies
and practices of the Division, the FDIC, the FRB and any other
federal or state authority having jurisdiction over such matters.
All of the outstanding stock of each Subsidiary has been duly
authorized and validly issued and is fully paid and nonassessable;
in the case of BBS and Associates, all such stock, and in the case
of BPCC, 99.9% of such stock, is owned of record and beneficially by
the Bank free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity.
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<PAGE>
(v) The deposit accounts of the Bank in mutual form were, and
the deposit accounts of the Board in stock form are, insured by the
BIF and the DIF up to the maximum amounts allowed by law; and, to
such counsel's knowledge, no proceeding for the termination or
revocation of such insurance is pending or threatened. The Bank is a
member of the Federal Home Loan Bank of Boston.
(vi) Upon consummation of the Reorganization and the
Offering, the authorized, issued and outstanding equity capital of
the Company will be as set forth in the Registration Statement and
the Prospectus under the caption "Capitalization" and, other than in
the Reorganization, no shares of Common Stock, or securities
exercisable into or exchangeable for Common Stock, will have been
issued prior to the Closing Date; at the time of the Reorganization
the Shares and the shares of Common Stock to be issued to the Mutual
Company will have been duly and validly authorized for issuance, and
when issued and delivered by the Company pursuant to the Plan
against payment therefor as set forth in the Plan and the
Prospectus, will be duly authorized and validly issued and fully
paid and nonassessable, and at such time all such shares of Common
Stock owned by the Mutual Company will be owned of record and
beneficially by the Mutual Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; and
neither the issuance of the Shares nor the issuance of the shares of
Common Stock to the Mutual Company is subject to any preemptive
rights.
(vii) Upon consummation of the Reorganization and the
Offering, all of the issued and outstanding capital stock of the
Bank will be duly authorized and validly issued and fully paid and
nonassessable, and all such capital stock will be owned of record
and beneficially by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
(viii) Each Reorganization Application has been approved by
the applicable regulatory authority pursuant to the Reorganization
Regulations, and, to such counsel's knowledge, no action has been
taken or is pending or threatened to revoke any such approval.
(ix) Each Reorganization Application, as amended or
supplemented, if amended or supplemented, as filed with the
applicable regulatory authority complied as to form in all material
respects with the requirements of the Reorganization Regulations.
(x) The Division's approval of the Plan remains in full force
and effect; the Bank has duly adopted a Massachusetts stock charter
and By-Laws effective upon consummation of the Reorganization; the
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Company and the Bank have conducted the Reorganization in all
material respects in accordance with the requirements of the
Reorganization Regulations, federal law, all other applicable
regulations, decisions and orders and the Plan, including all
material applicable terms, conditions, requirements and conditions
precedent to the Reorganization imposed upon the Company and the
Bank by the Division, the Bank Board, the FDIC and the FRB; no order
has been issued by the Division, the Bank Board, the FDIC or the FRB
to suspend the Reorganization or the Offering and no action for such
purpose has been instituted or, to such counsel's knowledge,
threatened by the Division, the Bank Board, the FDIC or the FRB;
and, to such counsel's knowledge, no person has sought to obtain
review of the final action of the Division in approving the MHC
Application or the Plan.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company and the Bank and is the legal, valid and
binding agreement of the Company and the Bank, subject, as to
enforceability, to bankruptcy, insolvency, reorganization,
moratorium, conservatorship, receivership and other laws of general
applicability relating to or affecting creditors' rights or the
rights of creditors of depository institutions the deposits of which
are insured by the BIF or the DIF, to general principles of equity
(whether considered in an action at law or in equity) and to the
extent that rights to indemnity and contribution thereunder may be
limited under applicable laws or under considerations of public
policy.
(xii) The Registration Statement is effective under the 1933
Act and no stop order suspending effectiveness has been issued under
the 1933 Act and, to such counsel's knowledge, no proceedings
therefor have been initiated or threatened by the Commission or any
state securities or Blue Sky authority.
(xiii) All conditions imposed by regulatory authorities in
connection with their respective approvals of the Reorganization
Applications have been satisfied, and no further approval,
authorization, consent or other order of any federal or state board
or body is required in connection with the execution and delivery of
this Agreement, the issuance of the Shares and the consummation of
the Reorganization, except as may be required under the securities
or Blue Sky laws of various jurisdictions.
(xiv) At the time the Registration Statement became
effective, (i) the Registration Statement (as amended or
supplemented, if so amended or supplemented) (other than the
financial statements, stock valuation information and other
financial
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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 1933 Act and the 1933 Act Regulations and (ii)
the Prospectus (other than the financial statements, stock valuation
information and other financial 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
Reorganization Regulations and federal and Massachusetts law.
(xv) The information in the Registration Statement and
Prospectus under the captions "Risk Factors-Regulatory Oversight and
Legislation" and "-Certain Anti-Takeover Provisions," "Federal and
State Taxation," "Regulation," "The Reorganization and Offering,"
"Restrictions on Acquisition of the Company and the Bank" and
"Description of Capital Stock of the Company" to the extent that it
constitutes matters of law, summaries of legal matters, documents or
proceedings or legal conclusions, has been reviewed by such counsel
and is correct in all material respects.
(xvi) The terms and provisions of the Common Stock conform in
all material respects to the description thereof contained in the
Prospectus, and the form of certificate used to evidence the Shares
is in due and proper form.
(xvii) There are no legal or governmental proceedings pending
or, to such counsel's knowledge, threatened against the Company, the
Bank or any Subsidiary which are required to be disclosed in the
Registration Statement and Prospectus other than those disclosed
therein, and all pending legal and governmental proceedings to which
the Company, the Bank or any Subsidiary is the subject which are not
disclosed in the Registration Statement, including ordinary routine
litigation, are, considered in the aggregate, not material.
(xviii) To such counsel's knowledge, there are no material
contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the
Registration Statement and Prospectus or to be filed as exhibits
thereto other than those described or referred to therein or filed
as exhibits thereto, and the description thereof or references
thereto are correct in all material respects.
(xix) The Company, the Bank and the Subsidiaries have
obtained all material licenses, permits and other governmental
authorizations currently required for the conduct of their
respective businesses as described in the Registration Statement and
Prospectus, all such licenses, permits and other governmental
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<PAGE>
authorizations are in full force and effect, and the Company, the
Bank and the Subsidiaries are in all material respects complying
therewith.
(xx) The Plan has been duly adopted by the required votes of
the Board of Directors of the Company and the Board of Trustees and
the corporators, including the "independent corporators," of the
Bank.
