<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-60237
PROSPECTUS
MASSACHUSETTS FINCORP, INC.
(Proposed Holding Company for The Massachusetts Co-operative Bank)
784,904 Shares of Common Stock
Massachusetts Fincorp, Inc. (the "Company" or "Massachusetts Fincorp"), a
Delaware corporation, is offering up to 682,525 shares of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion of
The Massachusetts Co-operative Bank (the "Bank" or "Massachusetts Co-op") from a
Massachusetts-chartered mutual co-operative bank to a Massachusetts-chartered
stock co-operative bank and the issuance of the Bank's capital stock to the
Company pursuant to the Bank's plan of conversion, as amended (the "Plan" or
"Plan of Conversion"). The simultaneous conversion of the Bank to stock form,
the issuance of the Bank's stock to the Company and the offer and sale of the
Common Stock by the Company are referred to as the "Conversion." In certain
circumstances, the Company may increase the amount of Common Stock offered up to
784,904 shares. See Footnote 4 to the table below.
(continued on following page)
_____________________
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE OR PLACE AN ORDER FOR COMMON
STOCK, PLEASE CALL THE STOCK INFORMATION CENTER AT (617) 696-9373.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE MASSACHUSETTS DIVISION OF BANKS, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE CO-OPERATIVE CENTRAL BANK OR ANY STATE
SECURITIES COMMISSION, OR ANY OTHER AGENCY, NOR HAS SUCH COMMISSION, OFFICE,
CORPORATION OR ANY STATE SECURITIES COMMISSION OR OTHER AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE
SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR THE SHARE INSURANCE FUND OF THE CO-OPERATIVE CENTRAL BANK OR ANY OTHER
GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK. THE COMMON
STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
COSTS AND OTHER FEES
PURCHASE PRICE(1) AND EXPENSES(2) ESTIMATED NET PROCEEDS(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share $ 10.00 $ 1.00 $ 9.00
- ---------------------------------------------------------------------------------------------------------
Midpoint Per Share $ 10.00 $ 0.88 $ 9.12
- ---------------------------------------------------------------------------------------------------------
Maximum Per Share $ 10.00 $ 0.78 $ 9.21
- ---------------------------------------------------------------------------------------------------------
Total Minimum(1) $5,044,750 $503,750 $4,541,000
- ---------------------------------------------------------------------------------------------------------
Total Midpoint(1) $5,935,000 $521,000 $5,414,000
- ---------------------------------------------------------------------------------------------------------
Total Maximum(1) $6,825,250 $537,250 $6,288,000
- ---------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted(4) $7,849,040 $556,040 $7,293,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro") dated July 22, 1998, which states that the estimated pro
forma market value of the Common Stock being offered for sale in the
Conversion ranged from $5.0 million to $6.8 million with a midpoint of $5.9
million (the "Valuation Range") or $5.2 million to $8.2 million with a
midpoint of $6.2 million taking into account the contribution to the
Massachusetts Co-operative Charitable Foundation of an amount of Common
Stock equal to 5% of the Common Stock sold in the Conversion. See
"Comparison of Valuation and Pro Forma Information With No Foundation." The
independent appraisal of FinPro is based upon estimates and projections that
are subject to change and the valuation must not be construed as a
recommendation as to the advisability of purchasing the Common Stock nor an
assurance that a purchaser of Common Stock will thereafter be able to sell
the Common Stock at prices within the Valuation Range. Based on the
Valuation Range, the Board of Directors of the Company and the Board of
Directors of the Bank established an estimated price range of the Common
Stock being offered for sale in the Conversion within the Valuation Range of
$5.0 million to $6.8 million (the "Estimated Price Range") or between
504,475 and 784,904 shares of Common Stock issued at the $10.00 per share
price (the "Purchase Price") to be paid for each share of Common Stock
subscribed for or purchased in the Offering. See "The Conversion--Stock
Pricing."
