PROSPECTUS
Up to 1,243,150 shares of common stock
SERVICE BANCORP, INC.
81 Main Street
Medway, Massachusetts 02053
(508) 533-4343
- --------------------------------------------------------------------------------
Service Bancorp, Inc., a Massachusetts-chartered stock holding company,
is offering for sale up to 1,243,150 shares, or 47%, of its common stock
pursuant to the terms of a stock issuance plan. Service Bancorp, Inc. will issue
the remaining 53% of its common stock to Service Bancorp, MHC, a Massachusetts
mutual holding company. Service Bancorp, Inc. has been organized as the mid-tier
stock holding company subsidiary of Service Bancorp, MHC, and will own 100% of
the common stock of Summit Bank, a Massachusetts-chartered stock savings bank.
The stock issuance plan has been approved by the corporators of Service Bancorp,
MHC, and has been conditionally approved by state and federal banking
regulators. Because the names of Summit Bank, Service Bancorp, Inc. and Service
Bancorp, MHC are so similar, we will refer to Summit Bank as the "Bank", we will
refer to Service Bancorp, Inc. as the "Stock Company" and we will refer to
Service Bancorp, MHC as the "Mutual Company."
- --------------------------------------------------------------------------------
TERMS OF OFFERING
An independent appraiser has estimated that the pro forma market value
of the Stock Company is between $17.0 million and $23.0 million. Based on this
estimate, the Stock Company will issue between 1.7 million and 2.3 million
shares of its common stock and intends to sell 47% of these shares, or between
799,000 and 1,081,000 shares, to depositors of the Bank and members of the
general public. The remaining 53% of the Stock Company's shares, or between
901,000 and 1,219,000 shares, will be issued to the Mutual Company. The number
of shares issued may be increased to 2,645,000 shares. If the number of shares
issued increases, the shares offered for sale in the stock offering will also
increase to up to 1,243,150 shares. The number of shares to be issued is subject
to regulatory approval. Based on these estimates, the Stock Company is making
the following offering of shares of common stock:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
<S> <C> <C> <C> <C>
o Price per share................................. $10.00 $10.00 $10.00 $10.00
o Number of shares................................ 799,000 940,000 1,081,000 1,243,150
o Offering expenses............................... $482,016 $500,000 $500,000 $500,000
o Net proceeds.................................... $7,507,984 $8,900,000 $10,310,000 $11,931,500
o Net proceeds per share.......................... $9.40 $9.47 $9.54 $9.60
</TABLE>
Please refer to Risk Factors beginning on page 19 of this prospectus.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation, the Depositors Insurance Fund or
any other government agency, and are not guaranteed by the Bank, the Stock
Company or the Mutual Company. The common stock is subject to investment risk,
including the possible loss of principal invested. Neither the Securities and
Exchange Commission, the Massachusetts Division of Banks, the Federal Deposit
Insurance Corporation, nor any state securities regulator has approved or
disapproved these securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
Trident Securities, Inc. will use its best efforts to assist in selling
at least the minimum number of shares of common stock but does not guarantee
that this number will be sold. All funds received from subscribers will be held
in an interest bearing savings account at the Bank until the completion or
termination of the stock offering. The Stock Company has applied to have the
common stock quoted on the Nasdaq SmallCap Market under the symbol "SUBC."
For information on how to subscribe, call the Stock Information Center
at (508) 533-6533.
Trident Securities, Inc.
Prospectus dated August 11, 1998
<PAGE>
[MAP]
2
<PAGE>
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING.................................4
SUMMARY AND OVERVIEW...........................................................6
SELECTED FINANCIAL AND OTHER DATA.............................................11
RECENT DEVELOPMENTS...........................................................13
RISK FACTORS..................................................................19
SERVICE BANCORP, MHC..........................................................25
SERVICE BANCORP, INC..........................................................25
SUMMIT BANK...................................................................26
REGULATORY CAPITAL COMPLIANCE.................................................27
USE OF PROCEEDS...............................................................28
DIVIDEND POLICY...............................................................29
MARKET FOR COMMON STOCK.......................................................29
CAPITALIZATION................................................................30
PRO FORMA DATA................................................................31
PARTICIPATION BY MANAGEMENT...................................................36
THE OFFERING AND THE REORGANIZATION...........................................37
SUMMIT BANK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME................49
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................50
BUSINESS OF THE STOCK COMPANY.................................................63
BUSINESS OF THE BANK..........................................................64
FEDERAL AND STATE TAXATION....................................................84
REGULATION....................................................................86
MANAGEMENT OF THE STOCK COMPANY...............................................95
MANAGEMENT OF THE BANK........................................................97
RESTRICTIONS ON ACQUISITION OF THE STOCK COMPANY AND THE BANK................106
DESCRIPTION OF CAPITAL STOCK OF THE STOCK COMPANY............................109
TRANSFER AGENT AND REGISTRAR.................................................110
LEGAL AND TAX MATTERS........................................................111
EXPERTS ....................................................................111
ADDITIONAL INFORMATION.......................................................111
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
GLOSSARY ....................................................................G-1
This document contains forward-looking statements which involve risks
and uncertainties. The Stock Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 19 of this prospectus.
Please see the Glossary beginning on page G-1 for the meaning of capitalized
terms that are used in this prospectus.
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the stock offering?
A: We are selling shares of common stock so that we can raise capital to grow
and compete more effectively in our market area, and so that our
depositors, employees, management, trustees and directors may obtain equity
ownership in the Bank. As part of the reorganization, you will have the
opportunity to become a stockholder of the Stock Company, which will allow
you to share indirectly in the future earnings and growth of our Bank. The
capital raised in the stock offering will enable us to expand our lending
and investment activities, and may be used to establish or acquire new
branch offices or acquire other financial institutions.
Q: Who will be permitted to purchase stock?
A: The stock will be offered on a priority basis to the following persons:
o Persons who had one or more deposit accounts with us with aggregate
balances of at least $50 on March 31, 1997. Any remaining shares will
be offered to:
o Persons who had one or more deposit accounts with us with aggregate
balances of at least $50 on June 30, 1998. Any remaining shares will
be offered to:
o The Bank's tax-qualified employee plans. Any remaining shares will be
offered to:
o The Bank's and the Mutual Company's employees, officers, directors and
trustees.
If the above persons do not subscribe for all of the shares of common
stock, the remaining shares will be offered to certain members of the
general public, with preference given to natural persons residing in the
Massachusetts towns of Franklin, Medfield, Medway and Millis.
Q: How much stock may I order?
A: The minimum order is 25 shares (or $250). The maximum order for any
individual person, persons having a joint account, or persons acting
together is 10,000 shares (or $100,000). We may decrease or increase the
maximum purchase limitation without notifying you. However, if we increase
the maximum purchase limitation, and you previously subscribed for the
maximum number of shares, you will be given the opportunity to subscribe
for additional shares.
Q: What happens if there are not enough shares to fill all orders?
A: If the stock offering is oversubscribed in any of the categories listed
above, then shares will be allocated among all subscribers in that category
based on a formula that is described in detail in "The Offering and the
Reorganization" section of this prospectus.
Q: How do I order the stock?
A: You must complete and return the stock order form and certification to us
together with your payment, so that we receive it on or before 12:00 noon,
Massachusetts time, on September 15, 1998. Payment may only be made by (i)
check or money order, or (ii) authorization of withdrawal from passbook or
money market accounts or certificates of deposit maintained by the Bank.
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<PAGE>
Q: As a depositor of Summit Bank, what will happen if I do not order any
common stock?
A: You are not required to purchase common stock. Your deposit accounts,
certificate accounts and any loans you may have with the Bank will not be
affected by the stock offering.
Q: How do I decide whether to buy stock in the stock offering?
A: In order to make an informed investment decision, you should read this
entire prospectus, particularly the section titled "Risk Factors."
Q: Who can help answer any questions I may have about the stock offering?
If you have questions about the Offering, you may contact:
Stock Information Center
Summit Bank
81 Main Street
Medway, Massachusetts 02053
(508) 533-6533
5
<PAGE>
SUMMARY AND OVERVIEW
This is a summary of selected information from this document and does
not contain all the information that you need to know before making an informed
investment decision. To understand the stock offering fully, you should read
carefully this entire prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Summit
Bank. References in this document to the "Bank," "we," "us," or "our" mean
Summit Bank. In certain instances where appropriate, "us" or "our" refers
collectively to Service Bancorp, Inc. and the Bank. References in this
prospectus to the "Stock Company" mean Service Bancorp, Inc., and references to
the "Mutual Company" mean Service Bancorp, MHC. References to the "Offering"
mean the subscription and if necessary, community offering described in this
prospectus.
The Companies
Service Bancorp, Inc.
81 Main Street
Medway, Massachusetts 02053
(508) 533-4343
After the Offering, the Stock Company will own 100% of the Bank's
common stock. Purchasers in the Offering will acquire in the aggregate 47% of
the Stock Company's common stock and the Mutual Company will acquire 53% of the
Stock Company's common stock. Although these percentages may change in the
future, the Mutual Company must always own at least 51% of the Stock Company's
common stock. See page 25.
Summit Bank
81 Main Street
Medway, Massachusetts 02053
(508) 533-4343
The Bank is a community-oriented Massachusetts-chartered stock savings
bank. We provide financial services to individuals, families and small
businesses primarily in Norfolk County and surrounding markets in the greater
Boston metropolitan area. We are engaged primarily in the business of offering
various FDIC-insured retail deposits to customers through our five full-service
branch offices, and investing those deposits, together with funds generated from
operations and borrowings, in one- to four-family residential mortgage loans,
commercial real estate loans, construction and development loans, commercial
business loans, consumer loans, and mortgage-backed and other securities. At
March 31, 1998, we had total assets of $131.2 million, total deposits of $108.1
million and total retained earnings of $9.9 million. See pages 64 to 84.
Description of the Mutual Holding Company Structure
The mutual holding company structure differs in significant respects
from the stock holding company structure that is typically used in a standard
mutual-to-stock conversion. In a standard conversion, a converting mutual
institution or its newly-formed holding company usually sells 100% of its common
stock in a stock offering. A savings institution that conducts a stock offering
using the mutual holding company structure sells less than 50% of its shares to
the public. As a result, control of the Stock Company will remain with the
Mutual Company.
Because the Mutual Company is a mutual corporation, its actions will
not necessarily always be in the best short-term interests of the Stock
Company's stockholders. In making business decisions, the Mutual Company's Board
of Trustees will consider a variety of constituencies, including the depositors
and employees of the Bank, and the communities in which the Bank operates. As
the majority stockholder of the Stock Company, the Mutual Company is also
interested in the continued success and profitability of the Bank and the Stock
Company. Consequently, the Mutual Company will act in a manner that furthers the
general interest of all of its constituencies, including, but not
6
<PAGE>
limited to, the interest of the stockholders of the Stock Company. The Mutual
Company believes that the interests are in many circumstances the same, such as
the increased profitability of the Stock Company and the Bank and continued
service to the communities in which the Bank operates.
Conversion of the Mutual Company to the Stock Form of Organization
Although the Mutual Company will own and control at least 51% of the
common stock of the Stock Company so long as the Mutual Company remains in
existence, the Mutual Company is permitted by law to convert to the stock form
of organization. Such a conversion transaction would be effected through a
merger of the Mutual Company into the Stock Company or the Bank concurrently
with the sale of the shares of the Stock Company's common stock held by the
Mutual Company in a subscription offering to qualifying depositors and others.
Regulations of the Division prohibit such a conversion 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. Moreover, the Division has proposed, but has not yet adopted, final
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. The stock issuance
plan provides that any conversion transaction shall be fair and equitable to the
Stock Company's 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 Stock Company) or the Mutual Company waives the receipt of dividends
declared by the Stock Company. While management expects that the capital raised
in the Offering will satisfy the Bank's capital requirements for the next two
years, and management has no current plans to convert the Mutual Holding Company
to stock form, management would consider a conversion transaction if attractive
acquisition or expansion opportunities make raising additional capital
necessary, or if financial conditions dictate such a transaction. If a
conversion transaction does not occur, the Mutual Company will continue to own
at least 51% of the outstanding common stock of the Stock Company and purchasers
of the common stock in the Offering will remain Minority Stockholders.
Accordingly, investors should not subscribe for shares of common stock in
anticipation of a sale of control of the Stock Company or the Bank. See "Risk
Factors--Conversion of Mutual Company to Stock Form."
The Stock Offering
The Stock Company is offering for sale between 799,000 and 1,081,000
shares of its common stock, for a price per share of $10.00. If market or
financial conditions change, we may increase the Offering to up to 1,243,150
shares without further notice to you. The number of shares that we sell in the
Offering is subject to approval of the Division and the FRB. We have engaged
Trident Securities, Inc. to assist us on a best efforts basis in selling the
common stock in the Offering. See pages 37 to 48.
Stock Pricing and Number of Shares to be Issued
The Bank's Board of Directors set the subscription price per share at
$10.00, the subscription price most commonly used in stock offerings involving
savings institutions. The number of shares of common stock issued in the
Offering is based on the independent valuation prepared by RP Financial, LC.,
Arlington, Virginia. The independent valuation states that as of May 29, 1998,
the estimated market value of the Stock Company after giving effect to the
reorganization ranged from a minimum of $17.0 million to a maximum of $23.0
million. Based on the independent valuation and the subscription price, the
number of shares of common stock that the Stock Company will issue will range
from 1.7 million shares to 2.3 million shares. The Board of Directors has
decided to offer for sale 47% of these shares, or between 799,000 shares and
1,081,000 shares, to qualifying depositors and others pursuant to this
prospectus. The Board determined to sell 47% of the stock in the Offering in
order to raise the maximum amount of proceeds while permitting the Stock Company
to issue additional shares of common stock in the future pursuant to the stock
award plan and stock option plan that the Stock Company intends to adopt no
sooner than six
7
<PAGE>
months after the Offering, subject to regulatory approval. The 53% of the shares
of common stock that are not sold in the Offering will be issued to the Mutual
Company.
Changes in the market and financial conditions and demand for the
common stock may result in an increase of up to 15% in the independent valuation
(to up to $26.5 million) and a corresponding increase in the maximum of the
Offering Range (to up to $12.4 million). We will not notify subscribers if the
maximum of the independent valuation and the maximum of the Offering Range are
increased by 15% or less. We will, however, notify subscribers if the maximum of
the independent valuation is increased by more than 15%, or if the minimum of
the independent valuation is decreased. The independent valuation is not a
recommendation as to the advisability of purchasing stock, and you should not
buy stock based on the independent valuation.
Stock Purchase Priorities
The Stock Company will offer shares of its common stock on the basis of
the following purchase priorities.
o Persons who had one or more deposit accounts with us with aggregate
balances of at least $50 on March 31, 1997. Any remaining shares will
be offered to:
o Persons who had one or more deposit accounts with us with aggregate
balances of at least $50 on June 30, 1998. Any remaining shares will
be offered to:
o The Bank's tax-qualified employee plans. Any remaining shares will be
offered to:
o The Bank's and the Mutual Company's employees, officers, directors and
trustees.
If the above persons do not subscribe for all of the shares of common stock, the
remaining shares will be offered to certain members of the general public, with
preference given to natural persons residing in the Massachusetts towns of
Franklin, Medway, Medfield and Millis.
Prohibition on Transfer of Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is illegal and may subject you to sanctions by the
Commissioner or the FDIC. The Bank and the Stock Company will pursue any and all
legal and equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders believed by them to involve the
transfer of such rights.
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, Massachusetts
time, on September 15, 1998. If a Community Offering is held, it is expected to
begin immediately after the termination of the Subscription Offering, but may
begin during the Subscription Offering. The Stock Company may terminate any
Community Offering at any time prior to October 30, 1998, without regulatory
approval.
Benefits to Management from the Offering
We intend to implement certain stock benefit plans which may provide to
our full-time employees, officers, trustees and directors up to 22% of the
common stock issued in the Offering. Our full-time employees will participate in
our employee stock ownership plan, pursuant to which they will be awarded up to
8% of the common stock issued in the Offering. These shares will be awarded at
no cost to the recipients, and will have a value of $864,800, assuming shares
are sold in the Offering at the maximum of the Offering Range. We also intend to
implement a stock award plan and a stock option plan no earlier than six months
following completion of the Offering, which will benefit
8
<PAGE>
our officers, trustees and directors. If we implement the stock award plan,
certain officers, trustees and directors will be awarded up to 4% of the common
stock issued in the Offering. These shares will be awarded at no cost to the
recipients, and will have a value of $432,400, assuming a $10 price per share
and assuming shares are sold in the Offering at the maximum of the Offering
Range. If we implement a stock option plan, certain officers, trustees and
directors will be awarded options to purchase up to 10% of the common stock
issued in the Offering. The options, which will be awarded at no cost to the
recipient, will entitle the participant to purchase common stock at a price per
share equal to the then-current trading price of common stock. However, the
stock award plan and stock option plan may not be adopted until at least six
months after completion of the Offering and are subject to shareholder approval.
The following table presents the dollar value of the shares to be
granted pursuant to the proposed benefit plans and the percentage of the Stock
Company's outstanding common stock which will be represented by these shares.
Percentage of
Value of Outstanding
Shares Granted(1) Common Stock
----------------- ------------
Benefit Plan:
Employee stock ownership plan $ 864,800 3.76%
Stock award plan..................... 432,400 1.88
Stock option plan.................... --(2) 4.70
------------- ------------
$ 1,297,200 10.34%
============= ============
- -------------------------
(1) Assumes shares are granted at $10 per share and that shares are sold in the
Offering at the maximum of the Offering Range.
(2) Recipients of stock options realize value only in the event of an increase
in the price of the common stock of the Stock Company following the date of
grant of the stock options.
The Stock Company will be controlled by its Board of Directors, which
will initially consist of the same individuals who currently serve on the Board
of Trustees of the Mutual Company. These individuals will exercise control over
the Mutual Company, which will exercise control over the Stock Company by virtue
of its owning 53% of the outstanding common stock of the Stock Company.
Accordingly, these individuals, through the Mutual Company, will be able to
elect all of the directors of the Stock Company and to direct the affairs and
business operations of the Stock Company. See "Risk Factors--Mutual Company
Control of Stock Company and other AntiTakeover Provisions."
Each director of the Stock Company will receive an annual $1,000
retainer fee for his service on the Stock Company's Board of Directors. In
addition, the Bank intends to enter into an employment agreement with its
President and Chief Executive Officer following completion of the Offering. See
pages 97 to 106.
Use of the Proceeds Raised from the Sale of Common Stock
The Stock Company will use the net proceeds from the Offering as
follows. The percentages we use are estimates:
o 50% will be contributed to the Bank in exchange for 100% of the
capital stock of the Bank.
o 8% will be loaned to the ESOP to fund its purchase of common stock.
o 42% will be retained by the Stock Company as a possible source of
funds for general corporate purposes, the payment of dividends to
shareholders, and the repurchase of stock, subject to applicable
regulatory requirements.
9
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The proceeds received by the Bank will be available for expansion of
our retail banking services through new branch openings or deposit or branch
acquisitions, acquisitions of other financial institutions, new loan
originations, and the purchase of investment and mortgage-backed securities, in
addition to general corporate purposes. See pages 28 and 29.
Dividends
The Board of Directors of the Stock Company currently does not intend
to pay cash dividends on its common stock. While the Board of Directors may
consider a policy of paying cash dividends on its common stock in the future,
there is no assurance that cash dividends will ever be paid, or, if paid, what
the amount of dividends will be, or whether such dividends, once paid, will
continue to be paid. For a discussion of the Stock Company's anticipated
dividend policy, including restrictions on its ability to pay dividends, see
"Dividend Policy."
Market for the Common Stock
We have applied to have the Stock Company's common stock listed on the
Nasdaq SmallCap Market under the symbol "SUBC." The requirements for listing
include a minimum number of publicly traded shares, a minimum market value of
the Stock Company's common stock, and a minimum number of market makers and
record holders. Trident Securities, Inc. has indicated its intention to make a
market in the common stock, and based on our analysis of the results of recent
stock offerings, we anticipate that the Stock Company will satisfy these
requirements. If we are unable, for any reason, to list the common stock on the
Nasdaq SmallCap Market, or to continue to be eligible for listing, then we
intend to list the common stock on the over-the-counter market with quotations
available on the OTC Bulletin Board, if we qualify under their listing criteria.
Risk Factors
The purchase of the Stock Company's common stock involves a substantial degree
of risk. Prospective stockholders should carefully consider the matters set
forth in this prospectus, including those set forth in "Risk Factors."
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SELECTED FINANCIAL AND OTHER DATA
The following information at and for the years ended June 30, 1997 and
1996 is derived from the audited consolidated financial statements of the Bank.
The information at and for the nine months ended March 31, 1998 and 1997 is
based on the unaudited consolidated financial statements of the Bank, which
management believes reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information as of such
dates and for such periods. The summary of operations and key operating ratios
and other data for the nine months ended March 31, 1998 and 1997 do not
necessarily mean that results for any other period will be similar. The
information is a summary only and you should read it in conjunction with the
Consolidated Financial Statements and Notes of the Bank beginning on page F-1.
Selected Financial Data
June 30,
March 31, -------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Total assets ................................. $131,204 $104,878 $ 90,354
Loans receivable, net ........................ 72,197 66,934 59,667
Short-term investments ....................... 6,400 6,305 2,597
Mortgage-backed securities--available for sale 7,305 2,745 2,076
Investment securities--available for sale (1) 37,603 22,989 19,181
Deposits ..................................... 108,056 92,897 81,189
Total borrowings ............................. 12,404 2,622 369
Retained earnings ............................ 9,890 8,695 7,421
Summary of Operations
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
March 31, June 30,
--------------- ---------------
1998 1997 1997 1996
(In Thousands)
<S> <C> <C> <C> <C>
Total interest income .............................. $6,309 $5,147 $7,037 $6,102
Total interest expense ............................. 2,972 2,324 3,174 2,746
------ ------ ------ ------
Net interest income ............................. 3,337 2,823 3,863 3,356
Provision for loan losses .......................... 75 35 35 93
------ ------ ------ ------
Net interest income, after provision for loan losses 3,262 2,788 3,828 3,263
Fees and service charges ........................... 312 295 406 388
Gain on sales of loans and securities .............. 719 369 493 308
Other non-interest income .......................... 44 46 60 78
------ ------ ------ ------
Total non-interest income .......................... 1,075 710 959 774
Total non-interest expense ......................... 2,861 2,212 3,094 2,735
------ ------ ------ ------
Income before income taxes ......................... 1,476 1,286 1,693 1,302
Income tax provision ............................... 521 477 611 501
------ ------ ------ ------
Net income ......................................... $ 955 $ 809 $1,082 $ 801
====== ====== ====== ======
</TABLE>
(1) Includes certificates of deposit and FHLB stock, which are not available
for sale.
11
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Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At or for the At or for the
Nine Months Ended Years Ended
March 31, June 30,
--------- --------
1998 1997 1997 1996
---- ---- ---- ----
Performance Ratios (1):
<S> <C> <C> <C> <C>
Return on average assets .................... 1.12% 1.15% 1.13% 0.97%
Return on average retained earnings ......... 13.64% 13.73% 13.58% 11.35%
Average interest rate spread during period .. 3.71% 3.84% 3.86% 3.99%
Net interest margin (2) ..................... 4.15% 4.27% 4.29% 4.34%
Ratio of operating expense to average assets 3.34% 3.15% 3.24% 3.31%
Ratio of average interest-earning assets to
average interest-bearing liabilities ..... 111.82% 112.48% 112.38% 109.81%
Efficiency ratio (3) ........................ 64.85% 62.61% 64.16% 66.22%
Asset Quality Ratios:
Non-accrual loans and other real estate owned
to total assets .......................... 0.26% 0.69% 0.22% 0.99%
Allowance for loan losses as a percent of
non-accrual loans ........................ 163.27% 220.00% 246.11% 52.28%
Allowance for loan losses as a percent of
loans receivable, net .................... 0.77% 0.84% 0.71% 0.79%
Capital Ratios:
Retained earnings to total assets ........... 7.54% 8.10% 8.29% 8.21%
Average retained earnings to average assets . 8.18% 8.39% 8.33% 8.55%
Other Data:
Number of full-service offices .............. 5 4 4 4
Number of deposit accounts .................. 16,306 15,379 15,598 14,830
Number of loans outstanding ................. 1,649 1,500 1,557 1,410
</TABLE>
(1) Ratios for the nine month periods have been annualized where applicable.
(2) Net interest income divided by average interest-earning assets.
(3) Non-interest expense divided by the sum of net interest income and
non-interest income.
12
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RECENT DEVELOPMENTS
The following information at and for the year ended June 30, 1997 is
derived from the audited consolidated financial statements of the Bank. The
information for the three months ended June 30, 1998 and 1997, at and for the
twelve months ended June 30, 1998 and at March 31, 1998 is based on the
unaudited consolidated financial statements of the Bank, which management
believes reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial information as of such
dates and for such periods. The summary of operations and key operating ratios
and other data for the three months ended June 30, 1998 and 1997 do not
necessarily mean that results for any other period will be similar. The
information is a summary only and you should read it in conjunction with the
Consolidated Financial Statements and Notes of the Bank beginning on page F-1.
Selected Consolidated Financial Information
June 30, March 31, June 30,
1998 1998 1997
---- ---- ----
(In Thousands)
Total assets ................................. $138,952 $131,204 $104,878
Loans receivable, net ........................ 76,735 72,197 66,934
Short-term investments ....................... 11,931 6,400 6,305
Mortgage-backed securities--available for sale 5,980 7,305 2,745
Investment securities--available for sale (1) 36,422 37,603 22,989
Deposits ..................................... 112,247 108,056 92,897
Total borrowings ............................. 14,562 12,404 2,622
Retained earnings ............................ 10,123 9,890 8,695
<TABLE>
<CAPTION>
Three Months Ended Years Ended
June 30, June 30,
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total interest income ............................... $2,328 $1,890 $8,636 $7,037
Total interest expense .............................. 1,145 850 4,116 3,174
------ ------ ------ ------
Net interest income .............................. 1,183 1,040 4,520 3,863
Provision for loan losses ........................... 25 -- 100 35
------ ------ ------ ------
Net interest income, after provision for loan losses 1,158 1,040 4,420 3,828
Fees and service charges ............................ 117 110 430 406
Gain on sales of loans and investment securities, net 114 124 833 493
Other non-interest income ........................... 15 14 58 60
------ ------ ------ ------
Total non-interest income ........................... 246 248 1,321 959
Total non-interest expense .......................... 1,047 881 3,908 3,094
------ ------ ------ ------
Income before income taxes .......................... 357 407 1,833 1,693
Income tax provision ................................ 111 133 632 611
------ ------ ------ ------
Net income .......................................... $ 246 $ 274 $1,201 $1,082
====== ====== ====== ======
</TABLE>
(1) Includes certificates of deposit and FHLB stock, which are not available
for sale.
13
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Years Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios (1):
Return on average assets ............................. 0.76% 1.08% 1.02% 1.13%
Return on average retained earnings .................. 9.92% 13.20% 12.80% 13.58%
Average interest rate spread during period ........... 3.38% 3.92% 3.59% 3.86%
Net interest margin (2) .............................. 3.85% 4.35% 4.07% 4.29%
Ratio of operating expense to average assets ......... 3.22% 3.47% 3.31% 3.24%
Ratio of average interest-earning assets to
average interest-bearing liabilities ........ 112.63% 112.06% 112.38% 112.38%
Efficiency ratio (3) ................................. 73.27% 68.40% 66.91% 64.16%
Asset Quality Ratios:
Non-performing assets to total assets at end of period 0.21% 0.22% 0.21% 0.22%
Allowance for loan losses to non-performing loans .... 199.65% 246.11% 199.65% 246.11%
Allowance for loan losses to loans receivable, net ... 0.75% 0.71% 0.75% 0.71%
Capital Ratios:
Retained earnings to total assets at end of period ... 7.28% 8.29% 7.28% 8.29%
Average retained earnings to average assets .......... 7.63% 8.16% 7.94% 8.33%
Other Data:
Number of full-service offices ....................... 5 4 5 4
</TABLE>
(1) Ratios for the three month periods have been annualized, where applicable.
(2) Net interest income divided by average interest-earning assets.
(3) Non-interest expense divided by the sum of net interest income and
non-interest income.
Comparison of Financial Condition at June 30, 1998 and March 31, 1998
Total assets increased by $7.8 million, or 5.9%, from $131.2 million at
March 31, 1998 to $139.0 million at June 30, 1998. This growth was due primarily
to a $5.5 million, or 86.4%, increase in short-term investments and a $4.5
million, or 6.3%, increase in net loans receivable. These increases were
partially offset by decreases of $1.3 million, or 18.1%, and $1.2 million, or
3.1%, in mortgage-backed securities and investment securities, respectively.
This asset growth was funded primarily by a $4.2 million, or 3.9%, increase in
deposits and a $2.2 million, or 17.4%, increase in total borrowings at June 30,
1998 as compared to March 31, 1998.
The net increase in loans resulted from increased commercial real
estate loan originations reflecting strong economic growth in the Bank's primary
lending area. In addition, the Bank purchased $3.4 million in residential
mortgages in the New England area from another New England financial
institution. From March 31, 1998 to June 30, 1998, commercial real estate loans
increased by $2.2 million, or 18.1%, residential mortgage loans increased by
$1.5 million, or 3.2%, construction or development loans increased by $350,000,
or 9.1%, and commercial business loans increased by $737,000, or 21.4%. These
increases were partially offset by a modest reduction in home equity loans of
$262,000, or 5.5%, from March 31, 1998 to June 30, 1998. The Bank funded these
loans primarily with deposit growth and FHLB advances as management sought to
increase net interest income by taking advantage of the favorable spread between
the yield on these purchased mortgages and the cost of the FHLB advances.
14
<PAGE>
At June 30, 1998, the Bank's total investment securities were $36.4
million, a decrease from the Bank's total investment securities of $37.6 million
at March 31, 1998. All of such investment securities are classified by the Bank
as available for sale. The decrease in the securities portfolio was attributable
primarily to $2.7 million of bond call redemptions during the period, which were
partially offset by the net increase of $811,000 in equity securities. In
addition, short-term investments increased $5.5 million to $11.9 million at June
30, 1998 compared to $6.4 million at March 31, 1998, while mortgage-backed
securities increased by $1.3 million to $6.0 million over the same period
principally due to the larger than normal prepayment activity within the
mortgage pools during the three month period. The Bank constantly monitors its
liquidity position and invests any excess funds in loan originations and in the
purchase of longer and higher yielding investment securities to increase its net
interest income.
Total deposits at June 30, 1998 were $112.2 million, an increase of
$4.2 million, or 3.9%, compared to $108.1 million at March 31, 1998. The
increase in deposits was attributable primarily to increases in regular savings,
NOW accounts and certificate of deposit accounts, the balances of which
increased by $705,000, or 3.1%, $1.2 million, or 6.9%, and $1.7 million, or
3.4%, respectively, from March 31, 1998 to June 30, l998. Total borrowed funds
increased to $14.6 million at June 30, 1998 compared to $12.4 million at March
31, 1998. The increases in total deposits and in borrowed funds were utilized to
fund the increases in total assets described above.
The Bank's retained earnings increased by $233,000, or 2.4%, to $10.1
million at June 30, 1998 compared to $9.9 million at March 31, 1998. The
increase in retained earnings resulted from net income of $246,000 for the three
months ended June 30, 1998, while unrealized gains (net of taxes) on securities
available for sale decreased by $13,000. The decrease in unrealized gains on
securities available was attributable in part to the sale of certain equity
securities within the investment portfolio during the three month period.
Comparison of Financial Condition at June 30, 1998 and June 30, 1997
Total assets increased by $34.1 million, or 32.5%, from $104.9 million
at June 30, 1997 to $139.0 million at June 30, 1998. This growth was due
primarily to a $13.4 million, or 58.4%, increase in investment securities, a
$5.6 million, or 89.2%, increase in short-term investments, a $9.8 million, or
14.7%, increase in net loans receivable and a $3.2 million, or 117.8%, increase
in mortgage-backed securities. This asset growth was funded primarily by a $19.4
million, or 20.8%, increase in deposits and a $11.9 million, or 455.4%, increase
in total borrowings at June 30, 1998 as compared to June 30, 1997.