(xxi) The Company is not in violation of its Articles of
Organization or By-Laws or in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company is a
party as a borrower, a lessee or a guarantor, or by which the
Company or any of its property may be bound as a borrower, a lessee
or a guarantor; 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, or result in the creation
or imposition of any material lien, charge or encumbrance upon any
property or assets of the Company pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument
to which the Company is a party as a borrower, a lessee or a
guarantor, or by which it may be bound as a borrower, a lessee or a
guarantor, or to which any of the property or assets of the Company
is subject, nor will such action result in any violation of the
provisions of the Articles of Organization or By-Laws of the
Company.
(xxii) The Bank is not in violation of its Massachusetts
mutual charter or By-Laws (and the Bank will not be in violation of
its Massachusetts stock charter upon consummation of the
Reorganization) or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which the Bank is a party as a borrower, a
lessee or a guarantor, or by which the Bank or any of its property
may be bound as a borrower, a lessee or a guarantor; 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, or result in the creation or imposition of any
material lien, charge or encumbrance upon any property or assets of
the Bank pursuant to any material contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the Bank is
a party as a borrower, a lessee or a guarantor, or by which it may
be bound as a borrower, a lessee or a guarantor, or to which any of
the
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property or assets of the Bank is subject, nor will such action
result in any violation of the provisions of the charter or By-Laws
of the Bank.
(xxiii) None of the Subsidiaries is in violation of its
charter or By-Laws or in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, loan agreement, note, lease
or other instrument to which such Subsidiary is a party as a
borrower, a lessee or a guarantor, or by which such Subsidiary or
any of its property may be bound as a borrower, a lessee or a
guarantor; 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, or result in the creation
or imposition of any material lien, charge or encumbrance upon any
property or assets of any Subsidiary pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which such Subsidiary is a party as a borrower, a
lessee or a guarantor, or by which it may be bound as a borrower, a
lessee or a guarantor, or to which any of the property or assets of
such Subsidiary is subject, nor will such action result in any
violation of the provisions of the charter or By-Laws of such
Subsidiary.
(xxiv) To such counsel's knowledge, the Company, the Bank and
the Subsidiaries have good and marketable title to all properties
and assets which are material to the business of the Company, the
Bank and the Subsidiaries, respectively, and to those properties and
assets described in the Registration Statement as owned by them,
free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Registration Statement and
Prospectus (including the Liquidation Account) or are not material
in relation to the business of the Company and the Bank taken as a
whole.
(xxv) To such counsel's knowledge, neither the Company nor
the Bank is in violation of any directive from the Division, the
Bank Board, the FDIC or the FRB to make any material change in the
method of conducting its business, and the Company and the Bank have
conducted and are conducting their respective businesses so as to
comply in all material respect with all applicable statutes and
regulations (including, without limitation, regulations, decisions,
directives and orders of the Division, the Bank Board, the FDIC and
the FRB).
(xxvi) Neither the Company nor the Bank is required to be
registered as an investment company under the Investment Company Act
of 1940.
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
Commonwealth of Massachusetts or the United States, to the extent such
counsel deems proper and specifies in such opinion, upon the opinion of
other counsel of good standing (providing that such counsel states that
Ryan, Beck and its counsel are justified in relying upon such specified
opinion or opinions), and (B) as to matters of fact, to the extent such
counsel deems proper, on certificates of responsible officers of the
Company and the Bank and public officials; provided copies of any such
opinion(s) or certificates are delivered to Ryan, Beck together with the
opinion to be rendered hereunder by such counsel.
(2) The letter of Luse Lehman addressed to Ryan, Beck, dated
the Closing Date, in form and substance to the effect that:
During the preparation of the Reorganization Applications, the
Registration Statement and the Prospectus, such counsel participated in
conferences with management of and the independent public accountants
for the Company and the Bank. Based upon such conferences and such
review of corporate records of the Company and the Bank as such counsel
conducted in connection with the preparation of the Registration
Statement and Reorganization Applications, nothing has come to their
attention that would lead them to believe that any Reorganization
Application, the Registration Statement, the Prospectus or any amendment
or supplement thereto (other than financial statements, stock valuation
information and other financial and statistical data included therein,
as to which such counsel need express no view), 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
therein, in light of the circumstances under which they were made, not
misleading.
(3) The favorable opinion, dated as of the Closing Date, of
Peabody & Brown, counsel for Ryan, Beck, with respect to such matters as
Ryan, Beck may reasonably require. Such opinion may rely upon the
opinions of counsel to the Bank and the Company, and, as to matters of
fact, upon certificates of officers and directors of the Company and the
Bank delivered pursuant hereto or as such counsel shall reasonably
request.
(c) At the Closing Date, Ryan, Beck shall receive a certificate of the
Chief Executive Officer and the Chief Financial Officer of the Company and
of the Chief Executive Officer and Chief Financial Officer of the Bank,
dated the Closing Date, to the effect that: (i) since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, capital, properties, affairs or
prospects of the Company and the Bank taken as a whole, whether or not
arising in the ordinary course of business; (ii) the representations
-30-
<PAGE>
and warranties in Section 4 of this Agreement are true and correct with the
same force and effect as though expressly made at and as of the Closing
Date; (iii) 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 the Closing Date and will comply with all obligations to be
satisfied by them after the Reorganization; (iv) 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 or any state securities or Blue Sky authority; and (v) no order
suspending the Offering, the Reorganization or the effectiveness of the
Prospectus has been issued and no proceedings for that purpose have been
issued and no proceedings for that purpose have been initiated or
threatened by the Division, the Bank Board, the FDIC or the FRB.
(d) Prior to and at the Closing Date: (i) there shall have been no
material adverse change in the condition, financial other otherwise, or in
the earnings, affairs or prospects of the Company or the Bank
independently, or of the Company and the Bank taken as a whole, since the
respective dates as of which information is given in the Prospectus, except
as referred to therein; (ii) there shall have been no material transaction
entered into by the Company or the Bank taken as a whole since the latest
dates as of which the financial condition of the Company and the Bank is
set forth in the Prospectus, other than transactions referred to or
contemplated therein; (iii) neither the Company nor the Bank shall have
received from the Division, the Bank Board, the FDIC or the FRB 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 Ryan, Beck) or which would materially and
adversely affect its business, operations, financial condition or income;
(iv) neither the Company nor the Bank shall have been in default (nor shall
an event have occurred which, with notice or lapse of time or both, would
constitute a default) under any provision of any agreement or instrument
relating to any outstanding indebtedness; (v) no action, suit or
proceeding, at law or in equity or before or by any federal or state
commission, board or other administrative agency, shall be pending or, to
the knowledge of the Company or the Bank, threatened against the Company or
the Bank or affecting any of their respective properties wherein an
unfavorable decision, ruling or finding would materially and adversely
affect the business, operations, financial condition or income of the
Company and the Bank taken as a whole; and (vi) the Shares shall have been
qualified or registered for offering and sale under the securities or Blue
Sky laws of the jurisdictions set forth in the Blue Sky Survey of Luse
Lehman.
