As filed with the Securities and Exchange Commission on June 15, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SUMMIT BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Massachusetts 6712 (To be applied for)
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial classification) identification number)
</TABLE>
81 Main Street
Medway, Massachusetts 02053
(508) 533-3100
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Eugene G. Stone
President and Chief Executive Officer
81 Main Street
Medway, Massachusetts 02053
(508) 533-3100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Robert B. Pomerenk, Esq.
Eric Luse, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed maximum
Title of each class of Amount to be maximum offering aggregate Amount of
securities to be registered registered price per share offering price (1) registration fee
--------------------------- ---------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 1,190,250 shares $10.00 11,902,500 $3,512
====================================== =================== ==================== ====================== ================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
PROSPECTUS
Up to 1,190,250 shares of common stock
SUMMIT BANCORP, INC.
81 Main Street
Medway, Massachusetts 02053
(508) 533-4343
- --------------------------------------------------------------------------------
Summit Bancorp, Inc., a Massachusetts-chartered stock holding company,
is offering for sale up to 1,190,250 shares, or 45%, of its common stock
pursuant to the terms of a stock issuance plan. Summit Bancorp, Inc. will issue
the remaining 55% of its common stock to Service Bancorp, MHC, a Massachusetts
mutual holding company. Summit 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, Summit Bancorp, Inc. and Service
Bancorp, MHC are so similar, we will refer to Summit Bank as the "Bank", we will
refer to Summit 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 45% of these shares, or between
765,000 and 1,035,000 shares, to depositors of the Bank and members of the
general public. The remaining 55% of the Stock Company's shares, or between
935,000 and 1,265,000 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 1,190,250 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................................ 765,000 900,000 1,035,000 1,190,250
o Offering expenses............................... $460,760 $485,600 $500,000 $500,000
o Net proceeds.................................... $7,189,240 $8,514,400 $9,850,000 $11,402,500
o Net proceeds per share.......................... $9.40 $9.46 $9.52 $9.58
</TABLE>
Please refer to Risk Factors beginning on page _____ 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 "____."
For information on how to subscribe, call the Stock Information Center
at (508) 533-________.
-----------------------
Prospectus dated August __, 1998
Trident Securities, Inc.
<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............................................10
RISK FACTORS.................................................................12
SERVICE BANCORP, MHC.........................................................17
SUMMIT BANCORP, INC..........................................................18
SUMMIT BANK..................................................................18
REGULATORY CAPITAL COMPLIANCE................................................19
USE OF PROCEEDS..............................................................20
DIVIDEND POLICY..............................................................21
MARKET FOR COMMON STOCK......................................................21
CAPITALIZATION...............................................................22
PRO FORMA DATA...............................................................23
PARTICIPATION BY MANAGEMENT..................................................28
THE OFFERING AND THE REORGANIZATION..........................................29
SUMMIT BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME...................................41
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................42
BUSINESS OF THE COMPANY......................................................55
BUSINESS OF THE BANK.........................................................55
FEDERAL AND STATE TAXATION...................................................77
REGULATION...................................................................78
MANAGEMENT OF THE STOCK COMPANY..............................................87
MANAGEMENT OF THE BANK.......................................................89
RESTRICTIONS ON ACQUISITION OF THE STOCK COMPANY AND THE BANK................98
DESCRIPTION OF CAPITAL STOCK OF THE STOCK COMPANY...........................102
TRANSFER AGENT AND REGISTRAR................................................103
LEGAL AND TAX MATTERS.......................................................103
EXPERTS ...................................................................103
ADDITIONAL INFORMATION......................................................103
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 ___ 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 and directors may obtain an 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 employee stock ownership plan. 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___, 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.
4
<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-______
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 Summit Bancorp, Inc. and the Bank. References in this prospectus
to the "Stock Company" mean Summit 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
Summit 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 45% of
the Stock Company's common stock and the Mutual Company will acquire 55% 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 __.
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 __ to __.
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 not yet adopted regulations governing the
conversion of Massachusetts-chartered mutual holding companies to stock form.
Accordingly, there can be no assurance that the Mutual Company will convert to
stock form or of the conditions that the Division would impose on a conversion
transaction by the Mutual Company. 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. 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 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 765,000 and 1,035,000
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 1,190,250
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 ___ to ___.
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 45% of these shares, or between 765,000 shares and
1,035,000 shares, to qualifying depositors and others pursuant to this
prospectus. The Board determined to sell 45% 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 months after the Offering. The 55% of the shares of common stock
that are not sold in the Offering will be issued to the Mutual Company.
7
<PAGE>
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 $11.9 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 Stock Company's employee stock ownership plan. 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 __, 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_____, 1998, without regulatory approval.
Benefits to Management from the Offering
Our full-time employees will participate in our employee stock
ownership plan. 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 our officers, trustees and directors. If we adopt the stock
award plan, certain officers, trustees and directors will be awarded shares of
common stock at no cost to them. 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. In addition, the Bank intends
to enter into employment agreements with certain executive officers following
completion of the Offering. See pages__ to__.
8
<PAGE>
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 the payment of dividends to shareholders, the
repurchase of stock, and for other general corporate purposes.
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 __ and __.
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 "____." 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."
9
<PAGE>
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
---- ---- ----
(Dollars 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
Nine Months Ended Years Ended
March 31, June 30,
----------------- -----------------
1998 1997 1997 1996
---- ---- ---- ----
(Dollars in Thousands)
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
====== ====== ====== ======
- ----------
(1) Includes certificates of deposit and FHLB stock, which are not available
for sale.
10
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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
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios (1):
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.
11
<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 restricting (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, create 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
12
<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 Holding 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.
13
<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
$142,830. 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."
Proposed Stock Benefit Plans
Following the Offering, 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 41,400
shares of common stock at the maximum of the Offering Range. Such shares would
be granted to officers, trustees and directors of the Bank, the Stock Company
and the Mutual Company at no cost to these recipients, for a total value of
$414,000 at the maximum of the Offering Range. If such shares were issued from
the Stock Company's authorized but unissued shares, the dilution of such
issuance to public stockholders' voting interests would be 1.73%. 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
14
<PAGE>
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. If the shares of common stock granted upon the
exercise of such options were issued from the Stock Company's authorized but
unissued shares, the dilution of such issuance to public stockholders' voting
interests would be 4.09%.
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 the insurance fund, depositors
and borrowers. 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 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 "_______," 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."
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<PAGE>
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 1,190,250 shares of common stock at $10 per share for
an aggregate purchase price of up to $11,902,500. 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
Reorganization and Offering--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
Conversion Transaction for three years following the Offering, subject to a
waiver by the Division for supervisory reasons or for compelling and valid
business reasons established to the satisfaction of the Division. To date,
however, the Division has not yet issued regulations regarding the conversion of
a Massachusetts mutual holding company to stock form, and there can be no
assurance that such regulations will be effective at such time as the Mutual
Company may wish to undertake a Conversion Transaction. Moreover, there can be
no assurance as to what form such regulations will take and what conditions the
Division may impose on a Conversion Transaction. Neither the Bank nor the 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
16
<PAGE>
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 Holding
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. Although
the Bank maintains a "Key Man" life insurance policy for Mr. Stone, the loss of
Mr. Stone as President and Chief Executive Officer would adversely affect the
operations of the Bank.
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 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."
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.
17
<PAGE>
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.
SUMMIT BANCORP, INC.
Summit 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
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."
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<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
--------------------------------------------------------------------------------
1,190,250
765,000 900,000 1,035,000 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% $12,559 9.34% $ 13,060 9.67% $ 13,573 10.00% $ 14,163 10.38%
======== ==== ======= ==== ======== ===== ======== ===== ======== =====
Leverage capital:
Capital level (3)...... $ 9,454 7.78% $12,123 9.72% $ 12,624 10.07% $ 13,137 10.43% $ 13,727 10.83%
Requirement (4)........ 4,859 4.00% 4,990 4.00% 5,015 4.00% 5,039 4.00% 5,068 4.00
-------- ---- ------- ---- -------- ----- -------- ---- -------- ----
Excess............... $ 4,595 3.78% $ 7,133 5.72% $ 7,609 6.07% $ 8,098 6.43% $ 8,659 6.83%
======== ==== ======= ==== ======== ===== ======== ==== ======== ====
Risk-based capital:
Capital level (3)(5)... $ 10,014 14.39% $12,683 17.81% $ 13,184 18.43% $13,697 19.07% $ 14,287 19.79%
Requirement............ 5,567 8.00 5,698 8.00% 5,722 8.00% 5,747 8.00% 5,776 8.00
-------- ---- ------- ---- -------- ----- -------- ---- -------- ----
Excess............... $ 4,447 6.39% $ 6,985 9.81% $ 7,462 10.43% $ 7,950 11.07% $ 8,511 11.79%
======== ==== ======= ==== ======== ===== ======== ===== ======== =====
</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.
19
<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
---------------------------------------------------------
765,000 900,000 1,035,000 1,190,250
Shares Shares Shares Shares
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Gross proceeds...................................... $ 7,650 $ 9,000 $ 10,350 $ 11,903
Expenses............................................ (476) (500) (500) (500)
--------- --------- --------- ---------
Estimated net proceeds.............................. $ 7,174 $ 8,500 $ 9,850 $ 11,403
========= ========= ========= =========
</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--Stock Option Plan" and "--Recognition 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--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 but not
be limited to: (i) market and financial factors such as the price at which the
stock is trading in the market, the
20
<PAGE>
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
Reorganization and Offering--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 Reorganization and Offering--Liquidation Rights."
In addition, the Bank's ability to pay cash dividends on its common stock is
subject to various other federal and state restrictions. Under FDIC regulations,
the Bank would be prohibited from paying dividends if, among other things, the
Bank 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 "_____." 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 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.
21
<PAGE>
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
-------------------------------------------------------------------
1,190,250
765,000 900,000 1,035,000 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) .............................. -- (612) (720) (828) (952)
Retained earnings(4) ...................... 9,890 9,890 9,890 9,890 9,890
Less:
Common stock acquired
by ESOP(5) ............................. -- (612) (720) (828) (952)
Common stock acquired
by Recognition ......................... -- (360) (360) (414) (476)
--------- --------- --------- --------- ---------
Total stockholders' equity ................ $ 9,890 $ 16,146 $ 17,324 $ 18,498 $ 19,865
========= ========= ========= ========= =========
</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--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."
22
<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) 150,000 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 5.66% and 5.39%,
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.
23
<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--Recognition 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
----------------------------------------------------------------
1,190,250
765,000 900,000 1,035,000 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 ................................................ $ 7,650 $ 9,000 $ 10,350 $ 11,903
Less expenses ................................................. 476 500 500 500
-------- -------- -------- --------
Estimated net proceeds ...................................... 7,174 8,500 9,850 11,403
Less: common stock purchased by ESOP ....................... (612) (720) (828) (952)
Less: common stock purchased by Recognition Plan ........... (306) (360) (414) (476)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ....................... $ 6,256 $ 7,420 $ 8,608 $ 9,975
======== ======== ======== ========
For the 9 months ended March 31, 1998
Consolidated net income
Historical income ........................................... $ 955 $ 955 $ 955 $ 955
Pro forma income on net proceeds ............................ 152 180 209 242
Pro forma ESOP adjustment ................................... (28) (32) (37) (43)
Pro forma Recognition Plan adjustment (3) ................... (28) (32) (37) (43)
-------- -------- -------- --------
Pro forma net income ...................................... $ 1,051 $ 1,071 $ 1,090 $ 1,111
======== ======== ======== ========
Net income per share:
Historical .................................................. $ 0.58 $ 0.49 $ 0.43 $ 0.37
Pro forma income on net proceeds ............................ 0.09 0.09 0.09 0.09
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) .................. $ 0.63 $ 0.54 $ 0.48 $ 0.42
======== ======== ======== ========
At March 31, 1998:
Stockholders' equity:
Historical .................................................. $ 9,890 $ 9,890 $ 9,890 $ 9,890
Estimated net proceeds ...................................... 7,174 8,500 9,850 11,403
Less: common stock acquired by ESOP (2) ..................... (612) (720) (828) (952)
Less: common stock acquired by Recognition Plan (3) ......... (306) (360) (414) (476)
-------- -------- -------- --------
Pro forma stockholders' equity (5) ......................... $ 16,146 $ 17,310 $ 18,498 $ 19,865
======== ======== ======== ========
Stockholders' equity per share:
Historical .................................................. $ 5.82 $ 4.95 $ 4.30 $ 3.74
Estimated net proceeds ...................................... 4.22 4.25 4.28 4.31
Less: common stock acquired by ESOP ......................... (0.36) (0.36) (0.36) (0.36)
Less: common stock acquired by Recognition Plan ............. (0.18) (0.18) (0.18) (0.18)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3)(4)(5) ........... $ 9.50 $ 8.66 $ 8.04 $ 7.51
======== ======== ======== ========
Offering price as a multiple of pro forma net earnings
per share (annualized) ...................................... 11.90x 13.89x 15.63x 17.86x
======== ======== ======== ========
Offering price as a percentage of pro forma stockholders'
equity per share ............................................ 105.26% 115.47% 124.38% 133.16%
======== ======== ======== ========
</TABLE>
(Footnotes on next page)
24
<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) 4,590, 5,400, 6,210 and 7,142 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--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
30,600, 36,000, 41,400, and 47,610 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 $0.74, $0.64, $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 $8.82, $8.09, $7.57
and $7.11 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--Recognition
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 76,500, 90,000,
103,500 and 119,025 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
$8.85, $8.14, $7.63 and $7.19, respectively. See "Management of the
Bank--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."
25
<PAGE>
<TABLE>
<CAPTION>
At or For the Fiscal Year Ended June 30, 1997
Based upon the Sale for $10.00 per share of
----------------------------------------------------------------
1,190,250
765,000 900,000 1,035,000 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 ................................................ $ 7,650 $ 9,000 $ 10,350 $ 11,903
Less expenses ................................................. 476 500 500 500
-------- -------- -------- --------
Estimated net proceeds ...................................... 7,174 8,500 9,850 11,403
Less: common stock purchased by ESOP (2) .................... (612) (720) (828) (952)
Less: common stock purchased by Recognition Plan (3) ........ (306) (360) (414) (476)
-------- -------- -------- --------
Estimated net proceeds, as adjusted ....................... $ 6,256 $ 7,420 $ 8,608 $ 9,975
======== ======== -------- ========
For the 12 Months Ended June 30, 1997:
Historical .................................................. $ 1,082 $ 1,082 $ 1,082 $ 1,082
Pro forma income on net proceeds ............................ 212 252 292 339
Pro forma ESOP adjustment (2) ............................... (37) (43) (50) (57)
Pro forma Recognition Plan adjustment (3) ................... (37) (43) (50) (57)
-------- -------- -------- --------
Pro forma net income ...................................... $ 1,220 $ 1,248 $ 1,274 $ 1,307
======== ======== ======== ========
Net income per share:
Historical .................................................. $ 0.66 $ 0.56 $ 0.49 $ 0.42
Pro forma income on net proceeds ............................ 0.13 0.13 0.13 0.13
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) .................. $ 0.75 $ 0.65 $ 0.58 $ 0.51
======== ======== ======== ========
At June 30, 1997:
Stockholders' equity:
Historical .................................................. $ 8,695 $ 8,695 $ 8,695 $ 8,695
Estimated net proceeds ...................................... 7,174 8,500 9,850 11,403
Less: common stock acquired by ESOP (2) ..................... (612) (720) (828) (952)
common stock acquired by Recognition Plan (3) ......... (306) (360) (414) (476)
-------- -------- -------- --------
Pro forma stockholders' equity (5) ......................... $ 14,951 $ 16,115 $ 17,303 $ 18,670
======== ======== ======== ========
Stockholders' equity per share:
Historical .................................................. $ 5.11 $ 4.35 $ 3.78 $ 3.29
Estimated net proceeds ...................................... 4.22 4.25 4.28 4.31
Less: Common stock acquired by ESOP (2) ..................... (0.36) (0.36) (0.36) (0.36)
Common stock acquired by Recognition Plan (3) ......... (0.18) (0.18) (0.18) (0.18)
-------- -------- -------- --------
Pro forma stockholders' equity per share(3)(4)(5) ........... $ 8.79 $ 8.06 $ 7.52 $ 7.06
======== ======== ======== ========
Offering price as a multiple of pro forma net earnings per
share ....................................................... 13.33x 15.38x 17.24x 19.61x
======== ======== ======== ========
Offering price as a percentage of pro forma stockholders'
equity per share ............................................ 113.77% 124.07% 132.98% 141.64%
======== ======== ======== ========
</TABLE>
(Footnotes on next page)
26
<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) 6,120, 7,200, 8,280 and 9,522 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--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
30,600, 36,000, 41,400, and 47,610 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 $0.63, $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 $9.51, $8.68, $8.08 and $7.55
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--Recognition 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 76,500, 90,000,
103,500 and 119,025 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
$9.52, $8.71, $8.13 and $7.62, respectively. See "Management of the
Bank--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."
27
<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 order. 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--Recognition 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
Michael A. Dalrymple Vice President 200 2,000 *
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 as a group
(21 persons) 73,950 $739,500 8.2%
====== ======== ===
</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.
28
<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; and (ii) the Mutual Company will contribute 100% of
the Bank's outstanding common stock to the Stock Company; and (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 45% of the shares issued in the Offering, and the number of
shares issued to the Mutual Company will be equal to 55% of the shares issued in
the Offering. The sale of 45% 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:
The Mutual Public
Company Stockholders
(a Massachusetts
mutual holding
company)
55% of the 45% of the
common common
stock stock
The Stock Company (a Massachusetts corporation)
100% of the
common stock
The 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, and to establish a structure that would enable the Bank to raise
additional equity capital and compete more effectively in the financial services
marketplace.
29
<PAGE>
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 Bank did not form the
mid-tier Stock Company at the time of the formation of the Mutual Company in
August 1997 because Massachusetts regulations did not specifically authorize the
two-tier structure at that time.
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.
See "Regulation--Holding Company Regulation--Conversion of the Mutual Company to
Stock Form."
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 45.0% of
the estimated pro forma market value of the common stock based on the
Independent Valuation. The aggregate purchase price of the common stock to be
sold in the Offering will range from $7.7 million to $10.4 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 1,190,250 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, 55% 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 765,000 shares or more than
1,035,000 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
30
<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 765,000 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 45% of the Common Stock, or 900,000
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
31
<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 1,190,250 shares or fewer than 765,000
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."
32
<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: Employee Stock Ownership Plan. The ESOP shall be given the
opportunity to purchase up to 8% of the common stock issued in the Offering. In
the event of an oversubscription in the Offering, subscriptions for shares by
the ESOP may be satisfied, in whole or in part, through open market purchases by
the ESOP subsequent to the closing of the 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 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.
33
<PAGE>
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," "resided" 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.
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
34
<PAGE>
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____, 1998, unless extended by the Bank and the
Stock Company for up to an additional 45 days (i.e., until October __, 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 __, 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 (765,000
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 __, 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 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
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<PAGE>
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 "Summit 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 __________, 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.
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,
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<PAGE>
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 prohibits the Bank from lending funds or extending credit to any
persons to purchase common stock in the Offering.
Limitations upon Purchases of Common Stock
The following additional limitations have been imposed upon purchases
of shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the 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
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.
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<PAGE>
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.
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.
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<PAGE>
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
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.
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<PAGE>
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.
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<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.
41
<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 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 commercial real estate loans have more
than doubled since June 30, 1996 and currently represent 16.67%
of total
42
<PAGE>
loans, up from 9.72% of total loans. Likewise, commercial
business loans have also 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".
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<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."
44
<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.
45
<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.
46
<PAGE>
Average Balance Sheet. The following table presents, 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......... $12,804 $ 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............... 111.63% 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.
47
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
Interest Interest
Average Earned/ Average Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ----------
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.
48
<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)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
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
49
<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
50
<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
51
<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 Stock 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
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<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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<PAGE>
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 $13.1
million, or 10.0% 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
54
<PAGE>
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.
BUSINESS OF THE 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.
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
55
<PAGE>
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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<PAGE>
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--Increased Lending Risks Associated with Commercial Real Estate Mortgage
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.
57
<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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<PAGE>
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 -- -- 7,589
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 $27,328
Commercial ............................ -- 7,686 7,686
Construction .......................... -- 1,206 1,206
------- ------- -------
Total real estate loans ............. 12,667 23,553 36,220
Other loans:
Consumer loans ........................ 1,139 8 1,147
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 Lending." Depending on the
size of the loan and the term for which it is fixed, the Bank may borrow from
the FHLB
59
<PAGE>
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--Lending Risks Associated with Commercial Real Estate Mortgage 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.
61
<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.
62
<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 federal regulators in their examination of
financial institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
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,
63
<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.
64
<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.
<TABLE>
<CAPTION>
June 30,
March 31, ------------------------------
1998 1997 1996
------------- ------------- -------------
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C>
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 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%
============= ============= =============
</TABLE>
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.
65
<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
-------- -------- -------- --------
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%
====== ======
66
<PAGE>
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."
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%
===== ===== ===== =====
67
<PAGE>
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>
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
68
<PAGE>
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 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.
69
<PAGE>
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)
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
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>
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>
70
<PAGE>
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)
Debt securities:
<S> <C> <C> <C> <C> <C> <C>
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>
<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 Year 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>
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>
71
<PAGE>
Sources of Funds
General. Deposits, repayments and prepayments of loans, proceeds from
sales of loans and securities, proceeds from maturing securities and cash flows
from operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes. The Bank utilizes borrowed funds from the
FHLB to fund its loans in connection with its management of the interest rate
sensitivity of its assets and liabilities.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of
non-interest-bearing checking accounts and interest-bearing NOW accounts,
savings accounts and money market 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, 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%
======== ======== ======== ========
72
<PAGE>
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%
=======
73
<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.
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Years Ended June 30,
--------------- --------------------
1998 1997 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Maximum balance............................................... $14,451 $ 2,641 $ 3,401 $ 833
Average balance............................................... $ 5,648 $ 2,003 $ 2,161 $ 365
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
June 30,
March 31, -------------------------------
1998 1997 1996
------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.................................... $ 12,404 $ 2,622 $ 369
Weighted average interest rate of FHLB advances 5.27% 5.69% 5.76%
</TABLE>
74
<PAGE>
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.
75
<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
Stock Bank--Compensation of Officers and Directors through Benefit Plans" for a
description of certain compensation and benefit programs offered to the Bank's
employees.
76
<PAGE>
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 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.
77
<PAGE>
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.
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
78
<PAGE>
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.
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
79
<PAGE>
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 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
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leverage and risk-based capital requirements on individual institutions when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
capital positions, well above the minimum levels.
The FDIC has also proposed that a bank's interest rate risk exposure
should be quantified using either the measurement system set forth in the
proposal or the institution's internal model for measuring such exposure.
Management of the Bank has not determined what effect, if any, the proposed
interest rate risk component would have on the Bank's capital if adopted as
proposed.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit program; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance 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).
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"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or to dismiss directors or officers, and restrictions
on interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things: (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership, the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for 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.
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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 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
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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 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."
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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 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. See "The Reorganization and
Offering--Conversion of Mutual Company to Stock Form."
If the Mutual Company decides that it is in its best interest to waive
a particular dividend to be paid by the 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.
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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. 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.
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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.
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.
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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
Michael A. Dalrymple 53 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.
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 Stock 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.
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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
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.
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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
Michael A. Dalrymple 53 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.
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.
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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.
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
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as Controller and Vice President of Financial Planning. His principal areas of
responsibility for the Bank include financial reporting, financial planning and
liquidity management.
Michael A. Dalrymple has been employed by the Bank since 1988,
initially as the Bank's Senior Loan Officer and currently as Vice President of
Residential and Consumer Lending.
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.
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.
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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 awards (#) 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--Stock Award
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 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.
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Employment and Severance Agreements
Employment Agreements. The Bank intends to enter into employment
agreements with _______________. Each of the agreements has a term of 36 months.
On each anniversary date, the agreement may be extended for an additional twelve
months, so that the remaining term shall be 36 months. If the agreement is not
renewed, the agreement will expire 36 months following the anniversary date.
Under the agreements, the current Base Salaries for ___________________ are
$_______ and $_______, respectively. The Base Salary may be increased but not
decreased. In addition to the Base Salary, the agreement provides for, among
other things, participation in retirement plans and other employee and fringe
benefits applicable to executive personnel. The agreement provides for
termination by the Bank for cause at any time. In the event the Bank terminates
the executive's employment for reasons other than 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.
______________________ would receive an aggregate of $___________ pursuant to
their employment agreements upon a change in control of the Bank or the Stock
Company, based upon current levels of compensation. The Bank would also continue
the executive's life, health, dental and disability coverage for 36 months from
the date of termination. In the event the payments to the executive would
include an "excess parachute payment" as defined by Code Section 280G (relating
to payments made in connection with a change in control), the payments would be
reduced in order to avoid having an excess parachute payment.
Under the agreement, the executive's employment may be terminated upon
his retirement in accordance with any retirement policy established on behalf of
the executive and with his consent. Upon the executive's retirement, he will be
entitled to all benefits available to him under any retirement or other benefit
plan maintained by the Bank. In the event of the executive's disability for a
period of six months, the Bank may terminate the agreement provided that the
Bank will be obligated to pay him his Base Salary for the remaining term of the
agreement or one year, whichever is longer, reduced by any benefits paid to the
executive pursuant to any disability insurance policy or similar arrangement
maintained by the Bank. In the event of the executive's death, the Bank will pay
his Base Salary to his named beneficiaries for one year following his death, and
will also continue medical, dental, and other benefits to his family for one
year. The employment agreement provides that, following his termination of
employment, the executive will not compete with the Bank for a period of one
year.
Severance Agreements. The Bank will enter into severance agreements
(the "Severance Agreements") with certain other officers of the Bank which
provide certain benefits in the event of a change in control of the Bank or the
Stock Company. Each of the Severance Agreements provides for a term of 36
months. Commencing on each anniversary date, the Board of Directors may extend
any Severance Agreement for an additional year. The Severance Agreements enable
the Bank to offer to designated officers certain protections against termination
without cause in the event of a "change in control." For these purposes, a
"change in control" is defined generally to mean: (i) consummation of a plan of
reorganization, merger or sale of substantially all of the assets of the Bank or
the Stock Company where the Bank or the Stock Company is not the surviving
entity; (ii) changes to the Board of Directors of the Bank or the Stock Company
whereby individuals who constitute the current Board cease to constitute a
majority of the Board, subject to certain exceptions; (iii) a change in
"control" as defined by the BHCA, in effect on the date of the Severance
Agreement; (iv) a transaction or occurrence whereby any person becomes the
beneficial owner of 25% or more of the voting securities of the Stock Company;
and (v) a tender offer is made for 25% or more of the voting securities of the
Stock Company and 25% or more of the shareholders have tendered their shares.
These protections against termination without cause in the event of a change in
control are frequently offered by other financial institutions, and the Bank may
be at a competitive disadvantage in attracting and retaining key employees if it
does not offer similar protections. Although the Severance Agreements may have
the effect of making a takeover
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more expensive to an acquiror, the Bank believes that the benefits of enhancing
the Bank's ability to attract and retain qualified management persons by
offering the Severance Agreements outweighs any disadvantage of such agreements.
Following a change in control of the Stock Company or the Bank, an
officer is entitled to a payment under the Severance Agreement if the officer's
employment is involuntarily terminated during the term of such agreement, other
than for cause, as defined, or if the officer voluntarily terminates employment
during the term of such agreement as the result of a demotion, loss of title,
office or significant authority, reduction in his annual compensation or
benefits, or relocation of his principal place of employment by more than 30
miles from its location immediately prior to the change in control. In the event
that an officer who is a party to a Severance Agreement is entitled to receive
payments pursuant to the Severance Agreement, he will receive a cash payment up
to a maximum of three times the average of the three preceding years' annual
base salary and bonuses. In addition to the severance payment, each covered
officer is entitled to receive life, health, dental and disability coverage for
a period of up to 36 months from the date of termination. Notwithstanding any
provision to the contrary in the Severance Agreement, payments under the
Severance Agreements are limited so that they will not constitute an excess
parachute payment under Section 280G of the Internal Revenue Code.
Compensation of Officers and Trustees through Benefit Plans
The Bank's current tax-qualified employee pension benefit plans consist
of a defined benefit pension plan and a profit sharing plan with a salary
deferral feature under section 401(k) of the Code. As a result of the
reorganization, the 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 prior to the effective date of the ESOP. Benefits generally vest over a
seven year period. Benefits generally vest at the rate of 20% per year beginning
in the third year of service until a participant is 100% vested after seven
years or upon normal retirement (as defined in the ESOP), disability or death of
the participant or a change in control (as defined in the ESOP). A participant
who terminates employment for reasons other than death, retirement or disability
prior to seven years of credited service will forfeit the nonvested portion of
his benefits under the ESOP. Benefits will be payable, at the election of the
participant, in the form of common stock 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 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 76,500 shares, 90,000 shares,
103,500 shares or 119,025 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
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options, to the extent permitted under the Code, designed to result in a
beneficial tax treatment to the employee but no tax deduction to the 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 30,600 shares, 36,000 shares, 41,400 or 47,610 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 substantially 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.
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Absence of Cumulative Voting. The Articles of Organization provide that
there shall be no cumulative voting for the election of directors.
Authorization of Preferred Stock. The Articles of Organization of the
Stock Company authorize 2,000,000 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
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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.
Mutual Holding Company Structure
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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 5 million shares of serial
preferred stock having a par value of $.01 per share. The Stock Company
currently expects to issue between 765,000 and 1,035,000 shares, with an
adjusted maximum of 1,190,250 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.
Common Stock
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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 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
_________________________________, 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.
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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 ______________,
___________________, 81 Main Street, Medway, Massachusetts, (508) 533- 4343.
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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.
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.
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.
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.
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 (concluded)
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, ("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 Service Bancorp, known as Summit Bank (the "Bank"). Service
Bancorp 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 voted to
establish Summit Bancorp (the "Company"), a capital stock holding company
incorporated in Massachusetts. The Bank will become a state chartered
capital stock bank wholly-owned by the Company. In addition, as part of a
Plan of Conversion (the "Plan") the Company plans to offer for sale 47% of
the shares of its common stock (the "Minority Ownership Interest") in a
subscription offering initially to Bank depositors, employee benefit plans
of the Bank and other certain eligible subscribers ("the Offering"). Any
shares of common stock not sold in the Offering are expected to be sold to
members of the general public. After completion of the Offering, Service
Bancorp will be the 53% owner of the 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 Company and the Bank may not declare or pay
dividends on and the Company may not, repurchase, any of its shares of
common stock if the effect thereof would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if
such declaration, payment or repurchase would otherwise violate regulatory
requirements.
Offering costs will be deferred and reduce the proceeds from the shares
sold in the Offering. If the Offering is not completed, all costs will be
expensed. As of 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 Summit 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 __________, local time, on September __, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
G-1
<PAGE>
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 of between 765,000 and
1,035,000 shares of common stock, subject to
adjustment to 1,190,250 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
765,000 and 1,035,000 shares (subject to
adjustment to 1,190,250 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
SEC Securities and Exchange Commission
G-2
<PAGE>
Stock Company Summit 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 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 $50 on June 30, 1998, who are
not Eligible Account Holders
G-3
<PAGE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Summit Bancorp, Inc. or Summit Bank. This prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares of common stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
SUMMIT BANCORP, INC.
(Proposed Holding Company for
Summit Bank)
Up to 1,190,250 Shares
Common Stock
($.01 par value per share)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
August __, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until September __, 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.
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article VI of the Articles of Organization of Summit Bancorp, Inc. (the
"Corporation") sets forth circumstances under which directors, officers,
employees and agents of the Corporation may be insured or indemnified against
liability which they incur in their capacities as such.
6.6 Indemnification
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Massachusetts Business Corporation Law, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the Corporation
to provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B The right to indemnification conferred in Section A of this Section
6.6 shall include, in the case of a Director or officer at the level of Vice
President or above, and in the case of any other Officer or any employee may
include (in the discretion of the Board of Directors) the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses").
Notwithstanding the foregoing, expenses incurred by an indemnitee in advance of
the final disposition of a proceeding may be paid only upon the Corporation's
receipt of an undertaking by the indemnitee to repay such payment if he shall be
adjudicated or determined to be not entitled to indemnification under applicable
law. The Corporation may accept such undertaking without reference to the
financial ability of the Indemnitee to make such repayment. The rights to
indemnification and to the advancement of expenses conferred in Sections A and B
of this Section 6.6 shall be contract rights and such rights shall continue as
to an indemnitee who has ceased to be a Director, Officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators.
C. If a claim under Section A or B of this Section 6.6 is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee also shall be
entitled to be paid the expense of prosecuting or defending such suit. In (i)
any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, he shall not have acted in good faith in the reasonable
belief that his action was in the best interests of the Corporation. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Massachusetts Business Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an
<PAGE>
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section 6.6 or otherwise, shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Section 6.6 shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Charter, Bylaws, agreement, vote of stockholders or disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Massachusetts Business Corporation Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Section 6.6 with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation. Without
limiting the generality of the foregoing, the Corporation may enter into
specific agreements, commitments or arrangements for indemnification on any
terms not prohibited by law which it deems to be appropriate.
G. If the Corporation is merged into or consolidated with another
corporation and the Corporation is not the surviving corporation, the surviving
Corporation shall assume the obligations of the Corporation under this Section
6.6 with respect to any action, suit, proceeding or investigation arising out of
or relating to any actions, transactions or facts occurring at or prior to the
date of such merger or consolidation.
Item 25. Other Expenses of Issuance and Distribution
Amount
------
* Legal Fees........................................ $125,000
* Printing and Mailing.............................. 73,000
* Appraisal and Business Plan Fees and Expenses..... 32,500
* Accounting Fees and Expenses...................... 60,000
** Marketing Fees and Expenses....................... 187,500
* Filing Fees (SEC and Division of Banks of
The Commonwealth of Massachusetts)............. 12,000
* Conversion Agent.................................. 10,000
--------
** Total ............................................ $350,000
========
- ------------
* Estimated
** The Bank and the Company have retained Trident Securities, Inc.
("Trident") to assist in the sale of common stock on a best efforts
basis in the Subscription and Community Offerings. For purposes of
computing estimated expenses, it has been assumed that Trident will
receive fees and expenses of approximately $160,000, exclusive of
attorneys' fees of $27,500.
Item 26. Recent Sales of Unregistered Securities.
Not Applicable.
<PAGE>
Item 27. Exhibits and Financial Statement Schedules:
(a) List of Exhibits
The index of exhibits immediately preecedes the exhibits
attached to this registration statement.
(b) Financial Statement Schedules
No financial statement schedules are filed because the
required information is not applicable or is included in the consolidated
financial statements or related notes.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii)To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Medway,
Massachusetts on June 9, 1998.
SUMMIT BANCORP, INC. (in formation)
By: /s/ Eugene G. Stone
-------------------------------------
Eugene G. Stone
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Summit Bancorp, Inc. (the
"Company," and in formation) hereby severally constitute and appoint Eugene G.