The net increase in loans resulted from increased commercial real
estate loan originations reflecting strong economic growth in the Bank's primary
lending area. In addition, the Bank purchased $5.9 million in residential
mortgages in the New England area from New England financial institutions,
thereby increasing the Bank's total purchased mortgage portfolio by $1.8
million. From June 30, 1997 to June 30, 1998, commercial real estate loans
increased by $5.2 million, or 57.1%, residential mortgage loans increased $1.3
million, or 2.7%, construction or development loans increased by $1.3 million,
or 46.3%, and commercial business loans increased by $1.6 million, or 65.0%. In
addition, from June 30, 1997 to June 30, 1998, consumer loans increased by
$485,000, or 24.7%, while home equity loans decreased slightly by $60,000, or
1.3%.
At June 30, 1998, the Bank's total investment securities were $36.4
million, an increase from $23.0 million at June 30, 1997. In addition,
short-term investments increased $5.6 million to $11.9 million at June 30, 1998
compared to June 30, 1997, while mortgage-backed securities increased by $3.2
million to $6.0 million over the same period. The increases in investment
securities and mortgage-backed securities from June 30, 1997 to June 30, 1998
were funded largely by FHLB advances, which increased to $14.6 million at June
30, 1998 compared to $2.6 million at June 30, 1997, as management sought to
increase net interest income by taking advantage of the favorable spread between
the yield on the securities and the cost of the FHLB advances. If and to the
extent that the FHLB advances are called, management may sell such securities to
fund growth in the loan portfolio to the extent necessary.
15
<PAGE>
Total deposits at June 30, 1998 were $112.2 million, an increase of
$19.4 million, or 20.8%, compared to $92.9 million at June 30, 1997. The
increase in deposits was attributable primarily to demand deposits, NOW accounts
and certificate of deposit accounts, the balances of which increased by $3.9
million, or 58.5%, $4.4 million, or 32.7%, and $8.9 million, or 20.9%,
respectively, for June 30, 1998 as compared to June 30, 1997. Total borrowed
funds increased to $14.6 million at June 30, 1998 compared to $2.6 million at
June 30, 1997. The increases in total deposits and in borrowed funds were
utilized to fund the increases in total assets described above.
The Bank's retained earnings increased by $1.4 million, or 16.4%, to
$10.1 million at June 30, 1998 compared to $8.7 million at June 30, 1997. The
increase in retained earnings resulted from net income of $1.2 million for the
twelve months ended June 30, 1998 and a $227,000 increase in unrealized gains
(net of taxes) on securities available for sale. The increase in unrealized
gains on securities available was attributable, in part, to continued strength
in U.S. equities markets generally; there can be no assurance that such gains
will continue in future periods.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
June 30, 1997
General. Net income decreased by $28,000, or 10.2%, from $274,000 for
the three months ended June 30, 1997 to $246,000 for the three months ended June
30, l998. This decrease was attributable to an increase of $166,000 in
noninterest expense, an increase of $25,000 in the provision for loan losses and
a decrease of $10,000 in the gain on the sale of loans and investment securities
between periods, which was partially offset by an increase in net interest
income of $143,000 for the same period.
Interest Income. Interest income for the three months ended June 30,
l998 was $2.3 million compared to $1.9 million for the three months ended June
30, 1997. The increase was attributable to a substantial increase in average
interest-earning assets of $27.3 million, or 28.5% for the three months ended
June 30, 1998 compared to the earlier year period, which more than offset the
reduction in the average yield on interest-earning assets from 7.90% for the
three months ended June 30, 1997 to 7.57% for the three months ended June 30,
1998. This yield decrease was caused primarily by the greater increase in
lower-yielding investment securities over total net loans between periods. The
principal areas of growth in average balances related to increases in loans
receivable (up $8.2 million, or 12.5%) and in investment securities, short-term
investments, and mortgage-backed securities, combined (up $19.0 million, or
64.0%). The increase in loans receivable reflected loan demand in the Bank's
primary lending area, and the increase in the average balance of investment
securities reflected management's decision to increase liquidity in anticipation
of further growth in the Bank's primary lending area.
Interest Expense. Interest expense for the three months ended June 30,
1998 was $1.1 million compared to $850,000 for the three months ended June 30,
1997, an increase of $295,000, or 34.7%. The increase resulted from both a
higher average balance of interest-bearing liabilities (which increased by $23.8
million, or 27.8%) as well as an increase in the average rate paid for funds to
4.20% for the three months ended June 30, 1998 compared to 3.98% for the three
months ended June 30, 1997. The increase in average interest-bearing deposit
balances reflected increases in both transaction accounts and certificate
accounts. In particular, the average balance of certificate accounts increased
to $50.4 million for the three months ended June 30, 1998 compared to $42.0
million for the earlier three month period, as the Bank increased the rates paid
on such accounts to fund asset growth. The Bank also expanded its use of
borrowings from the FHLB both to fund asset growth as well as to facilitate
management of interest rate risk and may continue to do so in the future for
both purposes. Interest expense on borrowed funds increased for the three months
ended June 30, 1998 compared to the earlier period, reflecting increased average
balances of such borrowings, notwithstanding a reduction in the rate paid on
such borrowings to 5.47% for the three months ended June 30, 1998 compared to
5.77% for the three months ended June 30, 1997.
Provision for Loan Losses. The Bank had a provision for loan losses of
$25,000 for the three months ended June 30, 1998. No such provision was made for
the comparable period in 1997. This increase reflected a desire by management to
keep the allowance for loan losses at a level to properly match loan growth and
to reset general reserves for certain loan categories. The ratio of non-accruing
loans and other real estate owned to total assets at June
16
<PAGE>
30, 1998 was 0.21% compared to 0.22% at June 30, 1997. The allowance for loan
losses was $577,000 at June 30, 1998 and $475,000 at June 30, 1997, or 0.75% and
0.71% of net loans receivable, respectively. During the three months ended June
30, 1998, the Bank experienced net charge-offs of $8,000, compared to net
charge-offs of $64,000 for the three months ended June 30, 1997. 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.
Non-interest Income. Non-interest income is comprised of fees and
charges for bank services, gains or losses from the sale of assets, other real
estate owned activity and other income resulting from miscellaneous
transactions. Total noninterest income was $246,000 for the three months ended
June 30, 1998 compared to $248,000 for the three months ended June 30, 1997.
Gains on sales of loans and investment securities decreased by $10,000 between
the two periods, and this decrease was partially offset by a $7,000 increase in
fees and sales charges.
Non-interest Expense. Non-interest expense increased by $166,000 to
$1.0 million for the three months ended June 30, 1998 compared to $881,000 for
the three months ended June 30, 1997. Of this increase, $80,000 related to
salaries and benefits, which rose 19.5%. The higher level of compensation and
employee benefits was attributable primarily to the opening of a new
full-service branch office in Franklin, Massachusetts during August 1997 as well
as increased pension, group health and training expenses. Other non-interest
expenses increased $86,000, or 18.4%, to $554,000 for the three months ended
June 30, 1998 compared to the earlier year period primarily due to increases in
advertising and data processing expenses to promote and process new bank
products and services, increases in occupancy and equipment expenses
attributable to the new full-service branch office in Franklin, Massachusetts,
and increases in consulting fees for the determination of ways to improve
bottom-line performance by improving income or better managing operating
expenses.
Income Taxes. Income tax expense for the three months ended June 30,
1998 was $111,000, compared to $133,000 for the three months ended June 30,
1997, resulting in effective tax rates of 31.1% and 32.7% for the respective
periods. The decrease in the effective tax rate reflects the increased
utilization by the Bank of securities investment subsidiaries to substantially
reduce state income taxes. Offsetting this decrease was the Bank's one-time
$53,000 contribution to its newly formed charitable foundation during the three
months ended June 30, 1997, which reduced the Bank's effective tax rate for that
period.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1998 and
1997
General. Net income increased by $119,000, or 11.0%, from $1.1 million
for the twelve months ended June 30, 1997 ("Fiscal 1997") to $1.2 million for
the twelve months ended June 30, 1998 ("Fiscal 1998"). The improvement was
attributable to higher net interest income of $4.5 million in Fiscal 1998
(compared to $3.9 million in Fiscal 1997) and a $833,000 gain on the sale of
loans and investment securities in Fiscal 1998 (compared to a $493,000 gain in
Fiscal 1997). These improvements more than offset the increase of $814,000, or
26.3%, in total non-interest expense in Fiscal 1998 compared to Fiscal 1997.
Interest Income. Interest income for Fiscal 1998 was $8.6 million
compared to $7.0 million for Fiscal 1997. The increase was attributable to a
substantial increase in average interest-earning assets of $21.4 million, or
23.8%, for Fiscal 1998 compared to Fiscal 1997. The yield on average earning
assets decreased slightly from 7.82% in Fiscal 1997 to 7.74% in Fiscal 1998. The
principal areas of growth in average balances related to loans receivable (up
$7.8 million, or 12.4%) and investment securities, short-term investments, and
mortgaged-backed securities combined (up $13.6 million, or 50.3%). The increase
in loans receivable reflected loan demand in the Bank's primary lending area,
and the increase in the average balance of investment securities reflected
management's decision to increase liquidity in anticipation of further growth in
the Bank's primary lending area.
17
<PAGE>
Interest Expense. Interest expense for Fiscal 1998 was $4.1 million
compared to $3.2 million for Fiscal 1997, an increase of $942,000, or 29.7%. The
increase resulted from both a higher average balance of interest-bearing
liabilities (which increased by $19.0 million, or 23.8%) as well as an increase
in the average rate paid for funds to 4.15% for Fiscal 1998 compared to 3.96%
for Fiscal 1997. The increase in average interest-bearing deposit balances
reflected increases in both transaction accounts and certificate accounts. In
particular, the average balance of certificate accounts increased to $48.3
million for Fiscal 1998 compared to $39.0 million for Fiscal 1997. The increase
in certificate accounts was caused by the Bank's increasing the rates paid on
such accounts to fund asset growth. Another source of asset funding was FHLB
advances, the average balance of which increased $5.4 million from $2.2 million
for Fiscal 1997 to $7.6 million for Fiscal 1998. The average rate paid on these
borrowings decreased from 5.74% for Fiscal 1997 to 5.56% for Fiscal 1998.
Provision for Loan Losses. The Bank had a provision for loan losses of
$100,000 for Fiscal 1998 compared to $35,000 for Fiscal 1997. This increase
reflected a desire by management to keep the allowance for loan losses at a
level to properly match loan growth and to reset general reserves for certain
loan categories. The ratio of non-accruing loans and other real estate owned to
total assets at June 30, 1998 was 0.21% compared to 0.22% at June 30, 1997. The
allowance for loan losses was $577,000 at June 30, 1998 and $475,000 at June 30,
1997, or 0.75% and 0.71% of net loans receivable, respectively. During Fiscal
1998, the Bank experienced net recoveries of $2,000, compared to net charge-offs
of $30,000 for Fiscal 1997. 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.
Non-interest Income. Non-interest income is comprised of fees and
charges for bank services, gains or losses from the sale of assets, other real
estate owned activity and other income resulting from miscellaneous
transactions. Total non-interest income was $1.3 million for Fiscal 1998
compared to $959,000 for Fiscal 1997. The increase resulted primarily from
$833,000 in gains on sales of loans, mortgage-backed securities and investment
securities for Fiscal 1998 as compared to $493,000 for the Fiscal 1997. All
other non-interest income increased $22,000.
Non-interest Expense. Non-interest expense increased by $814,000 to
$3.9 million for Fiscal 1998 compared to $3.l million for Fiscal 1997. Of this
increase, $330,000 related to salaries and benefits, which rose 20.4%. The
higher level of compensation and employee benefits was attributable primarily to
the opening of a new full-service branch office in Franklin, Massachusetts
during August 1997 as well as increased pension, group health and training
expenses. Other non-interest expenses increased $484,000, or 32.8%, to $2.0
million for Fiscal l998 compared to Fiscal 1997 primarily due to increases in
advertising and data processing expenses to promote and process new bank
products and services, and increases in occupancy and equipment expenses
attributable to the new full-service branch office in Franklin, Massachusetts.
Income Taxes. Income tax expense for Fiscal 1998 was $632,000 compared
to $611,000 for Fiscal 1997, resulting in effective tax rates of 34.5% and 36.1%
for the respective periods. The lower effective tax rate reflects the Bank's
utilizing securities investment subsidiaries to substantially reduce state
income taxes.
18
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
common stock.
Growth of the Bank's Commercial Business and Commercial Real Estate Lending
In recent years, the Bank's lending activities have increasingly
emphasized commercial business and commercial real estate lending to take
advantage of the demand for such loans in the Bank's primary lending area. At
March 31, 1998, the Bank's portfolio of commercial real estate mortgage loans
totaled $12.1 million, or 16.67% of gross loans, which represented an increase
in this type of loan of $6.3 million, or 107.3%, since June 30, 1996.
Additionally, at March 31, 1998, the Bank's portfolio of commercial business
loans totaled $3.5 million, or 4.84% of gross loans, which represented an
increase in this type of loan of $830,000, or 30.8%, since June 30, 1996. At
March 31, 1998, the Bank had an additional $2.8 million of outstanding
commitments to fund commercial real estate and commercial business loans. See
"Business of the Bank--Lending Activities." These loans generally have larger
principal amounts and a greater degree of risk than one- to four-family
residential mortgage loans. Moreover, many of the Bank's borrowers have more
than one commercial real estate mortgage loan or commercial business loan
outstanding with the Bank.
Commercial real estate mortgage loans and commercial business loans are
generally viewed as having greater credit risk and requiring substantially
greater oversight efforts than one- to four-family residential mortgage loans.
The repayment of such loans generally depends, 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, may impact the value of the properties securing such loans or the
future cash flow of the affected properties. See "Business of the
Bank--Delinquent Loans, Other Real Estate Owned and Classified Assets."
Mutual Company Control of Stock Company and Other Anti-Takeover Provisions
The mutual holding company structure and Massachusetts regulations
generally restrict (i) conversion of a mutual holding company to stock form for
a period of three years following a minority stock offering and (ii) the
acquisition of control of a fully-converted savings bank for three years after
conversion, creating substantial impediments to any change of control of the
Stock Company, or the Mutual Company.
Mutual Holding Company Structure. Under Massachusetts law, at least 51%
of the Stock Company's voting shares must be owned by the Mutual Company, and
the Mutual Company will be controlled by its Board of Trustees. As the majority
stockholder of the Stock Company, the Mutual Company will be able to elect all
of the directors of the Stock Company and direct the affairs and business
operations of the Stock Company. The Mutual Company will be able to prevent any
challenge to the ownership or control of the Stock Company by Minority
Stockholders. Accordingly, the purchasers of the common stock in the Offering
will be Minority Stockholders of the Stock Company and will have limited
influence on the election of directors or the affairs of the Stock 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.
Provisions in the Stock Company's and the Bank's Governing Instruments.
Certain provisions of the Stock Company's Articles of Organization and Bylaws
(particularly a provision limiting voting rights), the Bank's Charter and
Bylaws, as well as certain federal and state regulations, will assist the Stock
Company in maintaining its status as an independent, publicly-owned corporation.
These provisions provide for, among other things, a supermajority vote to
approve certain transactions and amend the charter, the staggered election of
members of the boards of directors so that no more than one-third of the
directors are elected annually, no cumulative voting for the election of
directors, limits on the calling of special meetings of stockholders and 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
19
<PAGE>
conversion, offers to acquire or the acquisition of beneficial ownership of more
than 10% of the outstanding stock of a stock savings bank. Any person, or group
acting in concert, violating this restriction may not vote the Bank's or the
Stock Company's securities in excess of the designated percentage. These
provisions in the Bank's and the Stock 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 Stock Company and the Bank."
Restrictions on Conversion to Stock Form. Massachusetts regulations
prohibit a mutual holding company from converting to stock form for at least
three years following the completion of its minority stock offering unless the
Division waives the restriction for supervisory reasons or for compelling and
valid business reasons established to the satisfaction of the Division.
Moreover, the mutual-to-stock conversion regulations of the Division prohibit
the sale of control of a converted savings bank for a period of three years
following conversion unless waived by the Division. Accordingly, prospective
investors should not purchase the common stock if they are doing so in
anticipation of a sale of control of the Stock Company.
Uncertainty as to Future Growth Opportunities
The Bank's total assets have increased by 100.7% since June 30, 1993,
and the Bank intends to continue to grow in the future by focusing on mortgage
and small business lending in its market area. The Bank also intends to grow by
establishing new branches or by acquiring other financial institutions or
branches. The Bank'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 origination of real
estate mortgage and commercial business loans 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 Stock 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.
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 tries to manage its interest rate risk exposure by (1)
originating and retaining adjustable-rate loans while generally selling
long-term one- to four-family fixed-rate loans in the secondary market, (2)
originating fixed-rate commercial real estate loans and matching the maturities
of these loans with long-term FHLB borrowings, (3) investing in debt securities
with relatively short maturities or call dates, (4) classifying all of the
Bank's investment portfolio as available for sale to provide greater flexibility
to liquidate assets in response to changes in interest rates, and (5)
maintaining a high concentration of "core deposits" which typically have lower
yields and are less interest rate sensitive. The Bank offers a one-year
adjustable rate mortgage loan that reprices annually, a three-year adjustable
rate mortgage loan that reprices every third year, and a "5-1" loan (for first
time home buyers) that has a fixed interest rate for the first five years and
adjusts annually thereafter. See "Business of the Bank--Lending Activities--Loan
Maturity and Repricing". While management expects that adjustable rate mortgage
loans will increase the yield on the Bank's loan portfolio in a rising interest
rate environment, the larger mortgage payments required from adjustable-rate
borrowers in the event of higher interest rates could lead to an increase in
defaults by such borrowers.
20
<PAGE>
At March 31, 1998, $65.8 million, or 59.7%, of the Bank's
interest-bearing deposits and borrowed funds mature or reprice within one year
or less, and $54.0 million, or 43.8% of the Bank's interest-earning assets
mature or reprice within one year or less. As a result, at March 31, 1998, 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 8.99%. Because 39.1% of the Bank's total deposits consisted of
certificates of deposit with maturities of one year or less at March 31, 1998,
the Bank's cost of funds is likely to increase at a greater rate in a rising
interest rate environment than if the Bank had a greater percentage of its
deposits in transaction accounts (NOW, savings and money market deposit
accounts). Accordingly, if market interest rates increase, the Bank's cost of
funds may increase more rapidly than the yield on its loans, thereby adversely
affecting the Bank's interest rate spread, net interest income and net income.
Geographic Concentration of Loans
The Bank's lending area is concentrated primarily in Norfolk County and
nearby surrounding markets in the greater Boston metropolitan area (the "primary
lending area"). Accordingly, the asset quality of the Bank's loan portfolio is
largely dependent upon the economy and unemployment rate in this area. These
factors are affected to a great extent by the success of companies operating 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, both of which are
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."
Potential Increased Compensation Expenses after the Reorganization and Offering
In November 1993, the American Institute of Certified Public
Accountants issued Statement of Position 93-6 entitled "Employers' Accounting
for Employee Stock Ownership Plans," which requires an employer to record
compensation expense in an amount equal to the fair market value of shares
committed to be released to employees from an employee stock ownership plan,
instead of an amount equal to the cost basis of such shares. If the shares of
common stock appreciate in value over time, this will result in increased
compensation expense with respect to the employee stock ownership plan that the
Stock Company intends to establish. It is impossible to determine at this time
the extent of such impact on future net income. However, if for example, the
ESOP purchases 8% of the common stock at the adjusted maximum of the Offering
Range, and such shares are expensed on average at $15 per share over a ten year
period, the annual compensation expenses associated with the ESOP would be
$149,178. See "Pro Forma Data." In addition, after completion of the
reorganization and Offering, the Stock Company intends to implement, subject to
stockholder approval (which approval cannot be obtained earlier than six months
subsequent to the reorganization and Offering), a restricted stock plan. Upon
implementation, the award of shares of common stock from the restricted stock
plan will result in significant additional compensation expense. See "Pro Forma
Data" and "Management of the Bank--Benefit Plans--Recognition and Retention
Plan."
Financial and Other Benefits to Officers and Directors
The Stock Company intends to implement certain benefit plans which may
provide to full-time employees, officers, trustees and directors up to 22% of
the common stock issued in the Offering. Full-time employees, including
executive officers, will participate in the ESOP, pursuant to which these
employees will be awarded up to 8% of the common stock issued in the Offering.
These shares will be awarded at no cost to the recipients, and will have a value
of $864,800 at the maximum of the Offering Range. Following the Offering and
subject to regulatory approval, the Stock Company intends to seek stockholder
approval of the Recognition Plan and the Stock Option Plan at a meeting of
stockholders which may be held no earlier than six months after completion of
the Offering. If the Recognition Plan is approved by stockholders of the Stock
Company, the Recognition Plan intends to acquire an amount of common stock equal
to at least 4% of the shares of common stock sold in the Offering, or 43,240
shares of common stock at the maximum of the Offering Range. Such shares would
be granted to officers, trustees and directors of the
21
<PAGE>
Bank, the Stock Company and the Mutual Company at no cost to these recipients,
for a total value of $432,400 at the maximum of the Offering Range (assuming a
$10 price per share). If the Stock Option Plan is approved by stockholders of
the Stock Company, the Stock Company intends to reserve for future issuance
pursuant to such plan a number of shares of common stock equal to 10% of the
common stock sold in the Offering. Options to purchase common stock at fair
market value as of the date of the award of the options will be granted to
officers, trustees and directors of the Bank, the Stock Company and the Mutual
Company at no cost to them, and without risk as there is no requirement that
officers, trustees and directors exercise their options. See "Management of the
Bank--Compensation of Officers and Trustees Through Benefit Plans."
The Stock Company will be controlled by its Board of Directors, which
will initially consist of the same individuals who currently serve on the Board
of Trustees of the Mutual Company. These individuals will exercise control over
the Mutual Company, which will exercise control over the Stock Company by virtue
of its owning 53% of the outstanding common stock of the Stock Company.
Accordingly, these individuals, through the Mutual Company, will be able to
elect all of the directors of the Stock Company and to direct the affairs and
business operations of the Stock Company. See "--Mutual Company Control of Stock
Company and other Anti-Takeover Provisions."
Possible Dilutive Effect of Issuance of Additional Shares
Shares of common stock to be issued pursuant to the Recognition Plan or
issued upon exercise of stock options granted pursuant to the Stock Option Plan
may be acquired by the Stock Company in the open market, or from
authorized-but-unissued shares of common stock. In the event such shares are
issued from authorized-but-unissued shares of Common Stock, and assuming shares
are sold at the maximum of the Offering Range, the voting interests of
stockholders will be diluted by approximately 6.17%, net earnings per share
would be decreased by $0.01 and stockholders' equity per share would be
increased by $0.12.
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, 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. 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"). As
the holding company of the Bank, the Stock Company will be subject to regulation
and oversight by the FRB and the Division. 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 depositors and borrowers and,
with respect to regulation and supervision by the FDIC, the deposit fund.
Regulatory authorities have broad discretion in their supervisory and
enforcement activities and may impose restrictions on the operations and
management of an institution. 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
22
<PAGE>
authorities, Congress or the Massachusetts legislature, could have a significant
impact on the Stock Company, the Bank and their respective operations. See
"Regulation."
Absence of Market for Common Stock
The Stock Company, as a newly organized corporation, has never issued
capital stock and, consequently, there is no established market for its common
stock at this time. The Stock Company has applied to have its common stock
quoted on the Nasdaq SmallCap Market under the symbol "SUBC," subject to the
completion of the Offering and compliance with certain conditions including the
presence of at least two registered and active market makers. If the Stock
Company is unable, for any reason, to list the common stock on the Nasdaq
SmallCap Market, then the Stock Company intends to list the common stock on the
over-the-counter market with quotations available on the OTC Bulletin Board if
it qualifies under their listing criteria. A public trading market, having the
desirable characteristics of depth, liquidity and orderliness, depends upon the
existence of willing buyers and sellers at any given time, the presence of which
depends on the individual decisions of buyers and sellers over which neither the
Stock 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, would 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. The market value of the common stock would be affected adversely
in the event a liquid market for the common stock does not develop or
broker-dealers discontinue making a market in the common stock. See "Market for
Common Stock."
Possible Increase in Estimated 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 Estimated Valuation Range of up to 15% to reflect
changes in market and financial conditions after the Offering begins. In the
event that the Offering Range is so increased, it is expected that the Stock
Company will issue up to 1,243,150 shares of common stock at $10 per share for
an aggregate purchase price of up to $12,431,500. 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 $10 per share purchase price as a percentage of pro forma
stockholders' equity per share and net earnings per share. See "Pro Forma Data."
Role of the Financial Advisor/Best Efforts Offering
The Bank and the Stock Company have engaged Trident Securities, Inc. as
a financial and marketing advisor, and Trident Securities, Inc. has agreed to
use its best efforts to solicit subscriptions and purchase orders for common
stock in the Offering. Trident Securities, Inc. has not prepared any report or
opinion constituting a recommendation or advice to the Bank or the Stock
Company, nor has it prepared an opinion as to the fairness of the $10 per share
purchase price or the terms of the Offering. Trident Securities, Inc. expresses
no opinion as to the price at which common stock to be issued in the Offering
may trade. Furthermore, Trident Securities, Inc. has not verified the accuracy
or completeness of the information contained in this prospectus. See "The
Offering and the Reorganization--Plan of Distribution and Selling Commissions."
Conversion of Mutual Company to Stock Form
The Mutual Company may convert to stock form (a Conversion Transaction)
by merging the Mutual Company either into the Stock 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 Stock 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 stock
issuance plan provides that any Conversion Transaction must 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
23
<PAGE>
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 proposed but not yet issued final 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 Stock 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.
The Mutual Company may, from time-to-time, waive the receipt of any
dividends declared and paid by the Stock 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
Stock 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 Stock 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."
Conditions to Closing of the Offering
The Offering will not be consummated until the following conditions are
satisfied: (i) the Bank's corporators approve the stock issuance plan; (ii) the
Bank receives favorable rulings or opinions of counsel with respect to the
federal and Massachusetts tax consequences of establishing the Stock Company and
issuing common stock in the Offering; (iii) the Division authorizes the
Offering; and (iv) the FRB approves the Offering and the application by the
Stock 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 stock
issuance plan and the Bank has received conditional approval of its applications
by the applicable regulatory authorities; however, there can be no assurances
that all required conditions will be satisfied or that final regulatory
approvals will be obtained. Moreover, the reorganization and Offering cannot be
completed until 15 days following approval of the holding company application by
the FRB. Approvals and authorizations by the FRB or the Division do not
constitute recommendations or endorsements of the reorganization or the Offering
by such entities.
Dependence on Key Personnel
The Bank depends to a considerable degree on Eugene G. Stone, who has
served as the Bank's President and Chief Executive Officer since 1988. The loss
of Mr. Stone as President and Chief Executive Officer would adversely affect the
operations of the Bank. However, the Bank does not maintain, and does not expect
to obtain, a "Key Man" life insurance policy for Mr. Stone.
Technology Risks and Year 2000 Problem
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to improving customer services, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. The
Stock Company's future success will depend, in part, on its ability to address
the needs of its customers by using technology to provide products and services
that will satisfy customer demands, as well as to create additional efficiencies
in the Bank's operations. Many
24
<PAGE>
of the Bank's competitors have substantially greater resources than the Bank to
invest in technological improvements. There can be no assurance that the Bank
will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to the public.
In addition, because of the demand for technology-driven products,
banks are contracting increasingly with outside vendors to provide data
processing and core banking functions. The use of technology-related products,
services, delivery channels, and processes expose a bank to various risks,
particularly transaction, strategic, reputation and compliance risk. Banks are
generally expected to successfully manage technology-related risks with all
other risks to ensure that a bank's risk management is integrated and
comprehensive, primarily through identifying, measuring, monitoring and
controlling risks associated with the use of technology. There can be no
assurance that the Bank will be able to successfully manage the risks associated
with its increased dependency on technology. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Bank."
The year 2000 issue centers upon concern among industry experts that on
January 1, 2000 computers will be unable to "read" the new year and there may be
widespread computer malfunctions. The Bank generally relies on software and
hardware developed by independent third parties to provide the information
systems used by the Bank, and we have been advised by our information systems
providers that the issue is being addressed. We are also in the process of
reviewing internally developed programs to assure year 2000 compliance. Based on
information currently available, management does not believe that significant
additional costs will be incurred in connection with the year 2000 issue.
SERVICE BANCORP, MHC
The Mutual Company was formed in August 1997 as part of the Bank's
conversion from mutual to stock form. The Mutual Company is 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 Stock Company so long as the Mutual Company
remains in existence. The Mutual Company is subject to regulation and
supervision by the FRB and the Division. See "Regulation --Holding Company
Regulation." Immediately after the Offering is completed, the Mutual Company is
not expected to engage in any business activity other than to hold at least 51%
of the Stock Company's common stock and to invest any liquid assets of the
Mutual Company. The Mutual Company's offices are located at 81 Main Street,
Medway, Massachusetts 02053, and its telephone number at that address is (508)
533-4343.
SERVICE BANCORP, INC.
Service Bancorp, Inc. was recently organized at the direction of the
Board of Directors of the Bank and the Board of Trustees of the Mutual Company
for the purpose of issuing all of the common stock in the Offering and acquiring
all of the capital stock of the Bank upon completion of the Offering. The Bank
and the Mutual Company have applied to the Division to form the Stock Company,
and also have applied to the FRB for the Stock 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. The Stock 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
Offering, the Stock 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 Stock Company
intends to loan to the ESOP a portion of the net proceeds that it retains to
enable the ESOP to purchase up to 8% of the common stock issued in the Offering.
See "Use of Proceeds." A description of the management of the Stock Company is
set forth under "Management of the Stock Company." Initially, the Stock 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 Stock Company does
not intend to employ any persons other than certain officers who are currently
officers of the Bank but will use the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the Stock
Company expands its business in the future. The Stock Company's offices are
25
<PAGE>
located at the executive offices of the Bank, at 81 Main Street, Medway,
Massachusetts 02053. Its telephone number is (508) 533-4343.
SUMMIT BANK
The Bank was organized in 1871 as a Massachusetts-chartered mutual
savings bank and was reorganized into the stock form of ownership in August 1997
as part of the Bank's original mutual holding company reorganization. No common
stock was offered for sale to depositors or other persons at the time of the
reorganization in 1997. The Bank's deposits are insured by the Bank Insurance
Fund, as administered by the FDIC, up to the maximum amount permitted by law,
and by the Depositors Insurance Fund in excess of the maximum FDIC insurance.
The Bank is a community-oriented savings bank engaged primarily in the business
of offering FDIC-insured deposits to customers through its branch offices and
using those deposits, together with funds generated from operations and
borrowings, to make one- to four-family residential mortgage loans, commercial
real estate loans, commercial business loans, construction loans and consumer
loans, and to invest in mortgage-backed and other securities. At March 31, 1998,
the Bank had total assets of $131.2 million, total deposits of $108.1 million
and retained earnings of $9.9 million. The Bank's business is described in more
detail in "Business of the Bank."
26
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At March 31, 1998, 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 March 31, 1998, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of its shares
expected to be acquired by the Recognition Plan are deducted from pro forma
regulatory capital. See "Management of the Bank." The Mutual Company and the
Stock Company (as bank holding companies) are subject to FRB capital adequacy
guidelines (on a consolidated basis) which are substantially similar to the FDIC
capital requirements for the Bank. On a pro forma consolidated basis after the
reorganization and Offering, the Stock Company's pro forma stockholders' equity
will exceed these requirements. See "Regulation--Holding Company Regulation."