(e) Concurrently with the execution of this Agreement, Ryan, Back, the
Company and the Bank shall receive a letter from Grant Thornton LLP dated
the date hereof and addressed to Ryan, Beck: (i) confirming that Grant
Thornton LLP is a firm of independent public accountants with respect to
the Company and the Bank within the meaning of the 1933 Act and the 1933
Act Regulations and the Code of Ethics of the American Institute of
Certified Public Accountants and no information concerning its relationship
with or interests in the Bank or the
-31-
<PAGE>
Company is required to be disclosed in the Prospectus, and stating in
effect that in its opinion the financial statements of the Bank included in
the Prospectus and covered by its opinion included therein comply as to
form in all material respects with the applicable accounting requirements
of the 1933 Act, the 1934 Act, the 1933 Act Regulations and the 1934 Act
Regulations, the relevant Reorganization Regulations and generally accepted
accounting principles; (ii) stating in effect that, on the basis of certain
agreed upon procedures (but not an examination in accordance with generally
accepted auditing standards) consisting of a reading of the latest
available unaudited interim financial statements of the Bank prepared by
the Bank, a reading of the minutes of the meetings of the Board of
Directors and corporators of the Bank and consultations with officers of
the Bank responsible for financial and accounting matters, nothing has come
to its attention which causes it to believe that: (A) the unaudited
financial statements included in the Prospectus do not comply as to form in
all material respects with applicable accounting requirements; (B) such
unaudited financial statements are not in conformity with generally
accepted accounting principles applied on a basis substantially consistent
with that of the audited financial statements included in the Prospectus;
(C) during the period from the date of the latest audited financial
statements included in the Prospectus to a specified date not more than
five business days prior to the date hereof, there was any material
increase in borrowings by the Company or the Bank; or (D) there was any
material decrease in surplus and reserves of the Bank at the date of such
letter as compared with amounts shown in the latest audited statement of
condition included in the Prospectus or any material decrease in net income
or net interest income of the Bank for the number of full months commencing
immediately after the period covered by the latest audited income statement
included in the Prospectus and ended on the latest month end prior to the
date of the Prospectus as compared to the corresponding period in the
preceding year; and (iii) stating that, in addition to the examination
referred to in its opinion included in the Prospectus and the performance
of the procedures referred to in clause (ii) of this paragraph (e), it has
compared with the general accounting records of the Company's and/or the
Bank's, as applicable, accounting system and other data prepared by the
Company and/or the Bank, as applicable, directly from such accounting
records, to the extent specified in such letter, such amounts and/or
percentages set forth in the Prospectus as Ryan, Beck may reasonably
request; and they have found such amounts and percentages to be in
agreement therewith (subject to rounding).
(f) At the Closing Date, Ryan, Beck shall receive a letter from Grant
Thornton LLP, dated the Closing Date, addressed to Ryan, Beck, confirming
the statements made by it in the letter delivered by it pursuant to
paragraph (e) of this Section 9, the "specified date" referred to in clause
(ii) (C) thereof to be a date specified in such letter, which shall not be
more than five business days prior to the Closing Date.
-32-
<PAGE>
(g) At the Closing Date, Ryan, Beck shall have received a letter from
Feldman Financial, dated as of the Closing Date, confirming the Independent
Valuation.
(h) At the Closing Date, counsel to Ryan, Beck shall have been
furnished with such documents and opinions as they may reasonably require
for the purpose of enabling them to pass upon the sale of the Shares as
herein contemplated and related proceedings or in order to evidence the
accuracy or completeness of any of the representations and warranties, or
the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company or the Bank in connection with the
Reorganization and the sale of the Shares as herein contemplated shall be
satisfactory in form and substance to Ryan, Beck and counsel to Ryan, Beck.
(i) The Company and the Bank shall not have sustained since the date of
the latest audited financial statements included in the Registration
Statement and Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, other than as set forth or contemplated in the Registration
Statement, which is in the judgment of Ryan, Beck sufficiently material and
adverse as to make it impracticable or inadvisable to proceed with the
Offering or the delivery of the Shares on the terms and in the manner
contemplated in the Prospectus.
(j) Subsequent to the date hereof, there shall not have occurred any of
the following: (i) a suspension or limitation in trading in securities
generally on the New York Stock Exchange or American Stock Exchange or in
the over-the-counter market, or quotations halted generally on the Nasdaq
Stock Market, or minimum or maximum prices for trading fixed, or maximum
ranges for prices for securities required by either of such exchanges or
the NASD or by order of the Commission or any other governmental authority;
(ii) a general moratorium on the operation of commercial banks, federal or
state savings and loan associations or savings banks in Massachusetts or a
general moratorium on the withdrawal of deposits from commercial banks,
federal or state savings and loan associations or savings banks in
Massachusetts declared by either federal or Massachusetts authorities;
(iii) the engagement by the United States in hostilities which have
resulted in the declaration, on or after the date hereof, a national
emergency or war; or (iv) a material decline in the price of equity or debt
securities, if the effect of such a decline, in the judgment or Ryan, Beck,
makes it impracticable or inadvisable to proceed with the Offering or the
delivery of the Shares on the terms and in the manner contemplated in the
Prospectus.
If any of the conditions specified in this Section 9 shall not have been
fulfilled when and as required by this Agreement, or by June 30, 1998, this
Agreement and all of Ryan, Beck's obligations hereunder may be canceled by Ryan,
Beck by notifying the Bank of such cancellation in writing or by telegram at any
time at or prior to the Closing Date, and any
-33-
<PAGE>
such cancellation shall be without liability of any party to any other party
except as otherwise provided in Sections 1, 6, 7 and 8 hereof. Notwithstanding
the above, if this Agreement is canceled pursuant to this paragraph, the Bank
and the Company jointly and severally agree to reimburse Ryan, Beck for all of
Ryan, Beck's out-of-pocket expenses reasonably incurred by Ryan, Beck, including
any legal fees to be paid to Ryan, Beck's counsel, subject to the limits
expressed in Section 6 hereof, and an advisory and administrative services fee
of $25,000 in connection with the preparation of the Registration Statement and
the Prospectus and in contemplation of the proposed Offering.