Stone, as our true and lawful attorney and agent, to do any and all things in
our names in the capacities indicated below which said Eugene G. Stone may deem
necessary or advisable to enable the Company to comply with the Securities Act
of 1933, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the registration statement on Form SB-2
relating to the offering of the Company's Common Stock, including specifically,
but not limited to, power and authority to sign for us in our names in the
capacities indicated below the registration statement and any and all amendments
(including post-effective amendments) thereto; and we hereby approve, ratify and
confirm all that said Eugene G. Stone shall do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Eugene G. Stone President, Chief Executive June 9, 1998
- --------------------------- Officer and Director (Principal
Eugene G. Stone Executive Officer)
/s/ Warren W. Chase, Jr. Vice President and Treasurer June 9, 1998
- --------------------------- (Principal Financial and
Warren W. Chase, Jr. Accounting Officer)
/s/ James W. Murphy Director and Clerk June 9, 1998
- ---------------------------
James W. Murphy
/s/ Kelly A. Adler Director June 9, 1998
- ---------------------------
Kelly A. Adler
/s/ Harold W. Bemis Director June 9, 1998
- ----------------------------
Harold W. Bemis
/s/ William L. Casey Director June 9, 1998
- ----------------------------
William L. Casey
<PAGE>
Signatures Title Date
---------- ----- ----
/s/ Paul J. DeSimone Director June 9, 1998
- ----------------------------
Paul J. DeSimone
/s/ John G. Dugan Director June 9, 1998
- ----------------------------
John G. Dugan
/s/ Richard Giusti Director June 9, 1998
- ----------------------------
Richard Giusti
/s/ John Hasenjaeger Director June 9, 1998
- ----------------------------
John Hasenjaeger
/s/ Robert J. Heavey Director June 9, 1998
- ----------------------------
Robert J. Heavey
/s/ Thomas R. Howie Director June 9, 1998
- ----------------------------
Thomas R. Howie
/s/ Kenneth C.A. Isaacs Director June 9, 1998
- ----------------------------
Kenneth C.A. Isaacs
/s/ Paul V. Kenney Director June 9, 1998
- ----------------------------
Paul V. Kenney
/s/ Eugene R. Liscombe Director June 9, 1998
- ----------------------------
Eugene R. Liscombe
/s/ Robert A. Matson Director June 9, 1998
- ----------------------------
Robert A. Matson
/s/ Lawrence E. Novick Director June 9, 1998
- ----------------------------
Lawrence E. Novick
<PAGE>
================================================================================
As filed with the Securities and Exchange Commission on June 15, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM SB-2
------------------------------------
SUMMIT BANCORP, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
1.1 Engagement Letter between Summit Bank and Trident Securities, Inc.
1.2* Form of Agency Agreement among Summit Bancorp, Inc., Summit Bank, and
Trident Securities, Inc.
2 Service Bancorp, MHC and Summit Bank Stock Issuance Plan.
3.1 Articles of Organization of Summit Bancorp, Inc. (Incorporated herein by
reference to Exhibit A of the Service Bancorp, MHC and Summit Bancorp, Inc.
Stock Issuance Plan.)
3.2 Bylaws of Summit Bancorp, Inc. (Incorporated herein by reference to Exhibit
B of the Service Bancorp, MHC and Summit Bancorp, Inc. Stock Issuance
Plan.)
4 Form of Common Stock Certificate of Summit Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 State Tax Opinion of Wolf & Company, P.C.
8.3 Letter from RP Financial, LC. with respect to Subscription Rights
10.1 Form of Employment Agreement
10.2 Form of Severance Agreement
10.3 Employee Stock Ownership Plan
21 Subsidiaries of the Registrant
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)
23.2 Consent of Wolf & Company, P.C. with respect to Report on Financial
Statements
23.3 Consent of Wolf & Company, P.C. with respect to State Tax Opinion
23.4 Consent of RP Financial, LC.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Summit Bank and RP Financial, LC.
99.2 Business Plan Agreement between Summit Bank and RP Financial, LC.
99.3 Appraisal Report of RP Financial, LC.*
99.4 Marketing Materials*
99.5 Order and Acknowledgment Form*
- ---------------
*To be filed supplementally or by amendment.
EXHIBIT 1.1
<PAGE>
[TRIDENT SECURITIES LETTERHEAD]
April 23, 1998
Board of Directors
Summit Bank
81 Main Street
Medway, Massachusetts 02053-1867
RE: Mutual Holding Company Marketing Services
-----------------------------------------
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Summit Bank (the "Bank") concerning Trident's
investment banking services in connection with a minority stock offering (the
"Offering") by a to-be-formed mid-tier stock holding company subsidiary (the
"Stock Holding Company") of Service Bancorp, MHC, the Bank's existing mutual
holding company (the "MHC").
Trident is prepared to assist the Bank in connection with the Offering of shares
of common stock pursuant to the Bank's Stock Issuance Plan (the "Plan"). It is
expected that Trident will assist the Bank in the Offering as follows: (1) as
financial advisor to Management, (2) targeting sales efforts in the Bank's local
communities, (3) conducting information meetings for prospective investors (as
desired), (4) training and educating the Bank's management and employees
regarding the mechanics and regulatory requirements of the process, (5)
providing support for the administration and processing of orders and
establishing a Stock Information Center on site in Medway, and (6) listing stock
of the Bank on the NASDAQ System and acting as a market maker for the shares.
The specific terms of the services contemplated hereunder shall be set forth in
a definitive Sales Agency Agreement (the "Agreement") between Trident and the
Bank/Stock Holding Company to be executed on the date the Prospectus is declared
effective by the appropriate regulatory authorities. The price of the shares
during the Offering will be the price established by the Bank's and the Stock
Holding Company's Board of Directors, based upon an independent appraisal as
approved by the appropriate regulatory authorities, provided such price is
mutually acceptable to Trident and the Bank/Stock Holding Company.
At the appropriate time, Trident, in conjunction with its counsel will conduct
an examination of the relevant documents and records of the Bank as Trident and
its counsel deem necessary and appropriate. The Bank will make all documents,
records and other information deemed necessary by Trident or its counsel
available to them upon request.
For its services, Trident will receive the following compensation and
reimbursement from the Bank:
<PAGE>
Board of Directors
April 23, 1998
Page 2
1. A commission equal to two percent (2.0%) of the aggregate dollar
amount of capital stock sold in the subscription and community
offerings up to a maximum of $150,000, excluding any shares of stock
sold to the Bank's directors, officers, employees and the employee
benefit plans. Additionally, commissions will be excluded on those
shares sold to "Associates" of the Bank's directors and executive
officers. The term "Associates" as used herein shall have the same
meaning as that found in the Bank's Plan.
2. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by Trident and the Bank to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering.
3. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Bank and Trident.
4. Trident shall be reimbursed for out-of-pocket expenses incurred by
them and their counsel, whether or not the Agreement is consummated.
Trident's out-of-pocket expenses will not exceed $10,000 and its legal
fees will not exceed $27,500. The Bank will forward to Trident a check
in the amount of $10,000 as an advance payment to defray the expenses
of Trident.
It further is understood that the Bank will pay all other expenses of the
offering including but not limited to its attorneys' fees, National Association
of Securities Dealers ("NASD") filing fees, and fees of either Trident's
attorneys or other attorneys relating to any required state securities laws
filings, transfer agent charges, telephone charges, air freight, rental
equipment, supplies, fees relating to auditing and accounting and costs of
printing all documents necessary in connection with the foregoing. These
expenses are to be in addition to those enumerated in Paragraph (4) above.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the reorganization, the
Bank warrants that: (a) the Bank has not privately placed any securities within
the last 18 months; (b) there have been no material dealings within the last 12
months between the Bank and any NASD member or any person related to or
associated with any such member; (c) none of the officers or directors of the
Bank has any affiliation with the NASD; (d) except as contemplated by this
engagement letter with Trident, the Bank has no financial or management
consulting contracts outstanding with any NASD member or any person related to
or associated with any such member; (e) the Bank has not granted Trident a right
of first refusal with respect to the underwriting of any future offering of the
Bank's stock; and, (f) there has been no intermediary between Trident and the
Bank in connection with the public offering of the Bank's shares, and no NASD
member or any person related to or associated with any such member is being
compensated in any manner for providing such service.
The Bank agrees to indemnify and hold harmless Trident and each person, if any,
who controls the firm against all losses, claims, damages or liabilities, joint
or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under securities laws or under the common law,
that arise out of or are based upon the reorganization or the engagement
hereunder of Trident except to the extent such losses are the result of the
negligence or willful misconduct of Trident. If the foregoing indemnification is
unavailable for any reason, the Bank agrees to contribute to such Losses in the
proportion that its financial interest in the reorganization bears to that of
the indemnified parties. If the agreement is entered into with respect the
common stock to be issued in
<PAGE>
Board of Directors
April 23, 1998
Page 3
the reorganization, the Agreement will provide for indemnification, which will
be in addition to any rights that Trident or any other indemnified party may
have at common law or otherwise. The indemnification provision of this paragraph
will be superseded by the indemnification provisions of the Agreement entered
into by the Bank and Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (4) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Bank agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between Trident and the Bank shall be
only as set forth in the duly executed Agreement. Such Agreement shall be in
form and content satisfactory to Trident and among other things, there being in
Trident's opinion no material adverse change in the condition or obligations of
the Bank or no market conditions which might render the sale of the shares by
the Bank hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$10,000. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ Timothy E. Lavelle
-----------------------------
Timothy E. Lavelle
Managing Director
TEL:cs
Agreed and accepted this
____ day of _________, 1998
SUMMIT BANK
By: /s/ Eugene G. Stone
-----------------------------
Eugene G. Stone
President and CEO
EXHIBIT 2
<PAGE>
SERVICE BANCORP, MHC
SUMMIT BANK
STOCK ISSUANCE PLAN
<PAGE>
TABLE OF CONTENTS
1. Introduction - Business Purpose......................................... 1
2. Definitions............................................................. 1
3. The Holding Company..................................................... 6
Organization of the Holding Company............................ 6
Holding Company Articles of Organization and Bylaws............ 7
MHC to Control Holding Company ................................ 7
4. Conditions to Implementation of the Stock Offering...................... 7
5. Special Meeting of Corporators and Vote Required to Approve the Plan.... 8
6. Conversion of MHC to Stock Form......................................... 8
7. Shares to be Offered.................................................... 9
8. Independent Valuation and Purchase Price of Shares...................... 9
9. Timing of Sale of Minority Stock........................................ 11
10. Method of Offering Shares and Rights to Purchase Stock.................. 11
Subscription Offering.......................................... 11
Community Offering............................................. 13
Syndicated Community Offering.................................. 14
11. Additional Limitations on Purchases of Minority Stock................... 14
12. Payment for Stock....................................................... 16
13. Manner of Exercising Subscription Rights Through Order Forms............ 17
14. Undelivered, Defective or Late Order Form; Insufficient Payment......... 18
15. Completion of the Stock Offering........................................ 18
16. Market and Post-Offering Filings for Common Stock....................... 18
17. Stock Purchases by Management Persons after the Stock Offering.......... 19
18. Resales of Stock by Management Persons.................................. 19
19. Stock Certificates...................................................... 19
20. Restriction on Financing Stock Purchases................................ 19
21. Stock Benefit Plans..................................................... 19
22. Liquidation Account..................................................... 20
23. Employment and Other Severance Agreements............................... 21
24. Payment of Dividends and Repurchase of Stock............................ 22
25. Stock Offering Expenses................................................. 22
26. Interpretation.......................................................... 22
27. Amendment or Termination of the Plan.................................... 22
Exhibits
Exhibit A Articles of Organization of the Holding Company
Exhibit B Bylaws of the Holding Company
<PAGE>
1. Introduction - Business Purpose
The Board of Trustees of Service Bancorp, MHC, a
Massachusetts-chartered mutual holding company (the "MHC") and the Board of
Directors of Summit Bank, the Massachusetts-chartered stock savings bank
subsidiary of the MHC (the "Bank"), have determined that it is in the best
interests of the MHC and of the Bank to establish a Massachusetts subsidiary
holding company (the "Holding Company") as a direct subsidiary of the MHC to
hold 100% of the capital stock of the Bank. In addition, the Board of Trustees
of the MHC and the Board of Directors of the Bank have determined that it is in
the best interests of the MHC and of the Bank for the Holding Company to offer
for sale up to 49% of its Common Stock in a stock offering on a priority basis
to qualifying depositors, Tax-Qualified Employee Plans of the Bank, and
employees, officers, directors, and trustees of the Bank and of the MHC, with
any remaining shares to be offered to the public in a Community Offering. In the
event the Holding Company is not established, the Board of Trustees and the
Board of Directors may elect to proceed with a stock offering by the Bank
directly. In such event, any reference herein to a Stock Offering by the Holding
Company shall mean a stock offering by the Bank directly, and the terms and
conditions of the Stock Offering described herein shall apply to the stock
offering by the Bank.
The primary purpose of the Stock Offering is to raise additional
capital for expansion of the business activities of the Bank to allow the Bank
to better compete in the financial services marketplace. Since the Holding
Company will not be offering all of its common stock for sale to depositors and
the public in the Stock Offering, the Stock Offering will result in less capital
raised in comparison to a standard mutual-to-stock conversion. In addition, the
formation of the Holding Company as a "mid-tier" holding company between the MHC
and the Bank will also provide greater flexibility to structure and finance the
expansion of operations, including the potential acquisition of other financial
institutions. Lastly, the formation of the Holding Company will enable the Bank
to better manage its capital by providing broader investment opportunities
through the holding company structure, and by enabling the Bank to distribute
capital to stockholders of the Holding Company in the form of dividends.
Only a minority of the Common Stock will be offered for sale in the
Stock Offering. As a result, the MHC's mutual form of ownership and the Bank's
ability to remain an independent savings bank and to provide community-oriented
financial services will be preserved through the mutual holding company
structure.
The Stock Offering and the organization of the Holding Company, are
subject to the approval of the Division, the FRB and the FDIC, and must be
approved by the affirmative vote of at least (i) a majority of the Bank's
corporators, and (ii) a majority of the Bank's Independent Corporators (who must
constitute not less than 60% of all corporators) at an annual meeting or a
special meeting called for such purpose.
2. Definitions
As used herein, the terms set forth below have the following meanings:
Acting in Concert: The term "acting in concert" means (a) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal, whether or not pursuant to an express agreement; or (b)
persons seeking to combine or pool their voting or other interests in the
securities of an issuer for a common purpose, pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. When persons act together for such purpose, their group is deemed to
have acquired their stock. The determination of whether a group is acting in
concert shall
1
<PAGE>
be made solely by the Board of Directors of the Bank and the Holding Company or
officers delegated by such Board and may be based on any evidence upon which the
Board or such delegatee chooses to rely, including, without limitation, joint
account relationships or the fact that such Persons have filed joint Schedules
13D with the SEC with respect to other companies.
Actual Subscription Price: The price per share, determined as provided
in the Plan, at which the Minority Stock will be sold in the Subscription
Offering.
Affiliate: An "affiliate" of, or a person "affiliated" with, a
specified person, is a person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with the
person specified.
Application: The application, including a copy of the Plan, submitted
by the Bank to the Commissioner for approval of the Stock Offering.
Associate: The term "Associate," when used to indicate a relationship
with any Person, means: (i) any corporation or organization (other than the
Bank, the Holding Company, the MHC or a majority-owned subsidiary of any
thereof) of which such Person is a director, officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity; (iii) any relative or spouse of such Person or
any relative of such spouse, who has the same home as such Person or who is a
director or officer of the Bank, the MHC, the Holding Company or any subsidiary
of the MHC or the Holding Company or any affiliate thereof; and (iv) any person
Acting in Concert with any of the persons or entities specified in clauses (i)
through (iii) above; provided, however, that any Tax-Qualified or
Non-Tax-Qualified Employee Plan shall not be deemed to be an associate of any
director, trustee or officer of the MHC, the Holding Company or the Bank, to the
extent provided in Sections 10 and 11. When used to refer to a Person other than
an officer or director of the Bank, the Bank in its sole discretion may
determine the Persons that are Associates of other Persons. Trustees of the MHC
and directors of the Holding Company and the Bank shall not be deemed to be
Associates solely as a result of their membership on such Board.
Bank: Summit Bank, a Massachusetts savings bank organized in stock
form.
BHCA: The Bank Holding Company Act of 1956, as amended.
Capital Stock: Any and all authorized stock of the Bank or the Holding
Company.
Commissioner: The Office of the Commissioner of Banks of the
Commonwealth of Massachusetts.
Community: The Massachusetts towns of Franklin, Medfield, Medway and
Millis.
Community Offering: The offering to certain members of the general
public of any unsubscribed shares in the Subscription Offering which may be
effected pursuant to the Plan. The Community Offering may include a Syndicated
Community Offering.
Common Stock: The Common Stock to be issued by the Holding Company to
the MHC and to the public in the Stock Offering.
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Corporator: A member of the MHC's Board of Corporators.
Deposit Account(s): Any withdrawable deposit(s) offered by the Bank,
including NOW account deposits, certificates of deposit, demand deposits and IRA
accounts and Keogh plans for which the Bank acts as custodian or trustee, but
not including repurchase agreements, savings bank life insurance policies or
escrow accounts.
Division: The Division of Banks of the Commonwealth of Massachusetts.
Effective Date: The date upon which all necessary approvals have been
obtained to consummate the Stock Offering.
Eligible Account Holder: Any Person holding a Qualifying Deposit on the
Eligibility Record Date.
Eligibility Record Date: March 31, 1997, the date for determining who
qualifies as an Eligible Account Holder.
ESOP: The Bank's employee stock ownership plan.
Estimated Valuation Range: The range of the estimated pro forma market
value of the total number of shares of Common Stock to be issued by the Holding
Company to the MHC and to the Minority Stockholders, as determined by the
Independent Appraiser prior to the Subscription Offering and as it may be
amended from time to time thereafter.
Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
FRB: The Board of Governors of the Federal Reserve System.
Holding Company: The intermediate stock holding company that will be a
Massachusetts corporation which will be majority-owned by the MHC and which will
own 100% of the common stock of the Bank.
Holding Company Application: The holding company application to be
submitted by the MHC and the Holding Company to the FRB to have the MHC and the
Holding Company acquire direct and indirect control of the Bank.
Independent Appraiser: The appraiser retained by the Bank to prepare an
appraisal of the pro forma market value of the Bank and the Holding Company.
Independent Corporator: A Corporator who is not an employee, officer,
or trustee of the MHC or an employee, officer, director or "significant
borrower" of the Bank.
Independent Valuation: The estimated pro forma market value of the
Holding Company and the Bank as determined by the Independent Appraiser.
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Information Statement: The information statement required to be sent to
the Corporators in connection with the Special Meeting.
Liquidation Account: The liquidation account established pursuant to
the Plan.
Management Person: Any officer, trustee, director or Corporator of the
Bank, the Holding Company or the MHC.
Marketing Agent: The broker-dealer responsible for organizing and
managing the Stock Offering and sale of the Minority Stock.
Market Maker: A dealer (i.e., any person who engages directly or
indirectly as agent, broker, or principal in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security, (i) regularly publishes bona fide
competitive bid and offer quotations on request, and (ii) is ready, willing and
able to effect transactions in reasonable quantities at the dealer's quoted
prices with other brokers or dealers.
MHC: Service Bancorp, MHC, a Massachusetts-chartered corporation and
the mutual holding company of the Bank.
Minority Ownership Interest: The shares of the Holding Company's Common
Stock owned by persons other than the MHC, expressed as a percentage of the
total shares of Holding Company Common Stock outstanding.
Minority Stock: The Common Stock to be issued by the Holding Company to
Persons other than the MHC in the Stock Offering.
Minority Stockholder: Any owner of the Holding Company's Common Stock,
other than the MHC.
Minority Stock Offering: One or more offerings of up to 49% in the
aggregate of the outstanding Common Stock of the Holding Company to persons
other than the MHC.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
Notice: The Notice of Stock Issuance to be submitted by the Bank to the
FDIC to notify the FDIC of the Stock Offering.
Offering Range: The aggregate purchase price of the Minority Stock to
be sold in the Stock Offering based on the Independent Valuation expressed as a
range which may vary within 15% above or 15% below the midpoint of such range,
with a possible adjustment by up to 15% above the maximum of such range. The
Offering Range will be based on the Estimated Valuation Range, but will
represent a Minority Ownership Interest equal to up to 49% of the Common Stock.
Officer: The Chairman of the Board, the President, any officer of the
level of vice president or above, the Clerk and the Treasurer of the Bank.
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Person: An individual, corporation, partnership, association,
joint-stock company, trust (including Individual Retirement Accounts and KEOGH
Accounts), unincorporated organization, government entity or political
subdivision thereof or any other entity.
Plan: This Stock Issuance Plan.
Qualifying Deposit: The aggregate balances of all Deposit Accounts of
an Eligible Account Holder as of the close of business on the Eligibility Record
Date or of a Supplemental Eligible Account Holder as of the close of business on
the Supplemental Eligibility Record Date, as the case may be, provided that such
aggregate balance is not less than $50.
Regulations: The regulations of the Division regarding minority stock
issuances and formation of subsidiary holding companies.
SEC: The Securities and Exchange Commission.
Special Meeting: The Special Meeting of Corporators called for the
purpose of voting on the Plan.
Stock Offering: The offering of Minority Stock in a Subscription
Offering and, to the extent shares remain available, in a Community Offering and
Syndicated Community Offering.
Subscription Offering: The offering of Minority Stock for subscription
and purchase pursuant to the Plan.
Subsidiary: A company that is controlled by another company, either
directly or indirectly through one or more subsidiaries.
Supplemental Eligible Account Holder: Any Person holding a Qualifying
Deposit on the Supplemental Eligibility Record Date, who is not an Eligible
Account Holder or a Tax-Qualified Employee Plan of the Bank, or an officer,
director, trustee or Corporator of the Bank or the MHC, or any associate
thereof.
Supplemental Eligibility Record Date: The date for determining who
qualifies as a Supplemental Eligible Account Holder.
Syndicated Community Offering: At the discretion of the Bank and the
Holding Company, the offering of Minority Stock following or contemporaneously
with the Community Offering through a syndicate of broker-dealers.
Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan (including the ESOP, any stock bonus plan, profit-sharing
plan, or other plan) of the Bank, the Holding Company, the MHC or any of their
affiliates, which, with its related trusts, meets the requirements to be
qualified under Section 401 of the Internal Revenue Code. The term
Non-Tax-Qualified Employee Benefit Plan means any defined benefit plan or
defined contribution plan which is not so qualified.
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Voting Stock:
(1) Voting Stock means common stock or preferred stock, or similar
interests if the shares by statute, charter or in any manner, entitle the
holder:
(i) To vote for or to select directors of the Bank or the
Holding Company; and
(ii) To vote on or to direct the conduct of the operations or
other significant policies of the Bank or the Holding
Company.
(2) Notwithstanding anything in paragraph (1) above, preferred stock is
not "Voting Stock" if:
(i) Voting rights associated with the preferred stock are
limited solely to the type customarily provided by statute
with regard to matters that would significantly and
adversely affect the rights or preferences of the preferred
stock, such as the issuance of additional amounts or classes
of senior securities, the modification of the terms of the
preferred stock, the dissolution of the Bank or the Holding
Company, or the payment of dividends by the Bank or the
Holding Company when preferred dividends are in arrears;
(ii) The preferred stock represents an essentially passive
investment or financing device and does not otherwise
provide the holder with control over the issuer; and
(iii)The preferred stock does not at the time entitle the
holder, by statute, charter, or otherwise, to select or to
vote for the selection of directors of the Bank or the
Holding Company.
(3) Notwithstanding anything in paragraphs (1) and (2) above, "Voting
Stock" shall be deemed to include preferred stock and other securities that,
upon transfer or otherwise, are convertible into Voting Stock or exercisable to
acquire Voting Stock where the holder of the stock, convertible security or
right to acquire Voting Stock has the preponderant economic risk in the
underlying Voting Stock. Securities immediately convertible into Voting Stock at
the option of the holder without payment of additional consideration shall be
deemed to constitute the Voting Stock into which they are convertible; other
convertible securities and rights to acquire Voting Stock shall not be deemed to
vest the holder with the preponderant economic risk in the underlying Voting
Stock if the holder has paid less than 50% of the consideration required to
directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
3. The Holding Company
A. Organization of the Holding Company
In connection with the Stock Offering, the MHC will organize the
Holding Company as a wholly-owned subsidiary and will contribute to the Holding
Company all of the outstanding shares of common stock of the Bank, which will
result in the MHC owning 100% of the common stock of the Holding Company and the
Holding Company owning 100% of the common stock of the Bank.
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B. Holding Company Articles of Organization and Bylaws
The Holding Company will be chartered as a Massachusetts corporation
and will be authorized to exercise any and all powers, rights and privileges,
and will be subject to all limitations applicable to mutual holding companies
pursuant to applicable law and regulation. The initial members of the Board of
Directors of the Holding Company will be the members of the existing Board of
Trustees of the MHC. Following the organization of the Holding Company, the
voting stockholders of the Holding Company will elect annually approximately
one-third of the Holding Company's directors, in accordance with the bylaws of
the Holding Company. The proposed Articles of Organization and Bylaws of the
Holding Company are attached hereto as Exhibit A and B, respectively, and are
made part of the Plan. By their approval of the Plan, the Corporators shall have
approved and adopted the Articles of Organization and Bylaws of the Holding
Company.
C. MHC to Control Holding Company
The Holding Company will have the power to issue shares of Capital
Stock to persons other than the MHC, provided, however, that for so long as the
MHC is in existence, the MHC will be required to own at least a majority of the
Voting Stock of the Holding Company. The Holding Company is authorized to issue
any amount of Non-Voting Stock to persons other than the MHC and to undertake
one or more Minority Stock Offerings.
4. Conditions to Implementation of the Stock Offering
Consummation of the Stock Offering is expressly conditioned upon prior
occurrence of the following:
A. Approval of the Plan by the affirmative vote of a majority of the
Board of Trustees of the MHC and of the Board of Directors of the
Bank.
B. Approval of the Plan by the affirmative vote of a majority of the
Corporators at a regular or special meeting of such Corporators,
and by the affirmative vote of a majority of Independent
Corporators (who shall constitute not less than 60% of all
Corporators).
C. Approval by the Commissioner of the Application, including the
Plan and the Articles of Organization and Bylaws of the Holding
Company.
D. Submission of the Notice to the FDIC and either (i) the Bank has
received a notice of intent not to object from the FDIC, or (ii)
60 days (subject to extension for an additional 60 days) have
passed following the acceptance of a complete FDIC Notice by the
FDIC.
E. Approval by the FRB pursuant to the BHCA for the MHC to become a
bank holding company by acquiring the majority of the Holding
Company's Common Stock and for the Holding Company to become a
bank holding company by acquiring all of the Bank's outstanding
common stock.
F. Submission of a Registration Statement to the SEC and the SEC
declares the Registration Statement Effective.
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5. Special Meeting of Corporators and Vote Required to Approve the Plan
Subsequent to the approval of the Plan by the Commissioner, the Special
Meeting shall be scheduled in accordance with the MHC's Bylaws. Promptly after
receipt of all regulatory approvals necessary to distribute the Information
Statement, the MHC shall distribute the Information Statement to all
Corporators. A copy of the Plan will be provided to all Corporators. Pursuant to
the Regulations, the affirmative vote of at least (i) a majority of the total
Corporators, and (ii) a majority of the Independent Corporators (who shall
constitute not less than 60% of all Corporators) voting at the Special Meeting
shall be required for approval of the Plan.
6. Conversion of MHC to Stock Form
Following the completion of the Stock Offering, the MHC may elect to
convert to stock form in accordance with M.G.L.c.167H, ss.9, the Massachusetts
conversion regulations set forth at 209 CMR Sections 33.01 et seq., and
applicable federal laws and regulations (a "Conversion Transaction"). In the
event that the MHC is chartered under federal law at the time of a Conversion
Transaction, the Conversion Transaction shall be consummated pursuant to
applicable regulations of the Office of Thrift Supervision or any successor
thereto. There can be no assurance when, if ever, a Conversion Transaction will
occur, and the Board of Trustees of the MHC has no intent or plan to undertake a
Conversion Transaction at this time. If the Conversion Transaction does not
occur, the MHC will always own a majority of the Common Stock of the Holding
Company.
In a Conversion Transaction, the MHC would merge with and into the Bank
or the Holding Company at the discretion of the MHC, and qualifying depositors
of the Bank would receive the right to subscribe for a number of shares of
common stock of the Holding Company, as determined by the formula set forth in
the paragraphs below. The additional shares of Common Stock of the Holding
Company issued in the Conversion Transaction would be sold at their aggregate
pro forma market value as determined by an Independent Appraisal.
Any Conversion Transaction shall be fair and equitable to Minority
Stockholders. In any Conversion Transaction, Minority Stockholders will be
entitled without additional consideration to maintain the same percentage
ownership interest in the Holding Company after the Conversion Transaction as
their percentage ownership interest in the Holding Company immediately prior to
the Conversion Transaction (i.e., the Minority Ownership Interest), subject only
to the following adjustments (if required by federal law, regulation, or
regulatory policy) to reflect: (i) the cumulative effect of the aggregate amount
of dividends waived by the MHC; and (ii) the market value of assets of the MHC
(other than Common Stock of the Holding Company).
The adjustment referred to in clause (i) of the immediately preceding
paragraph above would require that the Minority Ownership Interest be adjusted
by multiplying the Minority Ownership Interest by the following fraction:
(Holding Company stockholders' equity immediately preceding the
Conversion Transaction) - (aggregate amount of dividends waived by
MHC) Holding Company stockholders' equity immediately preceding the
Conversion Transaction
The Minority Ownership Interest shall also be adjusted to reflect only
assets of the MHC other than Common Stock of the Holding Company by multiplying
the result obtained in the immediately preceding
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paragraph by the following fraction:
(pro forma market value of Holding Company) - (market value of assets
of MHC other than Holding Company common stock) pro forma market value
of Holding Company
At the sole discretion of the Board of Trustees of the MHC and the
Board of Directors of the Holding Company, a Conversion Transaction may be
effected in any other manner necessary to qualify the Conversion Transaction as
a tax-free reorganization under applicable federal and state tax laws, provided
such Conversion Transaction does not diminish the rights and ownership interest
of Minority Stockholders as set forth in the preceding paragraphs. If a
Conversion Transaction does not occur, the MHC will always own a majority of the
Voting Stock of the Holding Company.
A Conversion Transaction would require the approval of applicable bank
regulators, and would be presented to a vote of the Corporators of the MHC and
the stockholders of the Holding Company as of a voting record date prior to the
completion of the Conversion Transaction. Federal and state regulatory policy
requires that in any Conversion Transaction the depositors of the Bank will be
accorded the same stock purchase priorities as if the MHC were a mutual savings
bank converting to stock form. Moreover, under Massachusetts regulations, a
Conversion Transaction may not occur within three years after the completion of
the Stock Offering unless (i) the Conversion Transaction is undertaken for
supervisory reasons, or (ii) the Conversion Transaction is undertaken for
compelling business reasons established to the satisfaction of the Commissioner.
7. Shares to be Offered
A. The Minority Stock, upon payment therefor, will be fully paid and
non-assessable and will not be insured by the FDIC. The total number of shares
of Common Stock authorized under the Holding Company's Articles of Organization
will exceed the number of shares of Common Stock to be issued in the Stock
Offering. The total number of shares (or range thereof) of Minority Stock to be
issued and offered for sale pursuant to the Plan shall be determined initially
by the Board of Directors of the Bank and of the Holding Company in conjunction
with the determination of the Independent Appraiser. The number of shares to be
offered may be adjusted prior to completion of the Stock Offering. The total
number of shares of Minority Stock may be no greater than 49% of the issued and
outstanding shares of Common Stock of the Holding Company.
B. For a period of 30 days following the completion of the
Reorganization, the Board of Directors of the Holding Company and the Board of
Trustees of the MHC, in their sole discretion, may determine to issue or
allocate shares of Common Stock ("Contingent Shares") (a) to subscribers to fill
orders resulting from (i) any allocation oversights in the event of an
oversubscription, (ii) lost or damaged stock order forms which the Holding
Company's Board determines should have been filled in the Stock Offering, or
(iii) orders initially rejected but later found to be legitimate, or (b) in the
event of an issuance described in (a), to the MHC in order to maintain a
Minority Ownership Interest at a percentage desired by the Board of Trustees of
the MHC and the Board of Directors of the Holding Company. Contingent Shares may
be authorized but unissued shares or shares issued to the MHC in the
Reorganization, and shall include no more than a number of shares equal to 3% of
the shares issued in the Stock Offering. Contingent Shares will not be included
in the total number of shares for purposes of determining any individual or
maximum purchase limitation or the number of shares of stock to be purchased by
Tax-Qualified Employee Plans. In the event of an oversubscription in the Stock
Offering, Contingent Shares
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will be allocated to a subscriber based upon the allocation of shares to persons
who had the same or similar Deposit Account balance as that subscriber.
8. Independent Valuation and Purchase Price of Shares
The total number of shares (and a range thereof) (the "Offering Range")
of Minority Stock will be determined jointly by the Boards of Directors of the
Bank and the Holding Company immediately prior to the commencement of the
Subscription and Community Offerings, subject to adjustment thereafter if
necessitated by market or financial conditions, with the approval of the FDIC
and the Division, if necessary. In particular, the total number of shares may be
increased by up to 15% of the number of shares offered in the Subscription and
Community Offerings if the Estimated Valuation Range is increased subsequent to
the commencement of the Subscription and Community Offerings to reflect changes
in market and financial conditions and the aggregate purchase price is not more
than 15% above the maximum of the Estimated Valuation Range.
All shares sold in the Stock Offering will be sold at a uniform price
per share referred to in the Plan as the Actual Subscription Price. The
aggregate purchase price for all shares of Common Stock will not be inconsistent
with the estimated consolidated pro forma market value of the Holding Company
and the Bank. The estimated consolidated pro forma market value of the Holding
Company and the Bank will be determined for such purpose by the Independent
Appraiser. Prior to the commencement of the Subscription and Community
Offerings, an Estimated Valuation Range will be established, which range will
vary within 15% above to 15% below the midpoint of such range. The shares of
Minority Stock will represent a minority ownership interest in the outstanding
Common Stock of the Holding Company equal to up to 49% of the estimated pro
forma market value of the Common Stock based upon the Independent Valuation. The
percentage of Common Stock offered for sale in the Stock Offering and the
Offering Range shall be determined by the Boards of Directors of the Holding
Company and the Bank prior to commencement of the Subscription and Community
Offerings, and will be confirmed upon completion of the Stock Offering.
The number of shares of Minority Stock and the purchase price per share
may be increased or decreased by the Boards of Directors of the Holding Company
and the Bank. In the event that the aggregate purchase price of the Minority
Stock is below the minimum of the Offering Range, or materially above the
maximum of the Offering Range, resolicitation of purchasers may be required,
provided that up to a 15% increase above the maximum of the Offering Range will
not be deemed material so as to require a resolicitation. Any such
resolicitation shall be effected in such manner and within such time as the
Holding Company and the Bank shall establish, with the approval of the FDIC and
the Division, if required. Up to a 15% increase in the number of shares to be
issued which is supported by an appropriate change in the estimated pro forma
market value of the Holding Company and the Bank will not be deemed to be
material so as to require a resolicitation of subscriptions. Based upon the
Independent Valuation as updated prior to the commencement of the Subscription
and Community Offerings, the Boards of Directors of the Holding Company and the
Bank will fix the Actual Subscription Price. If there is a Syndicated Community
Offering of shares of Common Stock not subscribed for in the Subscription and
Community Offerings, the price per share at which the Common Stock is sold in
such Syndicated Community Offering shall be equal to the Actual Subscription
Price.