<TABLE>
<CAPTION>
Pro Forma at March 31, 1998, Based upon the Sale of
----------------------------------------------------------------------------
1,243,150
799,000 940,000 1,081,000 Shares(1)
Shares Shares Shares at Adjusted
Historical at at Minimum of at Midpoint of at Maximum of Maximum of
March 31, 1998 Offering Range Offering Range Offering Range Offering Range
---------------- ----------------- ---------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets(2)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital............. $9,890 7.54% $12,685 9.42% $13,212 9.77% $13,748 10.11% $14,364 10.51%
====== ==== ======= ===== ======= ===== ======= ===== ======= =====
Leverage capital:
Capital level (3)...... $9,454 7.78% $12,249 9.81% $12,776 10.18% $13,312 10.55% $13,928 19.26%
Requirement (4)........ 4,859 4.00 4,996 4.00 5,022 4.00 5,048 4.00 5,078 4.00
------ ---- ------ ----- ------- ----- ------- ---- ------ ----
Excess............... $4,595 3.78% $7,253 5.81% $ 7,754 6.18% $ 8,264 6.55% $8,850 15.26%
====== ==== ====== ===== ======= ===== ======= ==== ====== =====
Risk-based capital:
Capital level (3)(5)... $10,014 14.39% $12,809 17.97% $13,336 18.62% $13,872 19.28% $14,488 20.03%
Requirement............ 5,567 8.00 5,704 8.00 5,730 8.00 5,755 8.00 5,785 8.00
------ ---- ------ ----- ------- ----- ------- ---- ------ ----
Excess............... $4,447 6.39% $7,105 9.97% $ 7,606 10.62% $ 8,117 11.28% $8,703 12.03%
====== ==== ====== ===== ======= ===== ======= ===== ====== =====
</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 conditions or
general financial and economic conditions following the commencement of the
Offering.
(2) GAAP capital levels are shown as a percentage of total assets. Leverage
capital levels are shown as a percentage of tangible assets. Risk-based
capital levels are shown as a percentage of risk-weighted assets.
(3) Pro forma capital levels assume that the Bank funds the Recognition Plan to
enable the Recognition Plan to purchase a number of shares equal to 4% of
the common stock sold in the Offering, and that the ESOP purchases 8% of
the shares sold in the Offering. See "Management of the Bank" for a
discussion of the Recognition Plan and ESOP.
(4) 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 adjustable assets. See
"Regulation--Regulatory Capital Requirements.
(5) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
27
<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, based on the assumptions set forth in "Pro Forma Data", that the
net proceeds from the sale of the common stock will be as set forth in the
following table.
<TABLE>
<CAPTION>
Net Offering Proceeds
Based upon the Sale for $10.00 per share of
---------------------------------------------------------
799,000 940,000 1,081,000 1,243,150
Shares Shares Shares Shares
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 7,990 $ 9,400 $ 10,810 $ 12,432
Expenses............................................ (482) (500) (500) (500)
--------- --------- --------- ---------
Estimated net proceeds.............................. $ 7,508 $ 8,900 $ 10,310 $ 11,932
========= ========= ========= =========
</TABLE>
The Stock Company will contribute 50% of the net proceeds of the
Offering to the Bank. The net proceeds received by the Bank from the Stock
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 such
funds to increase its origination of mortgage, consumer and commercial business
loans. The Bank may also use such funds to establish new branch offices and ATM
locations, and to expand operations through acquisitions of other financial
institutions, branch offices or other financial services companies. However, the
Stock Company and the Bank have no current arrangements, understandings or
agreements regrading any such transactions. To the extent that the stock-based
benefit programs which the Stock Company intends to adopt subsequent to the
Offering are not funded with authorized-but-unissued shares of common stock, the
Stock Company or the Bank may use net proceeds from the Offering to fund the
purchase of stock to be awarded under such stock benefit programs. See "Risk
Factors--Possible Dilutive Effect of Issuance of Additional Shares" and
"Management of the Bank--Compensation of Officers and Trustees through Benefit
Plans--Stock Option Plan" and "--Recognition and Retention Plan."
The Stock 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, 8% of the shares sold in the Offering. The
amount of the ESOP loan may be increased to the extent ESOP shares are not
available at the $10 per share offering price. See "Management of the
Bank--Compensation of Officers and Trustees through Benefit Plans--Employee
Stock Ownership Plan and Trust." The Stock Company and the Bank may
alternatively choose to fund the ESOP's stock purchase through a loan by a third
party financial institution. The remaining net proceeds retained by the Stock
Company will be invested initially in short- and medium-term investments.
Upon completion of the Offering, the Board of Directors of the Stock
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; 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
28
<PAGE>
but not be limited to: (i) market and financial 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 Stock 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 Offering, or to fund the Stock
Plans; and (iii) any other circumstances in which repurchases would be in the
best interests of the Stock Company and its shareholders. In the event the Stock
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 Stock Company and the Bank will be capitalized in excess of all
applicable regulatory requirements after any such repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, the Stock 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 Offering and the
Reorganization--Procedure for Purchasing Shares."
DIVIDEND POLICY
The Board of Directors of the Stock Company currently does not intend
to pay a cash dividend on its common stock. While the Board of Directors may
consider a policy of paying cash dividends on its common stock in the future,
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 Stock Company's
payment of dividends will, in part, depend upon dividends from the Bank, the net
proceeds retained by the Stock Company and the earnings of the Stock Company.
The Mutual Company may, from time to time, waive the receipt of dividends
declared and paid by the Stock Company, subject to regulatory approval. Under
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 Offering and the Reorganization --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 were not in compliance with applicable regulatory capital
requirements. Under Massachusetts law, a stock 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 COMMON STOCK
The Stock Company has applied to have the common stock quoted on the
Nasdaq SmallCap Market System under the symbol "SUBC." The requirements for
listing include a minimum number of publicly traded shares, a minimum market
capitalization, and a minimum number of market makers and record holders.
Trident Securities, Inc. has indicated its intention to make a market in the
common stock, and based on our analysis of the results of recent conversion
stock offerings we anticipate that the Stock Company will satisfy the Nasdaq
SmallCap listing requirements. If we are unable, for any reason, to list the
common stock on the Nasdaq SmallCap Market, or to
29
<PAGE>
continue to be eligible for such listing, then we intend to list the common
stock on the over-the-counter market, with quotations available on the OTC
Bulletin Board, subject to the applicable listing criteria for such markets.
The existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Stock Company nor any broker or dealer has
control. The absence of an active and liquid trading market may make it
difficult to sell the common stock and may have an adverse effect on the price
of the common stock. Purchasers should consider the potentially illiquid and
long-term nature of their investment in the common stock.
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at March 31, 1998, and the pro forma consolidated capitalization of the Stock
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>
Pro Forma Consolidated Capitalization
Based upon the Sale for $10.00 Per Share of
---------------------------------------------------------------
1,243,150
799,000 940,000 1,081,000 Shares(1)
Actual Shares Shares Shares at Adjusted
as of at Minimum of at Midpoint of at Maximum of Maximum of
March 31, 1998 Offering Range Offering Range Offering Range Offering Range
-------------- -------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2)............................ $ 108,056 $108,056 $ 108,056 $ 108,056 $108,056
Borrowed funds.......................... 12,404 12,404 12,404 12,404 12,404
--------- -------- --------- --------- --------
Total deposits and borrowed funds....... $ 120,460 $120,460 $ 120,460 $ 120,460 $120,460
========= ======== ========= ========= ========
Stockholders' equity:
Common Stock, $.01 par value, 12,000,000
shares authorized; shares to be issued
as reflected........................ $ -- $ 17 $ 20 $ 23 $ 26
Additional paid-in capital (3)........ -- 7,491 8,880 10,287 11,906
Retained earnings (4)................. 9,890 9,890 9,890 9,890 9,890
Less:
Common stock acquired by ESOP (5)... -- (639) (752) (865) (995)
Common stock acquired by Recognition
Plan (6).......................... -- (320) (376) (432) (497)
--------- -------- --------- --------- --------
Total stockholders' equity.............. $ 9,890 $ 16,439 $ 17,662 $ 18,903 $ 20,330
========= ======== ========= ========= ========
</TABLE>
- ---------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Estimated Valuation Range to
reflect changes in market or general financial conditions following the
commencement of the Offering.
(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 to the Mutual Company and the sale of
shares in the Offering. Does not include proceeds from the Offering that
the Stock Company intends to lend to the ESOP to enable it to purchase
shares of common stock in the Offering. No effect has been given to the
issuance of additional shares of common stock pursuant to the stock option
plan that the Stock Company expects to adopt. If such plan is approved by
stockholders, an amount equal to 10% of the shares of common stock issued
in the Offering will be reserved for issuance upon the exercise of options.
See "Management of the Bank."
(4) The retained earnings of the Bank will be restricted after the Offering.
See "Dividend Policy" and "Regulation--Federal Regulation of Savings
Institutions--Limitations on Capital Distributions." Includes unrealized
gains on securities available for sale, net of tax, of $436,000.
(5) Assumes that 8% of the shares sold in the Offering will be purchased by the
ESOP and that the funds used to acquire the ESOP shares will be borrowed
from the Stock Company. The common stock acquired by the ESOP is reflected
as a reduction of stockholders' equity. See "Management of the
Bank--Compensation of Officers and Directors through Benefit
Plans--Employee Stock Ownership Plan and Trust."
(6) Assumes that subsequent to the Offering an amount equal to 4% of the shares
of common stock sold in the Offering is purchased by the Recognition Plan
through open market purchases. The common stock to be purchased by the
Recognition Plan is reflected as a reduction of stockholders' equity. See
"Risk Factors--Possible Dilutive Effect of Issuance of Additional Shares,"
"Pro Forma Data" and "Management of the Bank."
30
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the Offering is completed. The following estimated pro forma
information is based upon the following assumptions: (i) 75,000 shares of common
stock will be purchased by employees and directors of the Bank, the Mutual
Company and the Stock Company, the ESOP will purchase 8% of the common stock
sold in the Offering, and the remaining shares will be sold in the Subscription
and/or Community Offering; (ii) Trident Securities, Inc. will receive a fee
equal to 2% of the aggregate Subscription Price of shares sold to persons other
than employees, trustees, directors and the ESOP, subject to a limit of
$150,000; and (iii) reorganization and Offering expenses, excluding the fees
payable to Trident Securities, Inc., will be approximately $350,000. Actual
expenses may vary from those estimated.
Pro forma consolidated net income of the Stock Company for the nine
months ended March 31, 1998 and for the fiscal year ended June 30, 1997 has 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 5.39% and 5.66%,
respectively (the one year U.S. Treasury bill rate as of March 31, 1998 and June
30, 1997, respectively). The U.S. Treasury rate was used on the reinvestment of
proceeds because it more appropriately reflects a market rate of return than the
arithmetic average of the average yield of the Bank's interest-earning assets
and cost of deposits. 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 Stock Company and the Bank is assumed to be 3.23% for the nine months
ended March 31, 1998 and 3.40% for the fiscal year ended June 30, 1997 (in both
cases, based on an assumed tax rate of 40.0%). 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," the Stock Company will retain 50% of the
net proceeds of the Offering.
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 Stock
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.
31
<PAGE>
The following tables summarize historical data of the Bank and pro
forma data of the Stock Company at or for the nine months ended March 31, 1998
and at or for the fiscal year ended June 30, 1997, 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 below
give effect to the Recognition Plan, which is expected to be adopted by the
Stock Company following the Offering and presented to stockholders for approval.
See "Management of the Bank--Compensation of Officers and Directors through
Benefit Plans--Recognition and Retention 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 Plan to be adopted by the Board of
Directors of the Stock Company and presented to stockholders for approval, nor
does book value as presented give any effect to the liquidation account to be
established for the benefit of Eligible Account Holders or Supplement Eligible
Account Holders, or the tax effect of the bad debt reserve and other factors.
<TABLE>
<CAPTION>
At or for the Nine Months Ended March 31, 1998
Based upon the sale for $10.00 per share of
-------------------------------------------------------------------
1,243,150
799,000 940,000 1,081,000 Shares(1)
Shares Shares Shares at Adjusted
at Minimum of at Midpoint of at Maximum of Maximum of
Offering Range Offering Range Offering Range Offering Range
-------------- -------------- -------------- --------------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds ................................................. $ 7,990 $ 9,400 $ 10,810 $ 12,432
Less expenses .................................................. 482 500 500 500
----------- ----------- ----------- -----------
Estimated net proceeds ....................................... 7,508 8,900 10,310 11,932
Less: common stock purchased by ESOP ........................ (639) (752) (865) (995)
Less: common stock purchased by Recognition Plan ............ (320) (376) (432) (497)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ........................ $ 6,549 $ 7,772 $ 9,013 $ 10,440
=========== =========== =========== ===========
For the 9 months ended March 31, 1998
Consolidated net income
Historical income ............................................ $ 955 $ 955 $ 955 $ 955
Pro forma income on net proceeds ............................. 159 189 219 253
Pro forma ESOP adjustment .................................... (29) (34) (39) (45)
Pro forma Recognition Plan adjustment (3) .................... (29) (34) (39) (45)
----------- ----------- ----------- -----------
Pro forma net income ....................................... $ 1,056 $ 1,076 $ 1,096 $ 1,118
=========== =========== =========== ===========
Net income per share:
Historical ................................................... $ 0.58 $ 0.50 $ 0.43 $ 0.37
Pro forma income on net proceeds ............................. 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment (2) ................................ (0.02) (0.02) (0.02) (0.02)
Pro forma Recognition Plan adjustment (3) .................... (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share (2)(3)(4) ................... $ 0.64 $ 0.56 $ 0.49 $ 0.43
=========== =========== =========== ===========
Number of shares used in calculating earnings per share ........ 1,638,477 1,927,620 2,216,763 2,549,277
=========== =========== =========== ===========
At March 31, 1998:
Stockholders' equity:
Historical ................................................... $ 9,890 $ 9,890 $ 9,890 $ 9,890
Estimated net proceeds ....................................... 7,508 8,900 10,310 11,932
Less: common stock acquired by ESOP (2) ..................... (639) (752) (865) (995)
Less: common stock acquired by Recognition Plan (3) ......... (320) (376) (432) (497)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (5) ......................... $ 16,439 $ 17,662 $ 18,903 $ 20,330
=========== =========== =========== ===========
Stockholders' equity per share:
Historical ................................................... $ 5.82 $ 4.95 $ 4.30 $ 3.74
Estimated net proceeds ....................................... 4.42 4.45 4.48 4.51
Less: common stock acquired by ESOP ......................... (0.38) (0.38) (0.38) (0.38)
Less: common stock acquired by Recognition Plan ............. (0.19) (0.19) (0.19) (0.19)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(3)(4)(5) .......... $ 9.67 $ 8.83 $ 8.21 $ 7.68
=========== =========== =========== ===========
Offering price as a multiple of pro forma net earnings
per share (annualized) ....................................... 11.72x 13.39x 15.31x 17.44x
=========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share ............................................. 103.41% 113.25% 121.80% 130.21%
=========== =========== =========== ===========
</TABLE>
(Footnotes on next page)
32
<PAGE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Estimated Valuation Range to
reflect changes in market or general financial conditions following the
commencement of the Offering.
(2) It is assumed that 8% of the shares sold 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 Stock
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon 10 equal annual installments of principal, with an assumed interest
rate of 8.5%. The pro forma net earnings information makes the following
assumptions: (i) the Bank's contribution to the ESOP is equivalent to the
debt service requirement for a full year and was made at the end of the
period; (ii) 4,794, 5,640, 6,486 and 7,459 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range,
respectively, were committed to be released during the nine months ended
March 31, 1998, 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 earnings per share calculations. See "Management of the
Bank--Compensation of Officers and Directors through Benefit
Plans--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Recognition Plan expected to be adopted by the Stock
Company following the Offering. This plan intends to acquire a number of
shares of common stock equal to 4% of the shares sold in the Offering, or
31,960, 37,600, 43,240, and 49,726 shares of common stock at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range,
respectively, either through open market purchases, or from authorized but
unissued shares of common stock or treasury stock of the Stock Company, if
any. Funds used by the Recognition Plan to purchase the shares will be
contributed to the plan by the Stock Company. In calculating the pro forma
effect of the Recognition Plan, it is assumed that the shares were
acquired by the plan in open market purchases at the beginning of the
period presented for a purchase price equal to the Subscription Price, and
that 20% of the amount contributed was an amortized expense during the
period. The issuance of authorized but unissued shares of the common stock
to the Recognition Plan instead of open market purchases would dilute the
voting interests of existing stockholders by approximately 4% and pro
forma net earnings per share would be $0.64, $0.55, $0.49 and $0.43 at the
minimum, midpoint, maximum and adjusted maximum of the Offering Range,
respectively, and pro forma stockholders' equity per share would be $9.68,
$8.85, $8.25 and $7.73 at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively. There can be no assurance
that the actual purchase price of the shares granted under the Recognition
Plan will be equal to the Subscription Price. See "Management of the
Bank--Compensation of Officers and Directors through Benefit
Plans--Recognition and Retention Plan."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the Stock Option Plan expected to be adopted by the
Stock Company following the Offering. Under the stock option plan, an
amount equal to 10% of the common stock sold in the Offering, or 79,900,
94,000, 108,100 and 124,315 shares at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plan. The issuance of common stock pursuant to the exercise of
options under the Stock Option Plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price equal to the Subscription
Price, existing stockholders' voting interest would be diluted by 9.1%,
and at the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, the pro forma net earnings per share would be $0.61, $0.53, $0.47
and $0.42, respectively, and the pro forma stockholders' equity per share
would be $9.68, $8.88, $8.30 and $7.79, respectively. See "Management of
the Bank--Compensation of Officers and Directors through Benefit
Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be restricted after the
Offering. See "Dividend Policy" and "Regulation--Regulation of Savings
Institutions."
33
<PAGE>
<TABLE>
<CAPTION>
At or For the Fiscal Year Ended June 30, 1997
Based upon the Sale for $10.00 per share of
------------------------------------------------------------------
1,243,150
799,000 940,000 1,081,000 Shares(1)
Shares Shares Shares at Adjusted
at Minimum of at Midpoint of at Maximum of Maximum of
Offering Range Offering Range Offering Range Offering Range
-------------- -------------- -------------- --------------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds ................................................. $ 7,990 $ 9,400 $ 10,810 $ 12,432
Less expenses .................................................. 482 500 500 500
----------- ----------- ----------- -----------
Estimated net proceeds ....................................... 7,508 8,900 10,310 11,932
Less: common stock purchased by ESOP (2) .................... (639) (752) (865) (995)
Less: common stock purchased by Recognition Plan (3) ........ (320) (376) (432) (497)
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ........................ $ 6,549 $ 7,772 $ 9,013 $ 10,440
=========== =========== ----------- ===========
For the 12 Months Ended June 30, 1997:
Historical ................................................... $ 1,082 $ 1,082 $ 1,082 $ 1,082
Pro forma income on net proceeds ............................. 222 264 306 355
Pro forma ESOP adjustment (2) ................................ (38) (45) (52) (60)
Pro forma Recognition Plan adjustment (3) .................... (38) (45) (52) (60)
----------- ----------- ----------- -----------
Pro forma net income ....................................... $ 1,228 $ 1,256 $ 1,284 $ 1,317
=========== =========== =========== ===========
Net income per share:
Historical ................................................... $ 0.66 $ 0.56 $ 0.49 $ 0.42
Pro forma income on net proceeds ............................. 0.14 0.14 0.14 0.14
Pro forma ESOP adjustment (2) ................................ (0.02) (0.02) (0.02) (0.02)
Pro forma Recognition Plan adjustment (3) .................... (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share (2)(3)(4) ................... $ 0.76 $ 0.66 $ 0.59 $ 0.52
=========== =========== =========== ===========
Number of shares used in calculating earnings per share ........ 1,639,276 1,928,560 2,217,844 2,550,521
=========== =========== =========== ===========
At June 30, 1997:
Stockholders' equity:
Historical ................................................... $ 8,695 $ 8,695 $ 8,695 $ 8,695
Estimated net proceeds ....................................... 7,508 8,900 10,310 11,932
Less: common stock acquired by ESOP (2) ..................... (639) (752) (865) (995)
Less: common stock acquired by Recognition Plan (3) ......... (320) (376) (432) (497)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (5) ......................... $ 15,244 $ 16,467 $ 17,708 $ 19,135
=========== =========== =========== ===========
Stockholders' equity per share:
Historical ................................................... $ 5.11 $ 4.35 $ 3.78 $ 3.29
Estimated net proceeds ....................................... 4.42 4.45 4.48 4.51
Less: common stock acquired by ESOP (2) ..................... (0.38) (0.38) (0.38) (0.38)
Less: common stock acquired by Recognition Plan (3) ......... (0.19) (0.19) (0.19) (0.19)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(3)(4)(5) .......... $ 8.96 $ 8.23 $ 7.69 $ 7.23
=========== =========== =========== ===========
Offering price as a multiple of pro forma net earnings per
share ........................................................ 13.16x 15.15x 16.95x 19.23x
=========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share ............................................. 111.61% 121.51% 130.04% 138.31%
=========== =========== =========== ===========
</TABLE>
(Footnotes on next page)
34
<PAGE>
- -----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the Estimated Valuation Range to
reflect changes in market or general financial conditions following the
commencement of the Offering.
(2) It is assumed that 8% of the shares sold 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 Stock
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon 10 equal annual installments of principal, with an assumed interest
rate of 8.50%. The pro forma net earnings information makes the following
assumptions: (i) the Bank's contribution to the ESOP is equivalent to the
debt service requirement for a full year and was made at the end of the
period; (ii) 6,392, 7,520, 8,648 and 9,945 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range,
respectively, were committed to be released during the fiscal year ended
June 30, 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 earnings per share calculations. See "Management of the
Bank--Compensation of Officers and Directors through Benefit
Plans--Employee Stock Ownership Plan and Trust."
(3) Gives effect to the Recognition Plan expected to be adopted by the Stock
Company following the Offering. This plan intends to acquire a number of
shares of common stock equal to 4% of the shares sold in the Offering, or
31,960, 37,600, 43,240, and 49,726 shares of common stock at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range,
respectively, either through open market purchases, or from authorized but
unissued shares of common stock or treasury stock of the Stock Company, if
any. Funds used by the Recognition Plan to purchase the shares will be
contributed to the plan by the Bank. In calculating the pro forma effect
of the Recognition Plan, it is assumed that the shares were acquired by
the plan in open market purchases at the beginning of the period presented
for a purchase price equal to the Subscription Price, and that 20% of the
amount contributed was an amortized expense during the period. The
issuance of authorized but unissued shares of the common stock to the
Recognition Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 4% and pro forma net
earnings per share would be $0.74, $0.65, $0.57 and $0.51 at the minimum,
midpoint, maximum and adjusted maximum of the Offering Range,
respectively, and pro forma stockholders' equity per share would be $8.99,
$8.27, $7.74 and $7.29 at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, respectively. There can be no assurance
that the actual purchase price of the shares granted under the Recognition
Plan will be equal to the Subscription Price. See "Management of the
Bank--Compensation of Officers and Directors through Benefit
Plans--Recognition and Retention Plan."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the Stock Option Plan expected to be adopted by the
Stock Company following the Offering. Under the Stock Option Plan, an
amount equal to 10% of the common stock sold in the Offering, or 79,900,
94,000, 108,100 and 124,315 shares at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively, will be reserved for
future issuance upon the exercise of options to be granted under the Stock
Option Plan. The issuance of common stock pursuant to the exercise of
options under the Stock Option Plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price equal to the Subscription
Price, existing stockholders' voting interest would be diluted by 9.1%,
and at the minimum, midpoint, maximum and adjusted maximum of the Offering
Range, the pro forma net earnings per share would be $0.71, $0.62, $0.55
and $0.49, respectively, and the pro forma stockholders' equity per share
would be $9.01, $8.31, $7.80 and $7.36, respectively. See "Management of
the Bank--Compensation of Officers and Directors through Benefit
Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be restricted after the
Offering. See "Dividend Policy" and "Regulation--Regulation of Savings
Institutions."
35
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended common
stock subscriptions by each of the directors, trustees and executive officers of
the Bank, the Mutual Company and the Stock Company and their families, and by
all such directors, 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, and any Recognition Plan awards or stock option grants
that may be made no earlier than six months after the completion of the
Offering. See "Management of the Bank--Compensation of Officers and Directors
through Benefit Plans--Recognition and Retention Plan" and "--Stock Option
Plan."
<TABLE>
<CAPTION>
Percent of
Position Shares Issued
With the Stock in the
Name Company Total Shares(1) Aggregate Price Offering(2)
---- ------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Eugene G. Stone President, Chief 5,000 $ 50,000 *
Executive Officer
and Director
Warren W. Chase, Jr. Vice President and 2,500 25,000 *
Treasurer
Kevin H. Kane Vice President 2,500 25,000 *
Pamela J. Mozynski Vice President 200 2,000 *
John J. Mogan, Jr. Vice President 2,500 25,000 *
Daniel G. Trombley Vice President 2,500 25,000 *
James W. Murphy Director and Clerk 5,000 50,000 *
Kelly A. Adler Director 10,000 100,000 1.1
Harold W. Bemis Director 250 2,500 *
William L. Casey Director 500 5,000 *
Paul J. DeSimone Director 100 1,000 *
John G. Dugan Director 2,500 25,000 *
Richard Giusti Director 5,000 50,000 *
John Hasenjaeger Director 10,000 100,000 1.1
Robert J. Heavey Director 5,000 50,000 *
Thomas R. Howie Director 200 2,000 *
Kenneth C.A. Isaacs Director 10,000 100,000 1.1
Paul V. Kenney Director 500 5,000 *
Eugene R. Liscombe Director 1,500 15,000 *
Robert A. Matson Director 500 5,000 *
Lawrence E. Novick Director 10,000 100,000 1.1
All directors, trustees and executive officers 76,250 $762,500 8.1%
as a group (21 persons) ====== ======== ===
</TABLE>
- ----------------
* Less than 1%.
(1) The maximum number of shares for which any officer, trustee or director may
subscribe is 10,000 shares.
(2) At the midpoint of the Offering Range.
36
<PAGE>
THE OFFERING AND THE REORGANIZATION
The Division has approved the Offering of the common stock subject to
the satisfaction of certain conditions imposed by the Division. However, such
approval does not constitute a recommendation or endorsement of the Offering by
the Division.
Description of and Reasons for the Offering and the Reorganization
The Bank's Board of Directors and the Mutual Company's Board of
Trustees unanimously adopted the stock issuance plan and the Mutual Company's
corporators have approved it. Pursuant to the stock issuance plan, the Bank will
reorganize into what is called a "two-tier" mutual holding company structure. It
is a two-tier structure because it will have two levels of holding companies: a
"mid-tier" stock holding company and a "top-tier" mutual holding company. As
discussed more specifically below, the mid-tier Stock Company is being formed
primarily to facilitate (i) the sale of common stock in the Offering, and (ii)
the management of the Bank's capital following the Offering. Under the terms of
the stock issuance plan: (i) the Mutual Company will form the Stock Company as a
Massachusetts corporation; (ii) the Mutual Company will contribute 100% of the
Bank's outstanding common stock to the Stock Company; (iii) the Stock Company
will issue shares of common stock to the public and the Mutual Company. These
steps are referred to in this prospectus as the "reorganization." The number of
shares of common stock sold to the public pursuant to this prospectus will be
equal to 47% of the shares issued in the Offering, and the number of shares
issued to the Mutual Company will be equal to 53% of the shares issued in the
Offering. The sale of 47% of the common stock pursuant to this prospectus is
referred to as the "Offering." The two-tier mutual holding company structure is
most easily understood by considering the following diagram:
Service Bancorp, Public
MHC Stockholders
(a Massachusetts
mutual holding
company)
53% of the 47% of the
common common
stock stock
Service Bancorp, Inc. (a Massachusetts corporation)
100% of the
common stock
Summit Bank
(a Massachusetts stock savings bank)
The Bank reorganized into a mutual holding company structure in August
1997 by establishing the Mutual Company and the Bank in its current stock form.
The primary purpose in forming the Mutual Company was to create a stock charter
for the Bank while retaining aspects of mutuality through the mutual holding
company structure, and
37
<PAGE>
to establish a structure that would enable the Bank to raise additional equity
capital and compete more effectively in the financial services marketplace.
The sole purpose of the reorganization of the Bank's existing mutual
holding company structure is to establish the Stock Company and to facilitate
the sale of common stock in the Offering. The two-tier structure will, among
other things: (i) enable the Stock Company to repurchase its common stock
without adverse tax consequences; (ii) permit the Stock Company to make
investments for the benefit of all stockholders; (iii) enable the Stock Company
to fund the loan to the ESOP; and (iv) provide greater flexibility in
structuring and approving mergers and acquisitions.
The primary purpose of the Offering is to permit the Stock Company to
raise additional equity capital for growth and expansion of the Bank's
operations both internally and through the potential acquisition or
establishment of new branches or the acquisition of other financial
institutions. Since the Stock Company is not offering all of its common stock
for sale to depositors and the public in the Offering (but is issuing a majority
of its stock to the Mutual Company), the Offering will result in less capital
raised in comparison to a standard mutual-to-stock conversion. The mutual
holding company structure, however, will also offer the Bank the opportunity to
raise additional capital since the stock held by the Mutual Company will be
available for sale in the future in the event the Mutual Company decides to
convert to the capital stock form of organization in a Conversion Transaction.
Although the Stock Company will have the power to issue shares of
capital stock to persons other than the Mutual Company, as long as the Mutual
Company is in existence, the Mutual Company will be required to own a majority
of the voting stock of the Stock Company. The Stock Company may issue any amount
of non-voting stock to persons other than the Mutual Company and the Stock
Company must own 100% of the voting stock of the Bank. The Bank and the Stock
Company may issue any amount of non-voting stock or debt to persons other than
the Mutual Company.
Stock Pricing and Number of Shares to be Issued 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 Stock Company and the Bank prepared by RP
Financial, LC., an independent appraisal firm. RP Financial, LC. determined that
the estimated pro forma market value of the common stock as of May 29, 1998
ranged from $17.0 to $23.0 million, with a midpoint of $20.0 million. The shares
of common stock being sold in the Offering represent a minority ownership
interest in the outstanding common stock of the Stock Company equal to 47% 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 $8.0 million to $10.3 million at a purchase
price of $10 per share. Following the commencement of the Offering, the maximum
of the Estimated Valuation Range may be increased by up to 15% to up to $26.5
million, which would result in a corresponding increase in the maximum of the
Offering Range to up to 1,243,150 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 Stock Company. In addition to the shares of common stock to be
sold in the Stock Offering, 53% of the shares of common stock outstanding upon
the closing of 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 799,000 shares or more than
1,081,000 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
38
<PAGE>
current passbook rate from the date of receipt to the date of termination of the
stock offering, and all authorizations for withdrawals of deposits will be
canceled. In the event the Bank receives orders for fewer than 799,000 at the
discretion of the Board of Directors and subject to the approval of the Division
and the FRB, 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 Stock 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 FRB, if necessary.
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 stock offering for $10.00 per
share. The number of shares issued will change in the event the Independent
Valuation changes when it is updated immediately prior to the consummation of
the Offering, but the purchase price is fixed at $10.00 per share and will not
change if the Independent Valuation changes.
RP Financial, LC., 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. RP Financial, LC. will receive a fee
of $20,000 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 RP Financial, LC. under certain circumstances
against liabilities and expenses (including certain legal fees) arising from or
based upon the services provided by RP Financial, LC., except where the
liability is adjudicated to have resulted from RP Financial, LC.'s negligence or
willful misconduct.
The Independent Valuation was prepared by RP Financial, LC. 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 in 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. RP
Financial, LC. 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, RP Financial, LC. 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, RP Financial, LC. has determined that as
of May 29, 1998, the estimated aggregate pro forma market value of the common
stock to be issued by the Stock Company was $20.0 million (the mid-point of the
Estimated Valuation Range). The Stock Company and the Bank have determined to
offer the shares in the Offering at a price of $10 per share. The Stock Company
and the Bank expect to sell a maximum of 47% of the Common Stock, or 940,000
shares (at the mid-point of the Offering Range), in the Offering. The Bank's
Board of Directors and the Stock Company's Board of Directors reviewed the
appraisal prepared by RP Financial, LC., and, in determining the reasonableness
and adequacy of such appraisal in consideration of FRB and Massachusetts
regulations and policies, has reviewed the methodology and reasonableness of the
assumptions utilized by RP Financial, LC. in the preparation of such appraisal.