SECTION 10. Termination.
-----------
(a) In the event the Company fails to sell the minimum number
of Shares in the Offering as set forth in the Prospectus and does not
modify the Offering within the period specified in, and in accordance
with the provisions of, the Plan or as required by the Reorganization
Regulations, this Agreement shall terminate upon refund by the Company
to each person who has subscribed for or ordered any of the Shares the
full amount which it may have received from such person, together with
interest, as provided in the Prospectus, and no party to this
Agreement shall have any obligation to the other hereunder, except for
payment by the Bank and/or the Company as set forth in Sections 1, 6,
7 and 8 hereof.
(b) This Agreement may be terminated by Ryan, Beck, with
respect to Ryan, Beck's obligations hereunder, by notifying the
Company at any time or prior to the Closing Date, if any of the
conditions specified in Section 9 hereof shall not have been fulfilled
when and as required by this Agreement or if the Reorganization has
not been completed by June 30, 1998.
SECTION 11. Survival. The respective indemnities, agreements,
--------
representations, warranties and other statements of the Bank, the Company and
Ryan, Beck, as set forth in this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of Ryan, Beck or any of Ryan, Beck's officers or
directors or any person controlling Ryan, Beck, or the Bank or the Company, or
any of their respective officers or directors or any person controlling the Bank
or the Company, and shall survive termination of this Agreement and receipt or
delivery of any payment for the Shares.
SECTION 12. Miscellaneous. Notices hereunder, except as otherwise
-------------
provided herein, shall be given in writing or by telegraph, addressed (a) to
Ryan, Beck at 220 South Orange Avenue, Livingston, New Jersey 07039-5817
(Attention: Ben A. Plotkin, President), with a copy to Peabody & Brown, 101
Federal Street, Boston, Massachusetts 02110-1832 (Attention: Kevin J. Handly,
Esq.) and (b) to the Bank and the Company at the Bank's principal office
(Attention: Richard P. Chapman, Jr., President and Chief Executive Officer),
with a copy to Luse Lehman Gorman Pomerenk & Schick, P.C., 5335 Wisconsin
Avenue, N.W., Suite 400, Washington, D.C. 20015 (Attention: Eric Luse, Esq.).
-34-
<PAGE>
This Agreement is made solely for the benefit of and will be binding
upon the parties hereto and their respective successors and the directors,
officers and controlling persons referred to in Section 7 hereof, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of any of the Shares.
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts.
Time shall be of the essence of this Agreement.
This Agreement may be signed in various counterparts which together
will constitute one agreement.
If the foregoing correctly sets forth the arrangement among the
Company, the Bank and Ryan, Beck, please indicate acceptance thereof in the
space provided below for that purpose, whereupon this letter shall constitute a
binding agreement.
BROOKLINE BANCORP, INC. BROOKLINE SAVINGS BANK
BY: BY:
----------------------------------- ------------------------------------
Richard P. Chapman, Jr., President Richard P. Chapman, Jr., President
and Chief Executive Officer and Chief Executive Officer
Accepted as of the date first above written.
RYAN, BECK & CO., INC.
By:
-----------------------------------
Ben A. Plotkin, President
-35-
<PAGE>
EXHIBIT B
BROOKLINE BANCORP, INC.
Shares of Common Stock
(par value $.01 per share)
Selected Dealers' Agreement
---------------------------
_________________, 1997
We have agreed to assist Brookline Bancorp, Inc. (the "Company"), and
Brookline Savings Bank (the "Bank") in connection with the offer and sale of up
to 11,891,000 shares of the Company's common stock, $.01 par value per share
(the "Common Stock"), in connection with the mutual holding company
reorganization (the "Reorganization") of the Bank, which includes the formation
of a Massachusetts-chartered stock savings bank as the successor to the Bank in
its mutual form and the concurrent formation of the Company as a majority-owned
subsidiary of Brookline Bancorp, MHC. The total number of shares of Common Stock
to be offered may be increased to allow for the sale of up to an additional 15%
of the shares (or a total of 13,674,650 shares). The price per share will be
fixed at $10.00. The Common Stock, the number of shares to be issued and certain
of the terms on which they are being offered are more fully described in the
enclosed prospectus dated _____________, 1997 (the "Prospectus").
In connection with the Reorganization, the Company has offered the
Common Stock in a Subscription Offering (to the Bank's Eligible Account Holders,
the Bank's Employee Stock Ownership Plan, the Bank's Supplemental Eligible
Account Holders and the Bank's employees, officers and trustees) and in a
concurrent Community Offering to certain members of the general public
(capitalized terms not otherwise defined herein are as defined in the
Prospectus). The Common Stock is also being offered in accordance with the
Bank's Plan of Reorganization From a Mutual Savings Bank to a Mutual Holding
Company and Stock Issuance Plan (the "Plan") by a selling group of broker
dealers in a Syndicated Community Offering.
We are offering the selected dealers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Common Stock
and we will use our best efforts to cause the Company to pay you directly a fee
in the amount of 5.5% percent of the dollar amount of the Common Stock sold on
behalf of the Company by you. The dollar amount of shares sold on behalf of the
Company by you shall be evidenced (1) on the Stock Subscription Agreements
supplied by the Company executed by subscribers or executed by your firm on
behalf of subscribers, pursuant to authority previously given, or (2) on a
summary record as may be prepared by your firm (the "Purchase Record").
Subscribers
<PAGE>
who elect to use Subscription Agreements must make checks payable to "Brookline
Bancorp, Inc."
It is understood that (i) Stock Subscription Agreements or the
Purchase Record must bear the authorized designation of your firm; (ii) Stock
Subscription Agreements or the Purchase Record executed by you shall indicate
the true and correct beneficial subscribers for the indicated shares; and (iii)
payment of your fee for the shares sold on behalf of the Company by you will be
made directly by the Company.
Each Stock Subscription Agreement or Purchase Record must precisely
set forth the Taxpayer Identification Number, number of shares, county, and
state of residence of the beneficial subscriber for each order and the name in
which each certificate for Common Stock should be issued and delivered.
Each order form for the purchase of Common Stock must set forth the
identity and address of each person to whom the certificates for such Common
Stock should be issued and delivered. Such order form should clearly identify
your firm. You shall instruct any subscriber who elects to send his or her order
form to you to make any accompanying check payable to "Brookline Bancorp, Inc."