Notwithstanding the foregoing, no sale of Minority Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Holding Company, the Bank and to the
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FDIC and the Division that, to the best knowledge of the Independent Appraiser,
nothing of a material nature has occurred which, taking into account all
relevant factors, would cause the Independent Appraiser to conclude that the
aggregate value of all shares of Common Stock at the purchase price per share is
incompatible with its estimate of the aggregate consolidated pro forma market
value of the Holding Company and the Bank. An increase in the aggregate value of
the Minority Stock by up to 15% would not be deemed to be material. If such
confirmation is not received, the Boards of Directors of the Holding Company and
the Bank may cancel the Stock Offering, extend the Stock Offering and establish
a new Actual Subscription Price and/or Estimated Valuation Range, extend, reopen
or hold a new Stock Offering or take such other action as the FDIC and the
Division may permit. The estimated market value of the Holding Company and the
Bank shall be determined for such purpose by an Independent Appraiser on the
basis of such appropriate factors as are not inconsistent with FDIC and Division
regulations.
9. Timing of Sale of Minority Stock.
The Bank and the Holding Company intend to consummate the Stock
Offering as soon as feasible following the receipt of all approvals referred to
in Section 4 of the Plan. As soon as practicable after the prospectus of the
Holding Company has been declared effective by the Division and the SEC, such
prospectus and accompanying order forms will be distributed to eligible
subscribers in the Subscription Offering at their last known addresses appearing
on the records of the Bank, and such prospectuses and accompanying order forms
will be made available for use by those Persons entitled to purchase in the
Community Offering. In lieu of immediately distributing the prospectus and order
forms in the Subscription Offering, the Holding Company may distribute a notice
of availability of the prospectuses and order forms, together with a request
card and a postage--pre-paid return envelope for use in requesting such
prospectus and order form. If this method is employed by the Holding Company,
such notices shall be mailed not less than 30 calendar days prior to the
expiration of the Subscription Offering.
The Holding Company may commence the Stock Offering concurrently with
or at any time after the mailing of the Information Statement to the
Corporators. In addition, the Holding Company may close the Stock Offering
before the Special Meeting, provided that the offer and sale of the Minority
Stock shall be conditioned upon approval of the Plan by the Corporators at the
Special Meeting.
10. Method of Offering Shares and Rights to Purchase Stock
The Stock Offering will be conducted in compliance with the securities
offering regulations of the FDIC, the SEC and the Division. In descending order
of priority, the opportunity to purchase Minority Stock shall be given in the
Subscription Offering to: (1) Eligible Account Holders; (2) Supplemental
Eligible Account Holders; (3) Tax-Qualified Employee Plans; and (4) employees,
officers, directors and trustees of the MHC and the Bank. Any shares of Minority
Stock that are not subscribed for in the Subscription Offering at the discretion
of the Bank and the Holding Company may be offered for sale in a Community
Offering or a Syndicated Community Offering on terms and conditions and
procedures satisfactory to the Bank and the Holding Company. The minimum
purchase by any Person shall be 25 shares. The Bank and the Holding Company may
use their discretion in determining whether prospective purchasers are
"residents," "associates," or "acting in concert", and in interpreting any and
all other provisions of the Plan. All such determinations are in the sole
discretion of the Bank and the Holding Company, and may be based on whatever
evidence they choose to use in making any such determination.
In addition to the priorities set forth below, the Board of Directors
of the Bank and the Holding
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Company may establish other priorities for the purchase of Minority Stock,
subject to the approval of the Division and the FDIC. The priorities for the
purchase of shares in the Stock Offering are as follows:
A. Subscription Offering
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall receive non-transferrable subscription rights to subscribe for shares of
Minority Stock in an amount equal to the greatest of $100,000, one-tenth of one
percent (.10%) of the total shares offered in the Stock Offering, or 15 times
the product (rounded down to the nearest whole number) obtained by multiplying
the total number of shares of Minority Stock to be issued in the Stock Offering
by a fraction, of which the numerator is the Qualifying Deposit of the Eligible
Account Holder and the denominator is the total amount of Qualifying Deposits of
all Eligible Account Holders. 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 Qualifying Deposit bears to the
total amount of Qualifying Deposits of all subscribing Eligible Account Holders
whose subscriptions remain unfilled. Subscription rights to purchase Minority
Stock received by Officers and directors of the Bank including Associates of
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 receive
non-transferable subscription rights to subscribe for shares of Minority Stock
in an amount equal to the greatest of $100,000, one-tenth of one percent (.10%)
of the total shares offered in the Stock Offering, or 15 times the product
(rounded down to the nearest whole number) obtained by multiplying the total
number of shares of Common Stock to be issued in the Stock Offering by a
fraction, of which the numerator is the Qualifying Deposit of the Supplemental
Eligible Account Holder and the denominator is the total amount of Qualifying
Deposits of all Supplemental Eligible Account Holders. In 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 Minority 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 Qualifying Deposits on the Supplemental
Eligibility Record Date bear to the total amount of Qualifying Deposits of all
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unfilled.
Priority 3: Tax-Qualified Employee Plans. To the extent there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and Supplemental Eligible Account Holders, the Tax-Qualified
Employee Plans shall be given the opportunity to purchase in the aggregate up to
10% of the Minority Stock. In the event of an oversubscription in the Stock
Offering, subscriptions for shares
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by the Tax-Qualified Employee Plans may be satisfied, in whole or in part, out
of authorized but unissued shares of the Holding Company subject to the maximum
purchase limitations applicable to such plans as set forth in Section 11, or may
be satisfied, in whole or in part, through open market purchases by the
Tax-Qualified Employee Plans subsequent to the closing of the Stock Offering.
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 Tax
Qualified Employee Plans, each employee, officer, director and trustee of the
MHC or the Bank shall receive non-transferable subscription rights to subscribe
for shares of Minority Stock in an amount equal to the greatest of $100,000,
one-tenth of one percent (.10%) of the total shares offered in the Stock
Offering, or 15 times the product (rounded down to the nearest whole number)
obtained by multiplying the total number of shares of Minority Stock to be
issued in the Stock Offering by a fraction, of which the numerator is the
Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders; provided
that the aggregate subscription rights granted to employees, officers, directors
and trustees in this category shall be limited to up to 33% of the total number
of shares of Minority Stock sold in the Stock Offering. Shares purchased under
this Section shall be aggregated with shares purchased under the preceding
priority categories when calculating the 33% 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 Section 11. For
purposes of this Section, trustees and 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 MHC. In
the event that employees, officers, directors and trustees subscribe under this
Section for more shares of Minority Stock than are available for purchase by
them, the shares of Minority Stock available for purchase will be allocated by
the Board of Directors among such subscribing persons on a equitable basis, such
as by giving weight to the period of service, compensation and position of the
individual subscriber, provided that no fractional shares will be allocated or
issued.
B. Community Offering
Any shares of Minority Stock not subscribed for in the Subscription
Offering may be offered for sale in a Community Offering. This will involve an
offering of all unsubscribed shares directly to the general public. The
Community Offering, if any, shall be for a period of not more than 45 days
unless extended by the Holding Company and the Bank, and shall commence
concurrently with, during or promptly after the Subscription Offering. The
Holding Company and the Bank may use an investment banking firm or firms on a
best efforts basis to sell the unsubscribed shares in the Subscription and
Community Offering. The Holding Company and the Bank may pay a commission or
other fee to such investment banking firm or firms as to the shares sold by such
firm or firms in the Subscription and Community Offering and may also reimburse
such firm or firms for expenses incurred in connection with the sale. The
Community Offering may include a Syndicated Community Offering managed by such
investment banking firm or firms. The Minority Stock will be offered and sold in
the Community Offering, in accordance with FDIC and Division regulations, so as
to achieve the widest distribution of the Minority Stock. No Person, by himself,
or with an Associate or group of Persons Acting in Concert, may subscribe for or
purchase more than $100,000 of Minority Stock in the Community Offering.
Further, the Holding Company and the Bank may limit total subscriptions under
this Section 10(B) 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.
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In the event of an oversubscription for shares in the Community
Offering, shares may be allocated (to the extent shares remain available) first
to cover orders of natural persons residing in the Bank's 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 occupies a dwelling within the
Bank's Community, has an intent to remain with 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 trustee shall be examined for purposes of this
definition. The Bank and the Holding Company may utilize deposit or loan records
or such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Bank and the Holding Company.
The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any Person under this Section
10.
C. Syndicated Community Offering
Any shares of Minority 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 in a Syndicated Community Offering, subject
to terms, conditions and procedures as may be determined by the Bank and the
Holding Company in a manner that is intended to achieve the widest distribution
of the Common Stock subject to the rights of the Holding Company to accept or
reject in whole or in part all order in the Syndicated Community Offering. It is
expected that the Syndicated Community Offering will commence as soon as
practicable after termination of the Subscription Offering and the Community
Offering, if any. The Syndicated Community Offering shall be completed within 45
days after the termination of the Subscription Offering, unless such period is
extended as provided herein. The Syndicated Community Offering price and the
underwriting discount in the Syndicated Community Offering shall be determined
by an underwriting agreement between the Holding Company, the Bank and the
underwriters. Such underwriting agreement shall be filed with the FDIC, the
Division and the SEC.
If for any reason a Syndicated Community Offering of unsubscribed
shares of Minority Stock cannot be effected and any shares remain unsold after
the Subscription Offering and the Community Offering, if any, the Boards of
Directors of the Holding Company and the Bank will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the Division and the FDIC and to compliance with
applicable state and federal securities laws. Depending upon market and
financial conditions, the Board of Directors of the Holding Company and the
Board of Directors of the Bank, with the approval of the Commissioner and FDIC,
may increase or decrease any of the purchase limitations set forth in this
Section 10.
11. Additional Limitations on Purchases of Minority Stock
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Purchases of Minority Stock in the Stock Offering will be subject to
the following purchase limitations:
A. The aggregate amount of outstanding Common Stock of the Holding
Company owned or controlled by persons other than the MHC at the
close of the Stock Offering shall not exceed 49% of the Holding
Company's total outstanding Common Stock.
B. No Person or group of persons Acting in Concert, may purchase
more than $100,000 of Minority Stock in the Stock Offering,
except that: (i) the Holding 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
Stock Offering; (ii) Tax-Qualified Employee Plans may purchase up
to 10% of the shares offered in the Stock Offering; and (iii) for
purposes of this subsection 11(B), shares to be held by any
Tax-Qualified Employee Plan and attributable to a person shall
not be aggregated with other shares purchased directly by or
otherwise attributable to such person.
C. The aggregate amount of Minority Stock acquired in the Stock
Offering by all Management Persons and their Associates,
exclusive of any stock acquired by such persons in the secondary
market, shall not exceed 33% of the outstanding shares of
Minority Stock at the close of the Stock Offering. In calculating
the number of shares held by Management Persons and their
Associates under this paragraph or under the provisions of
paragraph D of this Section, shares held by any Tax-Qualified
Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit
Plan of the Bank that are attributable to such persons shall not
be counted.
D. The aggregate amount of Minority Stock acquired in the Stock
Offering by all Management Persons and their Associates,
exclusive of any stock acquired by such persons in the secondary
market, shall not exceed 33% of the stockholders' equity of the
Bank. In calculating the number of shares held by Management
Persons and their Associates under this paragraph or under the
provisions of paragraph C of this Section, shares held by any
Tax-Qualified Employee Benefit Plan or any Non-Tax-Qualified
Employee Benefit Plan of the Bank that are attributable to such
persons shall not be counted.
E. Subject to the approval of the Commissioner, the Boards of
Directors of the Bank and the Holding Company may, in their sole
discretion, increase the maximum purchase limitation set forth in
paragraph 11(B) hereof to up to 9.9%, provided that orders for
Minority Stock in excess of 5% of the number of shares of
Minority Stock offered in the Stock Offering shall not in the
aggregate exceed 10% of the total shares of Minority Stock
offered in the Stock 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 Holding 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 Holding Company, in its sole discretion.
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F. In the event of an increase in the total number of shares offered
in the Subscription Offering due to an increase in the maximum of
the Offering Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be issued to fill unfulfilled
subscriptions of such subscribers according to their respective
priorities set forth in the Plan.
G. Notwithstanding any other provision of the Plan, no person shall
be entitled to purchase any Common Stock to the extent such
purchase would be illegal under any federal law or state law or
regulation or would violate regulations or policies of the
National Association of Securities Dealers, Inc., particularly
those regarding free riding and withholding. The Holding Company
and/or its agents may ask for an acceptable legal opinion from
any purchaser as to the legality of such purchase and may refuse
to honor any purchase order if such opinion is not timely
furnished.
H. The Boards of Directors of the Holding 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
Plan.
I. The Holding Company, in its sole discretion, may make reasonable
efforts to comply with the securities laws of any state in the
United States in which depositors of the Bank reside, and will
only offer and sell the Minority 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
Minority Stock under the Plan if he resides in a foreign country
or in a state of the United States with respect to which any of
the following apply: (i) a small number of persons otherwise
eligible to purchase shares under the Plan reside in such state
or foreign county; (ii) the offer or sale of shares of Minority
Stock to such persons would require the Bank, the Holding Company
or their 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.
Prior to the consummation of the Stock Offering, no Person shall offer
to transfer, or enter into any agreement or understanding to transfer the legal
or beneficial ownership of any subscription rights or shares of Minority Stock,
except pursuant to the Plan. Each Person purchasing Minority Stock shall be
deemed to confirm that such purchase does not conflict with the above purchase
limitations contained in the Plan.
EACH PERSON PURCHASING MINORITY STOCK IN THE STOCK OFFERING WILL BE
DEEMED TO CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE
LIMITATIONS IN THE PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE
ASSOCIATES OR A GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH
THE PURCHASE LIMITATIONS IN THE PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THE
PLAN SHALL BE DETERMINED BY THE HOLDING COMPANY AND THE BANK IN THEIR SOLE
DISCRETION. SUCH DETERMINATION SHALL BE CONCLUSIVE, FINAL AND BINDING ON ALL
PERSONS AND THE HOLDING COMPANY AND THE BANK MAY TAKE ANY REMEDIAL ACTION,
INCLUDING WITHOUT LIMITATION REJECTING THE PURCHASE
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OR REFERRING THE MATTER TO THE COMMISSIONER FOR ACTION, AS IN ITS SOLE
DISCRETION THE HOLDING COMPANY AND THE BANK MAY DEEM APPROPRIATE.
12. Payment for Stock
All payments for Minority Stock subscribed for or ordered in the Stock
Offering must be delivered in full to the Bank, together with a properly
completed and executed order form, or purchase order in the case of the
Syndicated Community Offering, on or prior to the expiration date specified on
the order form or purchase order, as the case may be, unless such date is
extended by the Holding Company and the Bank; provided, that if the Employee
Plans subscribe for shares during the Subscription Offering, such plans will not
be required to pay for the shares at the time they subscribe but rather may pay
for such shares of Minority Stock subscribed for by such plans at the Actual
Subscription Price upon consummation of the Stock Offering, provided that, in
the case of the ESOP there is in force from the time of its subscription until
the consummation of the Stock Offering, a loan commitment to lend to the ESOP,
at such time, the aggregated Actual Subscription Price of the shares for which
it subscribed. The Holding Company or the Bank may make scheduled discretionary
contributions to an Employee Plan provided such contributions from the Bank, if
any, do not cause the Bank to fail to meet its regulatory capital requirement.
Payment for Minority Stock shall be made either by check or money
order, or if a purchaser has a Deposit Account in the Bank, such purchaser may
pay for the shares subscribed for by authorizing the Bank to make a withdrawal
from the purchaser's passbook, money market or certificate account at the Bank
in an amount equal to the purchase price of such shares. Such authorized
withdrawal, whether from a savings passbook or certificate account, shall be
without penalty as to premature withdrawal. If the authorized withdrawal is from
a certificate account, and the remaining balance does not meet the applicable
minimum balance requirements, the certificate shall be canceled at the time of
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate. Funds for which a withdrawal is authorized will remain in the
purchaser's Deposit Account but may not be used by the purchaser until the
Minority Stock has been sold or the 45-day period (or such longer period as may
be approved by the Commissioner) following the Stock Offering has expired,
whichever occurs first. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the purchase price per share. Interest will continue to be earned on
any amounts authorized for withdrawal until such withdrawal is given effect.
Interest will be paid by the Bank at a rate established by the Bank on payment
for Minority Stock received in cash or by check. Such interest will be paid from
the date payment is received by the Bank until consummation or termination of
the Stock Offering. If for any reason the Stock Offering is not consummated, all
payments made by subscribers in the Stock Offering will be refunded to them with
interest. In case of amounts authorized for withdrawal from Deposit Accounts,
refunds will be made by canceling the authorization for withdrawal.
13. Manner of Exercising Subscription Rights Through Order Forms
Each order form will be preceded or accompanied by the prospectus
describing the Holding Company, the Bank, the Common Stock and the Subscription
and Community Offerings. Each order form will contain, among other things, the
following:
A. A specified date by which all order forms must be received by the
Bank, which date shall be not less than 20 nor more than 45 days,
following the date on which the order forms are mailed by the
Bank, and which date will constitute the termination of the
Subscription Offering;
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B. The purchase price per share for shares of Minority Stock to be
sold in the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of
Minority Stock that may be subscribed for pursuant to the
exercise of Subscription Rights or otherwise purchased in the
Community Offering;
D. Instructions as to how the recipient of the order form is to
indicate thereon the number of shares of Minority Stock for which
such Person elects to subscribe and the available alternative
methods of payment therefor;
E. An acknowledgment that the recipient of the order form has
received a final copy of the prospectus prior to execution of the
order form;
F. A statement indicating the consequences of failing to properly
complete and return the order form, including a statement to the
effect that all subscription rights are nontransferable, will be
void at the end of the Subscription Offering, and can only be
exercised by delivering to the Bank within the subscription
period such properly completed and executed order form, together
with cash (if delivered in person), check or money order in the
full amount of the purchase price as specified in the order form
for the shares of Minority Stock for which the recipient elects
to subscribe in the Subscription Offering (or by authorizing on
the order form that the Bank withdraw said amount from the
subscriber's Deposit Account at the Bank); and
G. A statement to the effect that the executed order form, once
received by the Bank, may not be modified or amended by the
subscriber without the consent of the Bank.
Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimilied order forms.
14. Undelivered, Defective or Late Order Form; Insufficient Payment
In the event order forms (a) are not delivered and are returned to the
Bank by the United States Postal Service or the Bank is unable to locate the
addressee, (b) are not received back by the Bank or are received by the Bank
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment for the shares of
Minority Stock subscribed for (including cases in which Deposit Accounts from
which withdrawals are authorized are insufficient to cover the amount of the
required payment), or (e) are not mailed pursuant to a "no mail" order placed in
effect by the account holder, the subscription rights of the Person to whom such
rights have been granted will lapse as though such Person failed to return the
contemplated order form within the time period specified thereon; provided, that
the Bank may, but will not be required to, waive any immaterial irregularity on
any order form or require the submission of corrected order forms or the
remittance of full payment for subscribed shares by such date as the Bank may
specify. The interpretation by the Bank of terms and conditions of the Plan and
of the order forms will be final, subject to the authority of the Commissioner
and the FDIC.
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15. Completion of the Stock Offering
The Stock Offering will be terminated if not completed within 90 days
from the date of approval by the Commissioner, unless an extension is approved
by the Commissioner.
16. Market and Post-Offering Filings for Common Stock
If at the close of the Stock Offering the Holding Company has more than
300 shareholders of any class of stock, the Holding Company shall:
(i) use its best efforts to encourage and assist a market maker to
establish and maintain a market for that class of stock;
(ii) use its best efforts to list that class of stock on a national or
regional securities exchange, or on the Nasdaq system; and
(iii)register its Common Stock with the SEC pursuant to the Exchange
Act, and shall undertake not to deregister such Common Stock for
a period of three years thereafter.
17. Stock Purchases by Management Persons after the Stock Offering
For a period of three years after the Stock Offering, no Management
Person or his or her Associates may purchase, without the prior written approval
of the Commissioner, any Common Stock of the Holding Company, except from a
broker-dealer registered with the SEC. The foregoing shall not apply to (i)
negotiated transactions involving more than 1% of the outstanding Common Stock,
or (ii) purchases of stock made by and held by any Tax-Qualified or Non-Tax
Qualified Employee Plan of the Bank or the Holding Company even if such stock is
attributable to Management Persons or their Associates.
18. Resales of Stock by Management Persons
Minority Stock purchased by Management Persons and their Associates in
the Stock Offering may not be resold for a period of at least one year following
the date of purchase, except in the case of death or substantial disability, as
determined by the Commissioner, of the Management Person or Associate.
19. Stock Certificates
Each stock certificate shall bear a legend giving appropriate notice of
the restrictions set forth in Sections 17 and 18. Appropriate instructions shall
be issued to the Holding Company's transfer agent with respect to applicable
restrictions on transfers of such stock. Any shares of stock issued as a stock
dividend, stock split or otherwise with respect to such restricted stock, shall
be subject to the same restrictions as apply to the restricted stock.
20. Restriction on Financing Stock Purchases
The Holding Company will not offer or sell any of the Minority Stock
proposed to be issued to any person whose purchase would be financed by funds
loaned to the person by the Holding Company, the
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Bank or any of their Affiliates.
21. Stock Benefit Plans
The Board of Directors of the Bank and/or the Holding Company intend to
adopt one or more stock benefit plans for the benefit of the employees, officers
and directors of the Bank and the Holding Company, including an ESOP, stock
award plans and stock option plans, which will be authorized to purchase Common
Stock and grant options for Common Stock. However, only the Tax-Qualified
Employee Plans will be permitted to purchase Common Stock in the Stock Offering
subject to the purchase priorities set forth in the Plan. Pursuant to the
Regulations, the Bank and the Holding Company may authorize the ESOP and any
other Tax-Qualified Employee Plans to purchase in the aggregate up to 10% of the
Minority Stock. The Bank or the Holding Company may make scheduled discretionary
contributions to one or more Tax-Qualified Employee Plans to purchase Minority
Stock issued in the Stock Offering or to purchase issued and outstanding shares
of Common Stock or authorized but unissued shares of Common Stock subsequent to
the completion of the Stock Offering, provided such contributions do not cause
the Bank to fail to meet any of its regulatory capital requirements. The Plan
specifically authorizes the grant and issuance by the Holding Company of (i)
awards of Common Stock after the Stock Offering pursuant to one or more stock
recognition and award plans (the "Recognition Plans") in an amount equal to up
to 4% of the number of shares of Minority Stock issued in the Stock Offering
(and in an amount equal to up to 5% of the Minority Stock issued in the Stock
Offering if the Recognition Plans are adopted more than one year after the
completion of the Stock Offering), (ii) options to purchase a number of shares
of the Holding Company's Common Stock in an amount equal to up to 10% of the
number of shares of Minority Stock issued in the Stock Offering and shares of
Common Stock issuable upon exercise of such options, and (iii) Common Stock to
one or more Tax Qualified Employee Plans, including the ESOP, at the closing of
the Stock Offering or at any time thereafter, in an amount equal to up to 8% of
the number of shares of Minority Stock issued in the Stock Offering if the
Recognition Plans award Common Stock sooner than one year after the completion
of the Stock Offering, and up to 10% of the number of shares of Minority Stock
issued in the Stock Offering if the Recognition Plans are adopted more than one
year after the completion of the Stock Offering. Shares awarded to the Tax
Qualified Employee Plans or pursuant to the Recognition Plans, and shares issued
upon exercise of options may be authorized but unissued shares of the Holding
Company's Common Stock, or shares of Common Stock purchased by the Holding
Company or such plans in the open market. The Recognition Plans and the stock
option plans will be subject to stockholder approval.
22. Liquidation Account
The Bank or the Holding Company shall establish at the completion of
the Stock Offering a Liquidation Account in an amount equal to the product of
(i) the percentage of the Holding Company's Common Stock issued in the Stock
Offering, and (ii) the net worth of the Bank (determined in accordance with
generally accepted accounting principles) as set forth in the latest statement
of financial condition contained in the prospectus used in connection with the
Stock Offering. For example, if the Stock Offering is for 49% of the Holding
Company's Common Stock, then the initial liquidation account shall be equal to
49% of the net worth of the Bank as shown on its latest financial statement used
in connection with the Stock Offering. The Liquidation Account will be
maintained by the Bank and/or the Holding Company for the benefit of the
Eligible Account Holders and Supplemental Eligible Account Holders who continue
to maintain Deposit Accounts with the Bank following the Stock Offering. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to each Deposit Account, hold a related
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inchoate interest in a portion of the Liquidation Account balance, in relation
to each Deposit Account balance at the Eligibility Record Date or Supplemental
Eligibility Record Date, as the case may be, or to such balance as it may be
subsequently reduced, as hereinafter provided. The initial Liquidation Account
balance shall not be increased, and shall be subject to downward adjustment to
the extent of any downward adjustment of any subaccount balance of any Eligible
Account Holder or Supplemental Eligible Account Holder in accordance with 209
CMR 33.05(12).
In the unlikely event of a complete liquidation of the Bank and the
Holding Company (and only in such event), following all liquidation payments to
creditors (including those to depositors to the extent of their Deposit
Accounts) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidating distribution from the Liquidation
Account, in the amount of the then-adjusted subaccount balances for his deposit
accounts then held, before any liquidating distribution may be made to any
holders of the Holding Company's or Bank's capital stock. No Conversion
Transaction and no merger, consolidation, reorganization, purchase of bulk
assets with assumption of deposit accounts and other liabilities, or similar
transactions with an FDIC-insured institution, in which the Bank or the Holding
Company is not the surviving institution, shall be deemed to be a complete
liquidation for this purpose. In such transactions, the Liquidation Account
shall be assumed by the surviving institution.
The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the Liquidation Account by a
fraction, the numerator of which is the amount of such Eligible Account Holder's
or Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
of which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Bank. For Deposit
Accounts in existence on both dates, separate subaccounts shall be determined on
the basis of the Qualifying Deposits in such Deposit Accounts on such record
dates. Such initial subaccount balance shall not be increased by additional
Deposits, but shall be subject to downward adjustment as described below.
If, at the close of business on the last day of any period for which
the Bank or the Holding Company, as the case may be, has prepared audited
financial statements subsequent to the effective date of the Stock Offering, the
deposit balance in the Deposit Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is less than the lesser of: (i) the balance
in the Deposit Account at the close of business on the last day of any period
for which the Bank or the Holding Company, as the case may be, has prepared
audited financial statements subsequent to the Eligibility Record Date or
Supplemental Eligibility Record Date, or (ii) the amount in such Deposit Account
as of the Eligibility Record Date or Supplemental Eligibility Record Date, then
the subaccount balance for such Deposit Account shall be adjusted by reducing
such subaccount balance in an amount proportionate to the reduction in the
balance of such Deposit Account. In the event of such downward adjustment, the
subaccount balance shall not be subsequently increased, notwithstanding any
subsequent increase in the deposit balance of the related Deposit Account. If
any such Deposit Account is closed, the related subaccount shall be reduced to
zero. For purposes of this Section and Section 86.4(f)(5) of the Regulations, a
time account shall be deemed to be closed upon its maturity date regardless of
any renewal thereof. A distribution of each subaccount balance may be made only
in the event of a complete liquidation of the Bank and the Holding Company
subsequent to the Stock Offering and only out of funds available for such
purpose after payment of all creditors.
Neither the Bank nor the Holding Company shall be required to set aside
funds for the purpose of
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establishing the Liquidation Account, and the creation and maintenance of the
Liquidation Account shall not operate to restrict the use or application of any
of the net worth accounts of the Bank, except that neither the Bank nor the
Holding Company shall declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect thereof would cause its net worth to be reduced
below the amount required for the Liquidation Account.
23. Employment and Other Severance Agreements
Following or contemporaneously with the Stock Offering, the Bank and/or
the Holding Company may enter into employment and/or severance arrangements with
one or more executive officers of the Bank and/or the Holding Company. It is
anticipated that any employment contracts entered into by the Bank and/or the
Holding Company will be for terms not exceeding three years and that such
contracts will provide for annual renewals of the term of the contracts, subject
to approval by the Board of Directors. The Bank and/or the Holding Company also
may enter into severance arrangements with one or more executive officers which
provide for the payment of severance compensation in the event of a change in
control of the Bank and/or the Holding Company. The terms of such employment and
severance arrangements have not been determined as of this time, but will be
described in any prospectus circulated in connection with the Stock Offering and
will be subject to and comply with all regulations of the Commissioner.
24. Payment of Dividends and Repurchase of Stock
The Holding Company may not declare or pay a cash dividend on, or
repurchase any of, its Common Stock if the effect thereof would cause its
regulatory capital to be reduced below the amount required to maintain the
Liquidation Account and under FDIC rules and regulations. Otherwise, the Holding
Company may declare dividends or make other capital distributions in accordance
with applicable laws and regulations. Subject to any applicable regulatory
approvals, the MHC may waive its right to receive dividends declared by the
Holding Company.
25. Stock Offering Expenses
The Regulations require that the expenses of the Stock Offering must be
reasonable. The Bank and the Holding Company will use their respective best
efforts to assure that the expenses incurred by the Bank and the Holding Company
in effecting the Stock Offering will be reasonable.
26. Interpretation
All interpretations of the Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Holding
Company and the Bank shall be final, subject to the authority of the
Commissioner.
27. Amendment or Termination of the Plan
If necessary or desirable, the terms of the Plan may be substantively
amended by a majority vote of the Board of Trustees of the MHC and by the Board
of Directors of the Bank as a result of comments from regulatory authorities or
otherwise, at any time prior to approval of the Plan by the Corporators. At any
time after approval of the Plan by the Corporators, the terms of the Plan may be
amended only with
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the concurrence of the Commissioner. The Plan may be terminated by a majority
vote of the Board of Trustees of the MHC or by a majority vote of the Board of
Directors of the Bank at any time prior to the date of the Special Meeting, and
may be terminated by a majority vote of the Board of Trustees of the MHC or by a
majority vote of the Board of Directors of the Bank at any time thereafter with
the concurrence of the Commissioner.
Dated: Effective April 1, 1998
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ARTICLES OF ORGANIZATION
SUMMIT BANCORP, INC.
ARTICLE I. NAME
The exact name of the corporation is: Summit Bancorp, Inc.
ARTICLE II. PURPOSE
The purpose of the corporation is to engage in the following business
activities: To buy, sell, deal in, or hold securities of every kind and
description; and in general to carry on any business permitted to corporations
organized under Chapter 156B of the Massachusetts General Laws as now in force
or hereafter amended.
ARTICLE III. AUTHORIZED CAPITAL STOCK
The total number of shares and par value of each class of stock that
the Corporation is authorized to issue is as follows:
Common: 10,000,000 shares, $.01 par value
Preferred: 2,000,000 shares, $.01 par value
ARTICLE IV. CAPITAL STOCK
A description of the different classes and series of the Corporation's
capital stock and a statement of the designations, and the relative rights,
preferences and limitations of the shares of each class and series of capital
stock are as follows:
A. Common Stock. Except as provided by law or in this ARTICLE IV
(or in any certificate of establishment of series of preferred stock),
holders of the Common Stock shall exclusively possess all voting
power. Each holder of shares of Common Stock shall be entitled to one
vote on all matters for each share held by such holder. There shall be
no cumulative voting rights in the election of Directors.
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the Common Stock as to the payment of dividends, the full amount
of dividends and of sinking fund, retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
Common Stock, then dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends; but only when and as
declared by the Board of Directors.
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In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
any class having preferences over the Common Stock in the event of liquidation,
dissolution or winding up of the full preferential amounts of which they are
respectively entitled, the holders of the Common Stock, and of any class or
series of stock entitled to participate therewith, in whole or in part, as to
distribution of assets, shall be entitled, after payment or provision for
payment of all debts and liabilities of the Corporation, to receive the
remaining assets of the Corporation available for distribution, in cash or in
kind, in proportion to their holdings.
Each share of Common Stock shall have the same relative rights as, and
be identical in all respects with, all the other shares of Common Stock.
B. Preferred Stock. Subject to any limitations prescribed by law,
the Board of Directors of the Corporation is authorized, by vote or
votes from time to time adopted, to provide for the issuance of one or
more classes of preferred stock, which shall be separately identified.
The Board of Directors shall have the authority to divide any
authorized class of preferred stock of the Corporation into one or
more series, to establish or change from time to time the number of
shares to be included in each such series, and to fix and state the
voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of any series so
established and the qualifications, limitations and restrictions
thereof. Each series shall be separately designated so as to
distinguish the shares thereof from the shares of all other series and
classes. The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of one or
more of the following:
1. The distinctive serial designation and the number of shares
constituting such series;
2. The dividend rates or the amount of dividends to be paid on
the shares of such series, whether dividends shall be
cumulative and, if so, from which date or dates, the payment
date or dates for dividends, and the participating or other
special rights, if any, with respect to dividends;
3. The voting powers, full or limited, if any, of shares of
such series;
4. Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and
conditions on which, such shares may be redeemed;
5. The amount or amounts payable upon the shares of such series
in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation;
6. Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the
purchase or redemption of such shares, and if so entitled,
the amount of such fund and the manner of its application,
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including the price or prices at which such shares may be
redeemed or purchased through the application of such fund;
7. Whether the shares of such series shall be convertible into,
or exchangeable for, shares of any other class or classes or
of any other series of the same or any other class or
classes of stock of the Corporation, and if so convertible
or exchangeable, the conversion price or prices or the rate
or rates of exchange, and the adjustments thereof, if any,
at which such conversion or exchange may be made, and any
other terms and conditions of such conversion or exchange;
8. The price or other consideration for which the shares of
such series shall be issued;
9. Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued
shares of preferred stock and whether such shares may be
reissued as shares of the same or any other series of stock;
and
10. Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as are permitted by law
and as the Board of Directors of the Corporation may deem
advisable.
Any such vote shall become effective when the Corporation files with
the Secretary of State of The Commonwealth of Massachusetts a certificate of
establishment of one or more series of preferred stock signed by the President
or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant
Secretary of the Corporation, setting forth a copy of the vote of the Board of
Directors establishing and designating the series and fixing and determining the
relative rights and preferences thereof, the date of adoption of such vote and a
certification that such vote was duly adopted by the Board of Directors.
Each share of each series of preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
Subject to the authority of the Board of Directors as set forth in
Paragraph 9 above, any shares of Preferred Stock shall, upon reacquisition
thereof by the Corporation, be restored to the status of authorized but unissued
Preferred Stock under this Section B.
Except as specifically provided in these Articles, the holders of
Preferred Stock or Common Stock shall not be entitled to any vote and shall not
have any voting rights concerning the designation or issuance of any shares of
Preferred Stock authorized by and complying with the conditions of these
Articles, and subject to the authority of the Board of Directors or any
authorized committee thereof as set forth above, the right to any such vote is
expressly waived by all present and future holders of the capital stock of the
Corporation.
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ARTICLE V. RESTRICTIONS ON TRANSFER OF SHARES
The restrictions, if any, imposed by these Articles upon the transfer
of shares of any class are: None.