The Board of Directors of the Bank and the Board of Directors of the Stock
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 RP Financial, LC.'s
appraisal and, in particular, considered (i) the Bank's financial condition and
results of operations
39
<PAGE>
for the year ended June 30, 1997 and the nine months ended March 31, 1998, (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
RP Financial, LC. 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 Stock Company, or both. If the updated estimate
of the pro forma market value of the Bank and the Stock 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 1,243,150 shares or fewer than 799,000
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 Stock 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, RP Financial, LC. has relied upon
and assumed the accuracy and completeness of financial and statistical
information provided by the Bank. RP Financial, LC. did not independently verify
the financial statements and other information provided by the Bank, nor did RP
Financial, LC. value independently the assets and liabilities of the Bank. The
Independent Valuation considers the Stock Company and the Bank only as going
concerns and should not be considered as an indication of the liquidation value
of the Stock Company and 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 $10.00 per share purchase price.
No sale of shares of common stock may be consummated unless, prior to
such consummation, RP Financial, LC. confirms to the Stock Company and the Bank,
the FRB 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 RP Financial, LC. to conclude that the Independent Valuation is
incompatible with its estimate of the pro forma market value of the common stock
of the Stock Company at the conclusion of the Offering. Any change that would
result in a market value that is below the minimum or 15% above the maximum of
the Offering Range would be subject to Division and FRB approval. If such
confirmation is not received, the Stock Company 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 FRB
or take such other actions as permitted by the Division and the FRB in order to
complete the Offering.
Subscription Offering
Subject to 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 $100,000 of common stock
offered in the Offering; provided that the Stock 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."
40
<PAGE>
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 directors of the Bank including associates of executive officers
and directors, 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 $100,000 of common stock offered in the Offering;
provided that the Stock 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 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: Tax-Qualified Employee Plans. The tax-qualified employee
plans of the Bank, including the ESOP, shall be given the opportunity to
purchase up to 10% of the common stock issued in the Offering. The ESOP intends
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 Offering, subject to the maximum purchase
limitations set forth under "Limitations upon Purchases of Common Stock."
Priority 4: Employees, Officers, Directors 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, director and trustee of the Mutual Company and the Bank
shall have the opportunity to purchase up to $100,000 of common stock offered in
the Offering; provided that the aggregate subscription rights granted to such
employees, officers, directors and trustees shall be limited to up to 30% 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 30% 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, directors shall not be deemed to be associates or a group acting in
concert solely as a result of their membership on the Board of Directors of the
Bank or the Board of Trustees of the Mutual Company. In the event that
employees, officers, directors 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
Directors among such
41
<PAGE>
subscribing persons on an 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.
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 unsubscribed shares directly to the general public for the
Subscription Price of $10 per share. If a Community Offering is conducted, it
will be for a period of not more than 45 days unless extended by the Stock
Company and the Bank, and may begin concurrently with, during or promptly after
the Subscription Offering. No person, by himself or herself, or with an
associate or group of persons acting in concert, may subscribe for or purchase
more than $100,000 of common stock offered in the Community Offering. Further,
the Stock Company and the Bank may limit total subscriptions in the Community
Offering so as to assure that the number of shares available for the public
offering may be up to a specified percentage of the number of shares of common
stock.
In the event of an oversubscription for shares in the Community
Offering, shares may be allocated in the sole discretion of the Bank (to the
extent shares remain available) first to cover orders of natural persons
residing in the Bank's local community of Franklin, Medway, Medfield and Millis,
Massachusetts (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 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 occupied a dwelling within the
Community, has an intent to remain within 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
within 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 director shall be examined for purposes of this definition.
The Bank may use deposit or loan records or such other evidence provided to it
to determine 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 Stock Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person. 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 stock issuance plan and in interpreting any and all other provisions of the
stock issuance 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.
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 Trident Securities, Inc. in a
Syndicated Community Offering, subject to terms, conditions and procedures as
may be determined by the Bank and the Stock Company in a manner that is intended
to achieve the widest distribution of the common stock subject to the rights of
the Stock Company to accept or reject in whole or in part all orders in the
Syndicated Community Offering. No person, together with associates or persons
acting in concert with such person, may purchase in the Syndicated Community
Offering more than $100,000 of common stock. 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 will be completed within 45 days after the termination of the
Subscription Offering, unless such period is extended as provided below.
42
<PAGE>
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 Board of Directors
of the Stock 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 FRB 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 will not be mailed any later than five
days prior to such date or 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 12:00 noon,
Massachusetts time, on September 15, 1998, unless extended by the Bank and the
Stock Company for up to an additional 45 days (i.e., until October 30, 1998) or,
if approved by the Division, 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 October 30, 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 (799,000
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 Estimated Valuation 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 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 12:00 noon, Massachusetts time, on September 15, 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 they are
purchasing such shares for their own account. The interpretation by the Bank of
the terms and conditions of the stock issuance plan and of the acceptability of
the Order Forms will be final. The Bank is not required to accept copies of
Order Forms. Order Forms cannot and will not be accepted without the execution
of the certification appearing on the reverse side of the Order Form. Neither
the Bank, the Stock Company, nor Trident Securities, Inc. is obligated to
deliver a prospectus and an Order Form by any means other than the U.S. Postal
Service.
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 passbook or money market accounts or certificates of deposit
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
43
<PAGE>
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
checks and money orders shall be made payable to "Service Bancorp, Inc." Such
funds will be placed in a segregated savings account and interest will be paid
by the Bank at the Bank's passbook rate, 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 October 30, 1998,
in which event purchasers may be given the opportunity to increase, decrease,
confirm or rescind their orders for a specified period of time.
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 Internal Revenue Service ("IRS") regulations require
that executive officers, directors, 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 common stock, such plan will not be
required to pay for such shares until consummation of the stock offering,
provided that there is in force from the time the order is received a loan
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 stock 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 stock 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. Subscribers are at their own risk if they sell shares before receiving
the certificates or determining whether their subscription has been accepted.
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 Trident Securities, Inc. All prospective purchasers are to 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 Stock
Company have retained Trident Securities, Inc., a broker-dealer registered with
the NASD. Trident Securities, Inc. 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; (iii) in
coordinating the selling efforts in the Bank's local communities; and (iv) in
soliciting orders for common stock. For these services, Trident Securities, Inc.
will receive an advisory and a management fee of 2% of the dollar amount of the
common stock sold in the Offering, excluding shares sold to the Bank's or the
Mutual Company's directors, trustees, officers, employees and employee benefit
plans, up to a maximum fee of $150,000.
44
<PAGE>
The Bank also will reimburse Trident Securities, Inc. for its
reasonable out-of-pocket expenses (including legal fees and expenses up to a
maximum of $27,500) associated with its marketing effort. The Bank has made an
advance payment to Trident Securities, Inc. in the amount of $10,000. The Bank
will indemnify Trident Securities, Inc. 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 materials for the common stock, including liabilities under the
Securities Act of 1933.
Directors, trustees and executive officers of the Bank, the Stock
Company and the Mutual Company 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 Stock Company and the Bank will rely on Rule
3a4-1 of the Securities Exchange Act of 1934 (the "Exchange Act"), so as to
permit officers, directors, trustees and employees to participate in the sale of
the common stock. No officer, director, trustee or employee 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 Stock
Information Center.
Other Restrictions. 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 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 stock
issuance plan and applicable regulations prohibit 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 stock
issuance plan.
1. The aggregate amount of outstanding common stock owned or controlled
by persons other than Mutual Company at the close of the Offering shall
not exceed 49% of the Stock Company's total outstanding common stock.
2. No person or group of persons acting in concert, may purchase more
than $100,000 of common stock offered in the Offering, except that: (i)
the Stock 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.
3. 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 30%
of the outstanding shares of common stock held by persons other than
the Mutual Company at the close of the Stock offering. In calculating
the number of shares held by Management Persons and their Associates
45
<PAGE>
under this paragraph or under the provisions of paragraph 4 below,
shares held by any Tax-Qualified Employee Benefit Plan or any
Nontax-Qualified Employee Benefit Plan of the Bank that are
attributable to such persons shall not be counted.
4. 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 30%
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 3 of this section,
shares held by any Tax-Qualified Employee Benefit Plan or any
Nontax-Qualified Employee Benefit Plan of the Bank that are
attributable to such persons shall not be counted.
5. With the approval of the Division, the Boards of Directors of the
Bank and the Stock Company may, in their sole discretion, increase the
maximum purchase limitation 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 Stock 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
Stock Company, in its sole discretion.
6. 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
Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be issued, to fill unfulfilled subscriptions of
subscribers according to their respective priorities set forth in the
stock issuance plan.
7. Notwithstanding any other provision of the stock issuance 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 Stock 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.
8. The Boards of Directors of the Stock Company and the Bank have the
right in their 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 stock issuance plan.
The Stock 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 if they
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 stock issuance plan reside in such state
or foreign county; (ii) the offer or sale of shares of common stock to such
persons would require the Bank, the Stock Company 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.
46
<PAGE>
Liquidation Account
At the completion of the Offering, the Bank or the Stock 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 Bank following the Offering. The amount of the liquidation account will
be equal to the Minority Ownership Interest multiplied by the net worth of the
Bank (determined in accordance with generally accepted accounting principles) 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 Bank and the
Stock 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 Bank commencing
after the Eligibility Record Date or Supplemental 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 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 Bank.
Neither the Bank nor the Stock 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 Bank, except that neither
the Bank nor the Stock 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.
Federal and State Tax Consequences of the Reorganization
The Bank intends to proceed with the reorganization on the basis of an
opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
reorganization. The opinion is based, among other things, on the assumptions
that the subscription rights to be received by Eligible Account Holders,
Supplemental Eligible Account Holders and others do not have any economic value
at the time of distribution or the time the subscription rights are exercised,
whether or not a Community Offering takes place. If the subscription rights
granted to Eligible Account Holders and Supplemental Eligible Account Holders
and certain others are deemed to have an ascertainable value, receipt of such
rights could result in taxable gain to such persons who exercise the
subscription rights in an amount equal to such value and the Bank could
recognize gain on such distribution. Persons who receive subscription rights are
encouraged to consult with their own tax advisors as to the tax consequences in
the event that such subscription rights are deemed to have an ascertainable
47
<PAGE>
value. Unlike private letter rulings, opinions of counsel or tax advisors 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 Bank or the depositors would prevail in a
judicial proceeding.
The Bank will receive an opinion of counsel from Luse Lehman Gorman
Pomerenk & Schick, P.C., to the effect that, for federal income tax purposes:
1. The reorganization qualifies as an exchange described in Code
Section 351.
2. The Mutual Company will recognize no gain or loss upon the
transfer of the stock of the Bank to the Stock Company solely in
exchange for Stock Company common stock. All other transferors
will recognize no gain or loss upon the transfer of property to
the Stock Company solely in exchange for common stock of the
Stock Company.
3. The Mutual Company's basis in the Stock Company common stock
received in the transaction will be equal to the basis of the
property transferred in exchange therefor.
4. The Mutual Company's holding period for the Stock Company common
stock received in the transaction will include the period during
which the property exchanged therefor was held, provided such
property was a capital asset or property described in Section
1231 of the Code on the date of the exchange.
5. The Stock 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 Stock Company.
6. The Stock Company's holding period for the property received from
the Mutual Company will include the period during which such
property was held by the Mutual Company.
7. Provided that the amount to be paid for the Stock Company common
stock pursuant to the subscription rights is equal to the fair
market value of such stock, no gain or loss will be recognized by
qualifying depositors, tax qualified employee plans of the Bank
and employees, officers, trustees and directors of the Mutual
Company and the Bank upon the distribution to them of
nontransferable subscription rights to purchase shares of Stock
Company common stock. Gain, if any, realized on the distribution
to them of nontransferable subscription rights to purchase shares
of Stock Company common stock will be recognized but only in an
amount not in excess of the fair market value of such
subscription rights.
8. The basis of the Stock Company common stock to the Minority
Stockholders will be the purchase price thereof plus the fair
market value, if any, of nontransferable subscription rights. The
Bank and the Mutual Company have received a letter from R.P.
Financial, LC. that the nontransferable subscription rights do
not have any value. Assuming the nontransferable subscription
rights have no value, the basis of the Stock Company common stock
will be the amount paid therefor.
The Bank has also received an opinion from Wolf & Company, P.C., that
implementation of the stock issuance plan will not result in any Massachusetts
income tax liability to the Bank, its depositors, tax qualified employee plans,
employees, officers, trustees and directors, the Stock Company or the Mutual
Company.
48
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of
the years in the two-year period ended June 30, 1997 have been audited by Wolf &
Company, P.C., independent certified public accountants, whose report thereon
appears elsewhere in this prospectus. With respect to information for the nine
months ended March 31, 1998 and 1997, 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 nine
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1998. 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>
Nine Months Ended Years Ended
March 31, June 30,
----------------- -------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
(In Thousands)
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest and fees on loans ............................................... $ 4,531 $ 3,923 $ 5,343 $ 4,539
Interest and dividends on securities available for sale
and Federal Home Loan Bank stock ....................................... 1,564 1,085 1,482 1,341
Interest on short-term investments and certificates of deposit ........... 214 139 212 222
------- ------- ------- -------
Total interest and dividend income ..................................... 6,309 5,147 7,037 6,102
------- ------- ------- -------
Interest expense:
Interest on deposits ..................................................... 2,733 2,238 3,050 2,724
Interest on borrowings ................................................... 239 86 124 22
------- ------- ------- -------
Total interest expense ................................................. 2,972 2,324 3,174 2,746
------- ------- ------- -------
Net interest income ......................................................... 3,337 2,823 3,863 3,356
Provision for loan losses (Note 4) .......................................... 75 35 35 93
------- ------- ------- -------
Net interest income, after provision for loan losses ................... 3,262 2,788 3,828 3,263
------- ------- ------- -------
Other income:
Customer service fees .................................................... 312 295 406 388
Gain on sales of securities available for sale, net (Note 3) ............. 675 343 462 308
Gain on sales of loan .................................................... 44 26 31 --
Miscellaneous ............................................................ 44 46 60 78
------- ------- ------- -------
Total other income ..................................................... 1,075 710 959 774
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits (Note 10) ................................. 1,439 1,201 1,619 1,385
Occupancy and equipment expenses (Notes 5 and 11) ........................ 627 486 667 574
Data processing expenses ................................................. 250 198 258 270
Professional fees ........................................................ 116 96 124 124
Advertising expenses ..................................................... 88 45 68 53
Gain on other real estate owned .......................................... (6) (158) (158) --
Other general and administrative expenses (Note 14) ...................... 347 344 516 329
------- ------- ------- -------
Total operating expenses ............................................... 2,861 2,212 3,094 2,735
------- ------- ------- -------
Income before income taxes .................................................. 1,476 1,286 1,693 1,302
Provision for income taxes (Note 8) ......................................... 521 477 611 501
------- ------- ------- -------
Net income .................................................................. $ 955 $ 809 $ 1,082 $ 801
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Stock 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,
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 Stock Company and the Bank.
Management Strategy
Historically, the Bank has focused on offering deposit products
primarily in the towns of Medway, Franklin, Medfield and Millis, all of which
are located in Norfolk County. The Bank's lending activities are concentrated
primarily in Norfolk County and nearby surrounding markets in the greater Boston
metropolitan area. The Bank generates its profitability primarily by
originating, purchasing and selling loans, investing in debt and equity
securities and mortgage-backed securities, attracting and retaining deposits by
paying competitive interest rates, borrowing from the Federal Home Loan Bank of
Boston ("FHLB") and maintaining a high standard of customer service as a local
community savings bank.
The Bank's strategy is to attempt to take advantage of favorable
conditions in its market area by continuing to grow the Bank, focus on
attracting core deposits and gradually shift its assets into higher yielding
loans. Norfolk County, which is located approximately 30 miles southwest of
Boston, has experienced population growth during the 1990's at a rate that is
almost twice the rate of growth for the Commonwealth of Massachusetts as a
whole. In particular, the town of Franklin experienced the greatest population
growth of any town in the Commonwealth from April 1, 1990 to July 1, 1996
according to the Massachusetts Institute for Social and Economic Research. This
growth is being driven by the area's proximity to Boston as convenient
transportation and more affordable housing have attracted many individuals who
work in the City of Boston. In addition, certain areas of the Bank's market area
have seen an expansion in commercial real estate development as a number of
small businesses have migrated to the area.
The Bank's growth has reflected that of its market area. Total assets
have increased 45.2% from $90.4 million at June 30, 1996 to $131.2 million at
March 31, 1998. During the same period, total loans grew 20.9% from $60.3
million to $72.9 million. Deposits also experienced significant growth,
increasing 33.1% from June 30, 1996 to March 31, 1998.
The principle elements of the Bank's strategy are as follows:
o Branching - Continue to explore branching opportunities either
by buying branches or de novo branching. The Bank opened one
branch in 1997 and is currently evaluating other
opportunities.
o Increasing Commercial Real Estate and Business Lending - The
Bank believes that due to extensive consolidation among
financial institutions in the northeast, many small businesses
are not being adequately served. The Bank has been able to
take advantage of this opportunity as its commercial real
estate loans have more than doubled since June 30, 1996 and
currently represent 16.67% of
50
<PAGE>
total loans, up from 9.72% of total loans. Likewise,
commercial business loans have increased, from $2.7 million at
June 30, 1996 to $3.5 million at March 31, 1998, an increase
of 30.79%.
o Maintaining Adequate Staffing - Continued growth in the loan
portfolio will require additional experienced personnel in
order to properly and prudently manage this growth. In
response, the Bank has recently hired an experienced banker
with more than 18 years of corporate credit analysis and
lending experience to head its commercial loan department.
o Maintaining High Asset Quality - At March 31, 1998 the Bank's
non-accrual loans and other real estate owned to total assets
was .26% and its allowance for loan losses as a percentage of
non-accrual loans was 163.27%.
o Attracting Core Deposits - At March 31, 1998 the Bank had
$58.3 million of transaction accounts which represented 53.9%
of total deposits. The Bank believes that by offering
attractive depository products in conjunction with various
business and commercial real estate loans, it will be able to
maintain a high level of core deposits.
Management of Credit Risk
Management considers credit risk to be an 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 approved by the Bank's Board of Directors, 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 such borrower's 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 Directors. 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
Directors 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 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 the origination and retention of adjustable-rate loans
while generally selling long-term one- to four-family fixed-rate loans in the
secondary market, (2) originating fixed-rate commercial real estate loans with
maturities matched by long-term FHLB borrowings, (3) investing in debt
securities with relatively short maturities or call dates, (4) classifying all
of the Bank's investment portfolio as available for sale so as to provide
sufficient flexibility in liquidity management, and (5) maintaining a high
concentration of less interest-rate-sensitive and lower-costing "core deposits".
51
<PAGE>
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 March 31, 1998, 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 8.99%. 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 amortized cost of interest-earning
assets and interest-bearing liabilities outstanding at March 31, 1998, 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
March 31, 1998, 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 loans (other than consumer loans) and
mortgage-backed securities is assumed to range between 8% and 12% depending upon
the type of loan, and the annual prepayment rate for consumer loans is assumed
to be 25%. See "Business of the Bank--Lending Activities," "--Investment
Activities" and "--Sources of Funds."
52
<PAGE>
<TABLE>
<CAPTION>
Amounts maturing or repricing at March 31, 1998
----------------------------------------------------------------------------------------------
Less
Than Three 3-6 6 Months to 1-3 3-5 5-10 Over 10
Months Months 1 Year Years Years Years Years Total
------ ------ ------ ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest-earning assets(1):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (2) .............. $ 18,261 $ 6,803 $ 15,657 $ 21,849 $ 5,367 $ 4,577 $ -- $ 72,514
Short-term investments ............ 6,400 -- -- -- -- -- -- 6,400
Mortgage-backed securities ........ 2,896 1,868 580 648 676 632 -- 7,300
Debt securities and
certificates of deposit .......... -- 500 1,000 500 3,000 26,507 2,000 33,507
Equity securities ................. -- -- -- -- -- -- 2,701 2,701
FHLB stock ........................ -- -- -- -- -- -- 723 723
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning assets ... 27,557 9,171 17,237 22,996 9,043 31,716 5,424 123,145
-------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits (3)(4) ........... 2,810 2,810 2,810 2,810 -- -- 11,240 22,480
Money market deposits (3) ......... 1,082 1,082 1,082 1,082 -- -- 4,331 8,659
NOW deposits (5) .................. 3,137 3,137 3,137 3,137 -- -- 4,181 16,729
Certificate accounts .............. 13,395 14,619 14,258 7,443 72 -- -- 49,787
FHLB advances ..................... 141 141 2,118 519 -- 9,000 485 12,404
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ....................$ 20,565 $ 21,789 $ 23,405 $ 14,991 $ 72 $ 9,000 $ 20,237 110,059
-------- -------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap (6) ........$ 6,992 $(12,618) $ (6,188) $ 8,006 $ 8,971 $ 22,716 $(14,813)
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap .$ 6,992 $ (5,626) $(11,794) $ (3,788) $ 5,183 $ 27,899 $ 13,086
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap
as a percentage of total assets .... 5.33% (4.29)% (8.99)% (2.89)% 3.95% 21.26% 9.97%
Cumulative interest sensitivity gap
as a percentage of total
interest-earning assets ............ 5.68% (4.57)% (9.57)% (3.08)% 4.21% 22.66% 10.66%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ....... 134.00% 86.72% 82.06% 95.31% 106.41% 131.06% 111.89%
</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) For the purposes of the gap analysis, the allowance for loan losses,
deferred loan fees, unearned income, and non-accrual loans have been
excluded.
(3) 50% of regular savings and money market account balances is included in the
over 10 year period; the remaining 50% of such balances is spread evenly
within the four intervals up to and including the one- to three-year
period.
(4) Includes mortgagors' escrow payments.
(5) 25% of NOW account balances are included in the over 10 year period; the
remaining balances are spread evenly within the four intervals up to and
including the one- to three-year period.
(6) Interest sensitivity gap represents the difference between interest-earning
assets and interest-bearing liabilities.
53
<PAGE>
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 interest income
on interest-earning assets and interest 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.
54
<PAGE>
Average Balance Sheet. The following tables present, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balances. Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Nine Months Ended March 31,
------------------------------------------------------------
At March 31, 1998 1998 1997
-------------------- --------------------------- ------------------------------
Interest Interest
Average Earned/ Average Earned/
Balance Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---------- ------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)...... $72,197 8.52% $ 69,670 $4,531 8.67% $ 62,027 $3,923 8.43%
Mortgage-backed securities 7,300 5.90 3,450 171 6.61 1,971 101 6.83
Debt securities (2)....... 33,507 6.82 26,392 1,351 6.83 18,333 904 6.57
Equity securities......... 2,701 2.52 2,682 51 2.54 2,018 58 3.83
FHLB stock................ 723 6.40 588 28 6.35 468 22 6.27
Short-term investments.... 6,400 5.72 4,373 177 5.40 3,333 139 5.56
------- ------ ------ ------ ------
Total interest-earning
assets.................. 122,828 7.61 107,155 6,309 7.85 88,150 5,147 7.79
----- ------
Non-interest-earning assets 8,376 6,941 5,406
------ ------ ------
Total assets............. $131,204 $114,096 $ 93,556
======== ======== ========
Interest-bearing liabilities:
Savings deposits (3)...... $22,480 2.49 $ 21,550 409 2.53 $ 20,406 386 2.52
Money market deposits..... 8,659 2.75 8,806 182 2.76 7,700 169 2.93
NOW accounts.............. 16,729 1.43 12,249 123 1.34 10,191 99 1.30
Certificate accounts...... 49,787 5.69 47,577 2,020 5.66 38,071 1,584 5.55
FHLB borrowings........... 12,404 5.27 5,648 238 5.62 2,003 86 5.72
------- -------- ----- -------- ------
Total interest-bearing
liabilities........... 110,059 4.11 95,830 2,972 4.14 78,371 2,324 3.95
------ ------
Demand deposits............ 10,563 7,956 6,463
Other non-interest bearing
liabilities............... 692 972 868
Retained earnings.......... 9,870 9,338 7,854
------- -------- --------
Total liabilities and
retained earnings....... $131,204 $114,096 $ 93,556
======== ======== ========
Net interest income........ $3,337 $2,823
====== ======
Net interest spread........ 3.50% 3.71% 3.84%
====== ===== =====
Net earning assets......... $12,769 $ 11,325 $ 9,779
======= ======== ========
Net yield on average
interest-earning assets 3.93% 4.15% 4.27%
====== ===== =====
Average interest-earning
assets to average
interest-bearing
liabilities............... 111.60% 111.82% 112.48%
======= ====== ======
</TABLE>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Debt securities include certificates of deposit.
(3) Savings deposits include mortgagors' escrow accounts.
55
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Interest Interest
Average Earned/ Average Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (1)...... $63,009 $5,343 8.48% $51,785 $4,540 8.77%
Mortgage-backed securities 2,151 145 6.74 2,007 140 6.98
Debt securities (2)....... 18,367 1,222 6.65 17,383 1,106 6.36
Equity securities......... 2,234 86 3.85 2,066 66 3.19
FHLB stock................ 489 31 6.34 452 29 6.42
Short-term investments.... 3,792 210 5.54 3,615 221 6.11
------- ----- ------ ------
Total interest-earning
assets................. 90,042 7,037 7.82 77,308 6,102 7.89
------ ------
Non-interest earning assets 5,555 5,252
------- ------
Total assets............. $95,597 $82,560
======= =======
Interest-bearing liabilities:
Savings deposits (3)...... $20,637 521 2.52 $19,847 503 2.53
Money market deposits..... 7,854 225 2.86 8,272 229 2.77
NOW accounts.............. 10,429 135 1.29 9,900 154 1.56
Certificate accounts...... 39,042 2,169 5.56 32,017 1,838 5.74
FHLB advances............. 2,161 124 5.74 365 22 6.03
------- ------ ------- ------
Total interest-bearing
liabilities........... 80,123 3,174 3.96 70,401 2,746 3.90
------ ------
Demand deposits............ 6,638 4,825
Other non-interest bearing
liabilities.............. 870 274
Retained earnings.......... 7,966 7,060
------- -------
Total liabilities and
retained earnings....... $95,597 $82,560
======= =======
Net interest income........ $3,863 $3,356
====== ======
Net interest spread........ 3.86% 3.99%
==== =====
Net earning assets......... $ 9,919 $ 6,907
======= =======
Net yield on average
interest-earning assets 4.29% 4.34%
==== =====
Average interest-earning assets
to average interest-bearing
liabilities............... 112.38% 109.81%
====== ======
</TABLE>
- ---------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Debt securities include certificates of deposit.
(3) Savings deposits include mortgagors' escrow accounts.
56
<PAGE>
Rate/Volume Analysis. The following table presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Nine Months Ended March 31, Years Ended June 30,
--------------------------------- ------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
Interest and dividend income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable............... $ 494 $ 114 $ 608 $ 958 $ (154) $ 804
Mortgage-backed securities..... 73 (3) 70 13 (8) 5
Debt securities................ 410 37 447 64 51 115
Other.......................... 16 (17) (1) 8 14 22
Short-term investments......... 42 (4) 38 10 (21) (11)
-------- --------- --------- -------- -------- -------
Total........................ 1,035 127 1,162 1,053 (118) 935
-------- --------- --------- -------- -------- -------
Interest expense:
Savings deposits............... 21 2 23 20 (2) 18
Money market deposits.......... 23 (10) 13 (11) 7 (4)
NOW deposits .................. 21 3 24 13 (32) (19)
Certificate accounts........... 404 32 436 391 (60) 331
FHLB borrowings................ 154 (2) 152 103 (1) 102
-------- --------- --------- -------- -------- -------
Total........................ 623 25 648 516 (88) 428
-------- --------- --------- -------- -------- -------
Net interest income............. $ 412 $ 102 $ 514 $ 537 $ (30) $ 507
======== ========= ========= ======== ======== =======
</TABLE>
Comparison of Financial Condition at March 31, 1998 and June 30, 1997
Total assets increased by $26.3 million, or 25.1%, from $104.9 million
at June 30, 1997 to $131.2 million at March 31, 1998. This growth was due
primarily to a $14.6 million, or 63.6%, increase in investment securities, a
$5.3 million, or 7.9%, increase in net loans receivable and a $4.6 million, or
165.9%, increase in mortgage-backed securities. This asset growth was funded
primarily by a $15.2 million, or 16.3%, increase in deposits and a $9.8 million,
or 373.1%, increase in total borrowings at March 31, 1998 as compared to June
30, 1997.
The net increase in loans resulted from increased commercial real
estate loan originations reflecting strong economic growth in the Bank's primary
lending area. From June 30, 1997 to March 31, 1998, commercial real estate loans
increased by $3.8 million, or 45.6%, construction or development loans increased
by $982,000, or 34.1%, and commercial business loans increased by $971,000, or
38.0%. These increases were partially offset by a modest reduction in one- to
four-family residential mortgage loans of $1.5 million, or 3.1%, from June 30,
1997 to March 31, 1998 due to refinancing activities.
At March 31, 1998, the Bank's total investment securities were $37.6
million, an increase from the Bank's total investment securities of $23.0
million at June 30, 1997. All of such investment securities are classified by
the Bank as available for sale. In addition, short-term investments increased
$95,000 to $6.4 million at March 31, 1998 compared to June 30, 1997, while
mortgage-backed securities increased by $4.6 million to $7.3 million over the
same period. The increase in investment securities and mortgage-backed
securities during the period from June 30, 1997
57
<PAGE>
to March 31, 1998 were funded largely by FHLB advances, which increased to $12.4
million at March 31, 1998 compared to $2.6 million at June 30, 1997, as
management sought to increase net interest income by taking advantage of the
favorable spread between the yield on the securities and the cost of the FHLB
advances. The securities are all classified as available for sale; if and to the
extent that the FHLB advances are called, management may sell such securities to
fund growth in the loan portfolio to the extent necessary.
Total deposits at March 31, 1998 were $108.1 million, an increase of
$15.2 million, or 16.3%, compared to $92.9 million at June 30, 1997. The
increase in deposits was attributable primarily to increases in demand deposits,
NOW accounts and certificate of deposit accounts, the average balances of which
increased by $1.3 million, or 19.9%, $1.8 million, or 17.5% and $8.5 million, or
21.9%, respectively, for the nine months ended March 31, 1998 as compared to the
twelve months ended June 30, 1997. Total borrowed funds increased to $12.4
million at March 31, 1998 compared to $2.6 million at June 30, 1997. The
increases in total deposits and in borrowed funds were utilized to fund the
increases in total assets described above.
The Bank's retained earnings increased by $1.2 million, or 13.5%, to
$9.9 million at March 31, 1998 compared to $8.7 million at June 30, 1997. The
increase in retained earnings resulted from net income of $955,000 for the nine
months ended March 31, 1998 and a $240,000 increase in unrealized gains (net of
taxes) on securities available for sale. The increase in unrealized gains on
securities available for sale was attributable, in part, to continued strength
in U.S. equities markets generally; there can be no assurance that such gains
will continue in future periods.
Comparison of Financial Condition at June 30, 1997 and June 30, 1996
Total assets were $104.9 million at June 30, 1997 compared to $90.4
million at June 30, 1996, an increase of $14.5 million, or 16.1%. This growth in
total assets reflected growth in net loans, which increased by $7.3 million, or
12.2%, short-term investments, which increased by $3.7 million, or 142.8%,
investment securities, which increased by $3.8 million, or 19.9%, and
mortgage-backed securities, which increased by $669,000, or 32.2%. Asset growth
was funded primarily by deposits, which increased by $11.7 million, or 14.4%,
total borrowings, which increased to $2.6 million from $369,000, and retained
earnings, which increased by $1.3 million, or 17.2%.
Net loans increased from $59.7 million at June 30, 1996 to $66.9
million at June 30, 1997. In the twelve months ended June 30, 1997, one- to
four-family residential mortgage loans increased by $4.4 million, or 10.3% and
commercial real estate loans increased by $2.5 million, or 42.4%. The increases
in net loans in these categories more than offset a modest decrease of $274,000,
or 8.7%, in construction and development loans, and reflected the economic
strength and loan demand in the Bank's primary lending area.