(2) Consists of the estimated costs to the Bank and the Company arising from the
Conversion, including estimated fixed expenses of approximately $425,000,
and marketing fees to be paid to Trident Securities, Inc. ("Trident
Securities"), estimated to be between $78,750 and $112,250 at the minimum
and maximum of the Estimated Price Range, respectively. See "The
Conversion--Marketing and Underwriting Arrangements." The actual fees and
expenses may vary from the estimates. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
(3) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold in the Offerings and other factors. Includes
the purchase of shares of Common Stock by The Massachusetts Co-operative
Bank Employee Stock Ownership Plan and related trust (the "ESOP") which is
intended to be funded by a loan to the ESOP, which will be deducted from the
Company's stockholders' equity. See "Use of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation of
subscribers or any right of cancellation, due to regulatory considerations,
changes in market or general financial and economic conditions. See "Pro
Forma Data" and "The Conversion--Stock Pricing." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Conversion--Subscription Offering and Subscription Rights," "--Direct
Community Offering" and "--Limitations on Common Stock Purchases."
_______________________
TRIDENT SECURITIES, INC.
_______________________
The date of this Prospectus is October 9, 1998.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING ORDER
OF PRIORITY TO: (1) THE BANK'S ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF
DEPOSIT ACCOUNTS TOTALLING $50 OR MORE AS OF APRIL 30, 1997); (2) THE BANK'S
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF DEPOSIT ACCOUNTS
TOTALLING $50 OR MORE AS OF MARCH 31, 1998); (3) THE COMPANY'S AND BANK'S TAX-
QUALIFIED EMPLOYEE BENEFIT PLANS (COLLECTIVELY, THE "EMPLOYEE PLANS"), INCLUDING
THE ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO 8% OF THE COMMON STOCK ISSUED IN
CONNECTION WITH THE CONVERSION (INCLUDING SHARES ISSUED TO THE MASSACHUSETTS CO-
OPERATIVE CHARITABLE FOUNDATION (THE "FOUNDATION")); AND (4) DIRECTORS, OFFICERS
AND EMPLOYEES OF THE BANK, WHO DO NOT OTHERWISE QUALIFY AS ELIGIBLE OR
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. SUBSCRIPTION RIGHTS ARE NON-
TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES. Concurrently, and subject to the prior rights of holders of
subscription rights, the Company is offering the shares of Common Stock not
subscribed for in the Subscription Offering for sale in a community offering to
certain members of the general public (the "Direct Community Offering") with a
preference given to natural persons residing in Suffolk and Norfolk Counties,
Massachusetts (the Bank's "Local Community") (such natural persons are referred
to as "Preferred Subscribers"). Shares not subscribed for in the Subscription
and Direct Community Offerings will be offered to certain members of the general
public in a syndicated community offering (the "Syndicated Community Offering").
The Subscription Offering, the Direct Community Offering and the Syndicated
Community Offering are referred to collectively as the "Offerings."
Except for the ESOP, which intends to purchase up to 8% of the Common Stock
issued in connection with the Conversion, including shares issued to the
Foundation, no Eligible Account Holder, Supplemental Eligible Account Holder or
Directors, Officers and employees may, in their respective capacities as such,
purchase in the Subscription Offering more than the applicable purchase
limitation; no person, together with associates and persons acting in concert
with such person, may purchase in the Direct Community Offering and Syndicated
Community Offering more than $100,000 of Common Stock; and no person, together
with associates of and persons acting in concert with such person, may purchase
in the aggregate more than the overall maximum purchase limitation of 2.0% of
the total number of shares of Common Stock sold in the Conversion exclusive of
any shares issued pursuant to an increase in the Estimated Price Range of up to
15%; provided, however, such purchase limitations may be increased or decreased
and the amount that may be subscribed for may be increased or decreased at the
sole discretion of the Bank and the Company without further approval of
subscribers or the Bank's depositors. The minimum purchase is 25 shares. See
"The Conversion--Subscription Offering and Subscription Rights," "--Direct
Community Offering" and "--Limitations on Common Stock Purchases."