ARTICLE VI. OTHER LAWFUL PROVISIONS
6.1 Corporate Governance
The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by statute or
by these Articles or the Bylaws of the Corporation, the Directors are
hereby empowered to exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide or unless so requested by
a stockholder entitled to vote thereon.
C. Any action to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by the
unanimous consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted
by a majority of the total number of authorized directorships (whether
or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the
Board for adoption) (the "Whole Board"), (provided, however, that if
there is an Interested Stockholder (as defined in Section C of Section
6.4), any such call by the Board of Directors shall also require the
affirmative vote of a majority of the Disinterested Directors (as
defined in Section C of Section 6.4) then in office). Special meetings
shall be called by the Clerk, or in the case of the death, absence,
incapacity or refusal of the Clerk, by any other officer, upon written
application of one or more stockholders who hold at least 80% in
interest of the capital stock entitled to vote at such meeting.
Application to a court pursuant to Section 34(b) of Chapter 156B (the
"Massachusetts Business Corporation Law") of the General Laws of The
Commonwealth of Massachusetts (or successor provisions) requesting the
call of a special meeting of stockholders because none of the officers
is able and willing to call such a meeting may be made only by
stockholders who hold at least 80% in interest of the capital stock
entitled to vote at such meeting. At a special meeting of
stockholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been stated in the
written notice of the special meeting, unless otherwise provided by
law.
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6.2 Directors
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board. The Directors shall be divided into
three classes, with the term of office of the first class to expire at
the first annual meeting of stockholders, the term of office of the
second class to expire at the annual meeting of stockholders one year
thereafter and the term of office of the third class to expire at the
annual meeting of stockholders two years thereafter. At each annual
meeting of stockholders following such initial classification and
election, Directors elected to succeed those Directors whose terms
expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of Directors or
any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or
other cause may be filled only by a majority vote of the Directors
then in office, though less than a quorum (provided, however, that if
there is an Interested Stockholder, any such action by the Board of
Directors shall also require the affirmative vote of a majority of the
Disinterested Directors then in office), and Directors so chosen shall
hold office for a term expiring at the annual meeting of stockholders
at which the term of office of the class to which they have been
chosen expires. No decrease in the number of Directors constituting
the Board of Directors shall shorten the term of any incumbent
Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any
meeting of the stockholders of the Corporation shall be given in the
manner provided in the Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any Director, or the entire Board of
Directors, may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least 80% of the
voting power of all of the then-outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of
Directors, voting together as a single class. At least 30 days prior
to such meeting of stockholders, written notice shall be sent to the
Director whose removal will be considered at the meeting and the
Director will be provided an opportunity to be heard before the
stockholders.
6.3 Amendment to Bylaws. The Board of Directors is expressly empowered
to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment
or repeal of the Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the Whole Board (unless at the time of
such action there shall be an Interested Stockholder, in which case such action
shall require the affirmative vote of a majority of the Disinterested Directors
then in office at such meeting). The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by these Articles, the affirmative vote of the
holders of at least 80% of the voting power of all of the then-outstanding
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shares of the capital stock of the Corporation entitled to vote generally in the
election of Directors, voting together as a single class, shall be required to
adopt, amend or repeal any provisions of the Bylaws of the Corporation.
6.4 Certain Business Combinations
A. In addition to any affirmative vote required by law or these
Articles, and except as otherwise expressly provided in this Section
6.4:
1. any merger or consolidation of the Corporation or any
Subsidiary (as defined in Section C of this Section 6.4) with (i)
any Interested Stockholder (as defined in Section C of this
Section 6.4), or (ii) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger
or consolidation would be, an Affiliate (as defined in Section C
of this Section 6.4) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder, or any
Affiliate of any Interested Stockholder, of any assets of the
Corporation or any Subsidiary having an aggregate Fair Market
Value (as herein defined in Section C of this Section 6.4)
equaling or exceeding 25% or more of the combined assets of the
Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of
any securities of the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property
(or a combination thereof) having an aggregate Fair Market Value
(as defined in Section C of this Section 6.4) equaling or
exceeding 25% of the combined Fair Market Value of the
outstanding Common Stock of the Corporation and its Subsidiaries,
except for any issuance or transfer pursuant to an employee
benefit plan of the Corporation or any Subsidiary thereof
(established with the approval of a majority of the Disinterested
Directors then in office); or
4. the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
5. any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any other transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has
the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder;
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shall require the affirmative vote of the holders of at least 80%
of the voting power of the then-outstanding shares of stock of
the Corporation entitled to vote in the election of Directors
(the "Voting Stock"), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that
no vote may be required, or that a lesser percentage may be
specified, by law or by any other provisions of these Articles or
any Certificate of Establishment or in any agreement with any
national securities exchange or otherwise.
The term "Business Combination" as used in this Section 6.4 shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Section 6.4.
B. The provisions of Section A of this Section 6.4 shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of
the outstanding shares of capital stock entitled to vote, or such vote
(if any), as is required by law or by these Articles, if, in the case
of any Business Combination that does not involve any cash or other
consideration being received by the stockholders of the Corporation
solely in their capacity as stockholders of the Corporation, the
condition specified in the following paragraph 1 is met or, in the
case of any other Business Combination, all of the conditions
specified in either of the following paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as defined in Section C
of this Section 6.4) then in office.
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be received per
share by the holders of Common Stock in such Business Combination
shall at least be equal to the higher of the following
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder or any of its Affiliates for any
shares of Common Stock acquired by it (i) within the
two-year period immediately prior to the first public
announcement of the proposal of the Business Combination
(the "Announcement Date"), or (ii) in the transaction in
which it became an Interested Stockholder, whichever is
higher.
(2) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter
date is referred to in this Section 6.4 as the
"Determination Date"), whichever is higher.
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(b) The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be received per
share by holders of shares of any class of outstanding Voting
Stock other than Common Stock shall be at least equal to the
highest of the following (it being intended that the requirements
of this subparagraph (b) shall be required to be met with respect
to every such class of outstanding Voting Stock, whether or not
the Interested Stockholder has previously acquired any shares of
a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage commissions,
transfer taxes and soliciting dealers' fees, paid by the
Interested Stockholder for any shares of such class of
Voting Stock acquired by it (i) within the two-year period
immediately prior to the Announcement Date, or (ii) in the
transaction in which it became an Interested Stockholder,
whichever is higher;
(2) (if applicable) the highest preferential amount per
share to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
(3) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
(c) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of
Voting Stock. If the Interested Stockholder has paid for shares
of any class of Voting Stock with varying forms of consideration,
the form of consideration to be received per share by holders of
shares of such class of Voting Stock shall be either cash or the
form used to acquire the largest number of shares of such class
of Voting Stock previously acquired by the Interested
Stockholder. The price determined in accordance with subparagraph
B.2 of this Section 6.4 shall be subject to appropriate
adjustment in the event of any stock dividend, stock split,
combination of shares or similar event.
(d) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of such
Business Combination: (1) except as approved by a majority of the
Disinterested Directors (as defined in Section C of this Section
6.4) then in office, there shall have been no failure to declare
and pay at the regular date therefor any full quarterly dividends
(whether or not cumulative) on any outstanding stock having
preference over the Common Stock as to dividends or liquidation;
(2) there shall have been (i)
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no reduction in the annual rate of dividends paid on the Common
Stock (except as necessary to reflect any subdivision of the
Common Stock), except as approved by a majority of the
Disinterested Directors then in office, and (ii) an increase in
such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding shares of
the Common Stock, unless the failure to so increase such annual
rate is approved by a majority of the Disinterested Directors
then in office, and (3) neither such Interested Stockholder or
any of its Affiliates shall have become the beneficial owner of
any additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder becoming
an Interested Stockholder.
(e) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall not
have received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided, directly or indirectly,
by the Corporation, whether in anticipation of or in connection
with such Business Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (or any subsequent provisions replacing
such Act, and the rules or regulations thereunder) shall be
mailed to stockholders of the Corporation at least 30 days prior
to the consummation of such Business Combination (whether or not
such proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions).
C. For the purposes of Section 6.1 and this Section 6.4:
1. A "Person" shall include an individual, a group acting in
concert, a corporation, a partnership, an association, a joint
venture, a pool, a joint stock company, a trust, an unincorporated
organization or similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of securities or
any other entity.
2. "Interested Stockholder" shall mean any person (other than the
Corporation or any Holding Company or Subsidiary thereof) who or
which:
(a) is the beneficial owner, directly or indirectly, of more
than 5% of the outstanding Voting Stock; or
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(b) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in
question was the beneficial owner, directly or indirectly, of 5%
or more of the voting power of the then outstanding Voting Stock;
or
(c) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the two-year
period immediately prior to the date in question beneficially
owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the
meaning of the Securities Act of 1933, as amended.
3. "Beneficial ownership" shall be determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule or statutory provision),
or, if said Rule 13d-3 shall be rescinded and there shall be no
successor rule or statutory provision thereto, pursuant to said Rule
13d-3 as in effect on the date of filing of these Articles; provided,
however, that a person shall, in any event, also be deemed the
"beneficial owner" of any Common Stock:
(a) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(b) which such person or any of its affiliates has (i) the
right to acquire (whether such right is exercisable immediately
or only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of an
agreement, contract, or other arrangement with this Corporation
to effect any transaction which is described in any one or more
clauses of Section A of Section 6.4) or upon the exercise of
conversion rights, exchange rights, warrants, or options or
otherwise, or (ii) sole or shared voting or investment power with
respect thereto pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but shall not be deemed
to be the beneficial owner of any voting shares solely by reason
of a revocable proxy granted for a particular meeting of
stockholders, pursuant to a public solicitation of proxies for
such meeting, with respect to shares of which neither such person
nor any such affiliate is otherwise deemed the beneficial owner);
or
(c) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person or any of
its affiliates acts as a partnership, limited partnership,
syndicate or other group pursuant to any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting or
disposing of any shares of capital stock of this Corporation;
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and provided further, however, that (1) no Director or Officer of
this Corporation (or any affiliate of any such Director or
Officer) shall, solely by reason of any or all of such Directors
or Officers acting in their capacities as such, be deemed, for
any purposes hereof, to beneficially own any Common Stock
beneficially owned by another such Director or Officer (or any
affiliate thereof, and (2) neither any employee stock ownership
plan or similar plan of this Corporation or any subsidiary of
this Corporation, nor any trustee with respect thereto or any
affiliate of such trustee (solely by reason of such capacity of
such trustee), shall be deemed, for any purposes hereof, to
beneficially own any Common Stock held under any such plan. For
purposes of computing the percentage beneficial ownership of
Common Stock of a person, the outstanding Common Stock shall
include shares deemed owned by such person through application of
this subsection but shall not include any other Common Stock
which may be issuable by this Corporation pursuant to any
agreement, or upon exercise of conversion rights, warrants or
options, or otherwise. For all other purposes, the outstanding
Common Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by this
Corporation pursuant to any agreement, or upon the exercise of
conversion rights, warrants or options, or otherwise.
4. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended, as
in effect on the date of filing of these Articles.
5. "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the
definition of Interested Stockholder set forth in Paragraph 2 of this
Section C, the term "Subsidiary" shall mean only a corporation of
which a majority of each class of equity security is owned, directly
or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board of
Directors who is unaffiliated with the Interested Stockholder and was
a member of the Board of Directors prior to the time that the
Interested Stockholder became an Interested Stockholder, and any
Director who is thereafter chosen to fill any vacancy of the Board of
Directors or who is elected and who, in either event, is unaffiliated
with the Interested Stockholder and in connection with his initial
assumption of office is recommended for appointment or election by a
majority of Disinterested Directors then in office.
7. "Fair Market Value" means:
(a) in the case of stock, the highest closing sales price of
the stock during the 30-day period immediately preceding the date
in question of a share of such stock on the National Association
of Securities Dealers Automated
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Quotation System or any system then in use, or, if such stock is
admitted to trading on a principal United States securities
exchange registered under the Securities Exchange Act of 1934, as
amended, Fair Market Value shall be the highest sale price
reported during the 30-day period preceding the date in question,
or, if no such quotations are available, the Fair Market Value on
the date in question of a share of such stock as determined by
the Board of Directors in good faith, in each case with respect
to any class of stock, appropriately adjusted for any dividend or
distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a
greater number of shares of such stock or any combination or
reclassification of outstanding shares of such stock into a
smaller number of shares of such stock, and
(b) in the case of property other than cash or stock, the
Fair Market Value of such property on the date in question as
determined by the Board of Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for
any dividend or distribution in shares of such stock or any stock
split or reclassification of outstanding shares of such stock into a
greater number of shares of such stock or any combination or
reclassification of outstanding shares of such stock into a smaller
number of shares of such stock.
9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in Subparagraphs (a) and (b) of Paragraph 2 of
Section B of this Section 6.4 shall include the shares of Common Stock
and/or the shares of any other class of outstanding Voting Stock
retained by the holders of such shares.
D. A majority of the Directors of the Corporation then in office
(provided, however, that if there is an Interested Stockholder, any such
determination shall also require the affirmative vote of a majority of the
Disinterested Directors then in office) shall have the power and duty to
determine for the purposes of this Section 6.4, on the basis of information
known to them after reasonable inquiry: (a) whether a person is an Interested
Stockholder; (b) the number of shares of Voting Stock beneficially owned by any
person; (c) whether a person is an Affiliate or Associate of another; and (d)
whether the assets which are the subject of any Business Combination have, or
the consideration to be received for the issuance or transfer of securities by
the Corporation or any Subsidiary in any Business Combination has, an aggregate
Fair Market Value equaling or exceeding 25% of the combined Fair Market Value of
the Common Stock of the Corporation and its Subsidiaries. A majority of the
Disinterested Directors then in office shall have the further power to interpret
all of the terms and provisions of this Section 6.4.
E. Nothing contained in the Section 6.4 shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
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F. Notwithstanding any other provisions of these Articles or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, these Articles or any Certificate of
Establishment, the affirmative vote of the holders of at least 80% of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal this Section 6.4.
6.5 Standards for Board of Directors' Evaluation of Offers. The Board
of Directors of the Corporation, in determining whether the interests of the
Corporation and its stockholders will be served by any offer of another Person
(as defined in Section 6.4) to (i) make a tender or exchange offer for any
equity security of the Corporation, (ii) merge or consolidate the Corporation
with or into another institution, or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Corporation, may consider
the interests of the Corporation'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 Corporation
and its stockholders, including the possibility that these interests may be best
served by the continued independence of the Corporation.
6.6 Indemnification
A. Each person who was or is made a party or is threatened to be made
a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he is or was a Director or an
Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to an employee benefit plan (hereinafter an
"indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a Director, Officer, employee or agent or in any other
capacity while serving as a Director, Officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Massachusetts Business Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith; provided, however, that, except
as provided in Section C hereof with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by
such indemnitee only if such proceeding (or part thereof) was authorized by
the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Section
6.6 shall include, in the case of a Director or officer at the level of
Vice President or above, and in the case of any other Officer or any
employee may include (in the discretion of the Board of Directors), the
right to be paid by the Corporation the expenses incurred in defending any
such proceeding
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in advance of its final disposition (hereinafter an "advancement of
expenses"). Notwithstanding the foregoing, expenses incurred by an
indemnitee in advance of the final disposition of a proceeding may be paid
only upon the Corporation's receipt of an undertaking by the indemnitee to
repay such payment if he shall be adjudicated or determined to be not
entitled to indemnification under applicable law. The Corporation may
accept such undertaking without reference to the financial ability of the
Indemnitee to make such repayment. The rights to indemnification and to the
advancement of expenses conferred in Sections A and B of this Section 6.6
shall be contract rights and such rights shall continue as to an indemnitee
who has ceased to be a Director, Officer, employee or agent and shall inure
to the benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Section 6.6 is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation
to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee also shall be entitled to be paid the expense
of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses
upon a final adjudication that, he shall not have acted in good faith in
the reasonable belief that his action was in the best interests of the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification
of the indemnitee is proper in the circumstances because the indemnitee has
met the applicable standard of conduct set forth in the Massachusetts
Business Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by
the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving
that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section 6.6 or otherwise, shall be on
the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Section 6.6 shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Articles, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the
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Corporation would have the power to indemnify such person against such
expense, liability or loss under the Massachusetts Business Corporation
Law.
F. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Section 6.6 with respect to the
indemnification and advancement of expenses of Directors and Officers of
the Corporation. Without limiting the generality of the foregoing, the
Corporation may enter into specific agreements, commitments or arrangements
for indemnification on any terms not prohibited by law which it deems to be
appropriate.
G. If the Corporation is merged into or consolidated with another
corporation and the Corporation is not the surviving corporation, the
surviving Corporation shall assume the obligations of the Corporation under
this Section 6.6 with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or
facts occurring at or prior to the date of such merger or consolidation.
6.7 Limitation of Liability of Directors.
A. No Director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director notwithstanding any provision of law imposing
such liability; provided, however, that this Section 6.7 shall not
eliminate or limit any liability of a Director (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Sections 61 or 62 of Chapter
156B of the General Laws of the Commonwealth of Massachusetts, or (iv) with
respect to any transaction from which the Director derived an improper
personal benefit.
B. No amendment or repeal of this Section 6.7 shall adversely affect
the rights and protection afforded to a Director of this Corporation under
this Section 6.7 for acts or omissions occurring prior to such amendment or
repeal. If the Massachusetts Business Corporation Law is hereafter amended
to further eliminate or limit the personal liability of Directors or to
authorize corporate action to further eliminate or limit such liability,
then the liability of the Directors of this Corporation shall be eliminated
or limited to the fullest extent permitted by the Massachusetts Business
Corporation Law as so amended.
6.8 Transactions with Interested Persons
A. Unless entered into in bad faith, no contract or transaction by the
Corporation shall be void, voidable or in any way affected by reason of the
fact that it is with an Interested Person.
B. For the purposes of this Section 6.8, "Interested Person" means any
person or organization in any way interested in the Corporation whether as
a director, officer, stockholder,
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employee or otherwise, and any other entity in which any such person or
organization of the Corporation is in any way interested.
C. Unless such contract or transaction was entered into in bad faith,
no Interested Person, because of such interest, shall be liable to the
Corporation or to any other person or organization for any loss or expense
incurred by reason of such contract or transaction or shall be accountable
for any gain or profit realized from such contract or transaction.
D. The provisions of this Section 6.8 shall be operative
notwithstanding the fact that the presence of an Interested Person was
necessary to constitute a quorum at a meeting of Directors or stockholders
of the Corporation at which such contract or transaction was authorized or
that the vote of an Interested Person was necessary for the authorization
of such contract or transaction.
6.9 Acting as a Partner
The Corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
6.10 Stockholders' Meetings
Meetings of stockholders may be held at such place in The Commonwealth
of Massachusetts or, if permitted by applicable law, elsewhere in the United
States as the Board of Directors may determine.
6.11 Ownership of Voting Stock by Mutual Holding Company
At all times so long as Service Bancorp, MHC (the "Mutual Holding
Company"), the majority holder of the Corporation's Common Stock, shall be in
existence, the Mutual Holding Company shall own at least a majority of the
Voting Stock of the Corporation and the Corporation shall not be authorized to
issue any shares of Voting Stock or take any action while the Mutual Holding
Company is in existence if after such issuance or action the Mutual Holding
Company shall own less than the majority of the Corporation's Voting Stock. For
these purposes, "Voting Stock" means Common Stock or preferred stock, or similar
interests if the shares by statute, charter or in any manner, entitle the
holder: (i) to vote for or to select directors of the Corporation; and (ii) to
vote on or to direct the conduct of the operations or other significant policies
of the Corporation. Notwithstanding anything in the preceding sentence,
preferred stock is not "Voting Stock" if: (i) voting rights associated with the
preferred stock are limited solely to the type customarily provided by statute
with regard to matters that would significantly and adversely affect the rights
or preferences of the preferred stock, such as the issuance of additional
amounts or classes of senior securities, the modification of the terms of the
preferred stock, the dissolution of the Corporation, or the payment of dividends
by the Corporation when preferred dividends are in arrears; (ii) the preferred
stock represents an essentially passive investment or financing device and does
not otherwise provide the holder with control over the Corporation; and (iii)
the preferred stock does not at the time entitle the holder, by statute,
charter, or otherwise,
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to select or to vote for the selection of directors of the Corporation.
Notwithstanding anything in the preceding two sentences, "Voting Stock" shall be
deemed to include preferred stock and other securities that, upon transfer or
otherwise, are convertible into Voting Stock or exercisable to acquire Voting
Stock where the holder of the stock, convertible security or right to acquire
Voting Stock has the preponderant economic risk in the underlying Voting Stock.
Securities immediately convertible into Voting Stock at the option of the holder
without payment of additional consideration shall be deemed to constitute the
Voting Stock into which they are convertible; other convertible securities and
rights to acquire Voting Stock shall not be deemed to vest the holder with the
preponderant economic risk in the underlying Voting Stock if the holder has paid
less than 50% of the consideration required to directly acquire the Voting Stock
and has no other economic interest in the underlying Voting Stock.
6.12 Conversion Transaction
A. In the event that the Mutual Holding Company elects to convert to
stock form in accordance with applicable law and regulation (a "Conversion
Transaction"), the Mutual Holding Company or its successor may merge or
combine with the Corporation, Summit Bank (the "Bank"), the Corporation's
wholly-owned subsidiary or any other corporation formed or controlled by
the Mutual Holding Company or the Corporation, and the depositors of the
Bank will receive the right to subscribe for a number of shares of Common
Stock of the surviving or resulting corporation determined as set forth in
the Stock Issuance Plan (the "Plan") of the Bank's mutual savings bank
predecessor. The additional shares of Common Stock of the Corporation
issued in the Conversion Transaction shall be sold at their aggregate pro
forma market value. Pursuant to the Plan, in any Conversion Transaction,
the minority stockholders of the Corporation (who consist of the holders of
Common Stock other than the Mutual Holding Company), will be entitled to
maintain the same percentage ownership interest in the Common Stock of the
Corporation (or the resulting corporation) after the Conversion Transaction
as their ownership interest in the Common Stock of the Corporation
immediately prior to the Conversion Transaction, subject only to adjustment
(if required by federal or state law, regulation, or regulatory policy) to
reflect (i) the cumulative effect of the aggregate amount of dividends
waived by the Mutual Holding Company, (ii) the market value of assets of
the Mutual Holding Company (other than Common Stock of the Corporation) and
(iii) any other factors required by applicable law.
B. At the sole discretion of the Board of Trustees of the Mutual
Holding Company and the Board of Directors of the Corporation, a Conversion
Transaction may be effected in any other manner necessary to qualify the
Conversion Transaction as a tax-free reorganization under applicable
federal and state tax laws, provided such Conversion Transaction does not
diminish the rights and ownership interest of Minority Stockholders as set
forth in the preceding paragraphs of this Section 6.12. If a Conversion
Transaction does not occur, the Mutual Holding Company will always own a
majority of the Voting Stock of the Corporation.
6.13 Amendment to Articles of Organization.
These Articles may be amended at a duly constituted meeting of
stockholders called expressly for such purpose, by the affirmative vote of at
least 80% of the total votes eligible to be
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cast by stockholders on such amendment, voting together as a single class;
provided, however, that if the Board of Directors recommends, by the affirmative
vote of at least two thirds of the Directors then in office at a duly
constituted meeting of the Board of Directors (unless at any time within the 60
day period immediately preceding the meeting at which the stockholder vote is to
be taken, there shall be an Interested Stockholder, in which case such action
shall also require the affirmative vote of a majority of the Disinterested
Directors then in office), that stockholders approve such amendment at such
meeting of stockholders, such amendment shall only require the affirmative vote
of a majority of the total votes eligible to be cast by stockholders on such
amendment, voting together as a single class.
ARTICLE VII. EFFECTIVE DATE
The effective date of organization of the Corporation shall be the date
approved and filed by the Secretary of the Commonwealth.
ARTICLE VIII. DIRECTORS AND OFFICERS
The information contained in Article VIII is not a permanent part of
the Articles of Organization.
a. The street address of the principal office of the Corporation in
Massachusetts is: 81 Main Street, Medway, Massachusetts 02053
b. The name, residential address and post office address of each Director and
Officer of the Corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
---- ------------------- -------------------
President: Eugene G. Stone 57 Moore Avenue Franklin, MA 02038
Treasurer: Warren W. Chase ____________________ ___________________
Clerk: James W. Murphy 234 Orchard Street Millis, MA 02054
Director: Eugene G. Stone 57 Moore Avenue Franklin, MA 02038
c. The fiscal year (i.e., tax year) of the Corporation shall end on the last
day of the month of: June
d. The name and business address of the resident agent, if any, of the
Corporation is: NONE
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ARTICLE IX. BYLAWS
Bylaws of the Corporation have been duly adopted and the President,
Treasurer, Clerk and Directors whose names are set forth above, have been duly
elected.
IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I/we, whose
signature(s) appear below as incorporator(s) and whose name(s) and business or
residential address(es) are clearly typed or printed beneath each signature do
hereby associate with the intention of forming this Corporation under the
provisions of General Laws, Chapter 156B and do hereby sign these Articles of
Organization as incorporator(s) this _______ day of _______, 1998
Robert B. Pomerenk, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 400
Washington, DC 20015
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SUMMIT BANCORP, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
the election of Directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen (13) months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 2. Special Meetings. Subject to the rights of the holders of
any class or series of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter, the "Whole Board").
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Massachusetts General Laws or the Articles of
Organization of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy (after giving effect to the Article FOURTH of the
Corporation's Articles of Organization), shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is required,
a majority of the shares of such class or classes present in person or
represented by proxy shall constitute a quorum entitled to take action with
respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
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If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization. Such person as the Board of Directors may have
designated or, in the absence of such a person, the Chairman of the Board of the
Corporation or, in his absence, the Chief Executive Officer or, in his absence,
such person as may be chosen by the holders of a majority of the shares entitled
to vote who are present, in person or by proxy, shall call to order any meeting
of the stockholders and act as chairman of the meeting. In the absence of the
Secretary of the Corporation, the secretary of the meeting shall be such person
as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation of
the manner of voting and the conduct of discussion as seem to him in order. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
(b) At any annual meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting: (i) by or at the
direction of the Board of Directors; or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
ninety (90) days prior to the date of the annual meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be brought before or conducted at an
annual meeting except in accordance with the provisions of this Section 6(b).
The Officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this
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Section 6(b) and, if he should so determine, he shall so declare to the meeting
and any such business so determined to be not properly brought before the
meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which Directors are to be elected
only: (i) by or at the direction of the Board of Directors; or (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal executive offices of the Corporation not
less than ninety (90) days prior to the date of the meeting; provided, however,
that in the event that less than one hundred (100) days' notice or prior
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that is required to be disclosed in solicitations of proxies for the
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934 (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); and (ii) as to the stockholder giving
notice of (x) the name and address, as they appear on the Corporation's books,
of such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The Officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he should so determine, he
shall declare to the meeting and the defective nomination shall be disregarded.
Section 7. Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used,
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provided that such copy, facsimile telecommunication or other reproduction shall
be a complete reproduction of the entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or by his proxy, a stock vote shall be taken. Every
stock vote shall be taken by ballots, each of which shall state the name of the
stockholder or proxy voting and such other information as may be required under
the procedure established for the meeting. The Corporation shall, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by the Certificate of Incorporation or by law, all
other matters shall be determined by a majority of the votes present and cast at
a properly called meeting of stockholders.
Section 8. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the identity
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the
rights of the holders of any class or series of preferred stock of the
Corporation, any action required or permitted to be taken by the stockholders of
the Corporation must be effected at an annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in writing by such
stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office. The business and
affairs of the Corporation shall be under the direction of its Board of
Directors. The number of Directors who
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shall constitute the Whole Board shall be such number as the Board of Directors
shall from time to time have designated, except that in the absence of any such
designation, such number shall be sixteen (16). The Board of Directors may
annually elect a Chairman of the Board from among its members who shall, when
present, preside at its meetings. In the absence of a Chairman of the Board,
meetings of the Board of Directors will be chaired by a Director selected by the
Board of Directors from among its members.
The Directors, other than those who may be elected by the holders of
any class or series of Preferred Stock, shall be divided, with respect to the
time for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his successor shall have been duly elected and
qualified. At each annual meeting of stockholders, commencing with the first
annual meeting, Directors elected to succeed those Directors whose terms then
expire shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each Director to hold
office until his successor shall have been duly elected and qualified. No person
shall be elected or appointed to serve or shall continue to serve as a Director
if he or she has reached the age of seventy-two (72) years.
Section 2. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any class or series of preferred stock, and unless the
Board of Directors otherwise determines, newly created Directorships resulting
from any increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only by a
majority vote of the Directors then in office, though less than a quorum, and
Directors so chosen shall hold office for a term specified by the Directors then
in office or, if not so specified, for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which they have been
elected expires and until such Director's successor shall have been duly elected
and qualified. No decrease in the number of authorized Directors constituting
the Board shall shorten the term of any incumbent Director.
Section 3. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all Directors. A notice of each regular meeting shall not be required.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called by one-third (1/3) of the Directors then in office (rounded up to
the nearest whole number) or by the Chief Executive Officer and shall be held at
such place, on such date, and at such time as they or he shall fix. Notice of
the place, date, and time of each such special meeting shall be given to each
Director by whom it is not waived by mailing written notice not less than five
(5) days before the meeting or be telegraphing or telexing or by facsimile
transmission of the same not less than
5
<PAGE>
twenty-four (24) hours before the meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Section 5. Quorum. At any meeting of the Board of Directors, a majority
of the Whole Board shall constitute a quorum for all purposes. If a quorum shall
fail to attend any meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone. Members
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting but shall not constitute attendance for the purpose of
compensation pursuant to Section 9 of this Article II, unless the Board of
Directors by resolution so provides.
Section 7. Conduct of Business. At any meeting of the Board of
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the Directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 8. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable
or non-negotiable, secured or unsecured, and to do all things
necessary in connection therewith;
(4) To remove any Officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any
Officer upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and
agents;
6
<PAGE>
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for Directors, Officers,
employees and agents of the Corporation and its subsidiaries as it may
determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for Directors, Officers, employees and agents of
the Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these Bylaws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. Removal.
A director may be removed only for cause as provided in the
Corporation's Articles of Organization. Any Director may resign at any time
giving written notice to Chairman of the Board or the Secretary. Any Director
who is absent from three or more meetings of the Board of Directors in a twelve
month period, or four or more meetings in a 24 month period, shall no longer be
qualified to serve as a Director and shall be removed automatically from his or
her position as a Director.
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors. The Board of
Directors, by a vote of a majority of the Whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a Director or
Directors to serve as the member or members, designating, if it desires, other
Directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to applicable law if the resolution which designates the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee and
any alternate member in his place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may by unanimous vote appoint another member of the
Board of Directors to act at the meeting in the place of the absent or
disqualified member.
7
<PAGE>
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings;
one-third (1/3) of the members shall constitute a quorum unless the committee
shall consist of one (1) or two (2) members, in which event one (1) member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filled with the minutes of the proceedings of such committee.
Section 3. Nominating Committee. The Board of Directors shall appoint a
Nominating Committee of the Board, consisting of not less than three (3)
members, one of which shall be the Chief Executive Officer (if a member of the
Board of Directors). The Nominating Committee shall have authority (a) to review
any nominations for election to the Board of Directors made by a stockholder of
the Corporation pursuant to Section 6(c)(ii) of Article I of these Bylaws in
order to determine compliance with such Bylaw provision and (b) to recommend to
the Whole Board nominees for election to the Board of Directors to replace those
Directors whose terms expire at the annual meeting of stockholders next ensuing.
ARTICLE IV - OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the
annual meeting of stockholders may choose a Chairman of the Board, and shall
choose a President, a Chief Executive Officer, one or more Vice Presidents, and
a Secretary and from time to time may choose such other Officers as it may deem
proper. The Chairman of the Board, if any, shall be chosen from among the
Directors. Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next annual
election of Officers and until their respective successors are chosen, but any
Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such Officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board. The Chairman of the Board, if one is
chosen, shall, subject to the provisions of these Bylaws and to the direction of
the Board of Directors, serve in a general executive capacity and, when present,
shall preside at all meetings of the Board of Directors or the stockholders of
the Corporation. The Chairman of the Board shall perform all duties and have all
powers which are commonly incident to the office of Chairman of the Board or
which are
8
<PAGE>
delegated to him by the Board of Directors. He shall have power to sign all
stock certificates, contracts and other instruments of the Corporation which are
authorized.
Section 3. Chief Executive Officer. The Chief Executive Officer shall
have general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the office of Chief Executive Officer or which
are delegated to him by the Board of Directors. Subject to the direction of the
Board of Directors, and in the absence of a Chairman of the Board, the Chief
Executive Officer shall have all of the powers and perform all of the duties of
the Chairman of the Board (as designated in Section 2), and shall also have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision of all of
the other Officers (other than the Chairman of the Board, if any), employees and
agents of the Corporation.
Section 4. President. The President shall have such powers and shall
perform such duties as are provided in these Bylaws or as may be assigned to him
by the Board of Directors or the Chief Executive Officer.
Section 5. Vice Presidents. The Vice President or Vice Presidents shall
perform the duties and exercise the powers usually incident to their respective
offices and/or such other duties and powers as may be properly assigned to them
by the Board of Directors or the Chief Executive Officer. A Vice President or
Vice Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 6. Secretary. The Secretary or an Assistant Secretary shall
issue notices of meetings, shall keep their minutes, shall have charge of the
seal and the corporate books, shall perform such other duties and exercise such
other powers as are usually incident to such offices and/or such other duties
and powers as are properly assigned thereto by the Board of Directors or the
Chief Executive Officer.
Section 7. Assistant Secretaries and Other Officers. The Board of
Directors may appoint one or more Assistant Secretaries and such other Officers
who shall have such powers and shall perform such duties as are provided in
these Bylaws or as may be assigned to them by the Board of Directors or the
Chief Executive Officer.
Section 8. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the Chief Executive Officer
or any Officer of the Corporation authorized by the Chief Executive Officer
shall have power to vote and otherwise act on behalf of the Corporation, in
person or in which the Corporation may hold securities and otherwise to exercise
any and all rights and powers which the Corporation may possess by reason of its
ownership of securities in such other corporation.
9
<PAGE>
ARTICLE V - STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate signed by, or in the name of the Corporation by, the Chairman of
the Board or the Chief Executive Officer, and by the Secretary or an Assistant
Secretary, or any Treasurer or Assistant Treasurer, certifying the number of
shares owned by him. Any or all of the signatures on the certificate may be by
facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these Bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 3. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
10
<PAGE>
ARTICLE VI - NOTICES
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, Director,
Officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid telegram
or mailgram or other courier. Any such notice shall be addressed to such
stockholder, Director, Officer, employee or agent at his last known address as
the same appears on the books of the Corporation. The time when such notice is
received, if hand delivered, or dispatched, if delivered through the mails or by
telegram or mailgram or other courier, shall be the time of the giving of the
notice.
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, Director, Officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, Director, Officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures. In addition to the provisions for use
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any Officer or Officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Comptroller or by an Assistant Secretary or an assistant to the Comptroller.