Total investments also increased in the twelve months ended June 30,
1997. The Bank's investment securities increased by $3.8 million, or 19.9%, to
$23.0 million at June 30, 1997 compared to $19.2 million at June 30, 1996, and
the Bank's short-term investments increased to $6.3 million at June 30, 1997
compared to $2.6 million at June 30, 1996. In addition, mortgage-backed
securities increased to $2.7 million from $2.1 million over the same period.
Total deposits increased by $11.7 million, or 14.4%, to $92.9 million
at June 30, 1997 from $81.2 million at June 30, 1996. Substantially all of the
growth in total deposits came from a $3.4 million, or 34.8% increase in NOW
accounts and a $7.5 million, or 21.2%, increase in total certificate accounts.
The Bank also increased its borrowings from the FHLB to $2.6 million at June 30,
1997 from $369,000 at June 30, 1996 as part of its management of interest rate
risk resulting from the origination and refinancing of commercial real estate
loans at fixed interest rates for certain time intervals.
The increase in retained earnings to $8.7 million at June 30, 1997 from
$7.4 million at June 30, 1996 resulted from net income of $1.1 million for the
twelve months ended June 30, 1997 and a $192,000 increase in unrealized gains
(net of taxes) on securities available for sale. The increase in unrealized
gains on securities available for sale
58
<PAGE>
was attributable, in part, to continued strength in U.S. equities markets
generally; there can be no assurance that such gains will continue in future
periods.
Comparison of Operating Results for the Nine Months Ended March 31, 1998 and
March 31, 1997
General. Net income increased by $146,000, or 18.0%, from $809,000 for
the nine months ended March 31, 1997 to $955,000 for the nine months ended March
31, 1998. The improvement was attributable to higher net interest income of $3.3
million (compared to $2.8 million in the earlier period) and a $719,000 gain on
the sale of loans and investment securities (compared to a $369,000 gain in the
earlier period). These improvements more than offset the increase of $649,000,
or 29.3%, in total noninterest expense for the nine months ended March 31, 1998
compared to the year earlier period.
Interest Income. Interest income for the nine months ended March 31,
1998 was $6.3 million compared to $5.1 million for the nine months ended March
31, 1997. The increase was attributable to a substantial increase in average
interest earning assets of $19.0 million, or 21.6% for the nine months ended
March 31, 1998 compared to the earlier year period, as well as an improvement in
the average yield on interest earning assets to 7.85% for the nine months ended
March 31, 1998 compared to 7.79% for the nine months ended March 31, 1997. The
principal areas of growth in average balances related to loans receivable (up
$7.6 million, or 12.3%) and investment securities (up $8.1 million, or 44.0%).
The increase in loans receivable reflected loan demand in the Bank's primary
lending area, and the increase in the average balance of investment securities
reflected management's decision to increase liquidity in anticipation of further
growth in the Bank's primary lending market.
Interest Expense. Interest expense for the nine months ended March 31,
1998 was $3.0 million compared to $2.3 million for the nine months ended March
31, 1997, an increase of $648,000, or 27.9%. The increase resulted from both a
higher average balance of interest-bearing liabilities (which increased by $17.5
million, or 22.3%) as well as an increase in the average rate paid for funds to
4.14% for the nine months ended March 31, 1998 compared to 3.95% for the nine
months ended March 31, 1997. The increase in average interest-bearing deposit
balances reflected increases in both transaction accounts and certificate
accounts. In particular, the average balance of certificate accounts increased
to $47.6 million for the nine months ended March 31, 1998 compared to $38.1
million for the earlier nine month period, as the Bank increased the rates paid
on such accounts to fund asset growth. The Bank also expanded its use of
borrowings from the FHLB both to fund asset growth as well as to facilitate
management of interest rate risk and may continue to do so in the future for
both purposes. Interest expense on borrowed funds increased for the nine months
ended March 31, 1998 compared to the earlier period, reflecting increased
average balances of such borrowings, notwithstanding a reduction in the rate
paid on such borrowings to 5.62% for the nine months ended March 31, 1998
compared to 5.72% for the nine months ended March 31, 1997.
Provision for Loan Losses. The Bank had a provision for loan losses of
$75,000 for the nine months ended March 31, 1998 compared to $35,000 for the
nine months ended March 31, 1997. This increase reflected a desire by management
to keep the allowance for loan losses at a level to properly match loan growth
and to reset general reserves for certain loan categories. The ratio of
non-accruing loans and other real estate owned to total assets at the end of the
nine month period ended March 31, 1998 was 0.26% compared to 0.69% at the end of
the nine months ended March 31, 1997. The allowance for loan losses was $560,000
at March 31, 1998 and $539,000 at March 31, 1997, or 0.77% and 0.84% of net
loans receivable, respectively. During the nine months ended March 31, 1998, the
Bank experienced net recoveries of $10,000, compared to net recoveries of
$34,000 for the nine months ended March 31, 1997. 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
59
<PAGE>
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 judgements differing from those of management.
Non-Interest Income. Noninterest income is comprised of fees and
charges for Bank services, gains or losses from the sale of assets, other real
estate owned activity and other income resulting from miscellaneous
transactions. Total noninterest income was $1.1 million for the nine months
ended March 31, 1998 compared to $710,000 for the nine months ended March 31,
1997. The increase resulted primarily from $719,000 in gains on sales of loans,
mortgage-backed securities and investment securities for the nine months ended
March 31, 1998 compared to $369,000 in such gains for the nine months ended
March 31, 1997. The Bank actively manages a portfolio of equity securities
which, since June 30, 1996, has ranged in size from $2.6 million to $3.3
million, all of which securities are classified as available for sale. There can
be no assurances that gains from the management of these securities will
continue to contribute to the Bank's interest income in future periods.
Non-Interest Expense. Noninterest expense increased by $649,000 to $2.9
million for the nine months ended March 31, 1998 compared to $2.2 million for
the nine months ended March 31, 1997. Of this increase, $238,000 related to
salaries and employee benefits, which rose 19.8%. The higher level of
compensation and employee benefits was attributable primarily to the opening of
a new full-service branch office in Franklin, Massachusetts during August 1997
as well as increased pension, group health and training expenses. 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 8% of the Common Stock issued in the Offering
and the Recognition and Retention Plan which, if implemented, would purchase an
amount of Common Stock equal to 4% of the Common Stock issued in the Offering,
would result in increased compensation and employee benefits expense as the
amortization of the ESOP loan and the Recognition Plan awards would be reflected
as compensation expense. See "Management of the Bank--Compensation of Officers
and Directors through Benefit Plans--Employee Stock Ownership Plan and Trust."
Other non-interest expenses increased $411,000, or 40.7%, to $1.4 million for
the nine months ended March 31, 1998 compared to the earlier year period
primarily due to increases in advertising and data processing expenses to
promote and process new bank products and services, and increases in occupancy
and equipment expenses attributable to the new full-service branch office in
Franklin, Massachusetts.
Income Taxes. Income tax expense for the nine months ended March 31,
1998 was $521,000, compared to $477,000 for the nine months ended March 31,
1997, resulting in effective tax rates of 35.3% and 37.1% for the respective
periods. The effective tax rate reflects the utilization by the Bank of a
securities investment subsidiary to substantially reduce state income taxes. See
"Business of the Bank--Subsidiary Activities."
Comparison of Operating Results for the Fiscal Years Ended June 30, 1997 and
June 30, 1996
General. Net income was $1.1 million for the twelve months ended June
30, 1997 ("Fiscal 1997") compared to $801,000 for the twelve months ended June
30, 1996 ("Fiscal 1996"). The increase in net income reflected an increase in
net interest income of $507,000, or 15.1% in Fiscal 1997 compared to Fiscal 1996
as well as an increase of $185,000, or 23.9%, in total noninterest income in
Fiscal 1997 compared to Fiscal 1996. The improvements in these areas more than
offset the increase in noninterest expense of $359,000, or 13.1%, in Fiscal 1997
compared to Fiscal 1996.
Interest Income. Interest income was $7.0 million in Fiscal 1997
compared to $6.1 million in Fiscal 1996, an increase of $935,000, or 15.3%. The
increase reflected an increase of $12.7 million in average interest earning
assets, which more than offset a slight decline in the yield on interest-earning
assets to 7.82% in Fiscal 1997 compared to 7.89% in Fiscal 1996. The increase in
interest income on the Bank's loan portfolio of $803,000, or 17.7%, reflected
substantially increased average balances of such loans to $63.0 million in
Fiscal 1997 compared to $51.8 million in Fiscal 1996. This more than offset any
lower yields paid on such assets in Fiscal 1997 resulting from lower
60
<PAGE>
market interest rates and the fact that a significant portion of the Bank's
mortgage loans was refinanced at lower fixed rates.
Interest Expense. Interest expense increased by $428,000, or 15.6%, to
$3.2 million in Fiscal 1997 compared to $2.7 million in Fiscal 1996. The
increase resulted primarily from substantially higher average balances of
certificate accounts, which increased to $39.0 million in Fiscal 1997 from $32.0
million in Fiscal 1996, as well as substantially higher average balances of
total borrowings, which increased to $2.2 million in Fiscal 1997 compared to
$365,000 in Fiscal 1996. However, because the rates paid on these categories of
interest-bearing liabilities decreased in Fiscal 1997 versus Fiscal 1996, the
average rate paid on total interest-bearing liabilities remained relatively
stable at 3.96% for Fiscal 1997 compared to 3.90% for Fiscal 1996.
Provision for Loan Losses. The Bank's provision for loan losses in
Fiscal 1997 decreased to $35,000 as compared to $93,000 in Fiscal 1996. The
decrease reflected the continued low level of nonperforming assets, which
decreased to 0.22% of the Bank's total assets at the end of Fiscal 1997 compared
to 0.99% of the Bank's total assets at the end of Fiscal 1996. Net loan
charge-offs in Fiscal 1997 amounted to $30,000 compared to $68,000 in Fiscal
1996. The allowance for loan losses was $475,000 at the end of Fiscal 1997,
compared to $470,000 at the end of Fiscal 1996.
Noninterest Income. Total noninterest income was $959,000 in Fiscal
1997 compared to $774,000 in Fiscal 1996, an increase of $185,000, or 23.9%. The
increase was attributable to modest increases in customer service fees and to
$493,000 in gains on sales of loans and securities available for sale in Fiscal
1997 compared to $308,000 in such gains in Fiscal 1996.
Noninterest Expense. Total noninterest expense was $3.1 million in
Fiscal 1997 compared to $2.7 million in Fiscal 1996, an increase of $359,000, or
13.1%. The increase reflected increases in salaries and employee benefits (up
$234,000 or 16.9%) and occupancy and equipment expenses (up $93,000 or 16.2%).
In addition, other general and administrative expenses increased by $187,000, or
56.8%, due to increases in supplies and ATM processing, as well as contribution
expenses, which increased due to the formation of the Bank's charitable
foundation. These increases were partially offset by a $158,000 gain on
foreclosed real estate in Fiscal 1997.
Income Taxes. Total income tax expense was $611,000 in Fiscal 1997
compared to $501,000 in Fiscal 1996. The effective tax rate was lower in 1997
(36.1%) than in 1996 (38.5%) due to the greater portion of 1997's net income
attributable to gains in securities trading, which were taxed at a lower rate
due to the Bank's Massachusetts security corporation.
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 $26.3 million, $14.5 million, and $13.2
million for the nine months ended March 31, 1998 and the twelve months ended
June 30, 1997 and 1996, respectively. These increases included $5.3 million,
$7.3 million and $11.9 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. However,
the Bank experienced a $15.2 million net deposit inflow for the nine months
ended March 31, 1998 and net deposit inflows of $11.7 million, and $11.6 million
for the twelve months ended June 30, 1997 and 1996, respectively. The Bank
expanded the use of borrowings from the FHLB by $9.8 million, $2.3 million, and
$98,000,
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during the nine months ended March 31, 1998 and the twelve months ended June 30,
1997 and 1996, respectively. At March 31, 1998, total borrowings from the FHLB
amounted to $12.4 million and the Bank had the capacity to increase that total
to $41.8 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, and debt securities. The levels of these assets are dependent on
the Bank's operating, financing, lending and investment activities during any
given period. At March 31, 1998, cash and due from banks, short-term
investments, and debt securities maturing within one year amounted to $12.6
million, or 9.6% of total assets.
At March 31, 1998, the Bank had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $13.8
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 March 31, 1998 amounted to $42.3 million. The Bank expects that
substantially all of the maturing certificate accounts will be retained by the
Bank at maturity.
At March 31, 1998, the Bank exceeded all of its regulatory requirements
with a Tier 1 capital of $9.5 million, or 7.78% of adjusted assets, which is
above the required level of $4.9 million, and total capital of $10.0 million, or
14.39% of risk-weighted assets, which is above the required level of $5.6
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 not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
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 March 31, 1998, 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
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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 Stock Company does not believe adoption of this
Statement will have any impact on its public financial reporting.
Employers' Disclosures about Pensions and Other Postretirement
Benefits. In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which standardizes the disclosure requirements for
pensions and other postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that the FASB
no longer considers as useful as when they were issued. This statement suggests
combined formats for presentation of pension and other postretirement benefit
disclosures. This statement is effective for fiscal years beginning after
December 15, 1997.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires that all derivatives be recognized at fair value as either assets or
liabilities on the balance sheet. If certain conditions are met, a derivative
may be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security or a foreign-currency-denominated forecasted transaction. The
accounting for changes in fair value of a derivative depends on the intended use
of the derivative and the resulting designation. This Statement generally
provides for matching the timing of a gain or loss recognition on the hedging
instrument with the recognition of (a) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (b) the
earnings effect of the hedged forecasted transaction. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application encouraged. Retroactive application to prior periods is
prohibited. The Bank does not generally use derivative instruments and therefore
the adoption of the Statement is not expected to have a material impact on the
financial statements of the Stock Company.
BUSINESS OF THE STOCK COMPANY
General
As part of the Reorganization, the Stock Company has been established
as a majority-owned subsidiary of the Mutual Company. The Stock 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 Stock Company will initially invest up to 50% of the
net proceeds primarily in short- and medium-term fixed-income securities. The
Stock Company also intends to fund the loan to the ESOP to enable the ESOP to
subscribe for up to 8% 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
Stock 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 Stock Company's operations. Initially, the Stock 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 Stock 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 Stock Company. The
Stock 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
Stock Company expands its business in the future.
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BUSINESS OF THE BANK
General
The Bank is a community-oriented stock 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, primarily in real estate mortgage
lending and various debt and equity securities. The Bank emphasizes the
origination of one- to four-family residential mortgage loans and commercial
real estate loans. The Bank also originates home equity loans, construction
loans, 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 towns of
Medway, Franklin, Medfield and Millis, all of which are located in Norfolk
County, a suburban area adjacent to the city of Boston. The Bank's deposits are
gathered from the general public primarily in these towns and surrounding
communities. The Bank's lending activities are concentrated primarily in Norfolk
County and nearby surrounding markets in the greater Boston metropolitan area.
Consistent with large metropolitan areas in general, the economy in the Bank's
market area is based on a mixture of service, manufacturing, wholesale/retail
trade, and state and local government. Maintaining operations in a large
metropolitan area serves as a benefit to the Bank in periods of economic growth,
while at the same time fosters significant competition for the financial
services provided by the Bank. Future growth opportunities for the Bank depend
in part on national economic factors, the future growth in the Bank's market
area, and the intensity of the competitive environment for financial
institutions.
Norfolk County has experienced population growth during the 1990s, with
the county showing a higher growth rate than the Commonwealth of Massachusetts
as a whole. Population growth has been supported by the outward expansion of the
greater Boston metropolitan area, with Norfolk County's proximity to Boston and
more affordable housing attracting a number of individuals wishing to maintain
jobs in greater Boston. Within Norfolk County, the town of Franklin in
particular has experienced considerable growth in recent years in population and
employment, and is one of the fastest growing towns in Massachusetts. The
increased demand for housing resulting from this growth has had a positive
impact on real estate values and on loan demand in the area in recent years.
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 one- to four-family residential real estate and commercial real
estate located in the Bank's primary lending area. The Bank also provides
financing for construction projects, home equity and second mortgage loans and
other consumer loans, and commercial business loans.
At March 31, 1998, the Bank's gross loan portfolio totaled $72.9
million, of which $45.7 million, or 62.77%, were one- to four-family residential
mortgage loans, and $12.1 million, or 16.67%, were commercial real estate loans.
Home equity loans were $5.2 million, or 7.15% of gross loans, construction loans
were $3.9 million, or 5.30% of gross loans, and commercial business loans were
$3.5 million, or 4.84% of gross loans at March 31, 1998.
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Loan Portfolio Composition. The following information relates to the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for unadvanced construction loans, deferred fees, and
premiums and discounts and allowances for loan losses) as of the dates
indicated.
<TABLE>
<CAPTION>
June 30,
March 31, ----------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family.............. $ 45,732 62.77% $ 47,196 69.91% $ 42,774 70.98%
Commercial....................... 12,148 16.67 8,342 12.36 5,860 9.72
Construction..................... 3,862 5.30 2,880 4.27 3,154 5.23
----------- -------- ----------- ------- ----------- -------
Total real estate loans...... 61,742 84.74 58,418 86.54 51,788 85.93
----------- -------- ----------- ------- ----------- -------
Other loans:
Consumer loans:
Collateral.................... 886 1.22 596 0.88 386 0.64
Home equity................... 5,209 7.15 4,574 6.78 4,271 7.09
Other......................... 1,495 2.05 1,362 2.02 1,128 1.87
----------- -------- ----------- ------- ----------- -------
Total consumer loans......... 7,590 10.42 6,532 9.68 5,785 9.60
Commercial business loans........ 3,525 4.84 2,554 3.78 2,695 4.47
----------- -------- ----------- ------- ----------- -------
Total other loans............ 11,115 15.26 9,086 13.46 8,480 14.07
----------- -------- ----------- ------- ----------- -------
Total gross loans............ 72,857 100.00% 67,504 100.00% 60,268 100.00%
======== ======= =======
Less:
Net deferred loan fees........ (103) (99) (100)
Deferred (income) premium..... 3 4 (31)
Allowance for loan losses..... (560) (475) (470)
----------- ----------- -----------
Total loans receivable, net.. $ 72,197 $66,934 $59,667
========== ======= =======
</TABLE>
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. The Bank relies on
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 and
commercial business loan customers have more than one loan outstanding with the
Bank. Construction loans are obtained primarily from builders who have an
established relationship with the Bank. Consumer loans are largely generated
through existing customers and walk-in customers. Loan generation is further
supported by advertising and community service by Bank employees.
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--Growth of the Bank's Commercial Business and Commercial Real Estate
Lending."
Loan Sales and Servicing. While the Bank has not originated for sale
large commercial real estate and commercial business loans, the Bank may
originate such loans for sale in the future to accommodate customers seeking
larger loans without taking on credit risks beyond policy guidelines.
The Bank's general practice has been to retain all one- to four-family
adjustable-rate residential mortgage loans and to sell one- to four-family
fixed-rate mortgage loans on a servicing-released basis. However, due to the
current limited demand for ARM loans and the potential for portfolio shrinkage
resulting from refinanced loans, the Bank's current policy is to retain in
portfolio 15-year fixed-rate one- to four-family residential mortgage loans
originated at interest rates of 7% or higher. To facilitate the sale of
fixed-rate one- to four-family residential mortgage loans, such loans are
generally underwritten to conform to secondary market guidelines. The Bank does
not service loans originated by other financial institutions.
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<PAGE>
Loan Purchases. To supplement originations of one- to four-family
residential mortgage loans, the Bank purchases adjustable-rate one- to
four-family mortgage loans secured by residential properties in the New England
area originated by other New England-based financial institutions. All purchased
loans are priced at market rates and must meet the underwriting standards
applied to loans originated by the Bank. Such loan purchases totaled $2.5
million for the nine months ended March 31, 1998 and $2.7 million and $2.8
million for the twelve months ended June 30, 1997 and 1996, respectively.
Historically, the Bank has purchased only whole loans and has not purchased
participations in loans originated by others.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
Nine Months
Ended March 31, Years Ended June 30,
--------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands)
Originations:
Real estate:
One- to four-family ............. $10,175 $ 6,319 $ 8,701 $10,260
Commercial ...................... 3,296 1,655 4,132 1,611
Construction .................... 2,837 3,732 4,227 3,352
Non-real estate:
Consumer ........................ 2,816 2,932 4,057 3,095
Commercial business ............. 2,314 1,395 2,658 1,729
------- ------- ------- -------
Total loans originated ............ 21,438 16,033 23,775 20,047
------- ------- ------- -------
Purchases:
Real estate:
One- to four-family ............. 2,490 2,670 2,670 2,826
Non-real estate:
Commercial business ............. -- -- -- 500(1)
------- ------- ------- -------
Total loans purchased ............. 2,490 2,670 2,670 3,326
------- ------- ------- -------
Sales and Repayments:
Real estate:
One- to four-family ............. 5,379 1,585 2,219 361
------- ------- ------- -------
Principal repayments .............. 13,196 12,671 16,990 11,109
------- ------- ------- -------
Total reductions .................. 18,575 14,256 19,209 11,470
------- ------- ------- -------
Net increase - gross loans ........ $ 5,353 $ 4,447 $ 7,236 $11,903
======= ======= ======= =======
- ------
(1) Consists of loans secured by leases on residential property.
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Loan Maturity and Repricing. The following table sets forth certain
information as of March 31, 1998, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than the period in which they contractually mature, and fixed-rate
loans are included in the period in which the final contractual repayment is
due. This table does not include prepayments on scheduled principal
amortizations.
<TABLE>
<CAPTION>
One Three Five Ten
Within Through Through Through Through Beyond
One Three Five Ten Twenty Twenty
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.............. $18,405 $10,404 $6,545 $2,789 $3,285 $4,305 $45,732
Commercial....................... 4,461 5,576 1,444 149 518 -- 12,148
Construction..................... 2,657 565 476 39 126 -- 3,862
------ ------ ------ ------ ------ ------ ------
Total real estate loans........ 25,523 16,544 8,464 2,977 3,929 4,305 61,742
Other loans
Consumer......................... 6,442 756 227 165 -- -- 7,590
Commercial business.............. 2,729 730 59 7 -- -- 3,525
------ ------ ------ ------ ------ ------ ------
Total loans.................... $34,694 $18,029 $8,750 $3,149 $3,929 $4,305 72,857
======= ======= ====== ====== ====== ======
Less:
Deferred loan origination fees (103)
Deferred premiums................ 3
Allowance for loan losses........ (560)
------
Net loans.................... $72,197
=======
</TABLE>
Prepayments and scheduled principal amortization totaled $13.2 million
for the nine months ended March 31, 1998 and $17.0 million and $11.1 million for
the years ended June 30, 1997 and 1996, respectively.
The following table sets forth at March 31, 1998, the dollar amount of
gross loans, net of unadvanced funds on loans, contractually due or scheduled to
reprice after March 31, 1999, and whether such loans have fixed interest rates
or adjustable interest rates. This table does not include prepayments on
scheduled principal amortizations.
Due After March 31, 1999
---------------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
Real estate loans:
One- to four-family ................... $12,667 $14,660 $27,327
Commercial ............................ -- 7,687 7,687
Construction .......................... -- 1,205 1,205
------- ------- -------
Total real estate loans ............. 12,667 23,552 36,219
Other loans:
Consumer loans ........................ 1,139 8 1,148
Commercial business loans ............. 557 239 796
------- ------- -------
Total loans receivable .............. $14,363 $23,800 $38,163
======= ======= =======
The Bank originates commercial real estate loans both as fixed-rate
loans and adjustable-rate loans. Typical terms for adjustable-rate commercial
real estate loans provide for a 3-year repricing term with a 20-year
amortization. Fixed-rate commercial real estate loans generally are amortized
for up to 30 years. See "--Commercial Real Estate Mortgage Lending." Depending
on the size of the loan and the term for which it is fixed, the Bank may borrow
from
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<PAGE>
the FHLB for a term that matches the fixed interest rate period in an amount
equal to all or part of the loan at the time of origination.
One- to Four-Family Mortgage Lending. 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 ranging
from fifteen to thirty years. One- to four-family mortgage loan originations are
generally obtained by the Bank through relationships established with real
estate brokers within the Bank's market area and by personnel at the Bank's five
operating offices. Currently, the Bank originates fixed-rate one- to four-family
mortgage loans for sale in the secondary mortgage market, except for 15-year
fixed-rate mortgage loans originated at an interest rate of 7% or higher.
Fixed-rate loans sold by the Bank are generally sold on a servicing released
basis. At March 31, 1998, the Bank's one- to four-family mortgage loans totaled
$45.7 million, or 62.77% 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 "5-1" loan (for
first-time home buyers) where the interest rate is fixed for the first five
years and is adjusted on an annual basis thereafter. The interest rates on the
adjustable-rate loans are indexed to the comparable-term U.S. Treasury
securities rate, with the initial rate of interest being dependent upon the
length of the repricing term (i.e., a higher rate is charged for loans with an
initial three-year repricing term). Initial rates on ARM loans are typically
discounted from the fully-indexed rate. The one year adjustable-rate loan and
the 5-1 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 March 31, 1998, the interest
rates offered by the Bank on the three types of adjustable-rate loans ranged
from 0.875 basis points to 1.375 basis points above the Index rates.
The volume and type of adjustable-rate loans originated by the Bank are
affected by market factors such as interest rates, 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, with some exceptions
on adjustable-rate loans originated for retention in the Bank's loan portfolio.
Loans are originated in amounts up to 95% of the lower of the appraised value or
the 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.
Commercial Real Estate Mortgage Lending. Origination of loans secured
by commercial real estate is the Bank's most significant area of lending
activity after one- to four-family residential mortgage lending. The loans are
generally secured by office buildings, office warehouses, apartments and gas
stations located in the Bank's primary market area. At March 31, 1998,
commercial real estate mortgage loans totaled $12.1 million, or 16.67% of gross
loans, an increase of $6.3 million, or 107.3%, since June 30, 1996.
Pursuant to the Bank's underwriting policies, a number of factors are
considered before a commercial real estate loan is made. The qualifications and
financial condition of the borrower, including credit history, profitability and
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.
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<PAGE>
According to Bank policy, multi-family mortgage loans may be made in an
amount up to 80% 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%. The appraisal process takes into consideration geographic location,
comparable sales, vacancy rates, if applicable, operating expenses and historic,
current and projected economic conditions. Appraisals are obtained from
independent licensed and certified fee appraisers for all loan requests.
Commercial real estate loans are offered both as adjustable-rate and
fixed-rate loans. Typical terms for adjustable-rate loans provide for a
three-year repricing term, with a 20-year amortization. Fixed-rate commercial
real estate loans are amortized for up to 30 years. The adjustable-rate is
generally tied to the Prime Rate as published in the Wall Street Journal. The
Bank from time to time will partially fund fixed-rate loans through fixed-rate
borrowings from the FHLB of Boston obtained for periods that approximate the
fixed-rate terms of the loans originated.
Many of the Bank's commercial real estate borrowers have done business
with the Bank for many years and have more than one loan outstanding. The Bank
generally originates commercial real estate loans of $150,000 to $500,000, a
range the Bank views as being too small for larger commercial banks. At March
31, 1998, the largest commercial real estate borrower had aggregate loans
outstanding of $748,000, or 7.9% of core capital. Including this borrower, there
were four borrowers each with aggregate commercial loans outstanding at March
31, 1998 of $500,000 or more, the cumulative total of which was $2.5 million, or
3.4% of gross loans. At March 31, 1998, all of these loans were performing in
accordance with their contractual terms.
Loans secured by commercial real estate 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 commercial real
estate 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--Growth of the Bank's Commercial Business and Commercial Real Estate
Lending."
The Bank intends to emphasize its 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. In anticipation of the
growth of this portion of the loan portfolio, the Bank has recently hired an
experienced banker with more than 18 years of corporate credit analysis and
lending experience to lend its commercial loan department.
Construction Lending. The Bank provides funding for construction
projects involving residential properties within its primary lending area. These
loans may be for the construction of new properties or the rehabilitation of
existing properties. Most of the Bank's construction lending activities consist
of construction loans on pre-sold property. The Bank underwrites
construction-permanent loans for one- to four-family property according to its
own internal guidelines for adjustable-rate mortgages. For this type of
construction loan, the Bank will lend up to 90% 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 80% of the lesser of completed
value or project cost (and up to 70% for speculative loans). Typically, loan
proceeds are disbursed in increments as construction progresses as determined by
property inspections.
At March 31, 1998, total construction loans outstanding amounted to
$3.9 million, or 5.30% of gross loans, and the Bank had committed to fund
additional construction loans totaling $1.5 million.
Construction 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.
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<PAGE>
Home Equity Lending. The Bank offers home equity lines of credit and
fixed-term loans secured by one- to four-family owner-occupied properties in its
primary lending area. Loans are offered in amounts up 80% of the value of the
property, less the first lien. Values are determined by a recent tax bill from
the town where the property is located showing the assessed value of the
property. Fixed-term home equity loans are written at fixed rates, and are
amortized for terms of up to 10 years, while home equity lines of credit are
written with adjustable rates, and may be extended for up to 15 years (with a 5
year draw period and a 10 year repayment period). At March 31, 1998, the Bank
had $5.2 million in home equity loans, or 7.15% of gross loans.
Commercial Loans. The Bank originates both secured and unsecured
commercial business loan to businesses located in the Bank's primary lending
area. Commercial business loans are originated as both fixed-rate loans and
adjustable-rate loans set at a percentage above the Prime Rate as published in
the Wall Street Journal. Fixed-rate loans generally are originated for terms of
seven years or less. The Bank intends for commercial business lending (and,
specifically, the Bank's new "Business One" loan product, which is a line of
credit available for commercial loan customers seeking a transaction account
with the Bank) to be an area of growth for the Bank. At March 31, 1998,
commercial business loans totaled $3.5 million, or 4.84% of gross loans.
Consumer Loans. The Bank's origination of consumer loans, other than
home equity loans, has been fairly limited. This consumer loan portfolio
includes direct automobile loans and various other types of installment loans,
including loans secured by deposits, as well as a modest amount of revolving
credit balances. Consumer lending is expected to remain a limited part of the
Bank's overall lending program. At March 31, 1998, consumer loans other than
home equity loans totaled $2.4 million, or 3.27% of gross loans.
Loan Approval Procedures and Authority. The Board of Directors annually
approves the lending policies and loan approval limits for the Bank as well as
the independent appraisers used by the Bank. Loans may be approved by loan
officers, management, the Loan Committee or the Board of Directors, depending on
the type and size of the loan and the borrower's aggregate loan balances with
the Bank. Where the borrower's aggregate loan balances with the Bank are
$250,000 or less, individual loan officers may approve loans, and where the
borrower's aggregate loan balances with the Bank are between $250,000 and
$500,000, the loan request must be approved by the Loan Committee. The Loan
Committee is made up of the President, Senior Loan Officer, Vice President of
Commercial Lending and the head of the loan servicing department. Where the
borrower's aggregate borrowings with the Bank exceed $500,000, the loan request
must be approved by the Board of Directors.
The Bank requires an environmental site assessment to be performed by
an independent professional for all non-residential mortgage loans. It is also
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
loan policies must be made in accordance with the limitations set out in each
policy. Typically, the exception authority ranges from the Senior Loan Officer
to the Board of Directors, depending on the size and type of loan involved.
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 real
estate, risks also may be substantial for loans secured by 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.
70
<PAGE>
The Bank believes its procedures regarding the assessment of
environmental risk are adequate and, as of March 31, 1998, 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. The Senior Loan Officer reviews the status of all
delinquent loan on a weekly basis. The actions taken by the Bank with respect to
delinquencies vary depending upon the nature of the loan and the period of
delinquency. Notices are generated by the Bank's service bureau when a loan is
five and twelve days past due. In addition, once a loan becomes fifteen days
past due, the borrower is contacted by phone in an attempt to bring the loan up
to date. Collection letters are used in addition to and as a supplement to
telephone calls. Typically, collection letters are sent out when a loan becomes
fifteen days overdue, and again at thirty days. Where allowed, late charges are
assessed once a loan becomes past due the required number of days.