This offer is made subject to the terms and conditions herein set
forth and is made only to selected dealers who are (i) members in good standing
of the National Association of Securities Dealers, Inc. ("NASD"), who are to
comply with all applicable rules of the NASD, including, without limitation, the
NASD's Interpretation With Respect to Free-Riding and Withholding and Section 24
of Article III of the NASD's Rules of Fair Practice, or (ii) foreign dealers not
eligible for membership in the NASD who agree (A) not to sell any Common Stock
within the United States, its territories or possessions or to persons who are
citizens thereof or residents therein and (B) in making other sales to comply
with the NASD Interpretation referred to above, Sections 8, 24 and 36 of the
above-referenced Article III and Section 25 of such Article III as if they were
NASD members, and Section 25 of such Article III as it applies to non-member
brokers or dealers in a foreign country.
Orders for Common Stock will be strictly subject to confirmation and
we, acting on behalf of the Company, reserve the right in our unfettered
discretion to reject any order in whole or in part, to accept or reject orders
in the order of their receipt or otherwise and to allot. Neither you nor any
other person is authorized by the Company or by us to give any information or
make any representations other than those contained in the Prospectus in
connection with the sale of any of the Common Stock. No selected dealer is
authorized to act as agent for us when soliciting offers to buy the Common Stock
from the public or otherwise. No selected dealer shall engage in any stabilizing
(as defined in Rule 10b-7 promulgated under the Securities Exchange Act of 1934)
(the "1934 Act") with respect to the Common Stock during the Reorganization.
We and each selected dealer assisting in selling the Common Stock
pursuant hereto agree to comply with the applicable requirements of the 1934 Act
and applicable state rules and regulations. In addition, we and each selected
dealer confirm that the Securities and
B-2
<PAGE>
Exchange Commission interprets Rule 15c2-8 promulgated under the 1934 Act as
requiring that a Prospectus be supplied to each person who is expected to
receive a confirmation of sale 48 hours prior to delivery of such person's order
form.
We and each selected dealer further agree to the extent that our
customers desire to pay for shares with funds held by or to be deposited with
us, in accordance with the interpretation of the Securities and Exchange
Commission of Rule 15c2-4 promulgated under the 1934 Act, either (a) upon
receipt of an executed Subscription Agreement or direction to execute a
Subscription Agreement on behalf of a customer to forward the offering price of
the Common Stock ordered on or before 12 noon, Eastern time, of the next
business day following receipt or execution of a Subscription Agreement by us to
the Company for deposit in a segregated account or (b) to solicit indications of
interest, in which event (i) we will subsequently contact any customer
indicating interest to confirm the interest and give instructions to execute and
return a Subscription Agreement or to receive authorization to execute the
Subscription Agreement on the customer's behalf, (ii) we will mail
acknowledgments of receipt of orders to each customer confirming interest on the
business day following such confirmation, (iii) we will debit accounts of such
customers on the third business day (the "Debit Date") following receipt of the
confirmation referred to in (i) and (iv) we will forward completed Subscription
Agreements together with such funds to the Company on or before 12 noon, Eastern
time, on the next business day following the Debit Date for deposit in a
segregated account. We and each selected dealer acknowledge that if the
procedure in (b) is adopted, our customers' funds are not required to be in
their accounts until the Debit Date.
Unless earlier terminated by us, this Agreement shall terminate upon
the Closing Date of the Reorganization. We may terminate this Agreement or any
provision hereof at any time by written or telegraphic notice to you. Of course,
our obligations hereunder are subject to the successful completion of the
Reorganization.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of shares of
Common Stock sold on behalf of the Company by you under this Agreement.
We shall have full authority to take such actions as we may deem
advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which
we believe the Common Stock has been qualified for sale under, or is exempt from
the requirements of, the respective blue sky laws of such states, but we assume
no responsibility or obligation as to your rights to sell Common Stock in any
state.
Additional copies of the Prospectus and any supplements thereto will
be supplied in reasonable quantities upon request.
B-3
<PAGE>
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned, or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Ryan, Beck & Co., Inc.,
220 South Orange Avenue, Livingston, New Jersey 07039-5817. The enclosed
duplicate copy will evidence the agreement between us.
RYAN, BECK & CO., INC.
By:
-----------------------------------
Ben A. Plotkin, President
CONFIRMED AS OF:
_______________________________, 1997
- ----------------------------------------
(Name of Dealer)
By:
------------------------------------
Its:
------------------------------------
B-4
<PAGE>
EXHIBIT 5
<PAGE>
[LETTERHEAD OF LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.]
(202) 274-2002
January 12, 1998
The Board of Trustees
Brookline Savings Bank
160 Washington Street
Brookline, Massachusetts 02147
RE: BROOKLINE BANCORP, INC.
COMMON STOCK PAR VALUE $.01 PER SHARE
-------------------------------------
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of Brookline Bancorp, Inc.
(the "Company") Common Stock, par value $.01 per share (the "Common Stock"). We
have reviewed the Company's Articles of Organization, Registration Statement on
Form S-1 (the "Form S-1"), as well as applicable statutes and regulations
governing the Company and the offer and sale of the Common Stock.
We are of the opinion that upon the declaration of effectiveness of the
Form S-1, the Common Stock, when sold, will be legally issued, fully paid and
non-assessable.
This Opinion has been prepared solely for the use of the Company and its
prospective stockholders in connection with the Form S-1. We hereby consent to
our firm being referenced under the caption "Legal and Tax Matters and to the
filing of this opinion letter as an exhibit to the Registration Statement."
Very truly yours,
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
By: /s/ Robert B. Pomerenk
------------------------------------
Robert B. Pomerenk
<PAGE>
EXHIBIT 8.1
<PAGE>
FORM OF FEDERAL TAX OPINION
January 12, 1998
Board of Trustees
Brookline Savings Bank
Board of Directors
Brookline Bancorp, Inc.
Board of Trustees
Brookline Bancorp, M.H.C.
160 Washington Street
Brookline , Massachusetts 02147
RE: MUTUAL HOLDING COMPANY FORMATION
--------------------------------
Ladies and Gentlemen:
We have been requested as special counsel to Brookline Savings Bank (the
"Bank"), a Massachusetts chartered mutual savings bank, Brookline Bancorp,
M.H.C., a Massachusetts chartered mutual holding company (the "Holding
Company"), and Brookline Bancorp, Inc. a Massachusetts chartered stock company
(the "Stock Holding Company") to express our opinion concerning certain Federal
income tax matters relating to the Plan of Reorganization from Mutual Savings
Bank to Mutual Holding Company and Stock issuance Plan (the "Plan of
Reorganization") of the Bank, the Mutual Holding Company, a newly organized
Massachusetts chartered stock savings bank established by the Mutual Holding
Company as a subsidiary (the "Stock Bank"), and the Stock Holding Company. Upon
consummation of the merger, Stock Bank will assume the name "Brookline Savings
Bank."