Section 3. Reliance upon Books, Reports and Records. Each Director,
each member of any committee designated by the Board of Directors, and each
Officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its Officers or employees, or committees
of the Board of Directors so designated, or by any other person as to matters
which such Director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these Bylaws
which requires that an act be done or not be done a specified number of days
prior to an event or that an act be done
11
<PAGE>
during a period of a specified number of days prior to an event, calendar days
shall be used, the day of the doing of the act shall be excluded, and the day of
the event shall be included.
ARTICLE VIII - AMENDMENT
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change is given not less
than two days prior to the meeting. The stockholders shall also have power to
amend, alter or repeal these Bylaws at any meeting of stockholders, provided
notice of the proposed change was given in the Notice of the Meeting; provided,
however, that, notwithstanding any other provisions of these Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock Designation or these Bylaws, the affirmative votes of
the holders of at least eighty percent (80%) of the voting power of all the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal any provisions of these Bylaws.
12
EXHIBIT 4
<PAGE>
CHARTERED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
SUMMIT BANCORP, INC.
Medway, Massachusetts
THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS. SEE
REVERSE SIDE.
$.01 par value common stock--fully paid and non assessable
This certifies that _____________________________ is the owner of __________
shares of the common stock of SUMMIT BANCORP, INC. (the "Corporation"), a
corporation chartered under the laws of the Commonwealth of Massachusetts.
The shares evidenced by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, in person or
by his duly authorized attorney or legal representative, upon surrender of this
certificate properly endorsed. This Certificate in not valid until countersigned
and registered by the Corporation's transfer agent and registrar. This security
is not a deposit or savings account and is not insured or guaranteed by the
Federal Deposit Insurance Corporation, the Depositors Insurance Fund or any
other insurer.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused a
facsimile of its seal to be affixed hereto.
DATED:____________________
- ---------------------------- ----------------------------
Treasurer (SEAL) President
<PAGE>
SUMMIT BANCORP, INC.
This Certificate and the shares of common stock represented hereby are
issued and shall be held subject to the laws of the Commonwealth of
Massachusetts and the Articles of Organization and Bylaws of the Corporation, to
all of which the holder by acceptance hereof assents. The Corporation will
furnish to any shareholder, upon written request and without charge, a copy of
the Articles of Organization and Bylaws of the Corporation.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Corporation will furnish
to any shareholder, upon written request and without charge, a full description
of each class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted
in the election of directors of the Corporation. The Articles of Organization
require the affirmative vote of the holders of at least 80% of the voting power
of the then-outstanding shares of voting stock of the Corporation, voting
together as a single class, to amend certain provisions of the Articles of
Organization.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _________Custodian_________
(Cust) (Minor)
TEN ENT - as tenants by the entireties
Under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as _________________________________
tenants in common (State)
Additional abbreviations may also be used though not in the above list
For value received, ___________________ hereby sell, assign and transfer unto
[ ]
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
(please print or typewrite name and address including
postal zip code of assignee)
- --------------------------------------------------------------------------------
_________________________________________________________________ Shares of the
Common Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _____________________________________________ Attorney to
transfer the said shares on the books of the within named corporation with full
power of substitution in the premises.
Dated, _____________________________
In the presence of Signature:
____________________________________ __________________________
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
EXHIBIT 5
<PAGE>
[letterhead of Luse Lehman Gorman Pomerenk & Schick, P.C.]
June 10, 1998
The Board of Trustees
Service Bancorp, M.H.C.
The Board of Directors
Summit Bank
81 Main Street
Medway, Massachusetts 02053
Re: Summit Bancorp, Inc.
Common Stock Par Value $.01 Per Share
-------------------------------------
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of Summit Bancorp, Inc. (the
"Company") Common Stock, par value $.01 per share (the "Common Stock"). We have
reviewed the Company's proposed Articles of Organization, Registration Statement
on Form SB-2 (the "Form SB-2"), as well as applicable statutes and regulations
governing the Company and the offer and sale of the Common Stock.
We are of the opinion that upon the declaration of effectiveness of the
Form SB-2, the Common Stock, when sold, will be legally issued, fully paid and
non-assessable.
This Opinion has been prepared for the use of the Company in connection
with the Form SB- 2. We hereby consent to our firm being referenced under the
caption "Legal and Tax Matters."
Very truly yours,
\s\ LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
----------------------------------------------
LUSE LEHMAN GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
EXHIBIT 8.1
<PAGE>
[letterhead of Luse Lehman Gorman Pomerenk & Schick, P.C.]
May 1, 1998
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
81 Main Street
Medway, Massachusetts 02053-1867
Re: Holding Company Formation and Stock Issuance
--------------------------------------------
Ladies and Gentlemen:
We have been requested as special counsel to Summit Bank (the "Bank"),
a Massachusetts chartered stock savings bank, and Service Bancorp, M.H.C., the
Bank's Massachusetts-chartered mutual holding company ("MHC") to express our
opinion concerning certain Federal income tax matters relating to the
organization of Summit Bancorp, Inc. ("Holding Company") as wholly-owned
subsidiary of the MHC and the contribution by MHC of all of the issued and
outstanding stock of Bank to Holding Company. Contemporaneously with MHC's
contribution of Bank's stock to the Holding Company, the Holding Company will
offer for sale up to 49% of its common stock ("Common Stock") in a stock
offering on a priority basis to qualifying depositors, tax-qualified employee
plans of the Bank, and employees, officers, trustees and directors of the Bank
and of the MHC, with any remaining shares to be offered to the public in a
community offering (all shareholders other than the MHC are referred to herein
as the "Minority Stockholders").
In connection therewith, we have examined the Service Bancorp, MHC and
Summit Bank Stock Issuance Plan ("Plan") and certain other documents of or
relating to the Reorganization (as defined below), some of which are described
or referred to in the Plan and which we deemed necessary to examine in order to
issue the opinions set forth below. Unless otherwise defined, all terms used
herein have the meanings given to such terms in the Plan.
<PAGE>
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
May 1, 1998
Page 2
In our examination, we have assumed the authenticity of original
documents, the accuracy of copies and the genuineness of signatures. We have
further assumed the absence of adverse facts not apparent from the face of the
instruments and documents we examined.
In issuing our opinions, we have assumed that the Plan has been duly
and validly authorized and has been approved and adopted by the Board of
Trustees of the MHC and the Board of Directors of the Bank at a meeting duly
called and held; that the MHC will comply with the terms and conditions of the
Plan, and that the various representations and warranties which are provided to
us are accurate, complete, true and correct. Accordingly, we express no opinion
concerning the effect, if any, of variations from the foregoing. We specifically
express no opinion concerning tax matters relating to the Plan under state and
local tax laws and under Federal income tax laws except on the basis of the
documents and assumptions described above.
For purposes of this opinion, we are relying on the representations
provided to us by the MHC as described herein.
In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, current administrative
rulings, notices and procedures and court decisions. Such laws, regulations,
administrative rulings, notices and procedures and court decisions are subject
to change at any time. Any such change could affect the continuing validity of
the opinions set forth below. This opinion is as of the date hereof and we
disclaim any obligation to advise you of any change in any matter considered
herein after the date hereof.
In rendering our opinions, we have assumed that the persons and
entities identified in the Plan will at all times comply with the requirements
of Code section 351, the other applicable state and Federal laws and the
representations of the MHC. In addition, we have assumed that the activities of
the persons and entities identified in the Plan will be conducted strictly in
accordance with the Plan. Any variations may affect the opinions we are
rendering.
We emphasize that the outcome of litigation cannot be predicted with
certainty and, although we have attempted in good faith to opine as to the
probable outcome of the merits of each tax issue with respect to which an
opinion was requested, there can be no assurance that our conclusions are
correct or that they would be adopted by the Internal Revenue Service (the
"Service") or a court.
<PAGE>
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
May 1, 1998
Page 3
SUMMARY OF OPINIONS
Based on the facts, representations and assumptions set forth herein,
we are of the opinion that:
1. The Reorganization qualifies as an exchange described in Code
Section 351.
2. The MHC will recognize no gain or loss upon the transfer of the
stock of Bank to Holding Company solely in exchange for Holding
Company Common Stock. All other transferors will recognize no
gain or loss upon the transfer of property to Holding Company
solely in exchange for Common Stock of Holding Company. (Code
Sections 351(a) and 357(a)).
3. The MHC's basis in the Holding Company Common Stock received in
the transaction will be equal to the basis of the property
transferred in exchange therefor. (Rev. Rul. 78-280, 1978-2 C.B.
139).
4. The MHC's holding period for the Holding 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. (Code Section 1223(1)).
5. The Holding Company will recognize no gain or loss upon its
receipt of property from the MHC and Minority Stockholders in
exchange for Common Stock of the Holding Company. (Code Section
1032).
6. The Holding Company's holding period for the property received
from the MHC will include the period during which such property
was held by the MHC. (Code Section 1223(2)).
STATEMENT OF FACTS
The MHC was organized as a Massachusetts mutual holding company in
August 1997 and currently owns 100% of the stock of the Bank, a Massachusetts
chartered stock savings bank. The main office of the MHC is located at 81 Main
Street, Medway, Massachusetts. The Bank is
<PAGE>
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
May 1, 1998
Page 4
regulated by the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"), including the Division of Banks and the Board of Bank
Incorporation. The Bank is also regulated by the Federal Deposit Insurance
Corporation (the "FDIC"). The Bank's principal executive office is located at 81
Main Street, Medway, Massachusetts 02053-1867. The Bank and the MHC have a June
30 fiscal year end.
The Bank has one wholly owned subsidiary, Medway Securities Corporation
("Medway Securities"), an active Massachusetts corporation. The sole activity of
Medway Securities is to invest in corporate securities, government and agency
bonds. The corporation is active and held approximately $12.5 million of
securities as of June 30, 1997. Medway Securities was incorporated by the Bank
to take advantage of Massachusetts tax law that taxes earnings on securities
held by a securities corporation at a 1.36% rate versus a 12.54% rate on
securities held by a Massachusetts banking institution.
The Holding Company will be a Massachusetts chartered intermediate
stock holding company that will be majority owned by the MHC and will own 100%
of the Bank's stock.
PROPOSED TRANSACTION
Effective as of April 1, 1998, the Board of Trustees of the MHC and the
Board of Directors of the Bank (the "Board of Directors") adopted that certain
Stock Issuance Plan.
Pursuant to the Plan, the following steps are proposed:
(i) The MHC will incorporate Holding Company as a
Massachusetts-chartered stock holding company.
(ii) The MHC will transfer all of the issued and outstanding stock
in Bank to Holding Company in exchange for Holding Company
Common Stock.
(iii) Holding Company will offer up to 49% of its Common Stock for
sale for cash to depositors of the Bank, employee stock
benefit plans of the Bank, and certain members of the
community pursuant to priorities established by the Board of
Directors unless market conditions are unfavorable or
regulatory approvals cannot be obtained. Any remaining shares
may be offered to the public at the sole discretion of the
Board of Directors. In the aggregate, these persons shall be
referred to as the Minority Stockholders.
<PAGE>
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
May 1, 1998
Page 5
Steps (i) through (iii) above shall be referred to herein as
the "Reorganization". Subsequent to the approval of the Plan by the
Commissioner, the affirmative vote of at least (i) a majority of the total
Corporators, and (ii) a majority of the Independent Corporators (as defined in
the Plan) voting at a special meeting is required for approval of the Plan.
Following the Reorganization, Holding Company will have the
power to issue shares of capital stock (including common and preferred stock) to
persons other than the MHC. So long as the MHC is in existence, however, it must
own a majority of the voting stock of Holding Company. Holding Company may issue
any amount of non-voting stock to persons other than MHC. No such non-voting
stock will be issued as of the date of the Reorganization.
An offering of the Common Stock of Holding Company will be
made subject to the approval of the Board of Trustees of the MHC and the Board
of Directors of the Bank. The stock offering will be made to the Minority
Stockholders described above. The Common Stock issued in the offering shall be
sold at a total price equal to the estimated pro forma market value of such
Common Stock, based upon an independent valuation. The aggregate amount of
outstanding Common Stock owned or controlled by persons other than MHC at the
close of the proposed stock offering shall be no more than 49 percent of the
Holding Company's total outstanding Common Stock. MHC and the Minority
Stockholders (as a class) will be the sole owners of Holding Company's total
outstanding Common Stock. A stock offering will not be made only if market
conditions dictate against such offering or regulatory approvals cannot be
obtained.
* * *
The opinions set forth above represent our conclusions as to
the application of existing Federal income tax law to the facts of the instant
transaction, and we can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us. Moreover,
there can be no assurance that contrary positions may not be taken by the
Service, or that a court considering the issues would not hold contrary to such
opinions.
It is expressly understood that the opinions set forth above
represent our conclusions based upon the documents reviewed by us and the facts
presented to us. Any material amendments to such documents or changes in any
significant fact would affect the opinions expressed herein.
<PAGE>
Board of Trustees
Service Bancorp, M.H.C.
Board of Directors
Summit Bank
May 1, 1998
Page 6
We have not been asked to, and we do not, render any opinion with
respect to any matters other than those expressly set forth above.
We hereby consent to the filing of the opinion as an exhibit to the
Stock Holding Company's Registration Statement on Form SB-2 as filed with the
SEC. We also consent to the references to our firm in the Prospectus contained
in the Form SB-2 under the captions "The Offering and The Reorganization -
Federal and State Tax Consequences of the Reorganization" and "Legal and Tax
Matters" and to the summarization of our opinion in such Prospectus.
Very truly yours,
\s\ Luse Lehman Gorman Pomerenk & Schick, P.C.
----------------------------------------------
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
EXHIBIT 8.2
<PAGE>
One International Place
Boston, Massachusetts 02110-9801
617/439-9700 o fax 617/439-0476
[WOLF & COMPANY, P.C. LOGO]
1441 Main Street
Certified Public Accountants Springfield, Massachusetts 01103
and Business Consultants 413/747-9042 o fax 413/733-1990
- --------------------------------------------------------------------------------
May 1, 1998
Board of Directors
Summit Bank
Board of Trustees
Service Bancorp, M.H.C.
81 Main Street
Medway, MA 02053
Re: Holding Company Formation and Stock Issuance
Ladies and Gentlemen:
You have requested our opinion regarding the Massachusetts income tax
consequences of the organization of Summit Bancorp, Inc. ("Holding Company"), a
business corporation organized under the laws of the State of Massachusetts, as
a wholly owned subsidiary of Service Bancorp, MHC ("MHC") and the contribution
of all of the outstanding capital stock of the Summit Bank ("Bank"), a
Massachusetts chartered stock savings bank, to the Holding Company and the sale
by the Holding Company of up to 49% of its common stock (the "Common Stock") in
a subscription offering ("Subscription Offering") pursuant to nontransferable
subscription rights issued on a priority basis to qualifying depositors,
tax-qualified employee plans of the Bank and employees, officers, trustees and
directors of the Bank and of the MHC, with any remaining shares to be offered to
the public in a community offering ("Community Offering") (all shareholders
other than the MHC are referred to herein as the "Minority Stockholders"),
pursuant to the Summit Bank Stock Issuance Plan ("Plan") adopted by the Board of
Directors of the Bank on April 1, 1998 (the "Plan"). These and related
transactions are described in the Plan, as submitted to the Massachusetts Bank
Commissioner (the "Division") in connection with the Plan. We are rendering this
opinion pursuant to the Plan. All capitalized terms used but not defined in this
letter shall have the meanings set forth in the Plan.
In connection with the opinions expressed below, we have relied upon originals
or copies certified or otherwise identified to our satisfaction, of the Plan and
of such corporate records of the Bank, MHC and the Holding Company as we have
deemed appropriate. We have assumed that the Bank, MHC and the Holding Company
and other parties will act in accordance with the Plan. In addition, we have
made such investigations of law as we have deemed appropriate to form a basis
for the opinions expressed below.
Member of Associated Regional Accounting Firms and TGI International
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Two
The Reorganization
- ------------------
The Board of Trustees of the MHC and the Board of Directors of the Bank have
adopted the Plan on April 1, 1998. Pursuant to the Plan, the Bank will
reorganize into a two-tier mutual holding company structure. The two-tier mutual
holding company structure will consist of: (i) a Massachusetts mutual holding
company, Service Bancorp, MHC, (MHC); (ii) a Massachusetts stock holding
company, Summit Bancorp, Inc., (the Holding Company) that will offer up to 49%
of its Common Stock for sale in the Offering, with the remaining 51% of its
Common Stock owned by the MHC; and (iii) a Massachusetts-chartered stock savings
bank, Summit Bank, (the Bank), which will be wholly-owned by the Holding
Company.
The Reorganization will be effected as follows:
(i) The MHC will organize a Massachusetts-chartered stock holding company
(the Holding Company) as a separate wholly-owned subsidiary of the
MHC;
(ii) The MHC will contribute all of the shares of common stock of the bank
to the Holding Company, which will result in the MHC owning 100% of
the Common Stock of the Holding Company and the Holding Company
owning 100% of the common stock of the Bank; and
(iii) The Holding Company will offer up to 49% of its Common Stock for sale
for cash to depositors of the Bank, employee stock benefit plans of
the Bank, and certain members of the community pursuant to priorities
established by the Board of Directors unless market conditions are
unfavorable or regulatory approvals cannot be obtained. Any remaining
shares may be offered to the public at the sole discretion of the
Board of Directors. In the aggregate, these persons shall be referred
to as the Minority Stockholders.
The Bank has received a federal tax opinion from Luse Lehman Gorman Pomerenk &
Schick that, for federal income tax purposes, under current law:
1. The Reorganization qualifies as an exchange described in Code Section 351.
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Three
2. The MHC will recognize no gain or loss upon the transfer of the stock of
Bank to Holding Company solely in exchange for Holding Company Common
Stock. All other transferors will recognize no gain or loss upon the
transfer of property to Holding Company solely in exchange for Common Stock
of Holding Company. (Code Sections 351(a) and 357(a)).
3. The MHC's basis in the Holding Company Common Stock received in the
transaction will be equal to the basis of the property transferred in
exchange therefor. (Rev. Rul. 78-280, 1978-2 C.B. 139).
4. The MHC's holding period for the Holding 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. (Code
Section 1223(1)).
5. The Holding Company will recognize no gain or loss upon its receipt of
property from the MHC and Minority Stockholders in exchange for Common
Stock of the Holding Company. (Code Section 1032).
6. The Holding Company's holding period for the property received from the MHC
will include the period during which such property was held by the MHC.
(Code Section 1223(2)).
7. Provided that the amount to be paid for the Holding Company 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 MHC and the Bank upon the distribution to them of nontransferable
subscription rights to purchase shares of Holding Company Common Stock.
Gain, if any, realized on the distribution to them of nontransferable
subscription rights to purchase shares of Holding Company Common Stock will
be recognized but only in an amount not in excess of the fair market value
of such subscription rights. (Code Section 356(a)).
8. The basis of the Holding Company Stock to the Minority Stockholders will be
the purchase price thereof plus the fair market value, if any, of
nontransferable subscription rights. (Section 1012 of the Code). We
understand that the Bank and MHC have received a letter from R.P.
Financial, Inc. that the nontransferable subscription rights do not have
any value. Assuming the nontransferable subscription rights have no value,
the basis of the Holding Company Common Stock will be the amount paid
therefor.
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Four
Financial Institution Excise Tax
- --------------------------------
Bank is a state-chartered stock savings bank subject to the Massachusetts
financial institution excise tax under MGL chapter 63, Sections 1, 2 and 7.
Holding Company will be a Massachusetts chartered corporation subject to the
Massachusetts financial institution excise tax under MGL chapter 63, Section 1,
2 and 7 or the excise imposed under MGL chapter 63, Section 38B(b) if Holding
Company is classified as a security corporation pursuant to that Section.
MGL c.63 s.2 provides that "[e]very financial institution engaged in business in
the commonwealth shall pay, on account of each taxable year, a tax measured by
its net income..." MGL c.63, s.1 defines net income for the purposes of Section
2 as "gross income other than ninety-five percent of dividends received in any
taxable year beginning on or after January first, nineteen hundred and
ninety-nine from or an account of the ownership of any class of stock if the
financial institution owns fifteen percent or more of the voting stock of the
institution paying the dividend, less the deductions, but not credits, allowable
under the provisions of the Internal Revenue Code, as amended and in effect for
the taxable year." M.G.L. c.63, s.1 provides "gross income is income as defined
under the provisions of the Internal Revenue Code, as amended and in effect for
the taxable year, plus the interest from bonds, notes, and evidences of
indebtedness of any state, including this commonwealth."
MGL c.63, s.1 provides the term "financial institution" includes any bank,
banking association, trust company, federal or state savings and loan
association, whether of issue or not, existing by authority of the United
States, or any state, or a foreign country or any law of Massachusetts. Such
financial institutions are subject to the tax rates at MGL c.63, s.2(a) for
their first taxable year beginning on or after January 1, 1995 that they are
subject to Massachusetts tax. The term "financial institution" also includes a
bank holding company and any subsidiary corporation or corporate trust which
participates with it in the filing of a consolidated federal tax return and
certain corporations subject to supervision by the Massachusetts division of
banks or any corporation in substantial competition with financial institutions
that derives more than 50% of its gross income, excluding non-recurring,
extraordinary items, from loan origination, lending or a credit card activities.
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Five
Corporate Excise Tax
- --------------------
Under Massachusetts Chapter 63, Section 38B, one of the requirements for
obtaining classification as a Massachusetts security corporation is that the
company be engaged "exclusively in buying, selling, dealing in, or holding
securities its own behalf and not as a broker." M.G.L. C.63 Section 38B.
Holding Company has been authorized to loan money to its ESOP to be used for the
purchase of Holding Company stock. The lending of money has been held to be an
impermissible activity for a Massachusetts security corporation and would result
in disqualification of the Holding Company as a Massachusetts security
corporation.
Management has represented to us that before the Holding Company loans money to
its ESOP, the Holding Company will create and fund a newly formed subsidiary
(Newco) to hold any investment securities of the Holding Company.
Massachusetts Letter Rulings 88-13 and 91-3 addressed the issues of whether bank
holding companies and other corporations, respectively, were allowed to own
wholly-owned subsidiaries and what their permissible activities would be. In
both rulings, corporations were given broad powers to manage the investment in
their wholly-owned subsidiaries provided they do not actually conduct a trade or
business themselves.
The formation and funding of Newco followed by the lending of money from the
Holding Company to its ESOP should not violate the requirements necessary to
obtain and retain Massachusetts security corporation status for Newco.
Accordingly, based upon the facts and representation stated herein, it is the
opinion of Wolf & Company, P.C. regarding the Massachusetts excise tax effect of
the planned reorganization that:
1. No gain or loss shall be recognized by the Bank or the Holding Company on
the receipt by the Bank of money from the Holding Company in exchange for
shares of the Bank's capital stock or by the Holding Company upon the
receipt of money from the sale of its Common Stock (Massachusetts Letter
Ruling 87-11, Section 1032(a) of the Code).
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Six
2. Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no gain
or loss will be recognized by qualifying depositors, tax qualified employee
plans of the Bank and employees, officers, trustees and directors of the
Bank and of the MHC upon the distribution to them of the nontransferable
subscription rights to purchase shares of stock in the Holding Company
(Section 356(a) and Massachusetts Letter Ruling 84-11). Gain, if any,
realized on the distribution to them of nontransferable subscription rights
to purchase shares of Common Stock will be recognized but only in an amount
not in excess of the fair market value of such subscription rights (Section
356(a) and Massachusetts Letter Ruling 84-11). They will not realize any
taxable income as a result of the exercise of the nontransferable
subscription rights (Massachusetts Letter Ruling 84-11).
3. The basis of the Holding Company Common Stock to its stockholders will be
the purchase price thereof plus the fair market value, if any, of
nontransferable subscription rights (Section 1012 of the Code and
Massachusetts Letter Rulings 84-11 and 83-61). Accordingly, assuming the
nontransferable subscription rights have no value, the basis of the Common
Stock will be the amount paid therefor. The holding period of the Common
Stock purchased pursuant to the exercise of subscription rights shall
commence on the date on which the right to acquire such stock was exercised
(Section 1223(6) of the Code and Massachusetts Letter Ruling 84-11 and
83-61).
4. The lending of money from Holding Company to its ESOP will not prevent
Newco from qualifying as a Massachusetts security corporation provided that
Newco does not conduct any other activities deemed impermissible under MGL
Chapter 63, Section 38B, and the various regulations, announcements and
letter rulings issued by the Massachusetts Department of Revenue.
Our opinion under paragraph (2) above is predicated on the representation that
no person shall receive any payment, whether in money or property, in lieu of
the issuance of subscription rights. Our opinion under paragraphs (2) and (3)
above assumes that the subscription rights to purchase shares of Common Stock
have a fair market value of zero. We understand that you have received a letter
form R.P. Financial, Inc. that the subscription rights do not have any value. We
express no view regarding the valuation of the subscription rights.
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
May 1, 1998
Page Seven
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights (in
certain cases, whether or not the rights are exercised) and Holding Company
and/or the Bank may be taxable on the distribution of the subscription rights.
Our opinion assumes that the Reorganization qualifies under Code Section 351 as
a tax free transfer to a corporation controlled by transferors. We understand
that the federal tax opinion is being rendered by Luse Lehman Gorman Pomerenk &
Schick.
We express no view regarding whether the Reorganization qualifies as a tax free
Section 351 transfer under the Code.
Conclusion
- ----------
The opinions contained herein are rendered only with respect to the specific
matters discussed herein and we express no opinion with respect to any other
legal, federal, state, or local tax aspect of these transactions. This opinion
is not binding upon any tax authority including the Massachusetts Department of
Revenue or any court and no assurance can be given that a position contrary to
that expressed herein will not be asserted by a tax authority.
In rendering our opinions we are relying upon the relevant provisions of the
Internal Revenue Code of 1986, as amended, Massachusetts general laws and the
regulations, judicial and administrative interpretations thereof, all as of the
date of this letter.
However, all of the foregoing authorities are subject to change or modification
which can be retroactive in effect and, therefore, could also affect our
opinions. We undertake no responsibility to update our opinions for any
subsequent change or modification.
We hereby consent to the filing of the opinion as an exhibit to the Stock
Holding Company's Registration Statement on Form SB-2 as filed with the SEC. We
also consent to the references to our firm in the Prospectus contained in the
Form SB-2 under the captions "The Offering and The Reorganization -- Federal and
State Tax Consequences of the Reorganization" and "Legal and Tax Matters."
Very truly yours,
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
EXHIBIT 8.3
<PAGE>
[letterhead of RP Financial, LC.]
June 10, 1998
Board of Trustees
Service Bancorp, MHC
Board of Directors
Summit Bank
81 Main Street
Medway, Massachusetts 02053
Re: Stock Issuance Plan: Subscription Rights
-----------------------------------------
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the stock issuance plan adopted by the Board of
Directors of Summit Bank ("Summit" or the "Bank") and the Board of Trustees of
Service Bancorp, MHC (the "MHC"). Pursuant to the stock issuance plan, Summit
will become a wholly-owned subsidiary of Summit Bancorp, Inc. (the "Holding
Company"), a Massachusetts corporation, and the Holding Company will issue a
majority of its common stock to the MHC, and sell a minority of its common stock
to the public.
We understand that in accordance with the stock issuance plan
subscription rights to purchase shares of common stock in the Holding Company
are to be issued to: (1) Eligible Account Holders; (2) Supplemental Eligible
Account Holders; (3) the ESOP; and (4) Employees, Officers, Directors and
Trustees. Based solely upon our observation that the subscription rights will be
available to such parties without cost, will be legally non-transferable and of
short duration, and will afford such parties the right only to purchase shares
of common stock in the Holding Company at the same price as will be paid by
members of the general public in the Community Offering, but without undertaking
any independent investigation of state or federal law or the position of the
Internal Revenue Service with respect to this issue, we are of the belief that,
as a factual matter:
(1) the subscription rights will have no ascertainable market value;
and,
(2) the price at which the subscription rights are exercisable will
not be more or less than the pro forma market value of the shares
upon issuance.
Changes in the local and national economy, the legislative and
regulatory environment, the stock market, interest rates, and other external
forces (such as natural disasters or significant world events) may occur from
time to time, often with great unpredictability and may materially impact the
value of thrift stocks as a whole or the Holding Company's value alone.
Accordingly, no assurance can be given that persons who subscribe to shares of
common stock in the Subscription Offering will thereafter be able to buy or sell
such shares at the same price paid in the Subscription Offering.
Very truly yours,
RP FINANCIAL, LC.
/s/ Gregory E. Dunn
-----------------------------
Gregory E. Dunn
Senior Vice President
EXHIBIT 10.1
<PAGE>
SUMMIT BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the ____ day of _____________,
1998 by and between Summit Bank (the "Bank"), a Massachusetts-chartered stock
savings bank, with its principal administrative office at 81 Main Street,
Medway, Massachusetts 02053-1867 and ______________ (the "Executive"). Any
reference to "Company" herein shall mean Summit Bancorp, Inc., a Massachusetts
stock corporation which will become the stock holding company of the Bank, or
any successor thereto, pursuant to the Stock Issuance Plan adopted by the Board
of Directors of the Bank and the Board of Trustees of Service Bancorp, M.H.C.,
effective as of April ____, 1998.
WHEREAS, the Bank wishes to assure itself of the continued services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue to serve in the employ of the
Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to
serve as _______________________________ of the Bank [and the Company]. During
said period, Executive also agrees to serve, if elected, as an officer and
director of any subsidiary or affiliate of the Bank. Failure to reelect
Executive as ___________________________________ without the consent of the
Executive during the term of this Agreement shall constitute a breach of this
Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall
begin as of the date first above written and shall continue for a period of
thirty-six (36) full calendar months thereafter. Commencing on the first
anniversary date of this Agreement, and continuing at each anniversary date
thereafter, this Agreement shall renew for an additional year such that the
remaining term shall be three (3) years unless written notice is provided to
Executive at least ten (10) days and not more than sixty (60) days prior to any
such anniversary date, that his employment shall cease at the end of thirty-six
(36) months following such anniversary date. Prior to each notice period for
non-renewal, the disinterested members of the Board of Directors ("Board") of
the Bank will conduct a comprehensive performance evaluation and review of the
Executive for purposes of determining whether to extend this Agreement, and the
results thereof shall be included in the minutes of the Board's meeting. The
"disinterested" members of the Board of Directors shall be all directors other
than the director who is the "Executive" under this Agreement.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall
<PAGE>
faithfully perform his duties hereunder including activities and services
related to the organization, operation and management of the Bank.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $______________
per year ("Base Salary"). Such Base Salary shall be payable monthly. During the
period of this Agreement, Executive's Base Salary shall be reviewed at least
annually; the first such review will be made no later than ______________, 1999.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase, but not decrease, Executive's Base Salary (any increase in
Base Salary shall become the "Base Salary" for purposes of this Agreement). In
addition to the Base Salary provided in this Section 3(a), the Bank shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage or any other employee benefit plan
or arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate (and he shall
be entitled to a pro rata distribution under any incentive compensation or bonus
plan as to any year in which a termination of employment occurs, other than
termination for Cause). Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred by Executive performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs
(a), (b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively, on a pro rata basis, based upon the amount of service the
Executive devotes to the Bank and Company, respectively.
2
<PAGE>
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 7 and 14.
(a) The provisions of this Section shall apply upon the occurrence of
an Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following:
(i) the termination by the Bank or the Company of Executive's full-time
employment hereunder for any reason other than (A) Disability or Retirement, as
defined in Section 5, or (B) Termination for Cause as defined in Section 6; or
(ii) Executive's resignation from the Bank's employ, upon any
(A) failure to elect or reelect or to appoint or reappoint
Executive as ____________,
(B) material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position
to become one of lesser responsibility, importance, or scope from
the position and attributes thereof described in Section 1,
(C) a relocation of Executive's principal place of employment by
more than 30 miles from its location at the effective date of
this Agreement, or a material reduction in the benefits and
perquisites to the Executive from those being provided as of the
effective date of this Agreement,
(D) liquidation or dissolution of the Bank or Company other than
liquidations or dissolutions that are caused by reorganizations
that do not affect the status of Executive, or
(E) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or
(E), above, Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon sixty (60) days prior written notice
given within a reasonable period of time not to exceed four calendar months
after the initial event giving rise to said right to elect. Notwithstanding the
preceding sentence, in the event of a continuing breach of this Agreement by the
Bank, the Executive, after giving due notice within the prescribed time frame of
an initial event specified above, shall not waive any of his rights solely under
this Agreement and this Section 4 by virtue of the fact that Executive has
submitted his resignation but has remained in the employment of the
3
<PAGE>
Bank and is engaged in good faith discussions to resolve any occurrence of an
event described in clauses (A), (B), (C), (D) and (E) above.
(iii) Executive's voluntary resignation from the Bank's employ on the
effective date of, or at any time following a Change in Control during the term
of this Agreement. For these purposes, a Change in Control of the Bank or the
Company shall mean a change in control of a nature that: (i) would be required
to be reported in response to Item 1(a) of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Bank Holding
Company Act of 1956, as amended, and applicable rules and regulations
promulgated thereunder, as in effect at the time of the Change in Control
(collectively, the "BHCA"); or (iii) without limitation such a Change in Control
shall be deemed to have occurred at such time as (a) any "person" (as the term
is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of Company's outstanding securities except for any
securities purchased by the Bank's employee stock ownership plan or trust; or
(b) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least three-quarters of the directors comprising
the Incumbent Board, or whose nomination for election by the Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (b), considered as though
he were a member of the Incumbent Board; or (c) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Company or similar transaction in which the Bank or Company is not the
surviving institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan are to be exchanged for or converted into
cash or property or securities not issued by the Company; or (e) a tender offer
is made for 25% or more of the voting securities of the Company and the
shareholders owning beneficially or of record 25% or more of the outstanding
securities of the Company have tendered or offered to sell their shares pursuant
to such tender offer and such tendered shares have been accepted by the tender
offeror.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 7, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to three (3) times the sum of (i) Base Salary and (ii) the highest rate of bonus
awarded to the Executive during the prior three years. At the election of the
Executive, which election is to be made on an annual basis during the month of
January, and which election is irrevocable for the year in which made and upon
the occurrence of an Event of Termination, any payments shall be made in a lump
sum or paid monthly during the remaining term of this Agreement following the
Executive's termination. In the event that no election is made, payment to the
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Executive will be made on a monthly basis during the remaining term of this
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall continue for 36 months from the Date of
Termination.
(d) Notwithstanding the preceding paragraphs of this Section 4, in the
event that:
(i) the aggregate payments or benefits to be made or
afforded to Executive under said paragraphs (the
"Termination Benefits") would be deemed to include an
"excess parachute payment" under Section 280G of the
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an
amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal
to the total amount of payments permissible under
Section 280G of the Code or any successor thereto,
then the Termination Benefits to be paid to Executive shall be so
reduced so as to be a Non-Triggering Amount.
5. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
Termination by the Bank of the Executive based on "Retirement" shall
mean termination in accordance with the Bank's retirement policy or in
accordance with any retirement arrangement established with Executive's consent
with respect to him. Upon termination of Executive upon Retirement, Executive
shall be entitled to all benefits under any retirement plan of the Bank and
other plans to which Executive is a party.