The Company intends to establish a charitable foundation in connection with
the Conversion. The Plan provides that the Bank and the Company will create the
Massachusetts Co-operative Charitable Foundation and fund the Foundation with
shares of Common Stock contributed by the Company from authorized but unissued
shares, in an amount equal to 5% of the number of shares of Common Stock sold in
the Conversion. The Foundation will be dedicated to charitable purposes within
the communities in which the Bank maintains a banking office. For a discussion
of the Foundation and its effects on the Conversion, see "Risk Factors--Effects
of the Establishment of the Charitable Foundation," "Pro Forma Data," and "The
Conversion--Establishment of the Charitable Foundation."
The Bank has engaged Trident Securities to consult with and advise the
Company and the Bank in the Offerings, and Trident Securities has agreed to use
its best efforts to assist the Company with the solicitation of subscriptions
and purchase orders for shares of Common Stock in the Offerings. Trident
Securities is not obligated to take or purchase any shares of Common Stock in
the Offerings. The Bank and the Company will pay a fee to Trident Securities
which will be based on the aggregate Purchase Price of the Common Stock sold in
the Offerings. The Company and the Bank have agreed to indemnify Trident
Securities against certain liabilities arising under the Securities Act of 1933,
as amended (the "Securities Act"). See "The Conversion--Marketing and
Underwriting Arrangements."
THE SUBSCRIPTION AND DIRECT COMMUNITY OFFERINGS WILL TERMINATE AT 12:00
NOON, EASTERN TIME, ON NOVEMBER 13, 1998 (THE "EXPIRATION DATE") UNLESS EXTENDED
BY THE BANK AND THE COMPANY, WITH THE APPROVAL OF THE COMMISSIONER OF THE
MASSACHUSETTS DIVISION OF BANKS (THE "COMMISSIONER") AND THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), IF NECESSARY. Orders submitted are
irrevocable until the completion of the Conversion; provided, that if the
Conversion is not completed within 45 days after the close of the Subscription
and Community Offerings, unless such period has been extended with the consent
of the Commissioner and FDIC, if necessary, all subscribers will have their
funds returned promptly with interest, and all withdrawal authorizations will be
cancelled. Such extensions may not go beyond May 6, 2000. See "The Conversion-
- -Procedure for Purchasing Shares in Subscription and Direct Community
Offerings."
As a mutual institution, the Bank has never issued stock. Consequently, as
of the date of this Prospectus, no public market exists for the Common Stock to
be issued in the Conversion. The Bank has requested that Trident Securities
undertake to match offers to buy and offers to sell the Common Stock, and
Trident Securities intends to list the Common Stock over-the-counter through the
National Daily Quotation Service "Pink Sheet" published by the National
Quotation Bureau, Inc. However, a public trading market will depend upon the
presence in the market place of both willing buyers and willing sellers at any
given time. Due to the relatively small size of the offering, it is highly
improbable that a stockholder base sufficiently large to create an active
trading market will develop and be maintained. THEREFORE, A PURCHASER OF THE
COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE THAT
THE ABSENCE OF AN ACTIVE TRADING MARKET MAY MAKE IT DIFFICULT TO SELL THE COMMON
STOCK AFTER THE CONVERSION AND MAY HAVE AN ADVERSE EFFECT ON THE PRICE OF THE
COMMON STOCK. SEE "RISK FACTORS --LIMITED MARKET FOR COMMON STOCK" AND "MARKET
FOR THE COMMON STOCK."
2
<PAGE>
[MAP GOES HERE]
3
<PAGE>
SUMMARY OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in
its entirety by the more detailed information appearing elsewhere in this
Prospectus.