In connection therewith, we have examined the Plan of Reorganization and
certain other documents of or relating to the Reorganization, some of which are
described or referred to in the Plan of Reorganization and which we deemed
necessary to examine in order to issue the opinions set forth below. Unless
otherwise defined, all terms used herein have the meanings given to such terms
in the Plan of Reorganization.
In our examination, we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have further
assumed the absence of adverse facts not apparent from the face of the
instruments and documents we examined.
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 2
In issuing our opinions, we have assumed that the Plan of Reorganization
has been duly and validly authorized and has been approved and adopted by the
Board of Trustees of the Bank at a meeting duly called and held and by the
corporators of the Bank at a Meeting of Corporators duly called and held
pursuant to Massachusetts law; that the Bank will comply with the terms and
conditions of the Plan of Reorganization; and that the various representations
and warranties which are provided to us are accurate, complete, true and
correct. Accordingly, we express no opinion concerning the effect, if any, of
variations from the foregoing. We specifically express no opinion concerning
tax matters relating to the Plan of Reorganization under state and local tax
laws and under Federal income tax laws except on the basis of the documents and
assumptions described above.
In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"); existing and proposed treasury regulations thereunder; current
administrative rulings, notices and procedures; and court decisions. Such laws,
regulations, administrative rulings, notices and procedures and court decisions
are subject to change at any time. Any such change could affect the continuing
validity of the opinions set forth below. This opinion is as of the date
hereof, and we disclaim any obligation to advise you of any change in any matter
considered herein after the date hereof.
In rendering our opinions, we have assumed that the persons and entities
identified in the Plan of Reorganization will at all times comply with the
requirements of Code Sections 368(a)(1)(A) and 368(a)(2)(D), the other
applicable state and Federal laws and the representations of the Bank. In
addition, we have assumed that the activities of the persons and entities
identified in the Plan of Reorganization will be conducted strictly in
accordance with the Plan of Reorganization. Any variations may affect the
opinions we are rendering.
We emphasize that the outcome of litigation cannot be predicted with
certainty and, although we have attempted in good faith to opine as to the
probable outcome of the merits of each tax issue with respect to which an
opinion was requested, there can be no assurance that our conclusions are
correct or that they would be adopted by the Internal Revenue Service (the
"Service") or a court.
For purposes of this opinion, we are relying on the representations
provided to us by the Bank as described in the Affidavit of Representations of
the President of the Bank, incorporated herein by reference.
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 3
STATEMENT OF FACTS
------------------
The Bank is a Massachusetts chartered mutual savings bank headquartered in
Brookline, Massachusetts. The Bank is regulated by the Commissioner of Banks of
the Commonwealth of Massachusetts (the "Commissioner"), including the Division
of Banks and the Board of Bank Incorporation. The Bank is also regulated by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank's principal
executive office is located at 160 Washington Street, Brookline, Massachusetts
02147. The Bank has, and the Mutual Holding Company and Stock Holding Company
will have, a December 31 fiscal year end.
As a Massachusetts-chartered mutual savings bank, the Bank has no capital
stock. Instead, depositors of the Bank possess the right (i) to share in the
Bank's current earnings (which is in the nature of the right to receive interest
on deposits); and (ii) upon liquidation of the Bank, to share in any surplus
remaining after all of the Bank's liabilities have been satisfied. A
depositor's rights terminate when the depositor's account is closed.
PROPOSED TRANSACTION
--------------------
On October 8, 1997, the Board of Trustees of the Bank adopted the Plan of
Reorganization. In a separate meeting of the corporators of the Bank, held on
November 24, 1997 the corporators of the Bank approved the Plan of
Reorganization. For what are represented to be valid business purposes, the
Bank's Board of Trustees has decided to convert to the mutual holding company
structure pursuant to Chapter 167H of the Massachusetts General Laws Annotated.
The following steps are proposed:
(i) Corporators will organize a de novo mutual savings bank ("De Novo
Bank") and will capitalize De Novo Bank with $10,000;
(ii) De Novo Bank will reorganize as a Massachusetts chartered mutual
holding company to be named Brookline Bancorp, M.H.C. ("Mutual
Holding Company") pursuant to Massachusetts law;
(iii) The Mutual Holding Company will organize and transfer virtually all
of its assets (i.e., $10,000) to a new stock savings bank subsidiary
of Mutual Holding Company ("Stock Bank"), in exchange for 100% of
Stock Bank's common stock;
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 4
(iv) Bank will merge with and into the Stock Bank with the Stock Bank as
the surviving entity. Contemporaneously with the merger, Stock Bank
will change its name to Brookline Savings Bank.
(v) The Mutual Holding Company will organize a Delaware chartered stock
as a separate wholly-owned company subsidiary of the (the "Stock
Holding Company") Mutual Holding Company.
(vi) The Mutual Holding Company will contribute all of the shares of
common stock of the Stock Bank to the Stock Holding Company.
(vii) Contemporaneously, with the contribution set forth in "(vi)" the
Stock Holding Company will offer to sell up to 49.9% of its Common
Stock in the Subscription Offering and, if applicable, the Direct
Community Offering.
Upon the transfer of assets by the Bank to the Stock Bank and the Stock
Bank's assumption of the Bank liabilities, if any, those persons who, as of the
date of the exchange, hold depository rights with respect to the Bank will
thereafter have such rights solely with respect to the Stock Bank. Each deposit
account with the Bank at the time of the exchange will become a deposit account
in the Stock Bank in the same amount and upon the same terms and conditions,
except that the holders of each such deposit account will have liquidation
rights with respect to the Mutual Holding Company rather than the Stock Bank.
Similarly, borrowers of the Bank will become borrowers of the Stock Bank with
the same status they had with the Bank.
The principal purposes of the Reorganization are to reorganize the Bank
into a corporate structure that enables it to access capital sources not
available to mutual savings banks, and to facilitate acquisitions and the
diversification of the Holding Company's activities.