In the event Executive is unable to perform his duties under this
Agreement on a full-time basis for a period of six (6) consecutive months by
reason of illness or other physical or mental disability, the Bank may terminate
this Agreement, provided that the Bank shall continue to be obligated to pay the
Executive his Base Salary for the remaining term of the Agreement, or one year,
whichever is the longer period of time, and provided further that any amounts
actually paid to Executive pursuant to any disability insurance or other similar
such program which the Bank has provided or may provide on behalf of its
employees or pursuant to any workman's or social security disability program
shall reduce the compensation to be paid to the Executive pursuant to this
paragraph.
In the event of Executive's death during the term of this Agreement,
his estate, legal representatives or named beneficiaries (as directed by
Executive in writing) shall be paid Executive's
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Base Salary as defined in Paragraph 3(a) at the rate in effect at the time
Executive's death for a period of one (1) year from the date of the Executive's
death, and the Bank will continue to provide medical, dental, family and other
benefits normally provided for an Executive's family for one (1) year after the
Executive's death.
6. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. In determining incompetence, the acts or omissions
shall be measured against standards generally prevailing in the savings
institutions industry. For purposes of this para graph, no act or failure to act
on the part of Executive shall be considered "willful" unless done, or omitted
to be done, by the Executive not in good faith and without reasonable belief
that the Execu tive's action or omission was in the best interest of the Bank.
Notwithstanding the foregoing, Executive shall not be deemed to have been
Terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. Any stock options granted to Executive
under any stock option plan of the Bank, the Company or any subsidiary or
affiliate thereof, shall become null and void effective upon Executive's receipt
of Notice of Termination for Cause pursuant to Section 7 hereof, and shall not
be exercisable by Executive at any time subsequent to such Termination for
Cause.
7. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
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(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the voluntary
termination by the Executive in which case the Date of Termination shall be the
date specified in the Notice, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by a binding arbitration award, or by a final judgment, order or decree
of a court of competent jurisdiction (the time for appeal having expired and no
appeal having been perfected) and provided further that the Date of Termination
shall be extended by a notice of dispute only if such notice is given in good
faith and the party giving such notice pursues the resolution of such dispute
with reasonable diligence. Notwithstanding the pendency of any such dispute, the
Bank will continue to pay Executive his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to, Base
Salary) and continue Executive as a participant in all compensation, benefit and
insurance plans in which he was participating when the notice of dispute was
given, until the dispute is finally resolved in accordance with this Agreement,
provided such dispute is resolved within the term of this Agreement. If such
dispute is not resolved within the term of the Agreement, the Bank shall not be
obligated, upon final resolution of such dispute, to pay Executive compensation
and other payments accruing beyond the term of this Agreement. Amounts paid
under this Section shall be offset against or reduce any other amounts due under
this Agreement.
8. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall
be subject to Executive's compliance with paragraph (b) of this Section 8 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information
and assistance to the Bank as may reasonably be required by the Bank in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party.
9. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a
result of which the Bank is paying Executive benefits under Section 4, Executive
agrees not to compete with the Bank and/or the Company for a period of one (1)
year following such termination in any city, town or county in which the Bank
and/or the Company has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination, except as agreed to pursuant to a resolution duly adopted by the
Board. Executive agrees that during such period and within said cities, towns
and counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank and/or the
Company. The parties hereto, recognizing that irreparable injury will result to
the Bank and/or the Company, its business and property in the event of
Executive's breach of this Subsection 9(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive,
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Executive's partners, agents, servants, employers, employees and all persons
acting for or with Executive. Executive represents and admits that Executive's
experience and capabilities are such that Executive can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or threatened
breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever (except
for such disclosure as may be required to be provided to any federal banking
agency with jurisdiction over the Bank or Executive). Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Bank, and Executive may
disclose any information regarding the Bank or the Company which is otherwise
publicly available. In the event of a breach or threatened breach by the
Executive of the provisions of this Section 9, the Bank will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
10. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Company.
11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
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12. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
13. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
14. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
15. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts but only to the extent not superseded by federal law.
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17. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
18. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Executive and the Bank or resolved in the Executive's favor.
19. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, and shall indemnify Executive (and
his heirs, executors and administrators) to the fullest extent permitted under
federal law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a trustee, director or officer of the
Bank (whether or not he continues to be a trustee, director or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgments, court costs and attorneys' fees
and the cost of reasonable settlements (such settlements must be approved by the
Bank's Board). If such action, suit or proceeding is brought against Executive
in his capacity as an officer, trustee, or director of the Bank, however, such
indemnification shall not extend to matters as to which Executive is finally
adjudged to be liable for willful misconduct in the performance of his duties.
20. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed and their seals to be affixed hereunto by their duly authorized
officers, and Executive has signed this Agreement, on the day and date first
above written.
ATTEST: SUMMIT BANK
_______________________ By: ________________________________
ATTEST: SUMMIT BANCORP, INC.
_______________________ By: ________________________________
WITNESS: EXECUTIVE:
________________________ By: ________________________________
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EXHIBIT 10.2
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FORM OF
SUMMIT BANK
SEVERANCE AGREEMENT
This Agreement is made effective as of the ____ day of _____________,
1998 by and between Summit Bank (the "Bank"), a Massachusetts-chartered stock
savings bank, with its principal administrative office at 81 Main Street,
Medway, Massachusetts 02053-1867 and ______________ (the "Executive"). Any
reference to "Company" herein shall mean Summit Bancorp, Inc., a Massachusetts
stock corporation which will become the stock holding company of the Bank, or
any successor thereto, pursuant to the Stock Issuance Plan adopted by the Board
of Directors of the Bank and the Board of Trustees of Service Bancorp, M.H.C.,
effective as of April ____, 1998.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of for the Bank, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the contribution and of Executive,
and upon the other terms and conditions hereinafter provided, the parties hereto
agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of [________] ( ) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the term of this
Agreement shall be extended for a period of one year in addition to the
then-remaining term, provided that (1) the Bank has not given notice to the
Employee in writing at least ten (10) days and not more than sixty (60) days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board of Directors of the Bank
("Board") explicitly reviews and approves the extension. Reference herein to the
term of this Agreement shall refer to both such initial term and such extended
terms.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank or the Company followed at any time during the term of this Agreement
by (i) the involuntary termination of Executive's employment, other than for
Cause, as defined in Section 2(c) hereof, or (ii) the voluntary termination of
Executive's employment during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation or benefits, or relocation of his principal place of employment by
more than 30 miles from its location immediately prior to the Change in Control,
then the provisions of Section 3 shall apply.
(b) A "Change in Control" of the Bank or the Company shall mean a
change in control of a nature that: (i) would be required to be reported in
response to Item 1(a) of the current report on Form 8- K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or
the Company within the meaning of the Bank Holding Company Act of 1956, as
amended, and applicable rules and regulations promulgated thereunder, as in
effect at the time of the Change in Control (collectively, the "BHCA"); or
<PAGE>
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of Company's
outstanding securities except for any securities purchased by the Bank's
employee stock ownership plan or trust; or (b) individuals who constitute the
Board on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Company or similar
transaction in which the Bank or Company is not the surviving institution
occurs; or (d) a proxy statement soliciting proxies from stockholders of the
Company, by someone other than the current management of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company or similar transaction with one or more corporations as a result of
which the outstanding shares of the class of securities then subject to the plan
are to be exchanged for or converted into cash or property or securities not
issued by the Company; or (e) a tender offer is made for 25% or more of the
voting securities of the Company and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Company have tendered or
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 upon Termination for Cause. The term "Termination for
Cause" shall mean termination because of the Executive's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the involuntary termination of Executive's
employment other than a Termination for Cause, or the voluntary termination of
Executive's employment by Executive after the occurrence of an event set forth
in Section 2(a), the Bank shall be obligated to pay the Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay, a sum equal to [________] times the
average of the three preceding years' annual base salary paid and bonuses
awarded to the Executive during such years. If the Executive has been employed
by the Bank for less than one year, then the severance pay shall be a sum equal
to [_______] times the average monthly salary and [_______] times the average
bonuses, if any, paid to the Executive during such period. At the election of
the Executive, which election is to be made on an annual basis during the month
of January, and which election is
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irrevocable for the year in which made and upon the occurrence of a Change in
Control, any payments shall be made in a lump sum or paid monthly during the
remaining term of this Agreement following the Executive's termination. In the
event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of this Agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
(b) Upon the occurrence of a Change in Control of the Bank followed at
any time during the term of this Agreement by the Executive's involuntary
termination of employment, other than for Termination for Cause, or the
voluntary termination of Executive's employment as set forth in Section 2(a),
the Bank shall cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for the
Executive prior to his severance. Such coverage and payments shall cease upon
expiration of [_____] months.
(c) Notwithstanding the preceding paragraphs of this Section 3, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among Termination Benefits
provided by the preceding paragraphs of this Section 3 shall be determined by
the Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall be
immediate). Except as set forth below in paragraph (c), in no event shall the
Date of Termination exceed 30 days from the date Notice of Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the
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notice of dispute was given, until the earlier of 120 days from the date of the
Notice of Termination or the date upon which the dispute is finally resolved in
accordance with this Agreement. Amounts paid under this Section are in addition
to all other amounts due under this Agreement and shall not be offset against or
reduce any other amounts due under this Agreement. Notwithstanding the
foregoing, no compensation or benefits shall be paid to the Executive in the
event the Executive is Terminated for Cause. In the event that such Termination
for Cause is found to have been wrongful or such dispute is otherwise decided in
the Executive's favor, the Executive shall be entitled to receive all
compensation and benefits which accrued for up to a period of nine months after
the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Company, however, guarantees payment and provision of all amounts and benefits
due hereunder to Executive and, if such amounts and benefits due from the Bank
are not timely paid or provided by the Bank, such amounts and benefits shall be
paid or provided by the Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Bank and Executive, except
that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
4
<PAGE>
9. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
10. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
11. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Massachusetts,
unless preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
12. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
13. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of
5
<PAGE>
the Bank, however, such indemnification shall not extend to matters as to which
Executive is finally adjudged to be liable for willful misconduct in the
performance of his duties.
14. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
15. SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed by their duly authorized officers and Executive has signed this
Agreement, on the day and date first above written.
ATTEST: SUMMIT BANK
_______________________ By: ______________________________
ATTEST: SUMMIT BANCORP, INC.
_______________________ By: ______________________________
WITNESS: EXECUTIVE
_______________________ By: ______________________________
6
EXHIBIT 10.3
<PAGE>
SUMMIT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective January 1, 1998)
<PAGE>
SUMMIT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed on the ____ day of
_____________, 1998, by Summit Bank, a Massachusetts-chartered stock savings
bank (the "Bank"),
W I T N E S S E T H T H A T
WHEREAS, the board of directors of the Bank has resolved to adopt an
employee stock ownership plan for eligible employees in accordance with the
terms and conditions presented to the directors;
NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth
the terms and conditions pertaining to contributions by the Employer and the
payment of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this
instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
_____________________________ By: ____________________________
Secretary President
<PAGE>
C 0 N T E N T S
Page No.
--------
Section 1. Plan Identity.............................................. -1-
1.1 Name................................................. -1-
1.2 Purpose.............................................. -1-
1.3 Effective Date....................................... -1-
1.4 Fiscal Period........................................ -1-
1.5 Single Plan for All Employers........................ -1-
1.6 Interpretation of Provisions......................... -1-
Section 2. Definitions................................................ -1-
Section 3. Eligibility for Participation........................ -7-
3.1 Initial Eligibility.................................. -7-
3.2 Definition of Eligibility Year....................... -7-
3.3 Terminated Employees................................. -7-
3.4 Certain Employees Ineligible......................... -7-
3.5 Participation and Reparticipation.................... -7-
3.6 Omission of Eligible Employee........................ -7-
3.7 Inclusion of Ineligible Employee..................... -8-
Section 4. Contributions and Credits............................ -8-
4.1 Discretionary Contributions.......................... -8-
4.2 Contributions for Stock Obligations.................. -8-
4.3 Definitions Related to Contributions................. -8-
4.4 Conditions as to Contributions....................... -9-
Section 5. Limitations on Contributions and Allocations......... -9-
5.1 Limitation on Annual Additions....................... -9-
5.2 Coordinated Limitation With Other Plans.............. -11-
5.3 Effect of Limitations................................ -11-
5.4 Limitations as to Certain Participants............... -12-
Section 6. Trust Fund and Its Investment........................ -12-
6.1 Creation of Trust Fund............................... -12-
6.2 Stock Fund and Investment Fund....................... -12-
6.3 Acquisition of Stock................................. -13-
6.4 Participants' Option to Diversify.................... -13-
Section 7. Voting Rights and Dividends on Stock................. -14-
7.1 Voting and Tendering of Stock........................ -14-
7.2 Dividends on Stock................................... -15-
(i)
<PAGE>
Page No.
--------
Section 8. Adjustments to Accounts.............................. -15-
8.1 Adjustments for Transactions......................... -15-
8.2 Valuation of Investment Fund......................... -15-
8.3 Adjustments for Investment Experience................ -16-
Section 9. Vesting of Participants' Interests................... -16-
9.1 Deferred Vesting in Accounts......................... -16-
9.2 Computation of Vesting Years......................... -16-
9.3 Full Vesting Upon Certain Events..................... -17-
9.4 Full Vesting Upon Plan Termination................... -18-
9.5 Forfeiture, Repayment, and Restoral.................. -18-
9.6 Accounting for Forfeitures........................... -18-
9.7 Vesting and Nonforfeitability........................ -18-
Section 10. Payment of Benefits.................................. -19-
10.1 Benefits for Participants............................ -19-
10.2 Time for Distribution................................ -19-
10.3 Marital Status....................................... -20-
10.4 Delay in Benefit Determination....................... -21-
10.5 Accounting for Benefit Payments...................... -21-
10.6 Options to Receive and Sell Stock.................... -21-
10.7 Restrictions on Disposition of Stock................. -22-
10.8 Continuing Loan Provisions; Creations
of Protections and Rights.......................... -22-
10.9 Direct Rollover of Eligible Distribution............. -22-
10.10 Waiver of 30 Day Period After Notice of
Distribution....................................... -23-
Section 11. Rules Governing Benefit Claims and Review
of Appeals......................................... -23-
11.1 Claim for Benefits................................... -23-
11.2 Notification by Committee............................ -23-
11.3 Claims Review Procedure.............................. -24-
Section 12. The Committee and Its Functions...................... -24-
12.1 Authority of Committee............................... -24-
12.2 Identity of Committee................................ -24-
12.3 Duties of Committee.................................. -24-
12.4 Valuation of Stock................................... -25-
12.5 Compliance with ERISA................................ -25-
12.6 Action by Committee.................................. -25-
12.7 Execution of Documents............................... -25-
12.8 Adoption of Rules.................................... -25-
12.9 Responsibilities to Participants..................... -25-
12.10 Alternative Payees in Event of Incapacity............ -26-
12.11 Indemnification by Employers......................... -26-
12.12 Nonparticipation by Interested Member................ -26-
(ii)
<PAGE>
Page No.
--------
Section 13. Adoption, Amendment, or Termination of the Plan...... -26-
13.1 Adoption of Plan by Other Employers.................. -26-
13.2 Adoption of Plan by Successor........................ -26-
13.3 Plan Adoption Subject to Qualification............... -26-
13.4 Right to Amend or Terminate.......................... -27-
Section 14. Miscellaneous Provisions............................. -27-
14.1 Plan Creates No Employment Rights.................... -27-
14.2 Nonassignability of Benefits......................... -27-
14.3 Limit of Employer Liability.......................... -28-
14.4 Treatment of Expenses................................ -28-
14.5 Number and Gender.................................... -28-
14.6 Nondiversion of Assets............................... -28-
14.7 Separability of Provisions........................... -28-
14.8 Service of Process................................... -28-
14.9 Governing State Law.................................. -28-
14.10 Employer Contributions Conditioned on Deductibility.. -28-
14.11 Unclaimed Accounts................................... -28-
14.12 Qualified Domestic Relations Order................... -29-
Section 15. Top-Heavy Provisions................................. -29-
15.1 Top-Heavy Plan....................................... -29-
15.2 Super Top-Heavy Plan................................. -30-
15.3 Definitions.......................................... -30-
15.4 Top-Heavy Rules of Application....................... -31-
15.5 Top-Heavy Ratio...................................... -32-
15.6 Minimum Contributions................................ -33-
15.7 Minimum Vesting...................................... -33-
15.8 Top-Heavy Provisions Control in Top-Heavy Plan....... -33-
(iii)
<PAGE>
SUMMIT BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity.
--------------
1.1 Name. The name of this Plan is "Summit Bank Employee Stock Ownership
Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is January 1, 1998.
1.4 Fiscal Period. This Plan shall be operated on the basis of a January 1
to December 31 fiscal year for the purpose of keeping the Plan's books and
records and distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated as a single
plan with respect to all participating Employers for the purpose of crediting
contributions and forfeitures and distributing benefits, determining whether
there has been any termination of Service, and applying the limitations set
forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and the
Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an
employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA
and Section 4975(e)(7) of the Code. The Plan is intended to have its assets
invested primarily in qualifying employer securities of one or more Employers
within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement
under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied
in a manner consistent with this intent and shall be administered at all times
and in all respects in a nondiscriminatory manner.
Section 2. Definitions.
------------
The following capitalized words and phrases shall have the meanings
specified when used in this Plan and in the Trust Agreement, unless the context
clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under
this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
"Active Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 and who qualifies as an Active Participant for a
particular Plan Year under Section 4.3.
"Bank" means Summit Bank and any entity which succeeds to the business of
Summit Bank and adopts this Plan as its own pursuant to Section 13.2.
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<PAGE>
"Beneficiary" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation or if all the designated Beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or
his estate if he is not survived by a Spouse. The Committee may rely upon the
advice of the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"Break in Service" means any Plan Year in which an Employee has 500 or
fewer Hours of Service. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence
(said Employee shall not be credited with more than 501 Hours of Service to
avoid a Break in Service), unless he does not resume his Service at the end of
the Recognized Absence. Further, if an Employee is absent for any period
beginning on or after January 1, 1985, (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of this
Plan in accordance with Section 12.
"Company" means Summit Bancorp, Inc., the stock holding company of the
Bank.
"Disability" means only a disability which renders the Participant totally
unable, as a result of bodily or mental disease or injury, to perform any duties
for an Employer for which he is reasonably fitted, which disability is expected
to be permanent or of long and indefinite duration. However, this term shall not
include any disability directly or indirectly resulting from or related to
habitual drunkenness or addiction to narcotics, a criminal act or attempt,
service in the armed forces of any country, an act of war, declared or
undeclared, any injury or disease occurring while compensation to the
Participant is suspended, or any injury which is intentionally self-inflicted.
Further, this term shall apply only if (i) the Participant is sufficiently
disabled to qualify for the payment of disability benefits under the federal
Social Security Act or Veterans Disability Act, or (ii) the Participant's
disability is certified by a physician selected by the Committee. Unless the
Participant is sufficiently disabled to qualify for disability benefits under
the federal Social Security Act or Veterans Disability Act, the Committee may
require the Participant to be appropriately examined from time to time by one or
more physicians chosen by the Committee, and no Participant who refuses to be
examined shall be treated as having a Disability. In any event, the Committee's
good faith decision as to whether a Participant's Service has been terminated by
Disability shall be final and conclusive.
"Early Retirement" means retirement on or after a Participant's attainment
of age 55 and the completion of ten years of employment with an Employer. If the
Participant terminates employment before satisfying the age requirement, but has
satisfied the employment requirement, the Participant will be entitled to elect
early retirement upon satisfaction of the age requirement.
-2-
<PAGE>
"Effective Date" means January 1, 1998.
"Employee" means any individual who is or has been employed or
self-employed by an Employer. "Employee" also means an individual employed by a
leasing organization who, pursuant to an agreement between an Employer and the
leasing organization, has performed services for the Employer and any related
persons (within the meaning of Section 414(n)(6) of the Code) on a substantially
full-time basis for more than one year, if such services are performed under the
primary direction or control of the Employer. However, such a "leased employee"
shall not be considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for immediate
participation, immediate full vesting, and an annual contribution of at least 10
percent of the Employee's 415 Compensation, and (ii) leased employees do not
constitute more than 20 percent of the Employer's total work force (including
leased employees, but excluding Highly Paid Employees and any other Employees
who have not performed services for the Employer on a substantially full-time
basis for at least one year).
"Employer" means the Bank or any affiliate within the purview of section
414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership,
or proprietorship which adopts this Plan with the Bank's consent pursuant to
Section 13.1, and any entity which succeeds to the business of any Employer and
adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and each January 1 and
July 1 of each Plan Year after the Effective Date.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L.
93-406, as amended).
"415 Compensation"
(a) shall mean wages, as defined in Code Section 3401(a) for purposes
of income tax withholding at the source.
(b) Any elective deferral as defined in Code Section 402(g)(3) (any
Employer contributions made on behalf of a Participant to the extent not
includible in gross income and any Employer contributions to purchase an
annuity contract under Code Section 403(b) under a salary reduction
agreement) and any amount which is contributed or deferred by the Employer
at the election of the Participant and which is not includible in gross
income of the Participant by reason of Code Section 125 (Cafeteria Plan)
shall also be included in the definition of 415 Compensation.
(c) 415 Compensation in excess of $160,000 (as indexed) shall be
disregarded for all Participants. For purposes of this sub-section, the
$160,000 limit shall be referred to as the "applicable limit" for the Plan
Year in question. The $160,000 limit shall be adjusted for increases in the
cost of living in accordance with Section 401(a)(17)(B) of the Code,
effective for the Plan Year which begins within the applicable calendar
year. For purposes of the applicable limit, 415 Compensation shall be
prorated over short Plan Years.
"Highly Paid Employee" for any Plan Year means an Employee who, during
either of that or the immediately preceding Plan Year was at any time a five
percent owner of the Employer (as defined in Code
-3-
<PAGE>
Section 416(i)(1)) or, for the preceding Plan Year, had 415 Compensation
exceeding $80,000 and was among the most highly compensated one-fifth of all
Employees. For this purpose:
(a) "415 Compensation" shall include any amount which is excludable
from the Employee's gross income for tax purposes pursuant to Sections 125,
402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated one-fifth
of all Employees" shall be determined by taking into account all
individuals working for all related Employer entities described in the
definition of "Service", but excluding any individual who has not completed
six months of Service, who normally works fewer than 17-1/2 hours per week
or in fewer than six months per year, who has not reached age 21, whose
employment is covered by a collective bargaining agreement, or who is a
nonresident alien who receives no earned income from United States sources.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be paid
for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid or
is entitled to be paid for a period of vacation, holidays, illness,
disability, lay-off, jury duty, temporary military duty, or leave of
absence is an Hour of Service. However, except as otherwise specifically
provided, no more than 501 Hours of Service shall be credited for any
single continuous period which an Employee performs no duties. No more than
501 Hours of Service will be credited under this paragraph for any single
continuous period (whether or not such period occurs in a single
computation period). Further, no Hours of Service shall be credited on
account of payments made solely under a plan maintained to comply with
worker's compensation, unemployment compensation, or disability insurance
laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of damages)
is either awarded or agreed to by an Employer is an Hour of Service.
However, no more than 501 Hours of Service shall be credited for any single
continuous period during which an Employee would not have performed any
duties. The same Hours of Service will not be credited both under paragraph
(a) or (b) as the case may be, and under this paragraph (c). These hours
will be credited to the employee for the computation period or periods to
which the award or agreement pertains rather than the computation period in
which the award agreement or payment is made.
(d) Hours of Service shall be credited in any one period only under
one of the foregoing paragraphs (a), (b) and (c); an Employee may not get
double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours of
Service for any class or group of non-hourly Employees, each Employee in
that class or group shall be credited with 45 Hours of Service for each
weekly pay period in which he has at least one Hour of Service. However, an
Employee shall be credited only for his normal working hours during a paid
absence.
-4-
<PAGE>
(f) Hours of Service to be credited on account of a payment to an
Employee (including back pay) shall be recorded in the period of Service
for which the payment was made. If the period overlaps two or more Plan
Years, the Hours of Service credit shall be allocated in proportion to the
respective portions of the period included in the several Plan Years.
However, in the case of periods of 31 days or less, the Administrator may
apply a uniform policy of crediting the Hours of Service to either the
first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be counted as
required by Section 2530.200b-2(b) and (c) of the Department of Labor's
regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of assets
other than Stock. Notwithstanding the above, assets from the Investment Fund may
be used to purchase Stock in the open market or otherwise, or used to pay on the
Stock Obligation, and shares so purchased will be allocated to a Participant's
Stock Fund.
"Normal Retirement" means retirement on or after the later of a
Participant's 65th birthday or fifth year of Service.
"Normal Retirement Date" means the date on which a Participant attains age
65 and completes five years of Service.
"Participant" means any Employee who is participating in the Plan, or who
has previously participated in the Plan and still has a balance credited to his
Account.
"Plan Year" means the twelve month period commencing January 1 and ending
December 31, 1998 and each period of 12 consecutive months beginning on January
1 of each succeeding year.
"Recognized Absence" means a period for which --
(a) an Employer grants an Employee a leave of absence for a limited
period, but only if an Employer grants such leave on a nondiscriminatory
basis; or
(b) an Employee is temporarily laid off by an Employer because of a
change in business conditions; or
(c) an Employee is on active military duty, but only to the extent
that his employment rights are protected by the Military Selective Service
Act of 1967 (38 U.S.C. Sec. 2021).
"Service" means an Employee's period(s) of employment or self-employment
with an Employer, excluding for initial eligibility purposes any period in which
the individual was a nonresident alien and did not receive from an Employer any
earned income which constituted income from sources within the United States. An
Employee's Service shall include any Service which constitutes Service with a
predecessor Employer within the meaning of Section 414(a) of the Code. An
Employee's Service shall also include any Service with an entity which is not an
Employer, but only either (i) for a period after 1975 in which the other entity
is a member of a controlled group of corporations or is under common control
with other trades and businesses within the meaning of Section 414(b) or 414(c)
of the Code, and a member of the controlled group or one of the trades and
businesses is an Employer, (ii) for a period after 1979 in which
-5-
<PAGE>
the other entity is a member of an affiliated service group within the meaning
of Section 414(m) of the Code, and a member of the affiliated service group is
an Employer, or (iii) all Employers aggregated with the Employer under Section
414(o) of the Code (but not until the Proposed Regulations under Section 414(o)
become effective). Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified military
service will be provided in accordance with Section 414(u) of the Code.
"Spouse" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier. A former Spouse shall be treated as
the Spouse or surviving Spouse to the extent provided under a qualified domestic
relations order as described in section 414(p) of the Code.
"Stock" means shares of the Company's voting common stock or preferred
stock meeting the requirements of Section 409(e)(3) of the Code issued by an
Employer which is a member of the same controlled group of corporations within
the meaning of Code Section 414(b).
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which satisfies the requirements set forth in
Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying Employer securities as defined in Treasury
Regulations ss. 54.4975-12
(ii) to repay such Stock Obligation; or
(iii) to repay a prior exempt loan.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Bank and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a
co-mingled trust fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that
co-mingled trust fund. With respect to the allocation of investment
responsibility for the assets of the Trust Fund, the provisions of Article II of
the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons or individuals selected from
time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund consisting of
the Plan's holding of Stock which have been acquired in exchange for one or more
Stock obligations and which have not yet been allocated to the Participant's
Accounts in accordance with Section 4.2
"Valuation Date" means the last day of the Plan Year and each other date as
of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
-6-
<PAGE>
"Valuation Period" means the period following a Valuation Date and ending
with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant pursuant
to Section 9.2 for purposes of determining his vested interest in his Account.
Section 3. Eligibility for Participation.
------------------------------
3.1 Initial Eligibility. An Employee shall enter the Plan as of the Entry
Date coincident with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee is not in
active Service with an Employer on the date he would otherwise first enter
the Plan, his entry shall be deferred until the next day he is in Service.
3.2 Definition of Eligibility Year. An "Eligibility Year" means an
applicable eligibility period (as defined below) in which the Employee has
completed 1,000 Hours of Service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the 12-consecutive
month period beginning on the first day on which he has an Hour of Service,
and
(b) his subsequent eligibility periods will be 12-consecutive month
periods beginning on each January 1 after that first day of Service.
3.3 Terminated Employees. No Employee shall have any interest or rights
under this Plan if he is never in active Service with an Employer on or after
the Effective Date.
3.4 Certain Employees Ineligible. No Employee shall participate in the Plan
while his Service is covered by a collective bargaining agreement between an
Employer and the Employee's collective bargaining representative if (i)
retirement benefits have been the subject of good faith bargaining between the
Employer and the representative and (ii) the collective bargaining agreement
does not provide for the Employee's participation in the Plan.
3.5 Participation and Reparticipation. Subject to the satisfaction of the
foregoing requirements, an Employee shall participate in the Plan during each
period of his Service from the date on which he first becomes eligible until his
termination. For this purpose, an Employee who returns before five (5)
consecutive Breaks in Service who previously satisfied the initial eligibility
requirements or who returns after five (5) consecutive one year Breaks in
Service with a vested Account balance in the Plan shall re-enter the Plan as of
the date of his return to Service with an Employer.
3.6 Omission of Eligible Employee. If, in any Plan Year, any Employee who
should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a subsequent
contribution with respect to the omitted Employee in the amount which the said
Employer
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would have contributed shall be made regardless of whether or not it is
deductible in whole or in part in any taxable year under applicable provisions
of the Code.
3.7 Inclusion of Ineligible Employee. If, in any Plan Year, any person who
should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction is allowable with respect to the ineligible person
shall constitute a forfeiture for the Plan Year in which the discovery is made.
Section 4. Contributions and Credits.
--------------------------
4.1 Discretionary Contributions. The Employer shall from time to time
contribute, with respect to a Plan Year, such amounts as it may determine from
time to time. The Employer shall have no obligation to contribute any amount
under this Plan except as so determined in its sole discretion. The Employer's
contributions and available forfeitures for a Plan Year shall be credited as of
the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation.
4.2 Contributions for Stock Obligations. If the Trustee, upon instructions
from the Committee, incurs any Stock Obligation upon the purchase of Stock, the
Employer may contribute for each Plan Year an amount sufficient to cover all
payments of principal and interest as they come due under the terms of the Stock
Obligation. If there is more than one Stock Obligation, the Employer shall
designate the one to which any contribution is to be applied. Investment
earnings realized on Employer contributions and any dividends paid by the
Employer on Stock held in the Unallocated Stock Account, shall be applied to the
Stock Obligation related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii) the
sum of (i) above, and the remaining principal and interest payments required (or
projected to be required on the basis of the interest rate in effect at the end
of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative rate that is not less
rapid at any time than level annual payments of such amounts for 10 years, (ii)
the interest included in any payment is ignored only to the extent that it would
be determined to be interest under standard loan amortization tables, and (iii)
the term of the Stock Obligation, by reason of renewal, extension, or
refinancing, has not exceeded 10 years from the original acquisition of the
Stock.
4.3 Definitions Related to Contributions. For the purposes of this Plan,
the following terms have the meanings specified:
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"Active Participant" means a Participant who has satisfied the eligibility
requirements under Section 3 and who has at least 1000 Hours of Service during
the current Plan Year. However, a Participant shall not qualify as an Active
Participant unless (i) he is in active Service with an Employer as of the last
day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or
(iii) his Service terminated during the Plan Year by reason of Disability,
death, Early or Normal Retirement.
"Cash Compensation" means a Participant's 415 Compensation while a
Participant in the Plan, as defined in Section 2 of the Plan and shall also
include amounts contributed under a salary reduction agreement pursuant to
Section 401(k) or Section 125 of the Code.
In the event a Plan Year is a period of less than 12 months for any reason,
then Cash Compensation for the short period shall not exceed the pro rata
portion of this limit created by multiplying a fraction which is the number of
months in the short period divided by twelve times the annual compensation
limit.
4.4 Conditions as to Contributions. Employers' contributions shall in all
events be subject to the limitations set forth in Section 5. Contributions may
be made in the form of cash, or securities and other property to the extent
permissible under ERISA, including Stock, and shall be held by the Trustee in
accordance with the Trust Agreement. In addition to the provisions of Section
13.3 for the return of an Employer's contributions in connection with a failure
of the Plan to qualify initially under the Code, any amount contributed by an
Employer due to a good faith mistake of fact, or based upon a good faith but
erroneous determination of its deductibility under Section 404 of the Code,
shall be returned to the Employer within one year after the date on which the
contribution was originally made, or within one year after its nondeductibility
has been finally determined. However, the amount to be returned shall be reduced
to take account of any adverse investment experience within the Trust Fund in
order that the balance credited to each Participant's Account is not less that
it would have been if the contribution had never been made.
Section 5. Limitations on Contributions and Allocations.
---------------------------------------------
5.1 Limitation on Annual Additions. Notwithstanding anything herein to the
contrary, allocation of Employer contributions for any Plan Year shall be
subject to the following:
5.1-1 If allocation of Employer contributions in accordance with
Section 4.1 will result in an allocation of more than one-third the total
contributions for a Plan Year to the Accounts of Highly Paid Employees,
then allocation of such amount shall be adjusted so that such excess will
not occur.
5.1-2 After adjustment, if any, required by the preceding paragraph,
the annual additions during any Plan Year to any Participant's Account
under this and any other defined contribution plans maintained by the
Employer or an affiliate (within the purview of Section 414(b), (c) and (m)
and Section 415(h) of the Code, which affiliate shall be deemed the
Employer for this purpose) shall not exceed the lesser of $30,000 (or such
other dollar amount which results from cost-of-living adjustments under
Section 415(d) of the Code) or 25 percent of the Participant's 415
Compensation for such limitation year. In the event that annual additions
exceed the aforesaid limitations, they shall be reduced in the following
priority:
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(i) If the Participant is covered by the Plan at the end of the
Plan Year, any excess amount at the end of the Plan Year that cannot
be allocated to the Participant's Account shall be used to reduce the
employer contribution for such Participant in the next limitation year
and any succeeding limitation years if necessary.
(ii) If the Participant is not covered by the Plan at the end of
the Plan Year, the excess amount will be held unallocated in a
suspense account. The suspense account will be applied to reduce
future Employer contributions for all remaining Participants in the
next limitation year and each succeeding limitation year if necessary.
(iii) If a suspense account is in existence at any time during a
limitation year, it will not participate in any allocation of
investment gains and losses. All amounts held in suspense accounts
must be allocated to Participant's Accounts before any contributions
may be made to the Plan for the limitation year.
(iv) If a suspense account exists at the time of Plan
termination, amounts held in the suspense account that cannot be
allocated shall revert to the Employer.
5.1-3 For purposes of this Section 5.1 and the following Section 5.2,
the "annual addition" to a Participant's Accounts means the sum of (i)
Employer contributions, (ii) Employee contributions, if any, and (iii)
forfeitures. Annual additions to a defined contribution plan also include
amounts allocated, after March 31, 1984, to an individual medical account,
as defined in Section 415(l)(2) of the Internal Revenue Code, which is part
of a pension or annuity plan maintained by the Employer, amounts derived
from contributions paid or accrued after December 31, 1985, in taxable
years ending after such date, which are attributable to post-retirement
medical benefits allocated to the separate account of a Key Employee under
a welfare benefit fund, as defined in Section 419A(d) of the Internal
Revenue Code, maintained by the Employer. For these purposes, annual
additions to a defined contribution plan shall not include the allocation
of the excess amounts remaining in the Unallocated Stock Fund subsequent to
a sale of stock from such fund in accordance with a transaction described
in Section 8.1 of the Plan. The $30,000 limitations referred to shall, for
each limitation year ending after 1988, be automatically adjusted to the
new dollar limitations determined by the Commissioner of Internal Revenue
for the calendar year beginning in that limitation year.