RISK FACTORS.................. A purchase of the Common Stock involves a
substantial degree of risk. Prospective investors
should carefully consider the matters set forth
under "Risk Factors." THE SHARES OF COMMON STOCK
OFFERED HEREBY ARE NOT INSURED OR GUARANTEED BY
THE FDIC, THE SHARE INSURANCE FUND OF THE CO-
OPERATIVE CENTRAL BANK (THE "SHARE INSURANCE
FUND") OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT
GUARANTEED BY THE COMPANY OR THE BANK.
MASSACHUSETTS FINCORP, INC.... Massachusetts Fincorp, Inc. is a Delaware
corporation organized by The Massachusetts Co-
operative Bank to become a savings and loan
holding company and own all of the Bank's stock
to be issued upon its conversion from mutual form
to stock form. To date, the Company has not
engaged in any business. Its executive office is
located at 1442 Dorchester Avenue, Boston,
Massachusetts 02122 and its telephone number is
(617) 825-5555.
THE MASSACHUSETTS CO-OPERATIVE
BANK........................ The Bank is a Massachusetts-chartered mutual co-
operative bank. At May 31, 1998, the Bank had
total assets of $63.2 million, total deposits of
$54.7 million and surplus of $5.1 million. The
Bank is located at 1442 Dorchester Avenue,
Boston, Massachusetts 02122 and its telephone
number is (617) 825-5555.
THE CONVERSION AND
REASONS FOR CONVERSION...... The Board of Directors of the Bank has adopted
the Plan of Conversion pursuant to which the Bank
intends to convert to a Massachusetts-chartered
stock co-operative bank and issue all of its
stock to the Company. The Company is offering
shares of its Common Stock in the Offerings in
connection with the Bank's Conversion. The
Conversion will be important to the future growth
and performance of the Bank by providing a larger
capital base on which the Bank may operate and by
enhancing future access to capital markets. The
sale of the Common Stock in the Conversion will
enhance the net worth position of the Bank to
better enable the Bank to (i) expand its
franchise through increased lending, (ii)
diversify its products offered to customers and
(iii) expand through the establishment of new
branch offices or mortgage origination locations
and the acquisition of other financial
institutions or their assets. THE CONVERSION AND
THE OFFERINGS ARE SUBJECT TO APPROVAL BY THE
COMMISSIONER AND NON-OBJECTION BY THE FDIC, AND
APPROVAL OF DEPOSITORS OF THE BANK ELIGIBLE TO
VOTE AT A SPECIAL MEETING TO BE HELD ON NOVEMBER
12, 1998 (THE "SPECIAL MEETING"). The
Commissioner issued an approval letter on
September 11, 1998 and the FDIC issued a notice
of intent not to object to the Conversion on
October 13, 1998. See "The Conversion--General."
As a result of the Conversion, depositors of the
Bank will no longer have voting rights. All
voting rights of the Bank will be vested in the
Company as sole stockholder of the Bank. Voting
rights of the Company will be vested in the
holders of the Common Stock. See "The
Conversion--Effects of the Conversion.
4
<PAGE>
MASSACHUSETTS CO-OPERATIVE
CHARITABLE FOUNDATION......... The Bank's Plan of Conversion provides for the
establishment of a charitable foundation in
connection with the Conversion. The Foundation,
which will be incorporated under Delaware law as
a non-stock corporation, will be funded with a
contribution by the Company equal to 5% of the
Common Stock sold in the Conversion. The
authority for the affairs of the Foundation will
be vested in the Board of Directors of the
Foundation. All shares held by the Foundation are
expected to be voted on a pro rata basis in
accordance with all other shares of outstanding
Common Stock. See "The Conversion-- Establishment
of the Charitable Foundation."
TERMS OF THE OFFERING......... The Common Stock to be sold is being offered at a
price of $10.00 per share in the Subscription
Offering pursuant to subscription rights in the
following order of priority to: (i) Eligible
Account Holders; (ii) Supplemental Eligible
Account Holders; (iii) the ESOP; and (iv)
directors, officers and employees of the Bank.