On loans secured by one- to four-family residences, the Bank attempts
to work out a payment schedule with the borrower in order to avoid foreclosure.
If a satisfactory payment plan is not arranged, the Bank refers the loan to
legal counsel and foreclosure procedures are initiated after the 90th day of
delinquency. 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 commercial real
estate properties, the Bank also seeks to reach a satisfactory payment plan so
as to avoid foreclosure. If a satisfactory pay plan is not arranged, the Bank
refers the loan to legal counsel for foreclosure after the loan becomes ninety
days past due. Prior to any 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 Loan Committee on a quarterly
basis, taking into consideration each property in the portfolio and current real
estate market conditions. At March 31, 1998, the Bank had no OREO.
Classified Assets. Consistent with regulatory guidelines, the Bank
provides for the classification of loans and other assets considered to be of
lesser quality. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by 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
obligors 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 assets 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 otherwise possess weaknesses are designated "Special Mention."
When the Bank classifies problem assets as either Substandard or
Doubtful, it establishes general valuation allowances or "loss reserves" in an
amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which,
71
<PAGE>
unlike specific allowances, have not been allocated to particular problem
assets. When the Bank classifies problem assets as "Loss," it is required either
to establish a specific allowance for losses equal to 100% of the amount of
assets so classified, or to charge-off such amount. The Bank's determination as
to the classification of its assets and the amount of its valuation allowance is
subject to review by its regulatory agencies, which can order the establishment
of additional general or specific loss allowances. The Bank reviews its
portfolio monthly to determine whether any assets require classification in
accordance with applicable regulations.
On the basis of management's review of its assets, at March 31, 1998,
the Bank had classified a total of $688,000 of its loans and other assets as
follows:
March 31, 1998
--------------
(In Thousands)
Special Mention............................. $ --
Substandard................................. 661
Doubtful assets............................. 27
Loss assets................................. --
---------
Total.................................. $ 688
=========
General allowance........................... $ 434
=========
Specific allowance.......................... $ 126
=========
Charge-offs................................. $ --
=========
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.
72
<PAGE>
Non-Accrual Loans and Non-Performing Assets. The table below sets forth
the amounts and categories of non-performing assets in the Bank's loan
portfolio. Loans are placed on non-accrual status when the collection of
principal and/or interest become doubtful. For all years presented, the Bank has
had no troubled debt restructurings (which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates). Foreclosed assets include assets acquired in
settlement of loans.
June 30,
March 31, ---------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family real estate ............. $315 $193 $424
Commercial real estate ...................... -- -- --
Construction ................................ -- -- --
Consumer .................................... -- -- 25
Commercial business ......................... 28 -- 449
---- ---- ----
Total ..................................... 343 193 898
---- ---- ----
Accruing loans delinquent
more than 90 days:
One- to four-family real estate ............. 172 334 29
Commercial real estate ...................... -- -- --
Construction ................................ -- -- --
Consumer .................................... 5 -- 17
Commercial business ......................... 146 2 --
---- ---- ----
Total ..................................... 323 336 46
---- ---- ----
Foreclosed assets:
One- to four-family real estate ............. -- -- --
Commercial family real estate ............... -- -- --
Construction ................................ -- 37 --
Consumer .................................... -- -- --
Commercial business ......................... -- -- --
---- ---- ----
Total ..................................... -- 37 --
---- ---- ----
Total non-performing assets
and delinquent loans ......................... $666 $566 $944
==== ==== ====
Total as a percentage of total assets ......... 0.51% 0.54% 1.04%
==== ==== ====
For the year ended June 30, 1997 and for the nine months ended March
31, 1998, gross interest income which would have been recorded had non-accruing
loans been current in accordance with their original terms amounted to $15,000
and $26,000, respectively. The amounts that were included in interest income on
such loans were $9,000 and $10,000 for the year ended June 30, 1997, and for the
nine months ended March 31, 1998, respectively.
As of March 31, 1998, there were no other loans not included in the
table above where known information about the possible credit problems of
borrowers caused management to have doubt as to the ability of the borrower to
comply with present loan repayment terms.
73
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
------------------------------------------- ---------------------------------------
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>
One- to four-family real estate .......... 5 $522 4 $403 3 $431 5 $443
Commercial real estate ................... 1 50 1 137 1 138 -- --
Construction ............................. -- -- -- -- -- -- -- --
Consumer loans ........................... 2 14 1 5 5 28 -- --
Commercial business ...................... 2 6 2 37 -- -- 1 2
---- ---- ---- ---- ---- ---- ---- ----
Total ................................. 10 $592 8 $582 9 $597 6 $445
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to total loans .......... 0.81% 0.80% 0.89% 0.66%
==== ==== ==== ====
</TABLE>
June 30, 1996
------------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollars in Thousands)
One- to four-family real estate 4 $ 319 3 $ 287
Commercial real estate......... -- -- 1 449
Construction................... 1 37 -- --
Consumer loans................. 11 60 5 42
Commercial business............ 1 5 -- --
----- ------ ------ ------
Total....................... 17 $ 421 9 $ 778
===== ====== ====== ======
Delinquent loans to total loans 0.70% 1.29%
====== ======
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 and estimable based on information currently
known to management. See "--Delinquent Loans, Other Real Estate Owned and
Classified Assets--Classified Assets."
74
<PAGE>
The following table sets forth activity in the Bank's allowance for
loan losses for the periods set forth in the table.
Nine Months
Ended March 31, Years Ended June 30,
--------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ........ $ 475 $ 470 $ 470 $ 445
Charge-offs:
One- to four-family ................. -- -- -- --
Commercial real estate .............. -- -- -- --
Construction ........................ -- -- -- --
Consumer ............................ 11 20 20 --
Commercial business ................. -- -- 74 88
----- ----- ----- -----
11 20 94 88
----- ----- ----- -----
Recoveries:
One- to four-family ................. -- 20 20 --
Commercial real estate .............. -- -- -- --
Construction ........................ -- -- -- --
Consumer ............................ 6 7 8 17
Commercial business ................. 15 27 36 3
----- ----- ----- -----
21 54 64 20
----- ----- ----- -----
Net charge-offs (recoveries) .......... (10) (34) 30 68
Additions charged to earnings ......... 75 35 35 93
----- ----- ----- -----
Balance at end of period .............. $ 560 $ 539 $ 475 $ 470
===== ===== ===== =====
Ratio of net charge-offs
(recoveries) during the period to
average loans outstanding during
the period .......................... (0.01)% (0.05)% 0.05% 0.13%
===== ===== ===== =====
Ratio of net charge-offs
(recoveries) during the period to
average non-performing assets ........ (3.62)% (4.97)% 5.35% 7.01%
===== ===== ===== =====
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------
March 31, 1998 1997 1996
---------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
real estate.............. $ 206 $45,732 62.77% $199 $47,196 69.91% $267 $42,774 70.98%
Commercial real estate.... 158 12,148 16.67 117 8,342 12.36 100 5,860 9.72
Construction.............. 12 3,862 5.30 7 2,880 4.27 8 3,154 5.23
Home equity............... 12 5,209 7.15 11 4,574 6.78 11 4,271 7.09
Consumer.................. 7 2,381 3.27 7 1,958 2.90 6 1,514 2.51
Commercial business....... 67 3,525 4.84 28 2,554 3.78 63 2,695 4.47
Unallocated............... 98 -- -- 106 -- -- 15 -- --
------- ------ ------ ---- ------- ------ ---- ------ ------
Total................ $ 560 $72,857 100.00% $475 $67,504 100.00% $470 $60,268 100.00%
======= ======= ====== ==== ======= ====== ==== ======= ======
</TABLE>
75
<PAGE>
Investment Activities
The investment policy of the Bank is reviewed and approved by the Board
of Directors on an annual basis. The Bank views its investment portfolio as an
alternative earning asset vehicle into which to deploy excess funds as well as
to assist in interest-rate risk management. Compliance with the Bank's
investment policy is the responsibility of the President. Investment purchases
are initiated 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 Directors 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 but does not allow the use of interest rate swaps, options and
futures. The Bank's current investment strategy has emphasized the purchase of
U.S. Government and Agency obligations and corporate debt obligations generally
maturing within ten years.
At March 31, 1998, the Bank had $44.9 million, or 34.2% of total
assets, in securities consisting primarily of U.S. Government and Agency
obligations ($29.6 million), corporate obligations ($2.5 million), certificates
of deposit ($1.5 million) and marketable equity securities ($3.3 million).
Investment in mortgage-backed securities totaled $7.3 million at that date. Also
included in investments is $723,000 of FHLB stock. 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. At March 31, 1998, all of the Bank's securities, except for
certificates of deposit and FHLB stock were designated as available for sale.
The net unrealized gain on securities classified as available for sale was
$677,000 at March 31, 1998.
U.S. Government and Agency Obligations. At March 31, 1998, the Bank's
U.S. Government and Agency securities portfolio totaled $29.6 million, all of
which was classified as available for sale. This portfolio consists primarily of
medium-term (maturities of 5 to 10 years) securities. The Bank's current
investment strategy, however, is to maintain investments in such instruments for
liquidity purposes, as collateral for borrowings, and for prepayment protection.
The Bank's Agency debentures are callable on a semi-annual basis following a
holding period of twelve months. The Bank generally does not purchase structured
notes and there were no structured notes in the Bank's portfolio at March 31,
1998.
Corporate Obligations and Certificates of Deposit. At March 31, 1998,
the Bank's portfolio of corporate debt obligations and certificates of deposit
totaled $2.5 million and $1.5 million, respectively. The Bank's policy generally
requires that investment in corporate debt obligations be limited to corporate
bonds with an "A" rating or better by at least one nationally recognized rating
service at the time of purchase.
Marketable Equity Securities. At March 31, 1998, the Bank's marketable
equity securities portfolio totaled $3.3 million, all of which was in common
stocks. Since June 30, 1996, the Bank's marketable equity securities portfolio
has ranged from $2.6 million to $3.3 million. While the Bank has no policy
limiting the aggregate carrying value of marketable equity securities,
applicable regulations limit the aggregate carrying value of such securities to
100% of the Bank's retained earnings. However, management has no present
intention of increasing the size of this portfolio. The Bank purchases
marketable equity securities as growth investments that can provide the
opportunity for capital appreciation 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 $1.8 million for the nine months ended March
76
<PAGE>
31, 1998 and $3.0 million and $2.6 million for the twelve months ended June 30,
1997 and 1996, respectively. At March 31, 1998, pre-tax net unrealized gains on
common stocks amounted to $550,000. See "Regulation--Activities and Investments
of Insured State-Chartered Banks."
Mortgage-Backed Securities. At March 31, 1998, the Bank's
mortgage-backed securities totaled $7.3 million, all of which were classified as
available for sale. Mortgage-backed securities are generally purchased by the
Bank as a means to deploy excess liquidity at more favorable yields than other
investment alternatives. In addition, mortgage-backed securities generate
positive interest rate spreads with minimal administrative expense and lower the
Bank's overall credit risk due to the guarantees on such securities provided by
GNMA, FNMA and FHLMC. The Bank generally does not invest in collateralized
mortgage obligations and the Bank's portfolio of mortgage-backed securities
included no collateralized mortgage obligations at March 31, 1998. At March 31,
1998, the Bank's mortgage-backed securities portfolio had a weighted average
yield of 5.90%.
Mortgage-backed securities are created by pooling individual mortgages
and bear an interest rate that is less than the interest rate on the underlying
mortgages. Mortgage-backed securities typically represent a participation
interest in a pool of single family or multi-family mortgages, although the Bank
generally purchases only mortgage-backed securities backed by single family
mortgage loans. The issuers of such securities (generally U.S. Government
agencies and Government sponsored enterprises, including FNMA, FHLMC and GNMA)
pool and resell the participation interests in the form of securities to
investors and guarantee the payment of principal and interest to these
investors. Investments in mortgage-backed securities involve a risk that actual
prepayments on the underlying mortgage loans will be greater than estimated over
the life of the security, which may require adjustments to the amortization of
any premium or accretion of any discount relating to such instruments, thereby
affecting the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. Finally, the market value of such
securities may be adversely affected by changes in interest rates.
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
March 31, ----------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and
Agency securities.............. $ 29,504 79.89% $ 16,823 74.09% $11,024 57.47%
Other debt securities............. 2,503 6.78 1,615 7.11 5,129 26.74
------- -------- -------- ------- -------- -------
Total debt securities........... 32,007 86.67 18,438 81.20 16,153 84.21
Marketable equity securities........ 2,701 7.31 3,232 14.23 2,573 13.42
------- -------- -------- ------- -------- -------
Total debt and equity
securities..................... 34,708 93.98 21,670 95.43 18,726 97.63
FHLB stock.......................... 723 1.96 538 2.37 455 2.37
Certificates of deposit............. 1,500 4.06 500 2.20 -- --
------- -------- -------- ------- -------- -------
Total investment securities.. $ 36,931 100.00% $22,708 100.00% $19,181 100.00%
======== ======== ======== ======= ======== =======
Other interest-earning assets:
Bank Liquidity Fund............... $ 25 0.39% $ 1,316 20.87% $ 720 27.72%
Federal funds sold................ 6,375 99.61 4,989 79.13 1,877 72.28
------- -------- -------- ------- -------- -------
Total other interest-earning
assets........................ $ 6,400 100.00% $ 6,305 100.00% $ 2,597 100.00%
======= ======== ======== ======= ======= =======
</TABLE>
77
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
March 31, ----------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA.............................. $ 327 4.48% $ 378 13.80% $ 427 20.34%
FNMA.............................. 5,894 80.74 984 35.91 -- --
FHLMC............................. 1,003 13.74 1,371 50.04 1,658 78.99
------- -------- -------- ------- -------- -------
7,224 98.96 2,733 99.74 2,085 99.33
Unamortized premium, net............ 76 1.04 7 0.26 14 0.67
------- -------- -------- ------- -------- -------
Total mortgage-backed securities.. $ 7,300 100.00% $ 2,740 100.00% $ 2,099 100.00%
======== ======== ======== ======= ======== =======
</TABLE>
The following table sets forth certain information regarding the
amortized cost and market values of the Bank's securities, at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
March 31, 1998 1997 1996
-------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and
Agency securities............... $ 29,504 $29,638 $ 16,823 $16,642 $11,024 $10,809
Other debt securities............. 2,503 2,491 1,615 1,613 5,129 5,114
------- -------- -------- ------- -------- -------
Total debt securities......... 32,007 32,129 18,438 18,255 16,153 15,923
Marketable equity securities........ 2,701 3,251 3,232 3,696 2,573 2,803
------- -------- -------- ------- -------- -------
Total debt and equity
securities...................... 34,708 35,380 21,670 21,951 18,726 18,726
FHLB stock.......................... 723 723 538 538 455 455
Certificates of deposit............. 1,500 1,500 500 500 -- --
------- -------- -------- ------- -------- -------
Total investment securities... 36,931 37,603 22,708 22,989 19,181 19,181
-------- -------- ------- -------- -------
Mortgage-backed securities:
GNMA.............................. 325 326 375 368 424 408
FNMA.............................. 5,965 5,965 980 987 -- --
FHLMC............................. 1,010 1,014 1,385 1,390 1,675 1,668
------- -------- -------- ------- -------- -------
Total mortgage-backed
securities.................. 7,300 7,305 2,740 2,745 2,099 2,076
------- -------- -------- ------- -------- -------
Net unrealized (losses) gains on
available-for-sale securities..... 677 286 (23)
------- -------- --------
Total securities.................... $44,908 $ 44,908 $ 25,734 $25,734 $ 21,257 $21,257
======= ======== ======== ======= ======== =======
</TABLE>
78
<PAGE>
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities portfolio as of March 31, 1998.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------------------------------------------
More Than One More Than Five More Than
One Year or Less Year to Five Years Years to Ten Years Ten Years Total
-------------------- ------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Debt securities
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agency securities............ $ -- --% $ 2,000 6.63% $25,504 6.87% $ 2,000 7.55% $29,504 6.90%
Other debt securities........ 500 5.25 1,000 6.13 1,003 6.91 -- -- 2,503 6.26
----- ------- ------- ------- -------
Total debt securities...... 500 5.25 3,000 6.46 26,507 6.87 2,000 7.55 32,007 6.85
Marketable equity
securities.................. -- -- -- -- -- -- 2,701 2.52 2,701 2.52
FHLB stock.................... -- -- -- -- -- -- 723 6.40 723 6.40
Certificates of deposit....... 1,000 5.80 500 6.40 -- -- -- -- 1,500 6.00
----- ------- ------- ------- -------
Total investment
securities............... 1,500 5.62 3,500 6.45 26,507 6.87 5,424 4.89 36,931 6.70
----- ------- ------- ------- -------
Mortgage-backed securities:
GNMA......................... $ -- -- $ -- -- $ -- -- $ 325 6.07 $ 325 6.07
FNMA......................... -- -- -- -- 1,306 6.86 4,659 5.36 5,965 5.69
FHLMC........................ 474 7.22 478 6.63 -- -- 58 10.00 1,010 7.10
----- ------- ------- ------- -------
Total mortgage-backed
securities................. 474 7.22 478 6.63 1,306 6.86 5,042 5.46 7,300 5.90
----- ------- ------- ------- -------
Total securities.............. $1,974 6.00% $ 3,976 6.47% $27,813 6.87% $10,466 5.17% $44,231 6.57%
====== ======= ======= ======= =======
</TABLE>
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 deposit accounts (referred to in the aggregate
as "transaction accounts") and certificate of deposit accounts. The Bank offers
Individual Retirement Accounts ("IRAs") and other qualified plan accounts.
For the nine months ended March 31, 1998, the Bank had $98.1 million in
total average deposits, of which $50.6 million, or 51.5%, were transaction
accounts. Of the $49.8 million of certificate of deposit accounts at March 31,
1998, $42.3 million, or 84.9% 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 communities surrounding
its five branch offices in Norfolk County. 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.
In addition, the Bank has actively marketed its core deposit products to elderly
customers in the Bank's market area through the organization of travel clubs
designed to promote savings by the Bank's senior citizen customers. Finally, the
Bank has emphasized the acquisition of customers dissatisfied with the less
personalized and more costly services provided by recently merged financial
institutions. 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,
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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.
Nine Months
Ended March 31, Years Ended June 30,
---------------------- ----------------------
1998 1997 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
Beginning balance ...... $ 92,897 $ 81,189 $ 81,189 $ 69,561
Deposits ............... 458,176 334,854 473,815 354,367
Withdrawals ............ 445,751 329,641 465,157 345,463
Interest credited ...... 2,734 2,238 3,050 2,724
-------- -------- -------- --------
Ending balance ......... $108,056 $ 88,640 $ 92,897 $ 81,189
======== ======== ======== ========
Net increase ........... $ 15,159 $ 7,451 $ 11,708 $ 11,628
======== ======== ======== ========
Percent increase ....... 16.32% 9.18% 14.42% 16.72%
======== ======== ======== ========
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The following tables set 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>
For the Nine Months
Ended March 31, For the Year Ended June 30,
--------------------------------- ---------------------------------
1998 1997
--------------------------------- ---------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts........... $ 8,806 8.97% 2.76% $ 7,854 9.28% 2.86%
Savings accounts................ 21,550 21.96 2.53 20,637 24.39 2.52
NOW accounts.................... 12,249 12.48 1.34 10,429 12.33 1.29
Non-interest-bearing
accounts....................... 7,956 8.11 -- 6,638 7.85 --
------- ----- ------- -----
Total non-certificate
accounts.................... 50,561 51.52 1.88 45,558 53.85 1.93
------- ----- ------- ------
Certificates of deposit:
Less than six months............ 8,289 8.45 5.44 6,468 7.65 5.10
Over six through 12 months...... 20,804 21.20 5.74 15,347 18.14 5.52
Over 12 through 24 months....... 13,985 14.25 5.50 12,185 14.40 5.65
Over 24 months.................. 4,499 4.58 6.16 5,042 5.96 6.01
------- ------- ------- ------
Total certificate accounts.... 47,577 48.48 5.66 39,042 46.15 5.56
------- ------- ------- ------
Total average deposits.... $98,138 100.00% 3.71% $ 84,600 100.00% 3.61%
======= ======= ======= ======
Certificates over $100,000.... $ 7,798 5.76% $ 6,198 5.73%
======= ========
</TABLE>
For the Year Ended June 30,
-----------------------------------
1996
-----------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
------- -------- ----
Money market accounts........... $ 8,272 11.05% 2.77%
Savings accounts................ 19,847 26.51 2.53
NOW accounts.................... 9,900 13.22 1.56
Non-interest-bearing accounts... 4,825 6.45 --
------- -----
Total non-certificate
accounts................... 42,844 57.23 2.07
Certificates of deposit:
Less than six months............ 4,828 6.45 5.28
Over six through 12 months...... 12,525 16.73 5.93
Over 12 through 24 months....... 9,337 12.47 5.73
Over 24 months.................. 5,327 7.12 5.73
------- -----
Total certificate accounts... 32,017 42.77 5.74
------- -----
Total average deposits... $ 74,861 100.00% 3.64
======== ======
Certificates over $100,000... $ 3,829 5.98%
========
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<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
1998.
<TABLE>
<CAPTION>
Maturity
----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $11,106 $12,386 $12,176 $ 6,353 $42,021
Weighted average rate ................ 5.73% 5.72% 5.62% 5.55% 5.67%
Certificates of deposit of $100,000 or more 2,290 2,233 2,080 1,163 7,766
Weighted average rate ................ 5.83% 5.76% 5.68% 5.92% 5.78%
Total certificates of deposit ............. $13,396 $14,619 $14,256 $ 7,516 $49,787
======= ======= ======= ======= =======
</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 March 31, 1998,
the Bank had $12.4 million in outstanding advances from the FHLB and had the
capacity to increase that amount to $41.8 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 the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
Nine Months
Ended March 31, Years Ended June 30,
-------------------- ---------------------
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands)
Maximum balance ........ $14,451 $ 2,641 $ 3,401 $ 833
Average balance ........ $ 5,648 $ 2,003 $ 2,161 $ 365
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
June 30,
March 31, ------------------
1998 1997 1996
(Dollars in Thousands)
FHLB advances ................... $12,404 $2,622 $369
Weighted average interest
rate of FHLB advances .......... 5.27% 5.69% 5.76%
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Subsidiary Activities
Medway Securities Corp. Medway Securities Corp. ("Medway") is a
wholly-owned subsidiary of the Bank established in 1994 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 Medway'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 March 31, 1998, Medway had total assets of $22.5 million, virtually all of
which were in investment securities.
Franklin Village Security Corp. Franklin Village Security Corp. ("Franklin
Village") is a wholly-owned subsidiary of the Bank established in 1997. Franklin
Village is also a Massachusetts security corporation and was formed for the
purpose of buying, selling and holding investment securities on its own behalf
and not as a broker. At March 31, 1998, Franklin Village had total assets of
$3.0 million, virtually all of which were in investment securities.
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, insurance companies and other
financial service companies. Its most direct competition for deposits has
historically come from commercial banks, savings banks, and savings and loan
associations. 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 they 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. Based on information currently available, management
does not believe that significant additional costs will be incurred in
connection with the year 2000 issue.
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<PAGE>
Properties
The Bank currently conducts its business through five full service
banking offices. The following table sets forth the Bank's offices at March 31,
1998.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Leasehold
Date of Lease Improvements
Location Description Year Opened Owned/Leased Expiration At March 31, 1998
- ------------------------- ------------- ------------- ------------- ------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
81 Main Street Main Office 1980 Owned -- $625
Medway, MA
1098 Main Street Branch Office 1962 Owned -- 128
Millis, MA
238 Main Street Branch Office 1990 Leased 1/30/99 --
Medfield, MA
1000 Franklin Village Drive Branch Office 1995 Leased 9/30/08 10
Franklin, MA
281A East Central Street Branch Office 1997 Leased 5/30/02 185
Franklin, MA
</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 March 31, 1998, the Bank had 50 full-time equivalent employees.
The employees are not represented by a collective bargaining unit and the Bank
considers its relationship with its employees to be good. See "Management of the
Bank--Compensation of Officers and Directors through Benefit Plans" for a
description of certain compensation and benefit programs offered to the Bank's
employees.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Mutual Company, the Stock Company and the Bank are 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
these entities.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a fiscal year ending June 30 for filing its consolidated federal income
tax returns.
Bad Debt Reserves. The Bank is permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions can, within
specified formula limits, be deducted in arriving at the Bank's taxable income.
In addition, the 1996 Act requires the recapture (over a six year period) of the
excess of tax bad debt
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<PAGE>
reserves accumulated after October 31, 1988. The amount of such reserve subject
to recapture by the Bank as of March 31, 1998 was $266,000.
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 June 30, 1996, the Bank's total federal pre-1988
reserve was $1.1 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 March 31, 1998, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Stock 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 Stock Company. As such, the Mutual Company will
not be permitted to file a consolidated federal income tax return with the Stock
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.
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 11.32% of its net income currently and
declining in increments to 10.50% for the fiscal year ending June 30, 2000. In
addition, the Bank's two wholly owned subsidiaries are both securities
corporations and, accordingly, are 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 Stock Company may 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.
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<PAGE>
REGULATION
General
The Bank is a Massachusetts-chartered stock 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 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 of Boston and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System. As
bank holding companies, the Mutual Company is and the Stock Company will be
subject to regulation by the FRB and the Division and 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 Stock Company, or the Mutual Company. Certain of the regulatory requirements
applicable to the Bank, the Stock 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.
Parity Regulation. Massachusetts regulation on parity with national
banks establishes procedures allowing state-chartered banks to exercise
additional or more flexible parallel powers granted to national banks under
federal law which are otherwise not permitted under state law. Under the parity
regulation, a bank which is either "adequately capitalized" or "well
capitalized," which has not been informed in writing by the Commissioner or an
applicable federal bank regulatory agency that it has been designated to be in
"troubled condition," and which has received as least a "satisfactory" CRA
rating (as defined below) during its most recent examination by the Commissioner
or other applicable federal banking regulatory agency may engage in certain
activities in which Massachusetts chartered banks ordinarily may not engage.
Such activities include, but are not limited to, the establishment of temporary
branch offices, investment in corporate affiliates and subsidiaries, engagement
in lease financing transactions, investment in community development and public
welfare projects, and the provision of tax planning and preparation, payroll and
financial planning services, among others. The procedures and requirements for
engaging in such activities range from an application process or expedited
review and notice process to no application or notice whatsoever. The applicable
procedures and requirements vary according to the nature of the activity to be
engaged in and the capitalization of the bank. As of the date of the prospectus,
the Bank was "adequately capitalized," had received a CRA rating of
"satisfactory" and was not in "troubled condition" and was therefore eligible to
engage in certain of the above-referenced activities, subject to the applicable
procedures and requirements of Massachusetts Regulation.
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.
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<PAGE>
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, 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.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. See
"--Prompt Corrective Action." The FDIC may also appoint a conservator or
receiver for a state bank on the basis of the institution's financial condition
or upon the occurrence of certain events, including: (i) insolvency (whereby the
assets of the bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the institution's capital with no
reasonable prospect of replenishment of capital without federal assistance.
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
87
<PAGE>
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 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
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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 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
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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 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 March 31, 1998, the Bank had marketable
equity securities with a cost of $2.7 million pursuant to this exception.
Transactions with Affiliates and Insiders of the Bank
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 Stock Company, as the
sole shareholder of the Bank, will a become bank holding company. The Mutual
Company will remain a bank holding company as the indirect controlling
shareholder of the Bank. Bank holding companies are subject to comprehensive
regulation and
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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 Stock Company and the Mutual
Company regulated as savings and loan holding companies 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 Stock
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 Stock Company's pro forma stockholders' 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 Massachusetts 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 Bank Holding Company Act 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 Stock 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
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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.
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 Stock 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
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restricted capital account which would be added to any liquidation account of
the Bank in the event of 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 stock issuance 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.
If the Mutual Company decides that it is in its best interest to waive
a particular dividend to be paid by the Stock Company, and the FRB and the
Division approve such waiver, then the Stock 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 Stock Company, and regulatory approvals. There can be no assurance (i) that
after the reorganization the Mutual Company will waive dividends paid by the
Stock 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 Stock Company to be issued in the Offering will
be registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. The Stock Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Stock Company common stock held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Stock Company
may not be resold without registration, unless such common stock is sold in
accordance with certain resale restrictions. If the Stock Company meets
specified current public information requirements, each affiliate of the Stock
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 March 31,
1998, 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 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.
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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.
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 March 31, 1998, the Bank owned $723,000 of FHLB stock. In
past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 6.48% for the year ended December 31, 1997. 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.
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MANAGEMENT OF THE STOCK COMPANY
Directors of the Stock Company
The Board of Directors of the Stock Company currently consists of 16
members, each of whom is currently serving as a trustee of the Mutual Company.
The current directors are as follows:
Name Age (1) Term Expires
- ------------------------ ------- ------------
Kelly A. Adler 37 2000
Harold W. Bemis 71 1998
William L. Casey 49 1998
Paul J. DeSimone 65 1999
John G. Dugan 47 1998
Richard Giusti 53 1999
John Hasenjaeger 55 1998
Robert J. Heavey 68 1998
Thomas R. Howie 55 1999
Kenneth C.A. Isaacs 45 2000
Paul V. Kenney 35 2000
Eugene R. Liscombe 52 2000
James W. Murphy 63 1999
Robert A. Matson 38 2000
Lawrence E. Novick 58 1998
Eugene G. Stone 62 2000
- -----------
(1) As of March 31, 1998.
Each director of the Stock Company has served as such since the Stock
Company's incorporation in June 1998. Directors of the Stock 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 and the Offering will not result initially in an
increase in the total compensation currently paid to directors of the Bank. Such
compensation, however, will be paid in part by the Mutual Company, the Stock
Company and the Bank based on the services performed by such individuals for
such entities. Subsequent to the reorganization and the Offering, compensation
of the directors of the Stock Company may be increased to reflect the additional
responsibilities of directors of a stock company with public stockholders.
Executive Officers of the Stock Company
The following individuals are executive officers of the Stock Company
and hold the offices set forth below opposite their respective names. The
biographical information for each executive officer is set forth under
"Management of the Bank--Biographical Information."
Name Age (1) Position
- ---- ------- --------
Eugene G. Stone 62 President and Chief Executive Officer
Warren W. Chase, Jr. 51 Vice President and Treasurer
Kevin H. Kane 44 Vice President
John J. Mogan, Jr. 55 Vice President
Pamela J. Mozynski 34 Vice President
Daniel G. Trombley 48 Vice President
- ----------
(1) As of March 31, 1998.
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The Board of Directors of the Stock Company shall appoint a President,
a Chief Executive Officer, and one or more Vice Presidents 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 Stock Company, none of the executive
officers has received remuneration from the Stock Company. It is not anticipated
that the executive officers of the Stock 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 Bank."
Board of Directors and Committees of the Stock Company
The Board of Directors of the Stock Company is expected to meet
quarterly following the reorganization and Offering, or more often as may be
necessary. The directors of the Stock Company will receive a $1,000 annual
retainer fee for serving on the Stock Company's Board of Directors.
The Board of Directors initially is expected to have, among others, a
standing Executive Committee and Audit Committee. The Stock Company's full Board
of Directors will act as the Nominating Committee, or may appoint a Nominating
Committee. The Stock Company does not intend initially to have a Compensation
Committee, as it is not anticipated that the officers of the Stock Company will
initially be compensated as such.
The Executive Committee initially will consist of directors Kelly A.
Adler, William L. Casey, Richard Giusti, Kenneth C.A. Isaacs, Robert A. Matson,
Lawrence E. Novick and Eugene G. Stone. The Executive Committee is expected to
meet as necessary when the Board is not in session to exercise general control
and supervision in all matters pertaining to the interests of the Stock Company,
subject at all times to the direction of the Board of Directors.
The Audit Committee initially will consist of directors John G. Dugan,
Eugene R. Liscombe, and Thomas R. Howie. The Audit Committee is expected to meet
at least quarterly to examine and approve the audit report prepared by the
independent auditors of the Stock Company, to review and to recommend the
independent auditors to be engaged by the Stock Company, to review the internal
accounting controls of the Stock Company, and to review and approve audit
policies.