5.1-4 Notwithstanding the foregoing, if no more than one-third of the
Employer contributions to the Plan for a year which are deductible under
Section 404(a)(9) of the Code are allocated to Highly Paid Employees
(within the meaning of Section 414(q) of the Internal Revenue Code), the
limitations imposed herein shall not apply to:
(i) forfeitures of Employer securities (within the meaning of
Section 409 of the Code) under the Plan if such securities were
acquired with the proceeds of a loan described in Section 404(a)(9)(A)
of the Code), or
(ii) Employer contributions to the Plan which are deductible
under Section 404(a)(9)(B) and charged against a Participant's
Account.
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5.1-5 If the Employer contributes amounts, on behalf of Employees
covered by this Plan, to other "defined contribution plans" as defined in
Section 3(34) of ERISA, the limitation on annual additions provided in this
Section shall be applied to annual additions in the aggregate to this Plan
and to such other plans. Reduction of annual additions, where required,
shall be accomplished first by reductions under such other plan pursuant to
the directions of the named Fiduciary for administration of such other
plans or under priorities, if any, established under the terms of such
other plans and then by allocating any remaining excess for this Plan in
the manner and priority set out above with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month period
beginning each January 1.
5.2 Coordinated Limitation With Other Plans. Aside from the limitation
prescribed by Section 5.1 with respect to the annual addition to a Participant's
Accounts for any single limitation year, if a Participant has ever participated
in one or more defined benefit plans maintained by an Employer or an affiliate,
then the accrued benefit shall be limited so that the sum of his defined plan
fraction and his defined contribution plan fraction does not exceed one. For
this purpose:
5.2-1 A Participant's defined contribution plan fraction with respect
to a Plan Year shall be a fraction, (i) the numerator of which is the sum
of the annual additions to his Accounts through the current year, and (ii)
the denominator of which is the sum of the lesser of the following amounts
-A- and -B- determined for the current limitation year and each prior
limitation year of Service with an Employer: -A- is 1.25 times the dollar
limit in effect for the year under Section 415(c)(1)(A) of the Code, or 1.0
times such dollar limitation if the Plan is top-heavy, and -B- is 35
percent of the Participant's 415 Compensation for such year. Further, if
the Participant participated in any related defined contribution plan in
any years beginning before 1976, any excess of the sum of the actual annual
additions to the Participant's Accounts for those years over the maximum
annual additions which could have been made in accordance with Section 5.1
shall be ignored, and voluntary contributions by the Participant during
those years shall be taken into account as to each such year only to the
extent that his average annual voluntary contribution in those years
exceeded 10 percent of his average annual 415 Compensation in those years.
5.2-2 A Participant's defined benefit plan fraction with respect to a
limitation year shall be a fraction, (i) the numerator of which is his
projected annual benefit payable at normal retirement under the Employers'
defined benefit plans, and (ii) the denominator of which is the lesser of
(a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is
top-heavy, and (b) 1.4 times the Participant's average 415 Compensation
during his highest-paid three consecutive limitation years.
5.3 Effect of Limitations. The Committee shall take whatever action may be
necessary from time to time to assure compliance with the limitations set forth
in Section 5.1 and 5.2. Specifically, the Committee shall see that each Employer
restrict its contributions for any Plan Year to an amount which, taking into
account the amount of available forfeitures, may be completely allocated to the
Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to one or more
Participants'
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compensation, or there is an amount of forfeitures which may not be credited in
the Plan Year in which it becomes available, the amount shall be corrected in
accordance with Section 5.1-2 of the Plan.
5.4 Limitations as to Certain Participants. Aside from the limitations set
forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a transaction as
to which a selling shareholder or the estate of a deceased shareholder is
claiming the benefit of Section 1042 of the Code, the Committee shall see that
none of such Stock, and no other assets in lieu of such Stock, are allocated to
the Accounts of certain Participants in order to comply with Section 409(n) of
the Code.
This restriction shall apply at all times to a Participant who owns (taking
into account the attribution rules under Section 318(a) of the Code, without
regard to the exception for employee plan trusts in Section 318(a)(2)(B)(i) more
than 25 percent of any class of stock of a corporation which issued the Stock
acquired by the Plan, or another corporation within the same controlled group,
as defined in Section 409(l)(4) of the Code (any such class of stock hereafter
called a "Related Class"). For this purpose, a Participant who owns more than 25
percent of any Related Class at any time within the one year preceding the
Plan's purchase of the Stock shall be subject to the restriction as to all
allocations of the Stock, but any other Participant shall be subject to the
restriction only as to allocations which occur at a time when he owns more than
25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder claiming
the benefit of Section 1042 and any other Participant who is related to such a
shareholder within the meaning of Section 267(b) of the Code, during the period
beginning on the date of sale and ending on the later of (1) the date that is
ten years after the date of sale, or (2) the date of the Plan allocation
attributable to the final payment of acquisition indebtedness incurred in
connection with the sale.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
Section 6. Trust Fund and Its Investment.
------------------------------
6.1 Creation of Trust Fund. All amounts received under the Plan from
Employers and investments shall be held as the Trust Fund pursuant to the terms
of this Plan and of the Trust Agreement between the Bank and the Trustee. The
benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, and the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
6.2 Stock Fund and Investment Fund. The Trust Fund held by the Trustee
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee. The Trustee shall have full
responsibility for the investment of the Investment Fund, except to the extent
such responsibility may be delegated from time to time to one or more investment
managers pursuant to Section 2.2 of the Trust Agreement, or to the extent the
Committee directs the Trustee to purchase Stock with the assets in the
Investment Fund.
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6.3 Acquisition of Stock. From time to time the Committee may, in its sole
discretion, direct the Trustee to acquire Stock from the issuing Employer or
from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for
such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may direct
the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called a
"Stock Obligation". The term "Stock Obligation" shall refer to a loan made to
the Plan by a disqualified person within the meaning of Section 4975(e)(2) of
the Code, or a loan to the Plan which is guaranteed by a disqualified person. A
Stock Obligation includes a direct loan of cash, a purchase-money transaction,
and an assumption of an obligation of a tax-qualified employee stock ownership
plan under Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term
"guarantee" shall include an unsecured guarantee and the use of assets of a
disqualified person as collateral for a loan, even though the use of assets may
not be a guarantee under applicable state law. An amendment of a Stock
Obligation in order to qualify as an "exempt loan" is not a refinancing of the
Stock Obligation or the making of another Stock Obligation. The term "exempt
loan" refers to a loan that satisfies the provisions of this paragraph. A
"non-exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be
subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not be
payable on demand except in the event of default, and shall bear a
reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a collateral
pledge of either the Stock acquired in exchange for the Stock Obligation,
or the Stock previously pledged in connection with a prior Stock Obligation
which is being repaid with the proceeds of the current Stock Obligation. No
other assets of the Plan and Trust may be used as collateral for a Stock
Obligation, and no creditor under a Stock Obligation shall have any right
or recourse to any Plan and Trust assets other than Stock remaining subject
to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must provide
for the release of pledged Stock in connection with payments on the Stock
obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock Obligation
shall be made by the Trustee only from Employer cash contributions
designated for such payments, from earnings on such contributions, and from
cash dividends received on Stock, in the last case, however, subject to the
further requirements of Section 7.2.
6.3-5 In the event of default of a Stock Obligation, the value of Plan
assets transferred in satisfaction of the Stock Obligation must not exceed
the amount of the default. If the lender is a disqualified person within
the meaning of Section 4975 of the Code, a Stock Obligation must provide
for a transfer of Plan assets upon default only upon and to the extent of
the failure of the Plan to meet the payment schedule of said Stock
Obligation. For purposes of this paragraph, the making of a guarantee does
not make a person a lender.
6.4 Participants' Option to Diversify. The Committee shall provide for a
procedure under which each Participant may, during the qualified election
period, elect to "diversify" a portion of the Employer Stock allocated to his
Account, as provided in Section 401(a)(28)(B) of the Code. An election
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to diversity must be made on the prescribed form and filed with the Committee
within the period specified herein. For each of the first five (5) Plan years in
the qualified election period, the Participant may elect to diversify an amount
which does not exceed 25% of the number of shares allocated to his Account since
the inception of the Plan, less all shares with respect to which an election
under this Section has already been made. For the last year of the qualified
election period, the Participant may elect to have up to 50 percent of the value
of his Account committed to other investments, less all shares with respect to
which an election under this Section has already been made. The term "qualified
election period" shall mean the six (6) Plan Year period beginning with the
first Plan Year in which a Participant has both attained age 55 and completed 10
years of participation in the Plan. A Participant's election to diversify his
Account may be made within each year of the qualified election period and shall
continue for the 90-day period immediately following the last day of each year
in the qualified election period. Once a Participant makes such election, the
Plan must complete diversification in accordance with such election within 90
days after the end of the period during which the election could be made for the
Plan Year. In the discretion of the Committee, the Plan may satisfy the
diversification requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount subject to the
diversification election.
6.4-2 The Plan may offer the Participant at least three other distinct
investment options, if available under the Plan. The other investment
options shall satisfy the requirements of Regulations under Section 404(c)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
6.4-3 The Plan may transfer the portion of the Participant's Account
subject to the diversification election to another qualified defined
contribution plan of the Employer that offers at least three investment
options satisfying the requirements of the Regulations under Section 404(c)
of ERISA.
Section 7. Voting Rights and Dividends on Stock.
-------------------------------------
7.1 Voting and Tendering of Stock. The Trustee generally shall vote all
shares of Stock held under the Plan in accordance with the written instructions
of the Committee. However, if any Employer has registration-type class of
securities within the meaning of Section 409(e)(4) of the Code, or if a matter
submitted to the holders of the Stock involves a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, or sale of
substantially all assets of an entity, then (i) the shares of Stock which have
been allocated to Participants' Accounts shall be voted by the Trustee in
accordance with the Participants' written instructions, and (ii) the Trustee
shall vote any unallocated Stock and allocated Stock for which it has received
no voting instructions in the same proportions as it votes the allocated Stock
for which it has received instructions from Participants; provided, however,
that if an exempt loan, as defined in Section 4975(d) of the Code, is
outstanding and the Plan is in default on such exempt loan, as default is
defined in the loan documents, then to the extent that such loan documents
require the lender to exercise voting rights with respect to the unallocated
shares, the loan documents will prevail. In the event no shares of Stock have
been allocated to Participants' Accounts at the time Stock is to be voted and
any exempt loan which may be outstanding is not in default, each Participant
shall be deemed to have one share of Stock allocated to his or her Account for
the sole purpose of providing the Trustee with voting instructions.
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Notwithstanding any provision hereunder to the contrary, all unallocated
shares of Stock must be voted by the Trustee in a manner determined by the
Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
Whenever such voting rights are to be exercised, the Employers shall provide the
Trustee, in a timely manner, with the same notices and other materials as are
provided to other holders of the Stock, which the Trustee shall distribute to
the Participants. The Participants shall be provided with adequate opportunity
to deliver their instructions to the Trustee regarding the voting of Stock
allocated to their Accounts. The instructions of the Participants' with respect
to the voting of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by the
Trustee in the same manner as set forth above with respect to the voting of
Stock. Notwithstanding any provision hereunder to the contrary, Stock must
be tendered by the Trustee in a manner determined by the Trustee to be for
the exclusive benefit of the Participants and Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received by the
Trustee in the form of additional Stock shall be retained in the Stock Fund, and
shall be allocated among the Participant's Accounts and the Unallocated Stock
Fund in accordance with their holdings of the Stock on which the dividends have
been paid. Dividends on Stock credited to Participants' Accounts which are
received by the Trustee in the form of cash shall, at the direction of the
Employer paying the dividends, either (i) be credited to the Accounts in
accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be
distributed immediately to the Participants in proportion with the Participants'
Stock Fund Account balance (iii) be distributed to the Participants within 90
days of the close of the Plan Year in which paid in proportion with the
Participants' Stock Fund Account balance or (iv) be used to make payments on the
Stock Obligation. If dividends on Stock allocated to a Participant's Account are
used to repay the Stock Obligation, Stock with a fair market value equal to the
dividends so used must be allocated to such Participant's Account in lieu of the
dividends. Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall be allocated to Participants'
Investment Fund Accounts (pro rata based on the Participant's Account balance in
relation to all Participants' Account balances) and shall be applied as soon as
practicable to payments of principal and interest under the Stock Obligation
incurred with the purchase of the Stock.
Section 8. Adjustments to Accounts.
------------------------
8.1 Adjustments for Transactions. An Employer contribution pursuant to
Section 4.1 shall be credited to the Participants' Accounts as of the last day
of the Plan Year for which it is contributed, in accordance with Section 4.1.
Stock released from the Unallocated Stock Fund upon the Trust's repayment of a
Stock Obligation pursuant to Section 4.2 shall be credited to the Participants'
Accounts as of the last day of the Plan Year in which the repayment occurred,
pro rata based on the cash applied from such Participant's Account relative to
the cash applied from all Participants' Accounts. Any excess amounts remaining
from the use of proceeds of a sale of Stock from the Unallocated Stock Fund to
repay a Stock Obligation shall be allocated as earnings of the Plan as of the
last day of the Plan Year in which the repayment occurred among the
Participants' Accounts in proportion to the opening balance in each Account. Any
benefit which is paid to a Participant or Beneficiary pursuant to Section 10
shall be charged to the Participant's Account as of the first day of the
Valuation Period in which it is paid. Any forfeiture or restoral shall be
charged or credited to the Participant's Account as of the first day of the
Valuation Period in which the forfeiture or restoral occurs pursuant to Section
9.6.
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8.2 Valuation of Investment Fund. As of each Valuation Date, the Trustee
shall prepare a balance sheet of the Investment Fund, recording each asset
(including any contribution receivable from an Employer) and liability at its
fair market value. Any liability with respect to short positions or options and
any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any contributions by
the Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account. Any cash
dividends received on Stock credited to Participant's Accounts shall be
allocated as of the last day of the Valuation Period among the Participants'
Accounts based on the opening balance in each Participant's Stock Fund Account.
Section 9. Vesting of Participants' Interests.
-----------------------------------
9.1 Deferred Vesting in Accounts. A Participant's vested interest in his
Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 3 0%
3 20%
4 40%
5 60%
6 80%
7 100%
9.2 Computation of Vesting Years. For purposes of this Plan, a "Vesting
Year" means generally a Plan Year in which an Employee has at least 1,000 Hours
of Service, beginning with the first Plan Year in which the Employee has
completed an Hour of Service with the Employer, and including Service with other
Employers as provided in the definition of "Service". However, a Participant's
Vesting Years shall be computed subject to the following conditions and
qualifications:
9.2-1 A Participant's Vesting Years shall not include any Service
prior to the date on which an Employee attains age 18.
9.2-2 A Participant's vested interest in his Account accumulated
before five (5) consecutive Breaks in Service shall be determined without
regard to any Service after such five
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consecutive Breaks in Service. Further, if a Participant has five (5)
consecutive Breaks in Service before his interest in his Account has become
vested to some extent, pre-Break years of Service shall not be required to
be taken into account for purposes of determining his post-Break vested
percentage.
9.2-3 In the case of a Participant who has 5 or more consecutive
1-year Breaks in Service, the Participant's pre-Break Service will count in
vesting of the Employer-derived post-break accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in the accrued
benefit attributable to Employer contributions at the time of
separation from Service, or
(ii) upon returning to Service the number of consecutive 1-year Breaks
in Service is less than the number of years of Service.
9.2-4 Unless otherwise specifically excluded, a Participant's Vesting
Years shall include any period of active military duty to the extent
required by the Military Selective Service Act of 1967 (38 U.S.C. Section
2021).
9.2-5 If any amendment changes the vesting schedule, including an
automatic change to or from a top-heavy vesting schedule, any Participant
with three (3) or more Vesting Years may, by filing a written request with
the Employer, elect to have his vested percentage computed under the
vesting schedule in effect prior to the amendment. The election period must
begin not later than the later of sixty (60) days after the amendment is
adopted, the amendment becomes effective, or the Participant is issued
written notice of the amendment by the Employer or the Committee.
9.3 Full Vesting Upon Certain Events.
9.3-1 Notwithstanding Section 9.1, a Participant's interest in his
Account shall fully vest on the Participant's Normal Retirement Date. The
Participant's interest shall also fully vest in the event that his Service
is terminated by Early Retirement, Disability or by death.
9.3-2 The Participant's interest in his Account shall also fully vest
in the event of a "Change in Control" of the Bank, or the Company. For
these purposes, "Change in Control" shall mean an event of a nature that;
(i) would be required to be reported in response to Item 1a of the current
report on Form 8-K, as in effect on the date hereof, pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act'); or
(ii) results in a Change in Control of the Bank or the Company within the
meaning of the Bank Holding Company Act of 1956, as amended, and applicable
rules and regulations promulgated thereunder as in effect at the time of
the Change in Control (collectively, the BHCA"); or (iii) without
limitation such a Change in Control shall be deemed to have occurred at
such time as (a) any "Person' (as the term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Bank or the Company representing 25% or more of the
Bank's or the Company's outstanding securities except for any securities of
the Bank purchased by the Company in connection with the conversion of the
Bank to the stock form and any securities purchased by the Bank's employee
stock ownership plan and trust; or (b) individuals who constitute the Board
on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided, however, that this
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subsection (b) shall not apply if the Incumbent Board is replaced by the
appointment by a Federal banking agency of a conservator or receiver for
the Bank and, provided further that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at
least two-thirds of the directors comprising the Incumbent Board or whose
nomination for election by the Company's stockholders was approved by the
same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (b), considered as though he were a member of the
Incumbent Board; or (c) a reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Company, or similar
transaction in which the Association or Company is not the surviving
institution occurs.
9.4 Full Vesting Upon Plan Termination. Notwithstanding Section 9.1, a
Participant's interest in his Account shall fully vest upon termination of this
Plan or upon the permanent and complete discontinuance of contributions by his
Employer. In the event of a partial termination, the interest of each affected
Participant shall fully vest with respect to that part of the Plan which is
terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested interest pursuant to Section 10.1, or (ii) incurs five (5)
consecutive one year Breaks in Service. If a Participant's Service terminates
prior to having any portion of his Account become vested, such Participant shall
be deemed to have received a distribution of his vested interest as of the
Valuation Date next following his termination of Service.
If a Participant who has received his entire vested interest returns to
Service before he has five (5) consecutive Breaks in Service, he may repay to
the Trustee an amount equal to the distribution. The Participant may repay such
amount at any time within five years after he has returned to Service. The
amount shall be credited to his Account at the time it is repaid; an additional
amount equal to that portion of his Account which was previously forfeited shall
be restored to his Account at the same time from other Employees' forfeitures
and, if such forfeitures are insufficient, from a special contribution by his
Employer for that year. A Participant who was deemed to have received a
distribution of his vested interest in the Plan shall have his Account restored
as of the first day on which he performs an Hour of Service after his return.
9.6 Accounting for Forfeitures. If a portion of a Participant's Account is
forfeited, Stock allocated to said Participant's Account shall be forfeited only
after other assets are forfeited. If interests in more than one class of Stock
have been allocated to a Participant's Account, the Participant must be treated
as forfeiting the same proportion of each class of Stock. A forfeiture shall be
charged to the Participant's Account as of the first day of the first Valuation
Period in which the forfeiture becomes certain pursuant to Section 9.5. Except
as otherwise provided in that Section, a forfeiture shall be added to the
contributions of the terminated Participant's Employer which are to be credited
to other Participants pursuant to Section 4.1 as of the last day of the Plan
Year in which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his Account
which has become vested shall be nonforfeitable for any reason.
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Section 10. Payment of Benefits.
--------------------
10.1 Benefits for Participants. For a Participant whose Service ends for
any reason, distribution will be made to or for the benefit of the Participant
or, in the case of the Participant's death, his Beneficiary, by either, or a
combination of the following methods:
10.1.1 By payment in a lump sum, in accordance with Section 10.2; or
10.1.2 By payment in a series of substantially equal annual
installments over a period not to exceed five (5) years, provided the
maximum period over which the distribution of a Participant's Account may
be made shall be extended by 1 year, up to five (5) additional years, for
each $145,000 (or fraction thereof) by which such Participant's Account
balance exceeds $725,000 (the aforementioned figures are subject to
cost-of-living adjustments prescribed by the Secretary of the Treasury
pursuant to Section 409(o)(2) of the Code).
The Participant shall elect the manner in which his vested Account balance
will be distributed to him. If a Participant so desires, he may direct how his
benefits are to be paid to his Beneficiary. If a deceased Participant did not
file a direction with the Committee, the Participant's benefits shall be
distributed to his Beneficiary in a lump sum. Notwithstanding any provision to
the contrary, if the value of a Participant's vested Account balance at the time
of any distribution, does not equal or exceed $5,000, then such Participant's
vested Account shall be distributed in a lump sum within 60 days after the end
of the Plan year in which employment terminates. If the value of a Participant's
vested Account balance is, or has ever been, in excess of $5,000, then his
benefits shall not be paid prior to the later of the time he has attained Normal
Retirement or age 62 unless he elects an early payment date in a written
election filed with the Committee. A Participant may modify such an election at
any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee.
10.2 Time for Distribution.
10.2.1 If the Participant and, if applicable, with the consent of the
Participant's spouse, elects the distribution of the Participant's Account
balance in the Plan, distribution shall commence as soon as practicable
after the last day of the Plan Year following his termination of Service
for any reason, but no later than one year after the close of the Plan
Year:
(i) in which the Participant separates from service by reason of
attainment of Normal Retirement Age under the Plan, Disability, or
death; or
(ii) which is the fifth Plan Year following the year in which the
Participant resigns or is dismissed, unless he is reemployed before
such date.
No distribution shall be made hereunder, unless the Plan has obtained,
to the extent applicable, the consent of the Participant and the
Participant's spouse.
10.2.2 Unless the Participant elects otherwise, the distribution of
the balance of a Participant's Account shall commence not later than the
60th day after the latest of the close of the Plan Year in which --
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(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in which the
Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the Employer.
10.2.3 Notwithstanding anything to the contrary, (1) with respect to a
5-percent owner (as defined in Code Section 416), distribution of a
Participant's Account shall commence (whether or not he remains in the
employ of the Employer) not later than the April 1 of the calendar year
next following the calendar year in which the Participant attains age 70-
1/2, and (2) with respect to all other Participants, payment of a
Participant's benefit will commence not later than April 1 of the calendar
year following the calendar year in which the Participant attains age
70-1/2, or, if later, the year in which the Participant retires. A
Participant's benefit from that portion of his Account committed to the
Investment Fund shall be calculated on the basis of the most recent
Valuation Date before the date of payment.
10.2.4 Distribution of a Participant's Account balance after his death
shall comply with the following requirements:
(i) If a Participant dies before his distributions have
commenced, distribution of his Account to his Beneficiary shall
commence not later than one year after the end of the Plan Year in
which the Participant died, however, if the Participant's Beneficiary
is his surviving Spouse, distributions may commence on the date on
which the Participant would have attained age 70-1/2. In either case,
distributions shall be completed within five years after the they
commence.
(ii) If the Participant dies after distribution has commenced
pursuant to Section 10.1.2 but before his entire interest in the Plan
has been distributed to him, then the remaining portion of that
interest shall, in accordance with Section 401(a)(9) of the Code, be
distributed at least as rapidly as under the method of distribution
being used under Section 10.1.2 at the date of his death.
(iii) If a married Participant dies before his benefit payments
begin, then unless he has specifically elected otherwise the Committee
shall cause the balance in his Account to be paid to his Spouse. No
election by a married Participant of a different Beneficiary shall be
valid unless the election is accompanied by the Spouse's written
consent, which (i) must acknowledge the effect of the election, (ii)
must explicitly provide either that the designated Beneficiary may not
subsequently be changed by the Participant without the Spouse's
further consent, or that it may be changed without such consent, and
(iii) must be witnessed by the Committee, its representative, or a
notary public. (This requirement shall not apply if the Participant
establishes to the Committee's satisfaction that the Spouse may not be
located.)
10.3 Marital Status. The Committee shall from time to time take whatever
steps it deems appropriate to keep informed of each Participant's marital
status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its Participants'
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marital status, and the Committee may, in its discretion, require a notarized
affidavit from any Participant as to his marital status. The Committee, the
Plan, the Trustee, and the Employers shall be fully protected and discharged
from any liability to the extent of any benefit payments made as a result of the
Committee's good faith and reasonable reliance upon information obtained from a
Participant and his Employer as to his marital status.
10.4 Delay in Benefit Determination. If the Committee is unable to
determine the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 Accounting for Benefit Payments. Any benefit payment shall be charged
to the Participant's Account as of the first day of the Valuation Period in
which the payment is made.
10.6 Options to Receive and Sell Stock. Unless ownership of virtually all
Stock is restricted to active Employees and qualified retirement plans for the
benefit of Employees pursuant to the certificates of incorporation or by-laws of
the Employers issuing Stock, a terminated Participant or the Beneficiary of a
deceased Participant may instruct the Committee to distribute the Participant's
entire vested interest in his Account in the form of Stock. In that event, the
Committee shall apply the Participant's vested interest in the Investment Fund
to purchase sufficient Stock from the Stock Fund or from any owner of Stock to
make the required distribution. In all other cases, the Participant's vested
interest in the Stock Fund shall be distributed in shares of Stock, and his
vested interest in the Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any person
who has received Stock from the Plan or from such a Participant by reason of the
Participant's death or incompetency, by reason of divorce or separation from the
Participant, or by reason of a rollover contribution described in Section
402(a)(5) of the Code, shall have the right to require the Employer which issued
the Stock to purchase the Stock for its current fair market value (hereinafter
referred to as the "put right"). The put right shall be exercisable by written
notice to the Committee during the first 60 days after the Stock is distributed
by the Plan, and, if not exercised in that period, during the first 60 days in
the following Plan Year after the Committee has communicated to the Participant
its determination as to the Stock's current fair market value. However, the put
right shall not apply to the extent that the Stock, at the time the put right
would otherwise be exercisable, may be sold on an established market in
accordance with federal and state securities laws and regulations. Similarly,
the put option shall not apply with respect to the portion of a Participant's
Account which the Employee elected to have reinvested under Code Section
401(a)(28)(B). If the put right is exercised, the Trustee may, if so directed by
the Committee in its sole discretion, assume the Employer's rights and
obligations with respect to purchasing the Stock. Notwithstanding anything
herein to the contrary, in the case of a plan established by a Bank (as defined
in Code Section 581), the put option shall not apply if prohibited by a federal
or state law and Participants are entitled to elect their benefits be
distributed in cash.
If a Participant elects to receive his distribution in the form of a lump
sum pursuant to Section 10.1.1 of the Plan, the Employer or the Trustee, as the
case may be, may elect to pay for the Stock in equal periodic installments, not
less frequently than annually, over a period not longer than five years from the
day after the put right is exercised, with adequate security and interest at a
reasonable rate on the unpaid balance, all such terms to be set forth in a
promissory note delivered to the seller with normal terms as to acceleration
upon any uncured default.
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If a Participant elects to receive his distribution in the form of an
installment payment pursuant to Section 10.1.2 of the Plan, the Employer or the
Trustee, as the case may be, shall pay for the Stock distributed in the
installment distribution over a period which shall not exceed 30 days after the
exercise of the put right.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right shall be nonterminable. The put right for Stock
acquired through a Stock Obligation shall continue with respect to such Stock
after the Stock Obligation is repaid or the Plan ceases to be an employee stock
ownership plan.
10.7 Restrictions on Disposition of Stock. Except in the case of Stock
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(a)(5) of the Code, shall, prior to any
sale or other transfer of the Stock to any other person, first offer the Stock
to the issuing Employer and to the Plan at the greater of (i) its current fair
market value, or (ii) the purchase price offered in good faith by an independent
third party purchaser. This restriction shall apply to any transfer, whether
voluntary, involuntary, or by operation of law, and whether for consideration or
gratuitous. Either the Employer or the Trustee may accept the offer within 14
days after it is delivered. Any Stock distributed by the Plan shall bear a
conspicuous legend describing the right of first refusal under this Section
10.7, as well as any other restrictions upon the transfer of the Stock imposed
by federal and state securities laws and regulations.
10.8 Continuing Loan Provisions; Creations of Protections and Rights.
Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no
shares of Employer Stock held or distributed by the Trustee may be subject to a
put, call or other option, or buy-sell arrangement. The provisions of this
Section shall continue to by applicable to such Stock even if the Plan ceases to
be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 Direct Rollover of Eligible Distribution. A Participant or distributee
may elect, at the time and in the manner prescribed by the Trustee or the
Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the Participant or
distributee in a direct rollover.
10.9-1 An "eligible rollover" is any distribution that does not
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the Participant and the Participant's Beneficiary, or for
a specified period of ten years or more; any distribution to the extent
such distribution is required under Code Section 401(a)(9); and the portion
of any distribution that is not included in gross income (determined
without regard to the exclusion for net unrealized appreciation with
respect to employer securities).
10.9-2 An "eligible retirement plan" is an individual retirement
account described in Code Section 401(a), an individual retirement annuity
described in Code Section 408(b), an annuity plan
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described in Code Section 403(a), or a qualified trust described in Code
Section 401(a), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution to
the surviving Spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
10.9-3 A "direct rollover" is a payment by the Plan to the eligible
retirement plan specified by the distributee.
10.9-4 The term "distributee" shall refer to a deceased Participant's
Spouse or a Participant's former Spouse who is the alternate payee under a
qualified domestic relations order, as defined in Code Section 414(p).
10.10 Waiver of 30 Day Period After Notice of Distribution. If a
distribution is one to which Sections 401(a)(11) and 417 of the Code do not
apply, such distribution may commence less than 30 days after the notice
required under Section 4.11(a)-11(c) of the Income Tax Regulations is given,
provided that:
(i) the Trustee or Administrative Committee, as applicable, clearly
informs the Participant that the Participant has a right to a period
of at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and, if
applicable, a particular option), and
(ii) the Participant, after receiving the notice, affirmatively elects a
distribution.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
-----------------------------------------------------
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies for
the payment of benefits shall file a claim for his benefits with the Committee
on a form provided by the Committee. The claim, including any election of an
alternative benefit form, shall be filed at least 30 days before the date on
which the benefits are to begin. If a Participant or Beneficiary fails to file a
claim by the day before the date on which benefits become payable, he shall be
presumed to have filed a claim for payment for the Participant's benefits in the
standard form prescribed by Sections 10.1 or 10.2
11.2 Notification by Committee. Within 90 days after receiving a claim for
benefits (or within 180 days, if special circumstances require an extension of
time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which the
denial is based;
(iii) a description of any additional material or information which
could be submitted by the Participant or Beneficiary to support his claim,
with an explanation of the relevance of such information; and
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(iv) an explanation of the claims review procedures set forth in
Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a Participant or
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination. In
connection with his appeal the Participant or Beneficiary or his representative
may inspect or purchase copies of pertinent documents and records to the extent
not inconsistent with other Participants' and Beneficiaries' rights of privacy.
Within 60 days after receiving a notice of appeal from a prior determination (or
within 120 days, if special circumstances require an extension of time and
written notice of the extension is given to the Participant or Beneficiary and
his representative within 60 days after receiving the notice of appeal), the
Committee shall furnish to the Participant or Beneficiary and his
representative, if any, a written statement of the Committee's final decision
with respect to his claim, including the reasons for such decision and the
particular Plan provisions upon which it is based.
Section 12. The Committee and Its Functions.
--------------------------------
12.1 Authority of Committee. The Committee shall be the "plan
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Bank, the Employers, or the Trustee under the
Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other
parties by operation of law. The Committee shall have exclusive responsibility
regarding decisions concerning the payment of benefits under the Plan. The
Committee shall have no investment responsibility with respect to the Investment
Fund except to the extent, if any, specifically provided in the Trust Agreement.
In the discharge of its duties, the Committee may employ accountants, actuaries,
legal counsel, and other agents (who also may be employed by an Employer or the
Trustee in the same or some other capacity) and may pay their reasonable
expenses and compensation.
12.2 Identity of Committee. The Committee shall consists of three or more
individuals selected by the Bank. Any individual, including a director, trustee,
shareholder, officer, or Employee of an Employer, shall be eligible to serve as
a member of the Committee. The Bank shall have the power to remove any
individual serving on the Committee at any time without cause upon 10 days
written notice, and any individual may resign from the Committee at any time
upon 10 days written notice to the Bank. The Bank shall notify the Trustee of
any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may be
necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Bank. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the plan Committee under ERISA and other
laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the Trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of Stock
and the creation and satisfaction of Stock Obligations. The Committee shall at
all times act consistently with the Bank's long-term intention that the Plan, as
an employee stock ownership plan, be invested primarily in Stock. Subject to the
direction of the Board as to the application
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of Employer contributions to Stock Obligations, and subject to the provisions of
Sections 6.4 and 10.6 as to Participants' rights under certain circumstances to
have their Accounts invested in Stock or in assets other than Stock, the
Committee shall determine in its sole discretion the extent to which assets of
the Trust shall be used to repay Stock Obligations, to purchase Stock, or to
invest in other assets to be selected by the Trustee or an investment manager.
No provision of the Plan relating to the allocation or vesting of any interests
in the Stock Fund or the Investment Fund shall restrict the Committee from
changing any holdings of the Trust, whether the changes involve an increase or a
decrease in the Stock or other assets credited to Participants' Accounts. In
determining the proper extent of the Trust's investment in Stock, the Committee
shall be authorized to employ investment counsel, legal counsel, appraisers, and
other agents to pay their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not established
by reported trading on a generally recognized public market, the Committee shall
have the exclusive authority and responsibility to determine its value for all
purposes under the Plan. Such value shall be determined as of each Valuation
Date, and on any other date as of which the Plan purchases or sells such Stock.
The Committee shall use generally accepted methods of valuing stock of similar
corporations for purposes of arm's length business and investment transactions,
and in this connection the Committee shall obtain, and shall be protected in
relying upon, the valuation of such Stock as determined by an independent
appraiser experienced in preparing valuations of similar businesses. For
purposes of the preceding sentence, the term "independent appraiser" means any
appraiser meeting requirements similar to the requirements of the regulations
prescribed under Section 170(a)(1) of the Code.
12.5 Compliance with ERISA. The Committee shall perform all acts necessary
to comply with ERISA. Each individual member or employee of the Committee shall
discharge his duties in good faith and in accordance with the applicable
requirements of ERISA.
12.6 Action by Committee. All actions of the Committee shall be governed by
the affirmative vote of a number of members which is a majority of the total
number of members currently appointed, including vacancies. The members of the
Committee may meet informally and may take any action without meeting as a
group.
12.7 Execution of Documents. Any instrument executed by the Committee shall
be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine which
Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA. The Committee
also shall determine when a Participant or his Beneficiary qualifies for the
payment of benefits under the Plan. The Committee shall furnish to each such
Participant or Beneficiary whatever information is required under ERISA (or is
otherwise appropriate) to enable the Participant or Beneficiary to make whatever
elections may be available pursuant to Sections 6 and 10, and the Committee
shall provide for the payment of benefits in the proper form and amount from the
assets of the Trust Fund. The
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Committee may decide in its sole discretion to permit modifications of elections
and to defer or accelerate benefits to the extent consistent with applicable law
and the best interests of the individuals concerned.