Following the Reorganization, the Stock Holding Company will have the power
to issue shares of capital stock (including common and preferred stock) to
persons other than the Mutual Holding Company. So long as the Mutual Holding
Company is in existence, however, it must own a majority of the voting stock of
the Stock Holding Company. The Stock Holding Company may issue any amount of
non-voting stock to persons other than the Mutual Holding Company.
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 5
SUMMARY OF OPINIONS
-------------------
Based on the facts, representations and assumptions set forth herein, we
are of the opinion that:
1. The conversion of the De Novo Bank into the Mutual Holding Company, a
Massachusetts mutual holding company, will qualify as a tax-free
reorganization under Code Section 368(a)(1)(F).
2. Based on the opinion of Massachusetts legal counsel that the merger of
the Bank into Stock Bank qualifies as a merger under Massachusetts
law, the merger of the Bank into the Stock Bank with the Stock Bank as
the survivor and the transfer of the depositors' equity interest in
the Bank to the Mutual Holding Company in exchange for equity
interests in the Mutual Holding Company qualifies as a tax-free
reorganization described in Code Sections 368(a)(1)(A) and
368(a)(2)(D). Bank, Stock Bank and Mutual Holding Company are each "a
party to the reorganization," as defined in Code Section 368(b).
3. Bank will recognize no gain or loss upon the transfer of substantially
all its assets to Stock Bank solely in exchange for equity interests
(voting and liquidation rights) in Mutual Holding Company and Stock
Bank's assumption of its liabilities, if any. (Rev. Rul. 57-278, 1957-
1 C.B. 124).
4. Neither Stock Bank nor Mutual Holding Company will recognize gain or
loss upon the receipt by Stock Bank of substantially all of the assets
of Bank in exchange for equity interests in Mutual Holding Company and
Stock Bank's assumption of Bank's liabilities.
5. The Mutual Holding Company's basis in the stock of Stock Bank will
increase by an amount equal to Bank's net basis in the property
transferred to the Stock Bank.
6. Stock Bank's basis in the property received from Bank will be the same
as the basis of such property in the hands of Bank immediately prior
to the Reorganization. Code Section 362(b).
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 6
7. Stock Bank's holding period for the property received from Bank will
include the period during which such property was held by Bank. Code
Section 1223(2).
8. Subject to the conditions and limitations set forth in Code Sections
381, 382, 383, and 384 and the Treasury regulations promulgated
thereunder, Stock Bank will succeed to and take into account the items
of Bank described in Code Section 381(c). (Section 381(a) and Section
1.381(a)-1 of the Income Tax Regulations).
9. No gain or loss will be recognized by the depositors of Bank on the
receipt of equity interests with respect to Mutual Holding Company in
exchange for their equity interests surrendered therefor. Section
354(a)(1).
10. Each depositor's aggregate basis, if any, in the Mutual Holding
Company equity interest received in the exchange will equal the
aggregate basis, if any, of each depositor's equity interest in the
Bank. Code Section 358(a)(1).
11. The holding period of Mutual Holding Company equity interests received
by the depositors of Bank will include the period during which the
Bank equity interests surrendered in exchange therefor were held. Code
Section 1223(1).
12. The Mutual Holding Company and the minority stockholders of the Stock
Holding Company ("Minority Stockholders") will recognize no gain or
loss upon the transfer of Stock Bank stock and cash, respectively, to
the Stock Holding Company in exchange for stock of the Stock Holding
Company. Code Sections 351(a) and 357(a):
13. The Stock Holding Company will recognize no gain or loss upon its
receipt of property from the Mutual Holding Company and Minority
Stockholders in exchange for Common Stock of Stock Holding Company.
Code Section 1032(a).
14. The Mutual Holding Company will increase its basis in its shares of
Stock Holding Company Common Stock by the Mutual Holding Company's
basis in its Stock Bank stock.
* * *
<PAGE>
Brookline Savings Bank
Brookline Bancorp, Inc.
Brookline Bancorp, M.H.C.
January 12, 1998
Page 7
The opinions set forth above represent our conclusions as to the
application of existing Federal income tax law to the facts of the instant
transaction, and we can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us.
There can be no assurance that contrary positions to the ones set forth in
our opinions may not be taken by the Service, or that a court considering the
issues would not hold contrary to such opinions.
It is expressly understood that the opinions set forth above represent our
conclusions based upon the documents reviewed by us and the facts presented to
us. Any material amendments to such documents or changes in any significant
fact would affect the opinions expressed herein.
We have not been asked to, and we do not, render any opinion with respect
to any matters other than those expressly set forth above. This opinion is
rendered solely for the benefit of the Mutual Holding Company, the Stock Holding
Company, the Bank, and prospective investors in connection with the proposed
transactions described herein, and may not be delivered to or relied upon by any
other person or entity without our express written consent, provided, however,
you are authorized to furnish a copy of this letter to Foley, Hoag, & Eliot LLP,
who may rely on this letter for the sole purpose of rendering their opinion to
Brookline Savings Bank, Brookline Bancorp, Inc. and Brookline Bancorp, M.H.C.
with respect to the state tax consequences of the transactions set forth herein.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK
& SCHICK, A Professional Corporation
<PAGE>
EXHIBIT 8.2
<PAGE>
[LETTERHEAD OF FOLEY, HOAG, & ELIOT LLP APPEARS HERE]
January 9,1997
BROOKLINE SAVINGS BANK
160 Washington Street
Brookline, MA 02147
Re: Mutual Holding Company Formation
Ladies and Gentlemen:
We have acted as counsel to Brookline Savings Bank (the "Bank"), a
Massachusetts chartered mutual savings bank, in connection with certain
Massachusetts state tax consequences of the transactions described in the
Brookline Savings Bank Plan of Reorganization from a Mutual Savings Bank to a
Mutual Holding Company and Stock Issuance Plan, dated as of October 8, 1997 and
amended on November 14, 1997 (the "Plan"). Capitalized terms used but not
defined herein shall have the respective meanings ascribed to them in the Plan.
We have examined the law and such papers, including the Plan, as deemed
necessary to render this opinion. As to questions of fact material to our
opinions we have relied upon representations set forth in the Plan (including
the Exhibits), and such other documents pertaining to the transactions
contemplated by the Plan as we have deemed appropriate and necessary. In
rendering our opinion, we have relied upon the opinions of Luse Lehman Gorman
Pomerenk & Schick related to the federal tax consequences of the transactions
contemplated by the Plan (the "Federal Tax Opinions"), without undertaking to
verify the same by independent investigation.