Concurrently, and subject to the prior rights of
holders of subscription rights, any shares of
Common Stock not subscribed for in the
Subscription Offering are being offered in the
Direct Community Offering at $10.00 per share to
certain members of the general public with a
preference given to Preferred Subscribers. The
Offering will expire on November 13, 1998 at
12:00 noon, Eastern Time, unless extended by the
Bank and the Company, with the approval of the
Commissioner and the FDIC, if necessary. See "The
Conversion--Subscription Offering and
Subscription Rights" and "--Direct Community
Offering." Shares of Common Stock not sold in the
Subscription and Direct Community Offerings, if
any, will be offered for sale to the general
public in a Syndicated Community Offering through
a syndicate of registered broker-dealers to be
formed and managed by Trident Securities. See
"The Conversion--Syndicated Community Offering."
The Company and the Bank reserve the absolute
right to reject orders, in whole or in part, in
their sole discretion, in the Community and
Syndicated Community Offerings.
PROCEDURE FOR ORDERING SHARES
AND PROSPECTUS DELIVERY..... Any eligible subscriber receiving a stock order
and certification form who desires to subscribe
for shares must do so prior to the Expiration
Date by delivering to the Bank a properly
executed stock order and certification form
together with full payment. ONCE TENDERED,
SUBSCRIPTION ORDERS CANNOT BE REVOKED OR MODIFIED
WITHOUT THE CONSENT OF THE COMPANY AND THE BANK.
Forms to order Common Stock offered in the
Subscription Offering and the Direct Community
Offering must be preceded or accompanied by a
Prospectus. To ensure that each purchaser
receives a prospectus at least 48 hours prior to
the Expiration Date in accordance with Rule 15c2-
8 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), no prospectus will
be mailed any later than five days prior to the
Expiration Date or hand delivered any later than
two days prior to such date. The Bank is not
obligated to accept subscriptions not submitted
on an original stock order form. See "The
Conversion--Procedure for Purchasing Shares in
Subscription and Direct Community Offerings." In
order to ensure that an eligible subscriber is
properly identified as to his stock purchase
priority, the eligible subscriber must list all
accounts on the stock order form giving all
names, account numbers and social security/tax
identification numbers relating to each account.
FAILURE TO LIST ALL SUCH NAMES, ACCOUNT NUMBERS
AND SOCIAL SECURITY/TAX IDENTIFICATION NUMBERS
RELATING TO EACH ACCOUNT
5
<PAGE>
MAY RESULT IN A REDUCTION IN THE NUMBER OF SHARES
ALLOCATED TO A SUBSCRIBING DEPOSITOR.
FORM OF PAYMENT............... Payment may be made: (i) in cash (if delivered in
person and only at the Conversion Center); (ii)
by check, bank draft or money order (provided
that checks will only be accepted subject to
collection); or (iii) by authorization of
withdrawal from deposit accounts maintained at
the Bank. No wire transfers or third party checks
will be accepted. See "Conversion--Procedure for
Purchasing Shares in Subscription and Direct
Community Offerings."
NONTRANSFERABILITY OF
SUBSCRIPTION RIGHTS......... The subscription rights of Eligible Account
Holders, Supplemental Eligible Account Holders,
the ESOP, and directors, officers and employees
of the Bank are nontransferable. Stock purchased
in the Subscription Offering must be registered
in the name(s) of the account holder(s) and
failure to do so will result in the rejection of
the order. See "The Conversion--Restrictions on
Transfer of Subscription Rights and Shares."