12.10 Alternative Payees in Event of Incapacity. If the Committee finds at
any time that an individual qualifying for benefits under this Plan is a minor
or is incompetent, the Committee may direct the benefits to be paid, in the case
of a minor, to his parents, his legal guardian, or a custodian for him under the
Uniform Gifts to Minors Act, or, in the case of an incompetent, to his spouse,
or his legal guardian, the payments to be used for the individual's benefit. The
Committee and the Trustee shall not be obligated to inquire as to the actual use
of the funds by the person receiving them under this Section 12.10, and any such
payment shall completely discharge the obligations of the Plan, the Trustee, the
Committee, and the Employers to the extent of the payment.
12.11 Indemnification by Employers. Except as separately agreed in writing,
the Committee, and any member or employee of the Committee, shall be indemnified
and held harmless by the Employer, jointly and severally, to the fullest extent
permitted by law against any and all costs, damages, expenses, and liabilities
reasonably incurred by or imposed upon it or him in connection with any claim
made against it or him or in which it or he may be involved by reason of its or
his being, or having been, the Committee, or a member or employee of the
Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the Committee
who also is a Participant in the Plan shall take no part in any determination
specifically relating to his own participation or benefits, unless his
abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
------------------------------------------------
13.1 Adoption of Plan by Other Employers. With the consent of the Bank, any
entity may become a participating Employer under the Plan by (i) taking such
action as shall be necessary to adopt the Plan, (ii) becoming a party to the
Trust Agreement establishing the Trust Fund, and (iii) executing and delivering
such instruments and taking such other action as may be necessary or desirable
to put the Plan into effect with respect to the entity's Employees.
13.2 Adoption of Plan by Successor. In the event that any Employer shall be
reorganized by way of merger, consolidation, transfer of assets or otherwise, so
that an entity other than an Employer shall succeed to all or substantially all
of the Employer's business, the successor entity may be substituted for the
Employer under the Plan by adopting the Plan and becoming a party to the Trust
Agreement. Contributions by the Employer shall be automatically suspended from
the effective date of any such reorganization until the date upon which the
substitution of the successor entity for the Employer under the Plan becomes
effective. If, within 90 days following the effective date of any such
reorganization, the successor entity shall not have elected to become a party to
the Plan, or if the Employer shall adopt a plan of complete liquidation other
than in connection with a reorganization, the Plan shall be automatically
terminated with respect to Employees of the Employer as of the close of business
on the 90th day following the effective date of the reorganization, or as of the
close of business on the date of adoption of a plan of complete liquidation, as
the case may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any other
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned upon their being determined initially by the Internal
Revenue Service to meet the qualification requirements of Section
-26-
<PAGE>
401(a) of the Code, so that the Employers may deduct currently for federal
income tax purposes their contributions to the Trust and so that the
Participants may exclude the contributions from their gross income and recognize
income only when they receive benefits. In the event that this Plan is held by
the Internal Revenue Service not to qualify initially under Section 401(a), the
Plan may be amended retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure qualification under Section 401(a). If
this Plan is held by the Internal Revenue Service not to qualify initially under
Section 401(a) either as originally adopted or as amended, each Employer's
contributions to the Trust under this Plan (including any earnings thereon)
shall be returned to it and this Plan shall be terminated. In the event that
this Plan is amended after its initial qualification and the Plan as amended is
held by the Internal Revenue Service not to qualify under Section 401(a), the
amendment may be modified retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure approval of the amendment under Section
401(a).
13.4 Right to Amend or Terminate. The Bank intends to continue this Plan as
a permanent program. However, each participating Employer separately reserves
the right to suspend, supersede, or terminate the Plan at any time and for any
reason, as it applies to that Employer's Employees, and the Bank reserves the
right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at
any time and for any reason, as it applies to the Employees of each Employer. No
amendment, suspension, supersession, merger, consolidation, or termination of
the Plan shall (i) reduce any Participant's or Beneficiary's proportionate
interest in the Trust Fund, (ii) reduce or restrict, either directly or
indirectly, the benefit provided any Participant prior to the amendment, or
(iii) divert any portion of the Trust Fund to purposes other than the exclusive
benefit of the Participants and their Beneficiaries prior to the satisfaction of
all liabilities under the Plan. Moreover, there shall not be any transfer of
assets to a successor plan or merger or consolidation with another plan unless,
in the event of the termination of the successor plan or the surviving plan
immediately following such transfer, merger, or consolidation, each participant
or beneficiary would be entitled to a benefit equal to or greater than the
benefit he would have been entitled to if the plan in which he was previously a
participant or beneficiary had terminated immediately prior to such transfer,
merger, or consolidation. Following a termination of this Plan by the Bank, the
Trustee shall continue to administer the Trust and pay benefits in accordance
with the Plan as amended from time to time and the Committee's instructions.
Section 14. Miscellaneous Provisions.
-------------------------
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
14.2 Nonassignability of Benefits. No assignment, pledge, or other
anticipation of benefits from the Plan will be permitted or recognized by the
Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall
not be subject to attachment, garnishment, or other legal process for debts or
liabilities of any Participant or Beneficiary, to the extent permitted by law.
This prohibition on assignment or alienation shall apply to any judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony, or property rights to a
present or former spouse, child or other dependent of a Participant pursuant to
a state domestic relations or community property law, unless the judgment,
decree, or order is determined by the Committee to be a
-27-
<PAGE>
qualified domestic relations order within the meaning of Section 414(p) of the
Code, as more fully set forth in Section 14.2 hereof.
14.3 Limit of Employer Liability. The liability of the Employer with
respect to Participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and the
Trustee in connection with administering this Plan and Trust Fund shall be paid
by the Trustee from the Trust Fund to the extent the expenses have not been paid
or assumed by the Employer or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be interpreted to
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and 13.3,
under no circumstances shall any portion of the Trust Fund be diverted to or
used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held to
be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the Plan
shall be the president of the Bank, or such other person as may be designated
from time to time by the Bank.
14.9 Governing State Law. This Plan shall be interpreted in accordance with
the laws of the Commonwealth of Massachusetts to the extent those laws are
applicable under the provisions of ERISA.
14.10 Employer Contributions Conditioned on Deductibility. Employer
Contributions to the Plan are conditioned on deductibility under Code Section
404. In the event that the Internal Revenue Service shall determine that all or
any portion of an Employer Contribution is not deductible under that Section,
the nondeductible portion shall be returned to the Employer within one year of
the disallowance of the deduction.
14.11 Unclaimed Accounts. Neither the Employer nor the Trustees shall be
under any obligation to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Employer or the Trustees, by certified or
registered mail addressed to his last known address of record with the Employer,
shall notify any Participant or Beneficiary that he is entitled to a
distribution under this Plan, and the notice shall quote the provisions of this
Section. If the Participant or Beneficiary fails to claim his benefits or make
his whereabouts known in writing to the Employer or the Trustees within seven
(7) calendar years after the date of notification, the benefits of the
Participant or Beneficiary under the Plan will be disposed of as follows:
(a) If the whereabouts of the Participant is unknown but the
whereabouts of the Participant's Beneficiary is known to the Trustees,
distribution will be made to the Beneficiary.
-28-
<PAGE>
(b) If the whereabouts of the Participant and his Beneficiary are
unknown to the Trustees, the Plan will forfeit the benefit, provided that
the benefit is subject to a claim for reinstatement if the Participant or
Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the Trustees
shall operate as a complete discharge of all obligations of the Trustees, to the
extent of the distributions so made.
14.12 Qualified Domestic Relations Order. Section 14.2 shall not apply to a
"qualified domestic relations order" defined in Code Section 414(p), and such
other domestic relations orders permitted to be so treated under the provisions
of the Retirement Equity Act of 1984. Further, to the extent provided under a
"qualified domestic relations order", a former Spouse of a Participant shall be
treated as the Spouse or surviving Spouse for all purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Plan Committee shall promptly notify the
Participant and any other alternate payee of the receipt of such order and
the Plan's procedures for determining the qualified status of domestic
relations orders, and
(b) Within a reasonable period after receipt of such order, the
Employer or the Plan Committee shall determine whether such order is a
qualified domestic relations order and notify the Participant and each
alternate payee of such determination. The Employer or the Plan Committee
shall establish reasonable procedures to determine the qualified status of
domestic relations orders and to administer distributions under such
qualified orders.
During any period in which the issue of whether a domestic relations order
is a qualified domestic relations order is being determined (by the Employer or
Plan Committee, by a court of competent jurisdiction, or otherwise), the
Employer or the Plan Committee shall segregate in a separate account in the Plan
or in an escrow account the amounts which would have been payable to the
alternate payee during such period if the order had been determined to be a
qualified domestic relations order. If within eighteen (18) months the order (or
modification thereof) is determined to be a qualified domestic relations order,
the Employer or the Plan Committee shall pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto. If within eighteen
(18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic
relations order is not resolved, then the Employer or the Plan Committee shall
pay the segregated amounts (plus any interest thereon) to the person or persons
who would have been entitled to such amounts if there had been no order. Any
determination that an order is a qualified domestic relations order which is
made after the close of the eighteen (18) month period shall be applied
prospectively only. The term "alternate payee" means any Spouse, former Spouse,
child or other dependent of a Participant who is recognized by a domestic
relations order as having a right to receive all, or a portion of, the benefit
payable under a Plan with respect to such Participant.
Section 15. Top-Heavy Provisions.
---------------------
15.1 Top-Heavy Plan. For any Plan Year beginning after December 31, 1983,
this Plan is top-heavy if any of the following conditions exist:
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<PAGE>
(a) If the top-heavy ratio for this Plan exceeds sixty percent (60%)
and this Plan is not part of any required aggregation group or permissive
aggregation group;
(b) If this Plan is a part of a required aggregation group (but is not
part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds sixty percent (60%); or
(c) If this Plan is a part of a required aggregation group and part of
a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds sixty percent (60%).
15.2 Super Top-Heavy Plan For any Plan Year beginning after December 31,
1983, this Plan will be a super top-heavy Plan if any of the following
conditions exist:
(a) If the top-heavy ratio for this Plan exceeds ninety percent (90%)
and this Plan is not part of any required aggregation group or permissive
aggregation group.
(b) If this Plan is a part of a required aggregation group (but is not
part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds ninety percent (90%), or
(c) If this Plan is a part of a required aggregation group and part of
a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds ninety percent (90%).
15.3 Definitions.
In making this determination, the Committee shall use the following
definitions and principles:
15.3-1 The "Determination Date", with respect to the first Plan Year
of any plan, means the last day of that Plan Year, and with respect to each
subsequent Plan Year, means the last day of the preceding Plan Year. If any
other plan has a Determination Date which differs from this Plan's
Determination Date, the top-heaviness of this Plan shall be determined on
the basis of the other plan's Determination Date falling within the same
calendar years as this Plan's Determination Date.
15.3-2 A "Key Employee", with respect to a Plan Year, means an
Employee who at any time during the five years ending on the top-heavy
Determination Date for the Plan Year has received compensation from an
Employer and has been (i) an officer of the Employer having 415
Compensation greater than 50 percent of the limit then in effect under
Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the
largest interests in the Employer having 415 Compensation greater than the
limit then in effect under Section 415(c)(1)(A), (iii) an owner of more
than five percent of the outstanding equity interest or the outstanding
voting interest in any Employer, or (iv) an owner of more than one percent
of the outstanding equity interest or the outstanding voting interest in an
Employer whose annual compensation exceeds $150,000. For purposes of
determining whether an Employee is a Key Employee, annual compensation
means compensation as defined in Section 415(c)(3) of the Code, but
including amounts contributed by
-30-
<PAGE>
the Employee pursuant to a salary reduction agreement which are excludable
from the Employee's gross income under Section 125, Section 402(e)(3),
Section 402(H)(1)(B) or Section 403(b) of the Code. The Beneficiary of a
Key Employee shall also be considered a Key Employee.
15.3-3 A "Non-key Employee" means an Employee who at any time during
the five years ending on the top-heavy Determination Date for the Plan Year
has received compensation from an Employer and who has never been a Key
Employee, and the Beneficiary of any such Employee.
15.3-4 A "required aggregation group" includes (a) each qualified Plan
of the Employer in which at least one Key Employee participates in the Plan
Year containing the Determination Date and any of the four (4) preceding
Plan Years, and (b) any other qualified Plan of the Employer which enables
a Plan described in (a) to meet the requirements of Code Sections 401(a)(4)
and 410. For purposes of the preceding sentence, a qualified Plan of the
Employer includes a terminated Plan maintained by the Employer within the
five (5) year period ending on the Determination Date. In the case of a
required aggregation group, each Plan in the group will be considered a
top-heavy Plan if the required aggregation group is a top-heavy group. No
Plan in the required aggregation group will be considered a top-heavy Plan
if the required aggregation group is not a top-heavy group. All Employers
aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after
the Code Section 414(o) regulations become effective) are considered a
single Employer.
15.3-5 A "permissive aggregation group" includes the required
aggregation group of Plans plus any other qualified Plan(s) of the Employer
that are not required to be aggregated but which, when considered as a
group with the required aggregation group, satisfy the requirements of Code
Sections 401(a)(4) and 410 and are comparable to the Plans in the required
aggregation group. No Plan in the permissive aggregation group will be
considered a top-heavy Plan if the permissive aggregation group is not a
top-heavy group. Only a Plan that is part of the required aggregation group
will be considered a top-heavy Plan if the permissive aggregation group is
top-heavy.
15.4 Top-Heavy Rules of Application.
For purposes of determining the value of Account balances and the present
value of accrued benefits the following provisions shall apply:
15.4-1 The value of Account balances and the present value of accrued
benefits will be determined as of the most recent Valuation Date that falls
within or ends with the twelve (12) month period ending on the
Determination Date.
15.4-2 For purposes of testing whether this Plan is top-heavy, the
present value of an individual's accrued benefits and an individual's
Account balances is counted only once each year.
15.4-3 The Account balances and accrued benefits of a Participant who
is not presently a Key Employee but who was a Key Employee in a Plan Year
beginning on or after January 1, 1984 will be disregarded.
15.4-4 For years beginning after December 31, 1984, Employer
contributions attributable to a salary reduction or similar arrangement
will be taken into account.
-31-
<PAGE>
15.4-5 When aggregating Plans, the value of Account balances and
accrued benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
15.4-6 The present value of the accrued benefits or the amount of the
Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a Plan of the Employer. No
distribution, however, made from the Plan to an individual (other than the
Beneficiary of a deceased Employee who was an Employee within the five (5)
year period ending on the Determination Date) who has not been an Employee
at any time during the five (5) year period ending on the Determination
Date shall be taken into account in determining whether the Plan is
top-heavy. Also, any amounts recontributed by an Employee upon becoming a
Participant in the Plan shall no longer be counted as a distribution under
this paragraph.
15.4-7 The present value of the accrued benefits or the amount of the
Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a terminated Plan of the Employer,
provided that such Plan (if not terminated) would have been required to be
included in the aggregation group.
15.4-8 Accrued benefits and Account balances of an individual shall
not be taken into account for purposes of determining the top-heavy ratios
if the individual has performed no services for the Employer during the
five (5) year period ending on the applicable Determination Date.
Compensation for purposes of this subparagraph shall not include any
payments made to an individual by the Employer pursuant to a qualified or
non-qualified deferred compensation plan.
15.4-9 The present value of the accrued benefits or the amount of the
Account balances of any Employee participating in this Plan shall not
include any rollover contributions or other transfers voluntarily initiated
by the Employee except as described below. If this Plan transfers or rolls
over funds to another Plan in a transaction voluntarily initiated by the
Employee after December 31, 1983, then this Plan shall count the
distribution for purposes of determining Account balances or the present
value of accrued benefits. A transfer incident to a merger or consolidation
of two or more Plans of the Employer (including Plans of related Employers
treated as a single Employer under Code Section 414), or a transfer or
rollover between Plans of the Employer, shall not be considered as
voluntarily initiated by the Employee.
15.5 Top-Heavy Ratio.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer has never
maintained any defined benefit plans which have covered or could cover a
Participant in this Plan, the top-heavy ratio is a fraction, the numerator of
which is the sum of the Account balances of all Key Employees as of the
Determination Date, and the denominator of which is the sum of the Account
balances of all Employees as of the Determination Date. Both the numerator and
denominator of the top-heavy ratio shall be increased to reflect any
contribution which is due but unpaid as of the Determination Date.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer maintains or
has maintained one (1) or more defined benefit plans which have covered or could
cover a Participant in this Plan, the top-heavy ratio is a fraction, the
numerator of which is the sum of Account balances under the defined contribution
plans for all Key
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<PAGE>
Employees and the present value of accrued benefits under the defined benefit
plans for all Key Employees, and the denominator of which is the sum of the
Account balances under the defined contribution plans for all Employees and the
present value of accrued benefits under the defined benefit plans for all
Employees.
For these purposes, the accrued benefit of a Participant other than a Key
Employee in a defined benefit plan shall be determined under (a) the method, if
any, that uniformly applies for accrual purposes under all defined benefit plans
maintained by the Employer, or (b) if there is no such method, as if such
benefit accrued not more rapidly than the slowest accrual rate permitted under
the fractional rule of Section 411(b)(1)(C).
15.6 Minimum Contributions. For any Top-Heavy Year, each Employer shall
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to Section 4 is less than the lesser
of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation received
by any Key Employee for that year. For purposes of the special contribution
of this Section 15.2, a Key Employee's 415 Compensation shall include
amounts the Key Employee elected to defer under a qualified 401(k)
arrangement. Such a special contribution shall be made on behalf of each
Participant who is employed by an Employer on the last day of the Plan
Year, regardless of the number of his Hours of Service, and shall be
allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key Employee
is a Participant in both this Plan and a defined benefit plan included in the
plan aggregation group which is top heavy, the sum of the Employer contributions
and forfeitures allocated to the Account of each such Non-key Employee shall be
equal to at least five percent (5%) of such Non-key Employee's 415 Compensation
for that year.
15.7 Minimum Vesting. For any Plan Year in which this Plan is Top-Heavy, a
Participant's vested interest in his Account shall be based on the following
"top-heavy table":
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 2 years 0%
2 20%
3 40%
4 60%
5 80%
6 100%
15.8 Top-Heavy Provisions Control in Top-Heavy Plan. In the event this Plan
becomes top-heavy and a conflict arises between the top-heavy provisions herein
set forth and the remaining provisions set forth in this Plan, the top-heavy
provisions shall control.
-33-
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of Summit Bancorp, Inc.
following the Reorganization:
Name State of Incorporation
---- ----------------------
Summit Bank Massachusetts
|
Medway Securities Corp. Massachusetts
Franklin Village Security Corp. Massachusetts
EXHIBIT 23.2
<PAGE>
[WOLF & COMPANY, P.C. LETTERHEAD]
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 and Prospectus
of Summit Bancorp, Inc. (proposed holding company for Summit Bank) of our report
dated August 8, 1997, except for Notes 15 and 16 as to which the dates are
August 19, 1997 and March 12, 1998, respectively, on the consolidated balance
sheets of Summit Bank 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 and to the use of our name and the statements with respect to us, as
appearing under the heading "Experts" in the Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
June 8, 1998
EXHIBIT 23.3
<PAGE>
[WOLF & COMPANY, P.C. LOGO]
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the filing of the opinion as an exhibit to the Stock
Holding Company's Registration Statement on Form SB-2 as filed with the SEC. We
also consent to the references to our firm in the Prospectus contained in the
Form SB-2 under the captions "The Offering and The Reorganization -- Federal and
State Tax Consequences of the Reorganization" and "Legal and Tax Matters."
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
June 9, 1998
EXHIBIT 23.4
<PAGE>
RP FINANCIAL, LC.
- ---------------------------------------
Financial Services Industry Consultants
June 10, 1998
Board of Trustees
Service Bancorp, MHC
Board of Directors
Summit Bank
81 Main Street
Medway, Massachusetts 02053
Gentlemen:
We hereby consent to the use of our firm's name in the Form SB-2 Registration
Statement and any amendments thereto for Summit Bancorp, Inc. We also hereby
consent to the inclusion of, summary of and references to our Appraisal and our
statement concerning subscription rights in such filings including the
Prospectus of Summit Bancorp, Inc.
Sincerely,
RP FINANCIAL, LC.
/s/ Gregory E. Dunn
Gregory E. Dunn
Senior Vice President
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997
<PERIOD-END> MAR-31-1998 JUN-30-1997
<CASH> 4,679 2,768
<INT-BEARING-DEPOSITS> 47 56
<FED-FUNDS-SOLD> 6,400 6,305
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 44,185 25,196
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 72,757 67,409
<ALLOWANCE> 560 475
<TOTAL-ASSETS> 131,204 104,878
<DEPOSITS> 108,056 92,897
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 854 664
<LONG-TERM> 12,404 2,622
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,890 8,695
<TOTAL-LIABILITIES-AND-EQUITY> 131,204 104,878
<INTEREST-LOAN> 4,531 5,343
<INTEREST-INVEST> 1,564 1,482
<INTEREST-OTHER> 214 212
<INTEREST-TOTAL> 6,309 7,037
<INTEREST-DEPOSIT> 2,734 3,050
<INTEREST-EXPENSE> 2,972 3,174
<INTEREST-INCOME-NET> 3,337 3,863
<LOAN-LOSSES> 75 35
<SECURITIES-GAINS> 675 462
<EXPENSE-OTHER> 2,861 3,094
<INCOME-PRETAX> 1,476 1,693
<INCOME-PRE-EXTRAORDINARY> 1,476 1,693
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 955 1,002
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 3.93 4.29
<LOANS-NON> 343 193
<LOANS-PAST> 323 336
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 475 470
<CHARGE-OFFS> 11 94
<RECOVERIES> 21 64
<ALLOWANCE-CLOSE> 560 475
<ALLOWANCE-DOMESTIC> 462 369
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 98 106
</TABLE>
EXHIBIT 99.1
<PAGE>
RP FINANCIAL, LC.
- ---------------------------------------
Financial Services Industry Consultants
April 2, 1998
Mr. Eugene G. Stone
President and Chief Executive Officer
Summit Bank
81 Main Street
Medway, Massachusetts 02053-1867
Dear Mr. Stone:
This letter sets forth the agreement between Summit Bank, Medway,
Massachusetts ("Summit" or the "Bank"), and RP Financial, LC. ("RP Financial")
for the independent appraisal services pertaining to the Bank's minority stock
offering in conjunction with the mutual holding company reorganization. The
specific appraisal services to be rendered by RP Financial are described below.
These appraisal services will be rendered by a team of two to three senior
consultants on staff and will be directed by the undersigned.
Description of Conversion Appraisal Services
- --------------------------------------------
Prior to preparing the valuation report, RP Financial will conduct a
financial due diligence, including on-site interviews of senior management and
reviews of financial and other documents and records, to gain insight into the
Bank's operations, financial condition, profitability, market area, risks and
various internal and external factors which impact the pro forma value of the
Bank. RP Financial will prepare a written detailed valuation report of Summit
which will be fully consistent with applicable regulatory guidelines and
standard pro forma valuation practices. The appraisal report will include an
in-depth analysis of the Bank's financial condition and operating results, as
well as an assessment of the Bank's interest rate risk, credit risk and
liquidity risk. The appraisal report will describe the Bank's business
strategies, market area, prospects for the future and the intended use of
proceeds both in the short term and over the longer term. A peer group analysis
relative to publicly-traded savings institutions will be conducted for the
purpose of determining appropriate valuation adjustments relative to the group.
We will review pertinent sections of the applications and offering documents to
obtain necessary data and information for the appraisal, including the impact of
key deal elements on the appraised value, such as dividend policy, use of
proceeds and reinvestment rate, tax rate, conversion expenses and
characteristics of stock plans. The appraisal report will conclude with a
midpoint pro forma value which will establish the range of value, and reflect
the minority stock offering size determined by the Bank's Board of Trustees. The
appraisal report may be periodically updated throughout the conversion process
and there will be at least one updated valuation prepared at the time of the
closing of the stock offering.
RP Financial agrees to deliver the valuation appraisal and subsequent
updates, in writing, to Summit at the above address in conjunction with the
filing of the regulatory application. Subsequent updates will be filed promptly
as certain events occur which would warrant the preparation and filing of such
valuation updates. Further, RP Financial agrees to perform such other services
as are necessary or required in connection with the regulatory review of the
appraisal and respond to the regulatory comments, if any, regarding the
valuation appraisal and subsequent updates.
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
<PAGE>
RP Financial, LC.
Mr. Eugene G. Stone
April 2, 1998
Page 2
Fee Structure and Payment Schedule
- ----------------------------------
Summit agrees to pay RP Financial a fixed fee of $20,000 for these
appraisal services, plus reimbursable expenses. Payment of these fees shall be
made according to the following schedule:
o $5,000 upon execution of the letter of agreement engaging RP
Financial's appraisal services;
o $12,500 upon delivery of the completed original appraisal report; and
o $2,500 upon completion of the conversion to cover all subsequent
valuation updates that may be required, provided that the transaction
is not delayed for reasons described below.
The Bank will reimburse RP Financial for out-of-pocket expenses incurred in
the preparation of the appraisal report. Such out-of-pocket expenses, which are
not expected to exceed $5,000 inclusive of expenses for the business plan and
appraisal, will include travel, telephone, facsimile, copying, shipping,
computer and data. RP Financial will make all attempts to keep out-of-pocket
expenses to a minimum.
In the event Summit shall, for any reason, discontinue the proposed
conversion prior to delivery of the completed documents set forth above and
payment of the respective progress payment fees, Summit agrees to compensate RP
Financial according to RP Financial's standard billing rates for consulting
services based on accumulated and verifiable time expenses, not to exceed the
respective fee caps noted above, after giving full credit to the initial
retainer fee. RP Financial's standard billing rates range from $75 per hour for
research associates to $250 per hour for managing directors.
If during the course of the proposed transaction, unforeseen events occur
so as to materially change the nature or the work content of the services
described in this contract, the terms of said contract shall be subject to
renegotiation by Summit and RP Financial. Such unforeseen events shall include,
but not be limited to, major changes in the conversion regulations, appraisal
guidelines or processing procedures as they relate to appraisals, major changes
in management or procedures, operating policies or philosophies, and excessive
delays or suspension of processing of conversion applications by the regulators
such that completion of the transaction requires the preparation by RP Financial
of a new appraisal or financial projections.
Representations and Warranties
- ------------------------------
Summit and RP Financial agree to the following:
1. The Bank agrees to make available or to supply to RP Financial such
information with respect to its business and financial condition as RP Financial
may reasonably request in order to provide the aforesaid valuation. Such
information heretofore or hereafter supplied or made available to RP Financial
shall include: annual financial statements, periodic regulatory filings and
material agreements, debt instruments, off balance sheet assets or liabilities,
<PAGE>
RP Financial, LC.
Mr. Eugene G. Stone
April 2, 1998
Page 3
commitments and contingencies, unrealized gains or losses and corporate books
and records. All information provided by the Bank to RP Financial shall remain
strictly confidential (unless such information is otherwise made available to
the public), and if conversion is not consummated or the services of RP
Financial are terminated hereunder, RP Financial shall upon request promptly
return to the Bank the original and any copies of such information.
2. The Bank hereby represents and warrants to RP Financial that any
information provided to RP Financial does not and will not, to the best of the
Bank's knowledge, at the times it is provided to RP Financial, contain any
untrue statement of a material fact or fail to state a material fact necessary
to make the statements therein not false or misleading in light of the
circumstances under which they were made.
3. (a) The Bank agrees that it will indemnify and hold harmless RP
Financial, any affiliates of RP Financial, the respective directors, officers,
agents and employees of RP Financial or their successors and assigns who act for
or on behalf of RP Financial in connection with the services called for under
this agreement (hereinafter referred to as "RP Financial"), from and against any
and all losses, claims, damages and liabilities (including, but not limited to,
all losses and expenses in connection with claims under the federal securities
laws) attributable to (i) any untrue statement or alleged untrue statement of a
material fact contained in the financial statements or other information
furnished or otherwise provided by the Bank to RP Financial, either orally or in
writing; (ii) the omission or alleged omission of a material fact from the
financial statements or other information furnished or otherwise made available
by the Bank to RP Financial; or (iii) any action or omission to act by the Bank,
or the Bank's respective officers, directors, employees or agents which action
or omission is in bad faith or negligent. The Bank will be under no obligation
to indemnify RP Financial hereunder if a court determines that RP Financial was
negligent or acted in bad faith with respect to any actions or omissions of RP
Financial related to a matter for which indemnification is sought hereunder. Any
time devoted by employees of RP Financial to situations for which
indemnification is provided hereunder, shall be an indemnifiable cost payable by
the Bank at the normal hourly professional rate chargeable by such employee.
(b) RP Financial shall give written notice to the Bank of such claim
or facts within thirty days of the assertion of any claim or discovery of
material facts upon which the RP Financial intends to base a claim for
indemnification hereunder. In the event the Bank elects, within seven days
of the receipt of the original notice thereof, to contest such claim by
written notice to RP Financial, RP Financial will be entitled to be paid
any amounts payable by the Bank hereunder within five days after the final
determination of such contest either by written acknowledgement of the Bank
or a final judgment of a court of competent jurisdiction. If the Bank does
not so elect, RP Financial shall be paid promptly and in any event within
thirty days after receipt by the Bank of the notice of the claim.
(c) The Bank shall pay for or reimburse the reasonable expenses,
including attorneys' fees, incurred by RP Financial in advance of the final
disposition of any proceeding within thirty days of the receipt of such
request if RP Financial furnishes the Bank: (1)ya written statement of RP
Financial's good faith belief that it is entitled to indemnification
hereunder; and (2)ya written undertaking to repay the advance if it
ultimately is determined in a final adjudication of such proceeding that it
or he is not entitled to such indemnification.
<PAGE>
RP Financial, LC.
Mr. Eugene G. Stone
April 2, 1998
Page 4
(d) In the event the Bank does not pay any indemnified loss or make
advance reimbursements of expenses in accordance with the terms of this
agreement, RP Financial shall have all remedies available at law or in
equity to enforce such obligation.
It is understood that, in connection with RP Financial's above-mentioned
engagement, RP Financial may also be engaged to act for the Bank in one or more
additional capacities, and that the terms of the original engagement may be
embodied in one or more separate agreements. The provisions of Paragraph 3
herein shall apply to the original engagement, any such additional engagement,
any modification of the original engagement or such additional engagement and
shall remain in full force and effect following the completion or termination of
RP Financial's engagement(s). This agreement constitutes the entire
understanding of the Bank and RP Financial concerning the subject matter
addressed herein, and such contract shall be governed and construed in
accordance with the laws of the Commonwealth of Virginia. This agreement may not
be modified, supplemented or amended except by written agreement executed by
both parties.
Summit and RP Financial are not affiliated, and neither Summit nor RP
Financial has an economic interest in, or is held in common with, the other and
has not derived a significant portion of its gross revenues, receipts or net
income for any period from transactions with the other.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter, together with
the initial retainer fee of $5,000.
Sincerely,
/s/ William E. Pommerening
William E. Pommerening
Chief Executive Officer
and Managing Director
Agreed To and Accepted By: Eugene G. Stone /s/ Eugene G. Stone
--------------------
President and Chief Executive Officer
Upon Authorization by the Board of Trustees: Summit Bank
Medway, Massachusetts
Date Executed: April 24, 1998
--------------
EXHIBIT 99.2
<PAGE>
RP FINANCIAL, LC.
- ---------------------------------------
Financial Services Industry Consultants
April 2, 1998
Mr. Eugene G. Stone
President and Chief Executive Officer
Summit Bank
81 Main Street
Medway, Massachusetts 02053-1867
Dear Mr. Stone:
This letter sets forth the agreement between Summit Bank, Medway,
Massachusetts ("Summit" or the "Bank"), and RP Financial, LC. ("RP Financial"),
whereby the Bank has engaged RP Financial to prepare the regulatory business
plan and financial projections to be adopted by the Bank's Board of Trustees in
conjunction with the concurrent mutual holding company reorganization and
minority stock offering. These services are described in greater detail below.
Description of Proposed Services
- --------------------------------
RP Financial's business planning services will include the following areas:
(1) evaluating Summit's current financial and operating condition, business
strategies and anticipated strategies in the future; (2) analyzing and
quantifying the impact of business strategies, incorporating the use of net
offering proceeds both in the short and long term; (3) preparing detailed
financial projections on a quarterly basis for a period of at least three fiscal
years to reflect the impact of Board approved business strategies and use of
proceeds; (4) preparing the written business plan document which conforms with
applicable regulatory guidelines including a description of the use of proceeds
and how the convenience and needs of the community will be addressed; and (5)
preparing the detailed schedules of the capitalization of the Bank and mutual
holding company and related cash flows.
Contents of the business plan will include: Philosophy/Goals; Economic
Environment and Background; Lending, Leasing and Investment Activities; Deposit,
Savings and Borrowing Activity; Asset and Liability Management; Operations;
Records, Systems and Controls; Growth, Profitability and Capital; Responsibility
for Monitoring this Plan.
RP Financial agrees to prepare the business plan and accompanying financial
projections in writing such that the business plan can be filed with the
appropriate regulatory agencies prior to filing the appropriate applications.
Fee Structure and Payment Schedule
- ----------------------------------
The Bank agrees to compensate RP Financial for preparation of the business
plan on a fixed fee basis of $7,500. Payment of the professional fees shall be
made upon delivery of the completed business plan.
- --------------------------------------------------------------------------------
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
<PAGE>
RP Financial, LC.
Mr. Eugene G. Stone
April 2, 1998
Page 2
The Bank will reimburse RP Financial for out-of-pocket expenses incurred in
the preparation of the appraisal report. Such out-of-pocket expenses, which are
not expected to exceed $5,000 inclusive of expenses for the business plan and
appraisal, will include travel, telephone, facsimile, copying, shipping,
computer and data. RP Financial will make all attempts to keep out-of-pocket
expenses to a minimum.
In the event the Bank shall, for any reason, discontinue this planning
engagement prior to delivery of the completed business plan and payment of the
progress payment fee, the Bank agrees to compensate RP Financial according to RP
Financial's standard billing rates for consulting services based on accumulated
and verifiable time expenses, not to exceed the fixed fee described above, plus
reimbursable expenses incurred.
If during the course of the planning engagement, unforeseen events occur so
as to materially change the nature or the work content of the business planning
services described in this contract, the terms of said contract shall be subject
to renegotiation by the Bank and RP Financial. Such unforeseen events may
include changes in regulatory requirements as it specifically relates to Summit
or potential transactions which will dramatically impact the Bank such as a
pending acquisition or branch transaction.
* * * * * * * * * * *
Please acknowledge your agreement to the foregoing by signing as indicated
below and returning to RP Financial a signed copy of this letter.
Sincerely,
/s/ William E. Pommerening
William E. Pommerening
Chief Executive Officer
and Managing Director
Agreed To and Accepted By: Eugene G. Stone /s/ Eugene G. Stone
--------------------
President and Chief Executive Officer
Upon Authorization by the Board of Trustees For: Summit Bank
Medway, Massachusetts
Date Executed: April 24, 1998
--------------