Indemnification and Limitation of Liability
The Articles of Organization of the Stock Company provide that a
director or officer of the Stock Company shall be indemnified by the Stock
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 Stock 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 Stock 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 Stock Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Stock Company or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Stock Company has the power to
indemnify such person against such expense, liability or loss under
Massachusetts law. The Stock Company intends to obtain such insurance.
Finally, the Articles of Organization provide that no director of the
Stock Company shall be personally liable to the Stock Company or its
stockholders for monetary damages for breach of fiduciary duty as a director
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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 Stock 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 Stock Company assets to Stock Company officers
or directors, unless such loan could reasonably be expected to benefit the Stock
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 Stock Company
insolvent.
MANAGEMENT OF THE BANK
Directors of the Bank
The directors of the Bank have three year terms which are staggered to
provide for the election of approximately one-third of the board members each
year. Directors of the Bank will be elected by the Stock Company as sole
stockholder of the Bank. The current directors of the Bank are as follows:
Director Age (1) Term Expires
- -------- ------- ------------
Kelly A. Adler 37 2002
William L. Casey 49 2001
Richard Giusti 53 2000
Kenneth C.A. Isaacs 45 2002
Robert A. Matson 38 2002
Lawrence E. Novick 58 2001
Eugene G. Stone 62 2001
- -----------
(1) As of March 31, 1998.
Executive Officers of the Bank
The following table sets forth certain information regarding the
executive officers of the Bank.
Name Age (1) Position
- ---- ------- --------
Eugene G. Stone 62 President and Chief Executive Officer
Warren W. Chase, Jr. 51 Vice President and Treasurer
Kevin H. Kane 44 Vice President
John J. Mogan, Jr. 55 Vice President
Pamela J. Mozynski 34 Vice President
Daniel G. Trombley 48 Vice President
Kelly A. Adler 37 Clerk of the Board
- ---------
(1) As of March 31, 1998.
The executive officers of the Bank will be elected annually by the
Board of Directors at its first meeting following the annual meeting of
stockholders of the Bank. The Clerk will be elected by the stockholders of the
Bank at annual meetings of the stockholders of the Bank.
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Biographical Information
Directors of the Stock Company
Kelly A. Adler has served as a trustee of the Bank since 1995 and a
member of the Bank's Audit Committee since 1996. Ms. Adler continues to serve as
a trustee of the Mutual Company as a director of the Bank, and as Clerk of the
Bank. Ms. Adler is an accountant and has served on several town committees in
Medway, Massachusetts.
Harold W. Bemis has served as a trustee of the Bank since 1967 and as a
member of the Bank's Audit Committee from 1992 to 1994. Mr. Bemis continues to
serve as a trustee of the Mutual Company. He is a retired contractor and
life-long resident of Medway, Massachusetts.
William L. Casey has served as a trustee of the Bank since 1995 and,
since 1997, has served as Chairman of the Board of Trustees of the Mutual
Company. Mr. Casey also serves on the Board of Directors of the Bank. He is the
Corporate Manager of Credit and Sales Accounting at Analog Devices, Inc.,
Norwood, Massachusetts, an integrated circuit manufacturer. Mr. Casey serves on
several town and community boards in Millis, Massachusetts.
Paul J. DeSimone has served as a trustee of the Bank since 1995 and
currently serves on the Board of Trustees of the Mutual Company. Mr. DeSimone is
owner of DeSimone Surveying Service, a civil engineering firm in Medway,
Massachusetts. Mr. DeSimone has served on the boards of a number of civic and
charitable organizations.
John G. Dugan has served as a trustee of the Bank since 1990 and
continues to serve as a trustee of the Mutual Company. Mr. Dugan also serves on
the Audit Committee of the Mutual Company. He is an attorney in the law firm of
Dugan & Cannon of Medfield, Massachusetts, and serves as town moderator for the
town of Millis. Mr. Dugan participates in a number of civic and charitable
organizations.
Richard Giusti has served as a trustee of the Bank since 1991 and
served on the Bank's Audit Committee from 1994 to 1995. Mr. Giusti continues to
serve as a trustee of the Mutual Company and a director of the Bank. He is
Manager of Administration & Finance of the Metropolitan Machine Co., Inc., a
machine company. Mr. Giusti is involved in various civic activities as well.
John Hasenjaeger has served as a trustee of the Bank since 1995 and
continues to serve as a trustee of the Mutual Company. He is owner of a real
estate firm and also is a professor of management at Boston College School of
Management.
Robert J. Heavey has served as a trustee of the Bank since 1981 and
served as Chairman of the Board of Trustees of the Bank from 1991 to 1994. He
continues to serve as a trustee of the Mutual Company. Mr. Heavey is President
and Treasurer of RJ Heavey Co., Inc., a plumbing company in Walpole,
Massachusetts. He also serves several civic and charitable organizations.
Thomas R. Howie has served as a trustee of the Bank since 1988 and
served on the Bank's Board of Investment from 1990 to 1994 and on its Audit
Committee since 1995. Mr. Howie continues to serve as a trustee of the Mutual
Company. He is Vice President of Howie Oil Company, Inc., a heating oil
distributor in Millis, Massachusetts. He is involved in various charitable and
civic organizations.
Kenneth C.A. Isaacs has served as a trustee of the Bank since 1997. He
continues to serve as a trustee of the Mutual Company and also is a director of
the Bank. Mr. Isaacs is a private trustee with extensive real estate experience.
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Paul V. Kenney has served as a trustee of the Bank since 1992, and
continues to serve as a trustee of the Mutual Company. He is a member of the law
firm Kenney and Maciolek of Medway, Massachusetts. He also serves several civic
organizations.
Eugene R. Liscombe has served as a trustee of the Bank since 1991 and
served on its Board of Investment from 1991 to 1996. Mr. Liscombe also was
Chairman of the Board of Trustees of the Bank from 1994 to 1996. He continues to
serve as a trustee of the Mutual Company and currently serves on the Mutual
Company's Audit Committee. Mr. Liscombe is a self-employed certified public
accountant and is active in several civic and charitable organizations.
Robert A. Matson has served as a trustee of the Bank since 1997 and
continues to serve on the Board of Directors of the Bank. He also is a member of
the Board of Trustees of the Mutual Company. Mr. Matson is self-employed as a
chartered financial consultant and chartered life underwriter. He is involved in
civic and charitable organizations.
James W. Murphy has served as a trustee of the Bank since 1979 and
served as Clerk of the Bank since 1992. Mr. Murphy continues to serve as a
trustee of the Mutual Company. Mr. Murphy is an insurance broker for D.L. Murphy
Insurance of Millis, Massachusetts.
Lawrence E. Novick has served as a trustee of the Bank since 1992,
where he also served on the Board of Investment (since 1996) and on the Audit
Committee (from 1993 to 1996). Mr. Novick continues to serve as a trustee of the
Mutual Company and a director of the Bank. He is a self-employed tax and
financial services advisor in Holliston, Massachusetts. Mr. Novick is involved
in many trade organizations and holds positions in civic and charitable
organizations.
Eugene G. Stone has served as a trustee of the Bank since 1988 and
continues to serve as a trustee of the Mutual Company and a director of the
Bank. He has been President and Chief Executive Officer of the Bank since 1988
and Chairman of the Bank since 1997. Mr. Stone serves on the boards of several
civic and charitable organizations.
Executive Officers of the Stock Company Who Are Not Directors
Warren W. Chase, Jr. has served as Vice President and Treasurer of the
Bank since 1995. Prior to joining the Bank, Mr. Chase, a certified public
accountant, worked for 17 years for Sterling Bank, Waltham, Massachusetts as
Controller and Vice President of Financial Planning. His principal areas of
responsibility for the Bank include financial reporting, financial planning and
liquidity management.
Kevin H. Kane joined the Bank in 1998 as a Vice President and Senior
Commercial Loan Officer. Mr. Kane has over 20 years of experience in commercial
lending, commercial credit and financial management. Prior to joining the Bank,
he was a Vice President of Flagship Bank and Trust Company of Worcester,
Massachusetts.
John J. Mogan, Jr. is currently Vice President of Commercial Lending
and has served in that capacity for the Bank since 1990.
Pamela J. Mozynski has been employed by the Bank since 1992 and
currently serves as Vice President of Retail Banking. She is responsible for
branch administration, management of the Summit Club (a banking club for
customers age 50 and over) and all training for branch personnel. She is also
responsible for Bank security and compliance.
Daniel G. Trombley has been employed by the Bank since 1995 and
currently serves as Vice President responsible for all deposit and loan
servicing operations, systems and data processing operations. Prior to 1995, Mr.
Trombley was a Senior Vice President of Quincy Savings Bank, Quincy,
Massachusetts.
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Meetings and Committees of the Board of the Bank
The Board of Directors of the Bank meets bi-weekly and may have
additional special meetings as may be called by the Chairman or as otherwise
provided by law. During the year ended June 30, 1997, the Board held 14
meetings. No director attended fewer than 75% in the aggregate of the total
number of meetings of the Board or Board committees on which such director
served for the year ended June 30, 1997. The Board of Directors of the Bank has
the following standing committees of the Board of Directors: Audit Committee and
CRA Committee.
Compensation of Directors
Directors of the Bank receive fees of $325 for each meeting attended.
Directors of the Stock Company and Trustees of the Mutual Company are paid an
annual retainer of $1,000 for their services on these Boards. Members of
committees of the Board are paid a fee of $50.
Subsequent to the consummation of the reorganization and Offering, it
is expected that the level and structure of compensation paid to the Boards of
Directors of the Stock Company and the 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.
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 June 30,
1997 to the Chief Executive Officer of the Bank. No other executive officers of
the Bank received total annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
Long-term compensation
--------------------------------------
Annual compensation Awards Payout
----------------------------------- ----------------------- ------
Other Restricted Options/
annual stock SARS All
Name and compensation awarded (#) LTIP other
principal position Salary Bonus (2) (3) (4) payouts compensation
- ------------------ ------ ----- ------ ----- ----- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eugene G. Stone $115,544 $300 -- -- -- -- --
President and Chief
Executive Officer
</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 June 30, 1996 and 1995, 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 potential awards pursuant to the Recognition Plan, as such
awards were not earned or granted in 1997. For a discussion of the terms of
such plans which are intended to be adopted by the Stock Company, see
"--Compensation of Officers and Trustees through Benefit Plans--Recognition
and Retention Plan."
(4) No stock options or SARs were earned or granted in 1997. For a discussion
of the Stock Option Plan which is intended to be adopted by the Stock
Company, see "--Compensation of Officers and Trustees through Benefit
Plans--Stock Option Plan."
Supplemental Executive Retirement Plan. In January 1992 the Bank
entered into an agreement with Eugene G. Stone, the Bank's President and Chief
Executive Officer, which established a nonqualified supplemental executive
retirement program ("SERP") for Mr. Stone. The SERP provides for an annual
benefit of $35,375 following Mr. Stone's termination of service due to
retirement on or after age 65. The annual benefit is adjusted and reduced
accordingly for payment following Mr. Stone's death, disability or termination
of service prior to normal retirement
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or upon early retirement. Benefits are payable monthly to Mr. Stone or, in the
case of his death, to his beneficiary, over a period of 15 years, unless an
optional form of payment available under the Bank's pension plan is elected.
Payment of benefits commence upon death, early or normal retirement. In the
event of disability, payment of benefits commence the later of age 65 or the
termination of other disability benefits. If Mr. Stone's employment is
terminated for reasons other than death, disability, or retirement, benefit
payments begin at age 65. Benefits under the SERP are forfeited if Mr. Stone's
service is terminated for cause. The Bank has established a rabbi trust and has
made contributions to the trust sufficient to fully satisfy its benefit
obligation under the SERP, however, for tax and ERISA purposes, the SERP is
considered an unfunded plan.
Deferred Compensation Plan. In November 1991 the Bank adopted a
deferred compensation plan ("DCP") for the benefit of trustees who serve the
Bank in an employment capacity. The DCP provides each trustee with the
opportunity to defer up to 100% of their salary or fees into the DCP. In the
event of a trustee's termination of employment, amounts credited to his account
under the DCP will be paid to him in the form of lump sum or monthly, quarterly,
semi-annual or annual cash installments in the discretion of the Bank beginning
not later than 30 days following the last day of the month of termination, or
within a reasonable period of time. In the event of death, amounts under the DCP
will be paid to the trustee's designated beneficiaries. Benefits under the DCP
are forfeited if the trustee is terminated for cause. The DCP is an unfunded
plan for tax purposes and for purposes of ERISA. All obligations arising under
the DCP are payable from the general assets of the Bank.
Employment and Severance Agreements
Employment Agreements. The Bank intends to enter into an employment
agreement with Mr. Stone. The agreement 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
agreement, the current Base Salary for Mr. Stone (as defined in the agreement)
is $147,800. 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 disability, retirement, or for cause, or in the event of
the executive's resignation from the Bank (such resignation to occur within the
period or periods set forth in the employment agreement) 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 or the Stock Company, (iv) a breach of the agreement by
the Bank, or (v) following a change in control of the Bank or the Stock 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. Mr. Stone would receive an
aggregate of $525,900 pursuant to his employment agreement upon a change in
control of the Bank or the Stock Company, based upon his current level 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 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
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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.
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 Stock Company and the Bank will be able to compensate
employees with stock-based compensation pursuant to the ESOP, the Recognition
Plan 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) with
group life (after six months of employment), business travel/accident insurance,
short term disability coverage, and long term disability coverage. For its
eligible employees, the Bank pays 60% of the monthly premiums for group health
coverage and 60% of the monthly premiums for individual and family dental
coverage. The Bank pays 100% of the monthly premiums for group life insurance
coverage.
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 a
qualified 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 for
each year of service (up to a maximum of 25 years) plus .6% of such average
compensation in excess of covered compensation (as defined in the Retirement
Plan) for each year 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 three years is eligible to receive his or her accrued
benefit commencing, generally, as soon as administratively possible, following
termination. Benefits under the Retirement Plan are payable in various annuity
forms as well as in the form of a lump sum payment. As of March 31, 1998, the
most recent date for which information is available, the market value of the
Retirement Plan assets equaled $385.6 million.
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The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in calendar year
1998, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
Years of service and benefit payable at retirement
Final --------------------------------------------------------
average 25 years
compensation 10 15 20 and after (2)
- ------------ -------- -------- -------- -------------
$ 50,000 $ 6,250 $ 9,375 $ 12,500 $ 15,625
100,000 16,742 25,113 33,484 41,854
150,000 25,992 38,988 51,984 64,979
160,000 (1) 27,842 41,763 55,684 69,604
-----------
(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 for each year of service, up to 25 years. Benefits do
not increase due to years of service in excess of 25.
At December 31, 1997, Mr. Stone had approximately nine years of credited
service (i.e., benefit service) under the Retirement Plan.
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
service during which they worked at least 1,000 hours are eligible to
participate.
Under the 401(k) Plan, participants are permitted to make salary
reduction contributions equal to the lesser of 15% of compensation or $10,000
(as indexed annually). For these purposes, "compensation" includes wages
reported on federal income tax form W-2 and includes any amount contributed by
salary reduction to a cafeteria plan or 401(k) plan, 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). The Bank will match 50% of the participant's
salary reduction contributions to the 401(k) Plan (up to 6% of the participant's
compensation). All employee contributions, matching 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. A participant may also borrow money from their account, which loan may
not exceed the lesser of $50,000 or 50% of the participant's total account
balance. 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, life annuity 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 401(k) Plan.
Normal retirement age under the 401(k) Plan is age 65. Early retirement age is
59 1/2.
Employee Stock Ownership Plan and Trust. The Bank intends to implement
an Employee Stock Ownership Plan in connection with the reorganization and
Offering. 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
and Offering, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8% 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. 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.
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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 each year of service with the
Bank after age 18 prior to the effective date of the ESOP. A participant will
vest in 100% of his or her account balance after 5 years of service or upon
normal or early 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 five years of service will forfeit the nonvested portion of his
benefits under the ESOP. Benefits will be payable, at the election of the
participant, in the form of common stock only, cash only or 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 committed to be released
from the suspense account.
The Bank will establish a committee 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 Stock 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 Stock Company. The Stock
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 Stock Company 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 79,900 shares, 94,000 shares,
108,100 shares or 124,315 shares at the minimum, mid-point, maximum and 15%
above the maximum of the Offering 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
Stock Company. Unless the Stock 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 Stock 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 Stock 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
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no tax deduction to the Stock 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.
Recognition and Retention Plan. At a meeting of the Stock 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 Stock 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 Stock 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 31,960 shares, 37,600 shares, 43,240 or 49,726 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Offering Range,
respectively. The Stock Plan may acquire the shares either directly from the
Stock 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 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 Stock Company's stockholders and by
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 Stock 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.
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 ss. 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 Stock
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 and directors. 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.
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Transactions With Certain Related Persons
The Bank offers to directors, officers, and employees real estate
mortgage loans secured by their principal residence. All loans to the Bank's
directors, officers and employees are made on the same terms, including interest
rates and collateral as those prevailing at the time for comparable
transactions, and do not involve more than minimal risk of collectibility.
RESTRICTIONS ON ACQUISITION OF THE STOCK COMPANY AND THE BANK
Although the Board of Directors of the Bank and the Stock Company are
not aware of any effort that might be made to obtain control of the Stock
Company following the reorganization and Offering, the Board of Directors, as
discussed below, believes that it is appropriate to include certain provisions
in the Stock Company's Articles of Organization and Bylaws to protect the
interests of the Stock Company and its stockholders from takeovers which the
Board of Directors of the Stock Company might conclude are not in the best
interest of the Bank, the Stock Company, or the Stock 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 Stock Company is not assured that the Mutual Company will
always control the Stock Company by virtue of its ownership of the majority of
the Common Stock. In addition, these provisions will increase protections
available to the Stock Company against transactions that, although not resulting
in an acquisition of a majority of the Stock Company's stock, nevertheless may
harm the Stock Company and its stockholders by disrupting the Bank's operations
and management, and by causing the Stock Company to incur substantial expenses.
The following discussion is a general summary of the material
provisions of the Stock 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 Stock
Company's Articles of Organization and Bylaws and the Bank's 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 Stock Company's
Registration Statement filed with the SEC. See "Additional Information."
Provisions of the Stock Company's Articles of Organization and Bylaws
Directors. Certain provisions of the Stock Company's Articles of
Organization and Bylaws will impede changes in control of the Board of
Directors. The Stock Company's Bylaws provide that the Board of Directors of the
Stock 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 Stock Company's
Board. The Stock 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 Stock 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.
106
<PAGE>
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 of the
Stock Company authorize 2,500,000 shares of serial preferred stock, par value
$0.01 per share. The Stock 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 Stock 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 Stock Company, when determining
whether the interests of the Stock 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 Stock Company, may consider the
interests of the Stock 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 Stock Company
and its stockholders, including the possibility that these interests will be
best served by the continued independence of the Stock Company.
Procedures for Certain Business Combinations. The Articles of
Organization require that certain business combinations between the Stock
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 Stock 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 Stock 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 Stock Company's Articles
of Organization and Bylaws. At least 51% of the Common Stock of the Stock
Company will be controlled by the Mutual Company. Moreover, management believes
that under current policy of the FDIC and other 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 Stock 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 Stock 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 Stock Company and 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 Stock 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
107
<PAGE>
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 Stock Company and its stockholders, with
due consideration given to matters such as the management and business of the
acquiring corporation and maximum strategic development of the Stock 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
Stock Company as to the benefits to stockholders of these provisions of the
Stock 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 Stock 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 Stock Company's Board of Directors and management. The
Boards of Directors of the Bank and the Stock 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 Stock 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
Stock Company and the Bank do not presently intend to propose the adoption of
further restrictions on the acquisition of the Stock Company's equity
securities.
Provisions of the Stock Bank's Charter and Bylaws
Directors. Like the Stock Company's Articles of Organization, the
Bank's Bylaws provides that the Board of Directors of the 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 Bank's Board of Directors. Additionally,
directors of the Bank may only be removed from office for cause and only by the
affirmative vote of the holders of at least 80% of the Bank's outstanding voting
stock, voting together as a single class.
Authorization of Preferred Stock. The Bank's Charter authorizes 500,000
shares of serial preferred stock, par value $1.00 per share. The Bank 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 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 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 plans of
understanding for the issuance of any preferred stock but it may issue any
preferred stock on terms which the Board deems to be in the best interests of
the Stock Company and its stockholders.
108
<PAGE>
Mutual Holding Company Structure
Under Massachusetts law, at least 51% of the Stock Company's voting
shares must be owned by the Mutual Company. The Mutual Company is controlled by
its Board of Trustees, and the same persons serving on the Board of Directors of
the Stock Company currently serve on the Board of Trustees of the Mutual
Company. The Mutual Company, acting through its Board of Trustees, will be able
to control the business and operations of the Stock Company and the Bank and
will be able to prevent any challenge to the ownership or control of the Stock
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 Stock 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 Stock Company's common stock will
be registered under Section 12 of the Exchange Act, any acquisition of 10% or
more of the Stock Company's common stock will give rise to a rebuttable
presumption that the acquiror of such stock controls the Stock 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
Stock 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 Massachusetts
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 STOCK COMPANY
General
The Stock Company is authorized to issue 12 million shares of common
stock having a par value of $.01 per share and 2.5 million shares of serial
preferred stock having a par value of $.01 per share. The Stock Company
currently expects to issue between 799,000 and 1,081,000 shares, with an
adjusted maximum of 1,243,150 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 stock issuance plan, all such stock will be duly authorized,
fully paid, validly issued and non-assessable.
The common stock of the Stock 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 Stock
Company's common stock will possess exclusive voting power in the Stock 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 Stock Company and the Bank." There are no cumulative voting rights in the
election of directors of the Stock Company. If the Stock 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 Stock 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 Stock
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 Stock Company out of funds legally available therefor. If the
Stock 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 Stock 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 Stock 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 Stock 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 Stock
Company of the full purchase price therefor, each share of the common stock will
be fully paid and nonassessable.
Preferred Stock. None of the 2.5 million authorized shares of preferred
stock of the Stock Company will be issued in the Offering. The Stock Company's
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
Continental Stock Transfer and Trust Co. 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 Stock 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 Stock
Company by Wolf & Company, P.C., Boston, Massachusetts. Luse Lehman Gorman
Pomerenk & Schick, P.C. and Wolf & Company, P.C. have consented to the
references herein to their opinions. Certain legal matters will be passed upon
for Trident Securities, Inc. by Thacher Profitt & Wood, Washington, D.C.
110
<PAGE>
EXPERTS
The consolidated financial statements as of June 30, 1997 and 1996 and
for each of the two years in the period ended June 30, 1997 appearing in this
prospectus have been audited by Wolf & Company, P.C., 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.
RP Financial, LC. has consented to the publication herein of the
summary of its report to the Bank and the Stock 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 Stock 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 and Offering. Pursuant to the rules and
regulations of the Division, this prospectus omits certain information contained
in that Application. The Application, including the stock issuance plan and the
Independent Valuation, may be examined at the office of the Division, 100
Cambridge Street, Boston, Massachusetts and at the main office of the Bank at 81
Main Street, Medway, Massachusetts, without charge.
In connection with the Offering, the Stock Company will register its
common stock with the SEC under Section 12(g) of the Exchange Act and, upon such
registration, the Stock 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 stock issuance plan, the Stock 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 Stock Company
are available without charge from the Bank by contacting Ms. Laurie Rizzo, Human
Resources Manager, 81 Main Street, Medway, Massachusetts, (508) 533-4343.
111
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Independent Auditors' Report...................................... F-2
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and June 30, 1997 and 1996....................... F-3
Consolidated Statements of Income for the Nine Months
Ended March 31, 1998 and 1997 (Unaudited) and the
Years Ended June 30, 1997 and 1996........................... F-4
Consolidated Statements of Changes in Retained Earnings
for the Nine Months Ended March 31, 1998 (Unaudited)
and the Years Ended June 30, 1997 and 1996................... F-5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997
(Unaudited) and the Years Ended June 30, 1997
and 1996..................................................... F-6 to F-7
Notes to Consolidated Financial Statements........................ F-8 to F-31
The financial statements of Service Bancorp have been omitted because Service
Bancorp has not conducted any business other than of an organizational nature.
All schedules have been omitted either because they are not required, not
applicable, or are included in the notes to consolidated financial statements.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Summit Bank
We have audited the accompanying consolidated balance sheets of Summit Bank,
formerly Medway Savings Bank, and subsidiary as of June 30, 1997 and 1996, and
the related consolidated statements of income, changes in retained earnings and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summit Bank and
subsidiary as of June 30, 1997 and 1996, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Wolf & Company, P.C.
WOLF & COMPANY, P.C.
Boston, Massachusetts
August8, 1997, except for Notes 15 and 16
as to which the dates are August 19, 1997
and March 12, 1998, respectively
F-2
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
June 30,
March 31, -----------------------
1998 1997 1996
---- ---- ----
(Unaudited)
Cash and due from banks ................. $ 4,726 $ 2,824 $ 4,495
Short-term investments .................. 6,400 6,305 2,597
--------- --------- ---------
Total cash and cash equivalents ..... 11,126 9,129 7,092
Certificates of deposit (Note 2) ........ 1,500 500 --
Securities available for sale (Note 3) .. 42,685 24,696 20,803
Loans ................................... 72,757 67,409 60,137
Less allowance for loan losses ...... (560) (475) (470)
--------- --------- ---------
Loans, net (Note 4) ..................... 72,197 66,934 59,667
--------- --------- ---------
Other real estate owned ................. -- 37 --
Banking premises and equipment,
net (Note 5) .......................... 1,509 1,402 1,035
Federal Home Loan Bank stock, at cost ... 723 538 454
Accrued interest receivable ............. 993 821 699
Net deferred tax asset (Note 8) ......... 47 201 349
Due from broker ......................... -- 272 --
Other assets ............................ 424 348 255
--------- --------- ---------
$ 131,204 $ 104,878 $ 90,354
========= ========= =========
LIABILITIES AND RETAINED EARNINGS
Deposits (Note 6) ....................... $ 108,056 $ 92,897 $ 81,189
Federal Home Loan Bank advances (Note 7) 12,404 2,622 369
Mortgagors' escrow payments ............. 162 42 69
Other liabilities ....................... 692 622 1,306
--------- --------- ---------
Total liabilities ................. 121,314 96,183 82,933
--------- --------- ---------
Commitments and contingencies (Note 11)
Retained earnings (Note 9) .............. 9,454 8,499 7,417
Net unrealized gain on securities
available for sale, after tax
effects (Notes 3 and 8) ................ 436 196 4
--------- --------- ---------
Total retained earnings ........... 9,890 8,695 7,421
--------- --------- ---------
$ 131,204 $ 104,878 $ 90,354
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Years
Ended March 31, Ended June 30,
--------------- ---------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest and fees on loans ........... $ 4,531 $ 3,923 $ 5,343 $ 4,539
Interest and dividends on
securities available for
sale and Federal Home Loan
Bank stock .......................... 1,564 1,085 1,482 1,341
Interest on short-term investments and
certificates of deposit ............. 214 139 212 222
------- ------- ------- -------
Total interest and dividend income . 6,309 5,147 7,037 6,102
------- ------- ------- -------
Interest expense:
Interest on deposits ............... 2,734 2,238 3,050 2,724
Interest on borrowings ............. 238 86 124 22
------- ------- ------- -------
Total interest expense ............. 2,972 2,324 3,174 2,746
------- ------- ------- -------
Net interest income .................... 3,337 2,823 3,863 3,356
Provision for loan losses (Note 4) ..... 75 35 35 93
------- ------- ------- -------
Net interest income,
after provision for
loan losses ....................... 3,262 2,788 3,828 3,263
------- ------- ------- -------
Other income:
Customer service fees ................ 312 295 406 388
Gain on sales of securities
available for sale, net (Note 3) .... 675 343 462 308
Gain on sales of loans ............... 44 26 31 --
Miscellaneous ........................ 44 46 60 78
------- ------- ------- -------
Total other income ................. 1,075 710 959 774
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits
(Note 10) ........................... 1,439 1,201 1,619 1,385
Occupancy and equipment expenses
(Notes 5 and 11) .................... 627 486 667 574
Data processing expenses ............. 250 198 258 270
Professional fees .................... 116 96 124 124
Advertising expenses ................. 88 45 68 53
Gain on other real estate owned ...... (6) (158) (158) --
Other general and administrative
expenses (Note 14) ................. 347 344 516 329
------- ------- ------- -------
Total operating expenses ........... 2,861 2,212 3,094 2,735
------- ------- ------- -------
Income before income taxes ............. 1,476 1,286 1,693 1,302
Provision for income taxes (Note 8) .... 521 477 611 501
------- ------- ------- -------
Net income ............................. $ 955 $ 809 $ 1,082 $ 801
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
Nine Months Ended March 31, 1998 (unaudited)
and the Years Ended June 30, 1997 and 1996
(In Thousands)
Net
Unrealized
Gain (Loss)
on Securities
Retained Available
Earnings For Sale Total
-------- -------- -----
Balance at June 30, 1995 ..................... $6,616 $ (15) $6,601
Net income ................................... 801 -- 801
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects ........................ -- 19 19
------ ------ ------
Balance at June 30, 1996 ..................... 7,417 4 7,421
Net income ................................... 1,082 -- 1,082
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects ........................ -- 192 192
------ ------ ------
Balance at June 30, 1997 ..................... 8,499 196 8,695
Net income (unaudited) ....................... 955 -- 955
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects (unaudited) ............ -- 240 240
------ ------ ------
Balance at March 31, 1998 (unaudited) ........ $9,454 $ 436 $9,890
====== ====== ======
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Years
Ended March 31, Ended June 30,
-------------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net income ............................................ $ 955 $ 809 $ 1,082 $ 801
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses ..................... 75 35 35 93
Gain on sales of securities available for sale,
net ....................................... (675) (343) (462) (308)
Net amortization of premium on securities
available for sale ........................ 338 31 40 81
Gain on other real estate owned ............... (6) (158) (158) --
Depreciation and amortization expense ......... 259 185 266 196
Increase in accrued interest receivable ....... (172) (116) (123) (65)
Deferred tax provision (benefit) .............. 3 47 31 (60)
Loans originated for sale ..................... (5,379) (1,585) (2,219) (361)
Principal balance of loans sold ............... 5,379 1,585 2,219 361
Other, net .................................... (6) (746) (776) 608
-------- -------- -------- --------
Net cash provided (used) by operating
activities .......................... 771 (256) (65) 1,346
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of certificates of deposit ................... (1,000) -- (500) --
Proceeds from sales of securities available for
sale .............................................. 3,611 4,259 4,388 2,846
Proceeds from maturities of and principal
payments on securities available for sale ......... 7,319 3,764 5,848 9,132
Purchase of securities available for sale ............. (27,919) (8,691) (13,670) (12,638)
Net increase in loans ................................. (5,512) (4,691) (7,568) (11,960)
Capital additions to other real estate owned .......... -- -- -- (97)
Proceeds from other real estate owned ................. 217 387 387 515
Purchase of banking premises and equipment ............ (366) (485) (633) (302)
Purchase of Federal Home Loan Bank stock .............. (185) (84) (84) (22)
-------- -------- -------- --------
Net cash used by investing activities ... (23,835) (5,541) (11,832) (12,526)
-------- -------- -------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Years
Ended March 31, Ended June 30,
------------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
(Unaudited)
Cash flows from financing activities:
<S> <C> <C> <C> <C>
Net increase in deposits ................... 15,159 7,450 11,707 11,629
Net increase (decrease) in mortgagors'
escrow payments ........................ 120 25 (27) (132)
Proceeds from FHLB advances ................ 12,000 2,327 2,327 166
Repayment of FHLB advances ................. (2,218) (55) (73) (68)
-------- -------- -------- --------
Net cash provided by financing
activities ............... 25,061 9,747 13,934 11,595
-------- -------- -------- --------
Net change in cash and cash equivalents ........ 1,997 3,950 2,037 415
Cash and cash equivalents at beginning of
period ..................................... 9,129 7,092 7,092 6,677
-------- -------- -------- --------
Cash and cash equivalents at end of period ..... $ 11,126 $ 11,042 $ 9,129 $ 7,092
======== ======== ======== ========
Supplementary information:
Interest paid .............................. $ 2,931 $ 2,289 $ 3,163 $ 2,743
Income taxes paid .......................... 541 349 613 538
Transfers to other real estate owned ....... 174 229 266 --
Increase (decrease) in due from broker ..... (272) -- 272 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Summit Bank
(the "Bank") and its wholly-owned subsidiaries, Medway Securities Corp.,
and, effective during the nine months ended March 31, 1998, Franklin
Village Security Corp., which engage in the purchase and sale of investment
securities. All significant intercompany balances and transactions have
been eliminated in consolidation.