PURCHASE LIMITATIONS.......... No person may purchase in the Subscription
Offering more than the greater of $100,000 of
Common Stock or fifteen times the product
(rounded down to the next whole number) obtained
by multiplying the total number of shares of
Common Stock to be issued by a fraction of which
the numerator is the amount of either the
Eligible or Supplemental Account Holder's
Qualifying Deposit and the denominator is the
total amount of Qualifying Deposits of all of
either the Eligible or Supplemental Eligible
Account Holders. No person, together with
associates of and persons acting in concert with
such person, including individuals on joint
accounts or having the same address on the Bank's
records, may purchase in the Direct Community
Offering and the Syndicated Community Offering
more than $100,000 of Common Stock. No person,
together with associates or persons acting in
concert with such person, including individuals
on joint accounts or having the same address on
the Bank's records may purchase in the aggregate
more than 2% of the Common Stock offered.
However, the ESOP may purchase up to 8% of the
Common Stock issued, including shares issued to
the Foundation. The minimum purchase is 25 shares
of Common Stock. At any time during the
Conversion and without approval of the Bank's
depositors or a resolicitation of subscribers,
the Bank and the Company may, in their sole
discretion, decrease the maximum purchase
limitation below $100,000 of Common Stock;
however, such amount may not be reduced to less
than 0.10% of the Common Stock offered.
Additionally, at any time during the Conversion,
the Bank and the Company may, in their sole
discretion, increase the maximum purchase
limitation to an amount in excess of $100,000 up
to a maximum of 5% of the shares to be sold in
the Conversion. Similarly, the 2% overall maximum
purchase limitation may be increased up to 5% of
the total shares of Common Stock offered in the
Conversion. See "The Conversion --Limitations on
Common Stock Purchases."
SECURITIES OFFERED AND
PURCHASE PRICE.............. The Company is offering between 504,475 and
682,525 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum of the
Estimated Price Range may be increased by up to
15% and the maximum number of shares of Common
Stock to be issued may be increased up to 784,904
shares due to regulatory considerations and
changes in market or
6
<PAGE>
general financial or economic conditions. See
"The Conversion--Stock Pricing" and "--Number of
Shares to be Issued."
APPRAISAL..................... The Purchase Price per share has been fixed at
$10.00. The total number of shares to be issued
in the Conversion is based upon an independent
appraisal prepared by FinPro, dated as of July
22, 1998, and updated on September 8, 1998, which
states that the estimated aggregate pro forma
market value of the Common Stock ranged from $5.0
million, $5.9 million, $6.8 million and $7.8
million at the minimum, midpoint, maximum and
supermaximum of the Estimated Price Range,
respectively. The appraisal of FinPro will be
further updated on a date near to the
consummation of the Conversion. The final
aggregate value and total number of shares issued
will be determined at the time of closing of the
Offerings based on such updated appraisal and is
subject to change due to changing market
conditions and other factors. For its services,
FinPro will receive a fee of $21,500. See "The
Conversion--Stock Pricing."
USE OF PROCEEDS............... The Company will use 50% of the net proceeds of
the Offerings to purchase all of the outstanding
common stock of the Bank. Net proceeds retained
by the Company will be used for general business
activities, including the formation and
capitalization of a wholly-owned subsidiary of
the Company, organized under the laws of
Massachusetts (the "ESOP Loan Subsidiary"), which
subsidiary intends to loan funds to the ESOP to
enable the ESOP to purchase up to 8% of the stock
issued in connection with the Conversion,
including shares issued to the Foundation. The
Company intends to initially invest the remaining
net proceeds in a deposit account in the Bank.
The Bank intends to utilize net proceeds for
general business purposes, including investments
in loans, the repayment of Federal Home Loan Bank
("FHLB") advances and investment in federal funds
and mortgage-backed securities. In addition and
consistent with its current expansion strategy,
the Bank is actively pursuing establishing a de
novo branch location and relocation of its
administrative offices and has budgeted
approximately $1.5 million for those purposes.
Accordingly, the Company and the Bank may utilize
a portion of net proceeds in connection with its
branching activities. See "Use of Proceeds."