Pursuant to the Plan, a newly-created mutual savings bank will convert to a
mutual holding company, Brookline Bancorp, M.H.C. (the "Mutual Holding
Company"). The Mutual Holding Company will then transfer all of its assets to a
newly-organized Massachusetts chartered stock savings bank (the "Stock Bank")
that is a wholly-owned subsidiary of the Mutual Holding Company in exchange for
all of the outstanding common stock of the Stock Bank.
Subsequently, the Bank will merge with and into the Stock Bank (the
"Merger"), with the Stock Bank surviving; the Bank's separate corporate
existence will cease. In the Merger, depositors of the Bank will exchange their
rights (i) to share in the Bank's current earnings
<PAGE>
BROOKLINE SAVINGS BANK
January 9,1997
Page 2
(which is in the nature of the right to receive interest on deposits); and (ii)
upon liquidation of the Bank, to share in any surplus remaining after all of the
Bank's liabilities have been satisfied (collectively, "Equity Interests") for
Equity Interests in the Mutual Holding Company.
After the Merger, the Mutual Holding Company will contribute the stock of
the Stock Bank to a newly-organized, wholly-owned subsidiary (the "Stock Holding
Company") in exchange for common stock of the Stock HOlding Company. Finally,
the Stock Holding Company will sell 49.9 percent of its voting stock in the
Subscription Offering or in a Direct Community Offering.
In our examination we have assumed that (i) each entity that is a party to
any of the documents (the "Documents") described in the preceding paragraphs has
been duly organized under the laws of its state or country of organization, is
validly existing and in good standing under such laws, and is duly qualified and
in good standing in each jurisdiction in which it is required to be qualified to
engage in the transactions contemplated by the Documents; (ii) each such entity
has full power, authority, capacity and legal right to enter into and perform
the terms of the Documents and the transactions contemplated thereby; (iii) the
copies or originals of the Documents furnished to us are authentic (if
originals) or accurate (if copies), those that are contracts or instruments are
enforceable and effective in accordance with their terms against all parties
thereto, and all signatures are genuine; (iv) any representations made in the
Documents are, and will continue to be, true and complete, and no default exists
under any of the Documents; (v) the business and affairs of each of the entities
that is a party to any of the Documents will be conducted in accordance with the
Documents and all relevant laws; (vi) no actions will be taken, no change in any
of the Documents will occur, and no other events will occur, after the date
hereof, that would have the effect of altering the facts, Documents or
assumptions upon which this opinion is based; and (vii) the Federal Tax Opinions
have been delivered and have not been withdrawn.
The opinions rendered herein are based upon the provisions of the
Massachusetts General Laws, proposed, temporary and final regulations of the
Massachusetts Department of Revenue (the "DOR"), judicial decisions, and rulings
and administrative interpretations of the Massachusetts General Laws, as each of
the foregoing exist on the date hereof. The opinions rendered herein are not
binding on the DOR or a court of law, and no assurance can be given that
legislative or administrative action or judicial decisions that differ from the
opinions rendered below will not be forthcoming. Any such differences could be
retroactive to transactions or business operations prior to such action or
decisions.
We express no opinion as to the Massachusetts state tax consequences other
than those described below, if any, or as to any federal, local or foreign
income or other tax consequences, with respect to the transactions contemplated
by the Plan.
<PAGE>
BROOKLINE SAVINGS BANK
January 9, 1997
Page 3
Based on the foregoing, we are of opinion, as of the date hereof and under
existing law, as follows:
1. For purposes of Massachusetts General Laws, chapter 63, sections 1, 2,
30, and 32, no gross income, gain or loss will be recognized by the Bank, the
Mutual Holding Company, the Stock Bank, or the Stock Holding Company as a result
of the transactions comtemplated by the Plan.
2. The Mutual Holding Company's basis in the stock of Stock Bank received
in the transaction will be the same as the basis of the property transferred in
exchange therefor, reduced by the sum of the liabilities assumed by the Stock
Bank or to which assets transferred are taken subject.
3. The Mutual Holding Company's holding period for the common stock of
the Stock Bank received in the transaction will include the period during which
the property exchanged was held by the Mutual Holding Company, provided that
such property was a capital asset in the hands of the Mutual Holding Company on
the date of the exchange.
4. The Stock Bank's basis in the assets received from the Bank in the
Merger will be same as the basis of such property in the hands of the Bank
immediately prior to the Merger.
5. The Stock Bank's holding period in the assets received from the Bank
in the Merger will include the period during which the assets were held by the
Bank, provided that such assets were capital assets in the hands of the Bank on
the date of the Merger.
6. The Mutual Holding Company's basis in the stock of the Stock Holding
Company received in the transaction will be the same as the basis of the
property transferred in exchange therefor, including the stock of the Stock
Bank, reduced by the sum of the liabilities assumed by the Stock Holding
Company or to which assets transferred are taken subject.
7. The Mutual Holding Company's holding period for the stock of the Stock
Holding Company received in the transaction will include the period during which
the property exchanged was held or considered to have been held by the Mutual
Holding Company, provided that such property was a capital asset in the hands of
the Mutual Holding Company on the date of the exchange.
8. No gross income, gain or loss will be recognized by the depositors of
the Bank on the receipt of Equity Interests with respect to the Mutual Holding
Company in exchange for their Equity Interests with respect to the Bank.
<PAGE>
BROOKLINE SAVINGS BANK
January 9, 1997
Page 4
9. Each depositor's aggregate basis in the Mutual Holding Company Equity
Interest received in the Merger will equal the aggregate basis of each
depositor's Equity Interest in the Bank.
10. A depositor's holding period in a Mutual Holding Company Equity
Interest received in the Merger will include the period during which the Bank
Equity Interest surrendered in exchange therefor was held.
We are furnishing this letter to you solely for the purpose of satisfying
Section 4 of the Plan. This letter is not to be used, circulated, quoted or
otherwise referred to for any other purpose without our prior written consent.
We consent, however, to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
and Tax Matters" in the Prospectus.
Very truly yours,
FOLEY, HOAG & ELIOT LLP
By: /s/ Richard Schaul-Yoder, Esq.
-------------------------------
A Partner
<PAGE>
EXHIBIT 23.2
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 13, 1997 accompanying the
consolidated financial statements of Brookline Savings Bank and Subsidiaries
contained in Amendment No. 2 to the Registration Statement and Prospectus on
Form S-1 (File No. 333-40471). We consent to the use of the aforementioned
report in the Registration Statement and Prospectus, and to the use of our name
as it appears under the caption "Experts."
/s/ Grant Thornton LLP
Boston, Massachusetts
January 9, 1998