Unaudited interim financial statements
The consolidated financial statements and related notes as of March 31,
1998 and for the nine months ended March 31, 1998 and 1997 are unaudited.
All adjustments, consisting of only normal recurring adjustments, which in
the opinion of management are necessary for fair presentation of the
financial information, have been made.
Business
The Bank provides a variety of financial services to individuals and small
businesses through its five offices in Norfolk County. Its primary deposit
products are savings, checking and term certificate accounts and its
primary lending products are mortgage, consumer and commercial loans.
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the consolidated balance sheet and reported amounts of
revenues and expenses during the reporting period. 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 and the valuation of
foreclosed real estate.
Reclassifications
Certain amounts have been reclassified in the 1996 consolidated financial
statements to conform to the 1997 presentation.
F-8
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash equivalents
Cash equivalents include amounts due from banks and short-term investments.
Short-term investments consist primarily of federal funds sold and other
interest-bearing deposits which mature on a daily basis.
Securities available for sale
Securities available for sale are carried at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate
component of retained earnings, net of taxes.
Amortization of premiums and accretion of discounts on debt securities are
computed using a method which approximates the interest method. Gains and
losses on sales are recorded on the trade date and are computed using the
specific identification method.
Loans
The Bank grants mortgage, consumer and commercial loans to its customers. A
substantial portion of the loan portfolio consists of mortgage loans in
Norfolk County. The ability of the Bank's debtors to honor their contracts
is dependent upon the local economy and the local real estate market.
Loans, as reported, have been adjusted by unadvanced construction loans,
the allowance for loan losses, net deferred loan fees and deferred
premium/income.
Income on loans, including impaired loans, is recognized on the simple
interest basis and is not accrued when in the judgment of management the
collectibility of the loan principal or interest becomes doubtful. Loans
delinquent 90 days or more remain on accrual status when the loan-to-value
ratio is less than 80% and the collateral value is sufficient to cover all
amounts due including principal, interest and related expenses.
Net deferred loan fees are amortized over the contractual lives of the
related loans using the interest method. Deferred premium/income is
amortized using a method which approximates the interest method.
F-9
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses
The allowance for loan losses is established through a provision for loan
losses charged to earnings and is maintained at a level considered adequate
to provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular
basis by management and are based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant change. Ultimately, losses may vary from current estimates and
future additions to the allowance may be necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if
any, are credited to the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis using the fair value of existing
collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
Other real estate owned
Other real estate owned is held for sale and carried at the lower of cost
or estimated fair value less estimated costs to sell.
F-10
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Other real estate owned (concluded)
Other real estate owned is initially recorded at fair value at the date of
foreclosure. Costs relating to the development and improvement of property
are capitalized, whereas costs relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established through a charge to earnings if the carrying value of
a property exceeds its fair value less estimated costs to sell.
Banking premises and equipment
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost less accumulated depreciation and amortization computed
on the straight-line method over the estimated useful lives of the assets
or the expected terms of the leases, if shorter.
It is general practice to charge the cost of maintenance and repairs to
earnings when incurred; major expenditures for betterments are capitalized
and depreciated.
Retirement plan
The Bank accounts for pension plan benefits on the net periodic pension
cost method for financial reporting purposes. This method recognizes the
compensation cost of an employee's pension benefit over the employee's
approximate service period. Pension costs are funded in the year of accrual
using the aggregate cost method.
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
accordingly through the provision for income taxes. The Bank's base amount
of its federal income tax reserve for loan losses is a permanent difference
for which there is no recognition of a deferred tax liability. However, the
loan loss allowance maintained for financial reporting purposes is a
temporary difference with allowable recognition of a related deferred tax
asset, if it is deemed realizable.
F-11
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
2. CERTIFICATES OF DEPOSIT
A summary of certificates of deposit follows:
March 31, June 30,
Maturity Date Rate 1998 1997
- ------------- ---- ---- ----
January 8, 1999 ................ 5.8% $1,000 $ --
June 5, 2000 ................... 6.4 500 500
------ ------
$1,500 $ 500
====== ======
3. SECURITIES AVAILABLE FOR SALE
A summary of securities available for sale follows:
March 31, 1998
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Federal agency obligations ....... $ 29,504 $ 214 $ (80) $ 29,638
Mortgage-backed securities ....... 7,300 26 (21) 7,305
Other debt securities ............ 2,503 4 (16) 2,491
-------- -------- -------- --------
Total debt securities ......... 39,307 244 (117) 39,434
Marketable equity securities ..... 2,701 588 (38) 3,251
-------- -------- -------- --------
$ 42,008 $ 832 $ (155) $ 42,685
======== ======== ======== ========
F-12
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE (continued)
June 30, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Federal agency obligations ....... $ 16,823 $ 14 $ (195) $ 16,642
Mortgage-backed securities ....... 2,740 19 (14) 2,745
Other debt securities ............ 1,615 5 (7) 1,613
-------- -------- -------- --------
Total debt securities ......... 21,178 38 (216) 21,000
Marketable equity securities ..... 3,232 543 (79) 3,696
-------- -------- -------- --------
$ 24,410 $ 581 $ (295) $ 24,696
======== ======== ======== ========
June 30, 1996
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Federal agency obligations ....... $ 11,024 $ 17 $ (232) $ 10,809
Mortgage-backed securities ....... 2,099 6 (29) 2,076
Other debt securities ............ 5,129 13 (28) 5,114
-------- -------- -------- --------
Total debt securities ......... 18,252 36 (289) 17,999
Marketable equity securities ..... 2,574 270 (40) 2,804
-------- -------- -------- --------
$ 20,826 $ 306 $ (329) $ 20,803
======== ======== ======== ========
F-13
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
SECURITIES AVAILABLE FOR SALE (concluded)
The amortized cost and estimated fair value of debt securities by
contractual maturity at March 31, 1998 and June 30, 1997 follows:
March 31, 1998 June 30, 1997
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Within 1 year .................. $ 500 $ 499 $ 616 $ 615
Over 1 year to 5 years ......... 3,000 3,006 7,009 6,988
Over 5 years to 10 years ....... 26,507 26,629 9,063 8,926
Over 10 years .................. 2,000 1,995 1,750 1,726
------- ------- ------- -------
32,007 32,129 18,438 18,255
Mortgage-backed
securities ................. 7,300 7,305 2,740 2,745
------- ------- ------- -------
$39,307 $39,434 $21,178 $21,000
======= ======= ======= =======
Proceeds from the sale of securities available for sale for the nine months
ended March 31, 1998 and 1997 were $3,611 and $4,259, respectively. Gross
gains of $680 and $363, and gross losses of $5 and $20, were realized
during the nine months ended March 31, 1998 and 1997, respectively.
Proceeds from the sale of securities available for sale during fiscal 1997
and 1996 were $4,660 and $2,846, respectively. Gross gains of $482 and
$316, and gross losses of $20 and $8, were realized during fiscal 1997 and
1996, respectively.
F-14
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
4. LOANS
A summary of the balances of loans follows:
June 30,
March 31, ----------------------
1998 1997 1996
---- ---- ----
Real estate loans:
Residential fixed rate ................. $ 13,459 $ 13,500 $ 13,219
Residential variable rate .............. 32,273 33,696 29,555
Commercial ............................. 12,148 8,342 5,860
Construction ........................... 5,318 4,493 4,659
-------- -------- --------
63,198 60,031 53,293
Less unadvanced construction loans ..... (1,456) (1,613) (1,505)
-------- -------- --------
61,742 58,418 51,788
-------- -------- --------
Other loans:
Home equity ............................ 5,209 4,574 4,271
Installment ............................ 1,495 1,362 1,128
Commercial ............................. 3,525 2,554 2,695
Passbook secured ....................... 886 596 386
-------- -------- --------
11,115 9,086 8,480
-------- -------- --------
Total loans .................. 72,857 67,504 60,268
Less: Allowance for loan losses ........... (560) (475) (470)
Net deferred loan fees ........... (103) (99) (100)
Deferred (income) premium ........ 3 4 (31)
-------- -------- --------
$ 72,197 $ 66,934 $ 59,667
======== ======== ========
At March 31, 1998 and June 30, 1997 and 1996, mortgage loans serviced for
others amounted to $1,268, $1,948 and $2,157, respectively.
F-15
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
LOANS (concluded)
An analysis of the allowance for loan losses is as follows:
Nine Months Years
Ended March 31, Ended June 30,
--------------- --------------
1998 1997 1997 1996
---- ---- ---- ----
Balance at beginning of period ......... $ 475 $ 470 $ 470 $ 445
Provision for loan losses .............. 75 35 35 93
Recoveries ............................. 21 54 64 20
Charge-offs ............................ (11) (20) (94) (88)
----- ----- ----- -----
Balance at end of period ............... $ 560 $ 539 $ 475 $ 470
===== ===== ===== =====
The following is a summary of the impaired and non-accrual loans:
June 30,
March 31, -------------------
1998 1997 1996
---- ---- ----
Loans with no valuation allowance .......... $ 151 $ 84 $ 474
Loans with a corresponding
valuation allowance .................... 192 136 534
------ ------ ------
Total impaired loans ....................... $ 343 $ 220 $1,008
====== ====== ======
Corresponding valuation allowance
on impaired loans ...................... $ 26 $ 9 $ 70
====== ====== ======
Non-accrual loans .......................... $ 343 $ 193 $ 898
====== ====== ======
Accrued interest receivable on non-
accrual loans .......................... $ 24 $ 8 $ 52
====== ====== ======
No additional funds are committed to be advanced in connection with
impaired loans.
Nine Months Years
Ended March 31, Ended June 30,
--------------- --------------
1998 1997 1997 1996
---- ---- ---- ----
Average recorded investment in
impaired loans ......................... $253 $282 $534 $793
==== ==== ==== ====
Interest income recognized on
impaired loans ......................... $ 7 $ 6 $ 9 $ 34
==== ==== ==== ====
Interest income recognized on
a cash basis on impaired loans ......... $ 7 $ 6 $ 9 $ 33
==== ==== ==== ====
F-16
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
March 31, June 30, Estimated
1998 1997 1996 Useful Lives
---- ---- ---- ------------
Banking premises:
Land ........................ $ 113 $ 113 $ 113
Building and leasehold
improvements ............ 1,771 1,547 1,349 1 - 40 years
Equipment ....................... 1,912 1,770 1,335 3 - 10 years
------- ------- -------
3,796 3,430 2,797
Less accumulated depreciation and
amortization ................ (2,287) (2,028) (1,762)
------- ------- -------
$ 1,509 $ 1,402 $ 1,035
======= ======= =======
Depreciation and amortization expense for the nine months ended March 31,
1998 and 1997 and the years ended June 30, 1997 and 1996 amounted to $259,
$185, $266 and $196, respectively.
6. DEPOSITS
A summary of deposit balances by type is as follows:
June 30,
March 31, ---------------------
1998 1997 1996
---- ---- ----
Demand ..................................... $ 10,563 $ 6,686 $ 6,630
NOW ........................................ 16,729 13,672 10,528
Money market deposits ...................... 8,659 8,436 8,006
Regular and other savings .................. 22,318 21,505 20,863
-------- -------- --------
Total non-certificate accounts ........... 58,269 50,299 46,027
-------- -------- --------
Term certificates $100,000 or greater ...... 7,766 7,126 4,618
Term certificates less than $100,000 ....... 42,021 35,472 30,544
-------- -------- --------
Total certificate accounts ............... 49,787 42,598 35,162
-------- -------- --------
Total deposits ........................... $108,056 $ 92,897 $ 81,189
======== ======== ========
F-17
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
DEPOSITS (concluded)
A summary of certificate accounts by maturity is as follows:
March 31, 1998 June 30, 1997 June 30, 1996
------------------ ----------------- --------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Within 1 year .......... $42,272 5.70% $35,683 5.60% $27,784 5.65%
Over 1 year to 3 years.. 7,443 5.61 6,915 5.64 7,378 6.00
Over 3 years to 5 years. 72 5.47 -- -- -- --
------- ------- -------
$49,787 5.69% $42,598 5.61% $35,162 5.72%
======= ======= =======
7. FEDERAL HOME LOAN BANK ADVANCES
The following advances were outstanding from the Federal Home Loan Bank of
Boston (FHLB):
Maturity Monthly March 31, June 30,
Date Payment Rate 1998 1997 1996
---- ------- ---- ---- ---- ----
August 19, 1997 ........... $ 9 5.43% $ -- $ 2,000 $ --
December 14, 1998 ......... 5 5.83 1,000 -- --
December 16, 1998 ......... 5 5.84 1,000 -- --
February 18, 1999 ......... 7 4.89 77 133 203
October 29, 1999 .......... 44 5.93 841 -- --
January 8, 2008 (1) ....... 12 4.99 3,000 -- --
February 6, 2008 (1) ...... 25 4.99 6,000 -- --
August 31, 2015 ........... 1 6.84 162 163 166
March 5, 2017 ............. 2 7.06 324 326 --
------- ------- -------
$12,404 $ 2,622 $ 369
======= ======= =======
(1) Callable by the FHLB in 1999.
The advance maturing August 19, 1997 requires interest only payments until
maturity. The advance maturing August 31, 2015 requires a balloon payment
of $96 at maturity. The advance maturing March 5, 2017 requires a balloon
payment of $191 at maturity.
F-18
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
FEDERAL HOME LOAN BANK ADVANCES (concluded)
Total scheduled future principal payments of the advances are as follows:
Year Ending March 31, June 30,
June 30, 1998 1997
--------------- -------------- -----------
1998 $ 142 $ 2,080
1999 2,566 64
2000 224 6
2001 6 6
2002 7 7
Thereafter 9,459 459
-------------- -----------
$ 12,404 $ 2,622
============== ===========
The Bank also has an available line of credit with the FHLB at an interest
rate that adjusts daily. Borrowings under the line are limited to $1,964 at
March 31, 1998 and June 30, 1997.
All borrowings from the FHLB are secured by a blanket lien primarily on
U.S. Government and federal agency obligations and real estate loans in
accordance with the FHLB agreement.
8. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
Nine Months Years
Ended March 31, Ended June 30,
--------------- --------------
1998 1997 1997 1996
---- ---- ---- ----
Current tax provision:
Federal ...................... $ 498 $ 361 $ 482 $ 446
State ........................ 20 69 98 115
----- ----- ----- -----
518 430 580 561
----- ----- ----- -----
Deferred tax provision
(benefit):
Federal ...................... 2 35 23 (55)
State ........................ 1 12 8 (5)
----- ----- ----- -----
3 47 31 (60)
----- ----- ----- -----
$ 521 $ 477 $ 611 $ 501
===== ===== ===== =====
F-19
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
INCOME TAXES (continued)
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
March 31, June 30,
------------------ -------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory rate ............................. 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 0.9 4.2 4.1 5.6
Dividend received deduction ............ (0.8) (1.1) (1.1) (1.5)
Other .................................. 1.2 -- (0.9) 0.4
---- ---- ---- ----
Effective tax rates ........................ 35.3% 37.1% 36.1% 38.5%
==== ==== ==== ====
</TABLE>
The components of the net deferred tax asset are as follows:
June 30,
March 31, --------------------
1998 1997 1996
---- ---- ----
Deferred tax asset:
Federal .......................... $ 317 $ 378 $ 399
State ............................ 109 132 141
----- ----- -----
426 510 540
----- ----- -----
Deferred tax liability:
Federal .......................... (328) (262) (159)
State ............................ (51) (47) (32)
----- ----- -----
(379) (309) (191)
----- ----- -----
Net deferred tax asset ............... $ 47 $ 201 $ 349
===== ===== =====
F-20
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
June 30,
March 31, -----------------
1998 1997 1996
---- ---- ----
Allowance for loan losses ................... $ 99 $ 66 $ 107
Net unrealized gain/loss on securities
available for sale ...................... (241) (90) 27
Employee benefit plans ...................... 73 98 95
Net deferred loan fees ...................... 51 51 64
Depreciation ................................ 81 79 56
Other ....................................... (16) (3) --
----- ----- -----
Net deferred tax asset ...................... $ 47 $ 201 $ 349
===== ===== =====
A summary of the change in net deferred tax asset is as follows:
Nine Months Years
Ended March 31, Ended June 30,
--------------- --------------
1998 1997 1997 1996
---- ---- ---- ----
Balance at beginning of period .......... $ 201 $ 349 $ 349 $ 286
Deferred tax (provision) benefit ........ (3) (47) (31) 60
Change in deferred tax effect of
net unrealized gain/loss on
securities available for sale ....... (151) 57 (117) 3
----- ----- ----- -----
Balance at end of period ................ $ 47 $ 359 $ 201 $ 349
===== ===== ===== =====
There was no valuation reserve required for the periods presented.
The federal income tax reserve for loan losses at the Bank's base year is
approximately $1,142. If any portion of the reserve is used for purposes
other than to absorb loan losses, approximately 150% of the amount actually
used, limited to the amount of the reserve, would be subject to taxation in
the fiscal year in which used. As the Bank intends to use the reserve
solely to absorb loan losses, a deferred tax liability of approximately
$467 has not been provided.
F-21
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
9. MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes
that the Bank meets all capital adequacy requirements to which it is
subject.
As of March 31, 1998 and June 30, 1997 and 1996, the most recent
notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are also
presented in the table.
F-22
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998:
Total capital
(to risk weighted assets) $ 10,014 14.4% $ 5,567 8.0% $ 6,958 10.0%
Tier 1 capital
(to risk weighted assets) 9,454 13.6 2,783 4.0 4,175 6.0
Tier 1 capital
(to average assets) 9,454 7.8 3,657- 3.0- 6,096 5.0
6,096 5.0
June 30, 1997:
Total capital
(to risk weighted assets) 8,974 15.0 4,791 8.0 5,989 10.0
Tier 1 capital
(to risk weighted assets) 8,499 14.2 2,395 4.0 3,593 6.0
Tier 1 capital
(to average assets) 8,499 8.4 3,046- 3.0- 5,077 5.0
5,077 5.0
June 30, 1996:
Total capital
(to risk weighted assets) 7,887 14.4 4,392 8.0 5,490 10.0
Tier 1 capital
(to risk weighted assets) 7,417 13.5 2,196 4.0 3,294 6.0
Tier 1 capital
(to average assets) 7,417 8.5 3,501- 4.0- 4,376 5.0
4,376 5.0
</TABLE>
F-23
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
10. PENSION AND COMPENSATION PLANS
Defined benefit plan
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association
("SBERA") Pension Plan. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in one consecutive twelve-month
period, beginning with such employee's date of employment, automatically
becomes a participant in the retirement plan. All participants are fully
vested after three years of service.
Net periodic pension cost included the following components:
Years Ended October 31,
-----------------------
1997 1996
---- ----
Service cost - benefits earned during the year ......... $ 70 $ 67
Interest cost on projected benefits .................... 36 32
Actual return on plan assets ........................... (71) (60)
Net amortization and deferral .......................... (3) (3)
Amortization of net loss ............................... 27 25
---- ----
$ 59 $ 61
==== ====
Total pension expense for the nine months ended March 31, 1998 and 1997 and
for the years ended June 30, 1997 and 1996 amounted to $53, $45, $60 and
$67, respectively.
According to the SBERA's actuary, the funded status of the plan is as
follows:
October 31,
-----------------
1997 1996
----- -----
Plan assets at fair value .................................. $ 620 $ 473
Actuarial present value of projected benefit obligation
(substantially all vested) ............................. 655 477
----- -----
Projected benefit obligation in excess of plan assets ...... (35) (4)
Unamortized net asset since adoption of SFAS No. 87 ........ (32) (35)
Unrecognized net gain ...................................... (118) (147)
----- -----
Accrued pension cost ....................................... $(185) $(186)
===== =====
The accumulated benefit obligation (substantially all vested) at October
31, 1997 amounted to $397, which was less than the plan assets at fair
value.
F-24
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
PENSION AND COMPENSATION PLANS (concluded)
Defined benefit plan (concluded)
For the plan years ended October 31, 1997 and 1996, actuarial assumptions
used in accounting were:
1997 1996
---- ----
Discount rate on benefit obligations ..................... 7.25% 7.50%
Expected long-term rate of return on plan assets ......... 8.00 8.00
Annual salary increases .................................. 5.00 5.00
401(k) plan
In addition to the defined benefit plans, the Bank provides a savings plan
which qualifies under Section 401(k) of the Internal Revenue Code and
provides for voluntary contributions by participating employees ranging
from one percent to fifteen percent of their compensation, subject to
certain limitations. The Bank will make matching contributions equal to 50%
of each employee's voluntary contribution, up to 3% of the employee's
compensation. Total expense under the plan for the nine months ended March
31, 1998 and 1997 and the years ended June 30, 1997 and 1996 amounted to
$22, $16, $24 and $18, respectively.
Supplemental executive retirement plan
The Bank has supplemental retirement agreements with certain current and
retired officers of the Bank which provide for supplemental compensation
payments upon retirement, subject to certain limitations as set forth in
the agreements. The present value of these future payments amounted to $96,
$75 and $63 at March 31, 1998 and June 30, 1997 and 1996, respectively.
11. COMMITMENTS AND CONTINGENCIES
General
In the ordinary course of business, various legal claims arise from time to
time and, in the opinion of management, these claims will have no material
effect on the Bank's consolidated financial statements.
F-25
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (continued)
Loan commitments
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, which
involve elements of credit and interest rate risk in excess of the amount
recognized in the accompanying consolidated balance sheets. The Bank's
exposure to credit loss is represented by the contractual amount of the
instruments. The Bank uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Financial instruments whose contract amount represents credit risk consist
of:
June 30,
March 31, ---------------
1998 1997 1996
---- ---- ----
Commitments to grant loans .......................... $5,063 $5,670 $1,679
Unadvanced funds on home equity lines-of-credit ..... 5,069 4,457 4,126
Unadvanced funds on commercial lines-of-credit ...... 1,966 1,347 1,822
Unadvanced funds on personal lines-of-credit ........ 295 213 134
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 payment of a fee. The commitments for home equity
lines-of-credit may expire without being drawn upon, therefore, 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. Commitments to grant loans and lines-of-credit are secured by real
estate or other collateral, if deemed necessary.
F-26
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
COMMITMENTS AND CONTINGENCIES (concluded)
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at March
31, 1998 and June 30, 1997 pertaining to banking premises and equipment,
future minimum rent commitments are as follows:
Year Ending March 31, June 30,
June 30, 1998 1997
--------------- -------------- ------------
1998 $ 56 $ 214
1999 244 224
2000 243 213
2001 208 178
2002 195 164
Thereafter 985 414
-------------- ------------
$ 1,931 $ 1,407
============== ============
Two leases contain an option to extend for two additional five year
periods. The cost of such rentals is not included above. Total rent expense
for nine months ended March 31, 1998 and 1997 and the years ended June 30,
1997 and 1996 amounted to $178, $156, $210 and $184, respectively.
12. RELATED PARTY TRANSACTIONS
Certain of the Bank's trustees and officers and their affiliates are also
customers of the Bank. At March 31, 1998 and June 30, 1997 and 1996, total
loans to such persons amounted to $643, $563 and $655, respectively. The
loans were made in the ordinary course of business at the Bank's normal
credit terms, including interest rate and collateral requirements and do
not represent more than a normal risk of collection.
F-27
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of estimated fair
values of all financial instruments where it is practicable to estimate
such values. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
investments approximate fair values.
Certificates of deposit: The carrying amount of certificates of
deposit approximates fair value.
Securities available for sale: Fair values for securities available
for sale are based on quoted market prices.
FHLB stock: The carrying value of FHLB stock is deemed to approximate
fair value.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. At June 30, 1996, fair values for residential mortgages are
based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics and credit risk. Fair values for other loans,
including residential mortgage loans at March 31, 1998 and June 30,
1997, are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms
and adjusted for credit risk. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
F-28
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Deposits: The fair values disclosed for non-certificate accounts are,
by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Federal Home Loan Bank advances: The fair values for the FHLB advances
are estimated using discounted cash flow analyses based on rates
currently in effect for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate
fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending com-mitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing and are not
material.
The estimated fair values and related carrying amounts of the Bank's
financial instruments are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
March 31, 1998 1997 1996
------------------ ------------------ -------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
Financial assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents ... $ 11,126 $ 11,126 $ 9,129 $ 9,129 $ 7,092 $ 7,092
Certificates of deposit ..... 1,500 1,500 500 500 -- --
Securities available for sale 42,685 42,685 24,696 24,696 20,803 20,803
FHLB stock .................. 723 723 538 538 454 454
Loans, net .................. 72,197 72,545 66,934 68,070 59,667 60,243
Accrued interest receivable . 993 993 821 821 699 699
Financial liabilities:
Deposits .................... 108,056 108,091 92,897 92,893 81,189 81,258
Federal Home Loan Bank
advances ................ 12,404 12,436 2,622 2,648 369 358
</TABLE>
F-29
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
14. CHARITABLE FOUNDATION
During 1997, the Bank established a private charitable foundation (the
"Foundation") to provide grants and donations to charitable organizations
and various other deserving entities. The Foundation is not a subsidiary of
the Bank and maintains a tax-exempt status. The Foundation was funded by a
donation from the Bank of marketable equity securities with a zero cost
basis and a market value of $53 at the date of the transfer. Such
securities had been classified as available for sale and, accordingly, the
transfer resulted in the Bank recognizing the net unrealized appreciation
of the securities of $53 in the consolidated statement of income.
15. REORGANIZATION
On August 19, 1997, Summit Bank, a Massachusetts-charted mutual savings
bank, was reorganized into a Massachusetts-chartered mutual holding
company, Service Bancorp, MHC ("Corporation") pursuant to Section 2 of
Chapter 167H of the Massachusetts General Laws. Concurrent with the
reorganization, a Massachusetts-chartered stock savings bank was
established as a subsidiary of the Corporation, known as Summit Bank (the
"Bank"). The Corporation exchanged certain of its assets and liabilities,
including all of its deposits, for 100% of the common stock of Summit Bank.
The Bank has continued the operations of the predecessor mutual savings
bank. The transaction has been accounted for as a pooling of interests and
has no effect on the consolidated financial results of the Corporation and
the Bank.
16. PLAN OF CONVERSION (UNAUDITED)
On March 12, 1998, the Board of Trustees of Service Bancorp, MHC voted to
establish Service Bancorp, Inc. (the "Stock Company"), a capital stock
holding company incorporated in Massachusetts. The Bank will become a state
chartered capital stock bank wholly-owned by the Stock Company. In
addition, as part of a Plan of Conversion (the "Plan") the Stock 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 members of the general public. After
completion of the Offering, Service Bancorp, MHC will be the 53% owner of
the Stock Company.
F-30
<PAGE>
SUMMIT BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
March 31, 1998 and 1997 (Unaudited) and June 30, 1997 and 1996
(Dollars in Thousands)
PLAN OF CONVERSION (UNAUDITED) (concluded)
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 Stock Company and the Bank may not declare
or pay dividends on and the Stock 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 March 31, 1998, no offering costs have been incurred. In
addition, as part of the Offering, the Bank intends to enter into
employment agreements with certain executive officers.
F-31
<PAGE>
GLOSSARY
Associate "Associate" of a person means: (i) any corporation or
organization (other than the Bank or its subsidiaries or the
Stock Company) of which such person is a director, officer,
partner or 10% shareholder; (ii) any trust or other estate in
which such person has a substantial beneficial interest or
serves as trustee or in a similar fiduciary capacity;
provided, however that such term shall not include any
employee stock benefit plan of the Stock Company or the Bank
in which such a person has a substantial beneficial interest
or as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or relative of such
spouse, who either has the same home as such person or who is
a director or officer of the Bank or its subsidiaries or the
Stock Company
Bank Summit Bank, a Massachusetts stock savings bank
BIF The Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as amended
Commissioner The Massachusetts Commissioner of Banks
Community
Offering The offering for sale to the general public of shares of
common stock not subscribed for in the Subscription Offering,
with preference given to natural persons residing in the town
of Medway, Massachusetts.
Conversion
Transaction A mutual-to-stock conversion of the Mutual Company
DIF The Depositors Insurance Fund
Division The Massachusetts Division of Banks
Eligible
Account Holders Depositors of the Bank with aggregate account balances of at
least $50 as of the close of business on March 31, 1997
ERISA Employee Retirement Income Security Act of 1974, as amended
ESOP The Service Bancorp, Inc. Employee Stock Ownership Plan and
Trust
Estimated
Valuation
Range The estimated pro forma market value of the common stock to be
issued in the Offering, or $17,000,000 to $23,000,000. The
maximum of the Estimated Valuation Range may be increased to
$26,450,000 without a resolicitation of subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 noon, Massachusetts time, on September 15, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
G-1
<PAGE>
FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991,
as amended
FHLB The Federal Home Loan Bank
FNMA Federal National Mortgage Association
FRB The Federal Reserve Board
Independent
Valuation The appraisal of the pro forma market value of the Common
Stock to be issued in the reorganization and Offering, as
determined by RP Financial, LC., Arlington, Virginia
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority
Ownership
Interest The shares of common stock of the Stock Company issued in the
Offering to persons other than the Mutual Company.
Minority
Stockholders Stockholders of the Stock Company other than the Mutual
Company
MMDA Money Market Demand Account
Mutual Company Service Bancorp, MHC, a Massachusetts mutual holding company
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable Order of Withdrawal account
NPV Net portfolio value
Offering The offer and sale by the Stock Company of between 799,000 and
1,081,000 shares of common stock, subject to adjustment to
1,243,150 shares of common stock to depositors and others in
the Subscription Offering and the Community Offering pursuant
to this prospectus
Offering Range The offer and sale by the Stock Company of between 799,000 and
1,081,000 shares (subject to adjustment to 1,243,150 shares)
of common stock in the Offering pursuant to this prospectus
Order Form The form for ordering common stock accompanied by a
certification concerning certain matters
Qualifying
Deposits Deposit accounts with aggregate balances of $50 or more as of
specified dates
Recognition Plan The restricted stock plan to be submitted for approval at
a meeting of the Stock Company's shareholders to be held no
earlier than six months after the completion of the Offering
REO Real estate owned
G-2
<PAGE>
SEC Securities and Exchange Commission
Stock Company Service Bancorp, Inc., the parent holding company for Summit
Bank, and the issuer of the shares of common stock in the
Offering
Stock Option
Plan The stock option plan for directors, trustees, officers and
employees to be submitted for approval at a meeting of the
Stock Company's shareholders to be held no earlier than six
months after the completion of the Offering
Subscription
Offering The offering of nontransferable rights to subscribe for the
common stock, in order of priority, to Eligible Account
Holders, Supplemental Eligible Account Holders, the Bank's
tax-qualified employee plans, including the ESOP and
employees, officers, directors and trustees of the Bank and
the Mutual Company
Subscription
Price The $10.00 price per share at which the common stock will be
sold in the Offering
Supplemental
Eligible Account
Holders Depositors of the Bank with aggregate account balances of at
least $50 on June 30, 1998, who are not Eligible Account
Holders
G-3
<PAGE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Service Bancorp, Inc. or Summit Bank. This prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares of common stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
SERVICE BANCORP, INC.
(Proposed Holding Company for
Summit Bank)
Up to 1,243,150 Shares
Common Stock
($.01 par value per share)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
August 11, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until September 15, 1998 or 25 days after the commencement of the Offering of
common stock, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
G-4