DIVIDEND POLICY............... Upon Conversion, the Board of Directors of the
Company will have the authority to declare
dividends on the Common Stock, subject to
statutory and regulatory requirements. Under the
current dividend policy, the Company does not
expect to pay cash dividends on the Common Stock
during the two years following the Conversion and
may pay dividends thereafter depending on the
financial condition of the Company and market
conditions. See "Dividend Policy."
BENEFITS OF THE CONVERSION TO
MANAGEMENT................... Among the benefits to the Bank and the Company
anticipated from the Conversion is the ability to
attract and retain personnel through the use of
stock options and other stock related benefit
programs. Subsequent to the Conversion, the
Company intends to adopt a Stock-Based Incentive
Plan for the benefit of directors, officers and
employees. If the Stock-Based Incentive Plan is
adopted within one year after the Conversion,
such plans will be subject to stockholders'
approval at a meeting of stockholders which may
not
7
<PAGE>
be held earlier than six months after the
Conversion. Such stock-based benefit plans will
increase management's voting control of the
Company.
The following table presents the dollar value and
percentage of shares to be issued in the
Offering, including shares issued to the
Foundation, of the shares to be allocated under
the ESOP to all eligible employees over a 10 year
period in accordance with the requirements of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and the proposed stock-
based benefit plan that the Company intends to
adopt within one year of the consummation of the
Conversion, subject to shareholder approval.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES ISSUED,
ESTIMATED INCLUDING
VALUE SHARES ISSUED
OF SHARES (1) TO THE FOUNDATION
------------- -----------------
<S> <C> <C>
Employee Stock Ownership Plan..... $573,320 8.0%
Stock-Based Incentive Plan:
Stock Awards (2)................ $286,660 4.0
Stock Options (3)............... -- 10.0
-------- ----
$859,980 22.0%
======== ====
</TABLE>
--------------------
(1) Assumes shares are allocated to participants
at $10.00 per share and that shares are sold
in the Offering at the maximum of the
Valuation Range.
(2) Any Common Stock awarded under the Stock-
Based Incentive Plan will be awarded at no
cost to the recipients.
(3) Stock options will be granted with an
exercise price equal to the fair market value
of Common Stock on the day of grant.
Recipients of stock options realize value
only in the event of an increase in the price
of the Common Stock following the date of
grant of the stock options.
Additionally, certain officers of the Company and
the Bank will be provided with employment
agreements or change in control agreements which
provide such officers with employment rights
and/or payments upon their termination of service
following a change in control. The Stock-Based
Incentive Plan may also provide participants with
benefits if they are terminated following a
change in control of the Company or the Bank. For
a further description of the Stock-Based
Incentive Plan and employment and change in
control agreements, see "Risk Factors--Anti-
Takeover Provisions Which May Discourage Takeover
Attempts--Employment Contracts and Change in
Control Payments" and "Management of the Bank--
Employment Agreements," "--Change in Control
Agreements" and "--Other Benefit Plans."
VOTING CONTROL OF OFFICERS
AND DIRECTORS............... Directors and executive officers of the Bank and
the Company expect to purchase approximately
12.9%, 11.0%, 9.6% or 8.3% of the shares of
Common Stock, based upon the minimum, midpoint,
maximum and supermaximum of the Estimated Price
Range, including shares issued to the Foundation,
respectively. Assuming the implementation of the
ESOP, the Stock-Based Incentive Plan and shares
purchased directly by directors and executive
officers of the Bank and the Company, directors,
executive officers and employees have the
potential to control the voting of approximately
34.9%, 33.0%, 31.6% or 30.3% of the Common Stock
at the minimum,
8
<PAGE>
midpoint, maximum and supermaximum of the
Estimated Price Range, respectively, including
shares issued to the Foundation. Additionally,
the Foundation will hold Common Stock in an
amount equal to 4.8% of the Common Stock issued
in the Conversion, with such shares of Common
Stock to be voted in the same ratio as all other
shares of the Company's Common Stock. See
"Management of the Bank--Subscriptions of
Executive Officers and Directors," "The
Conversion--Establishment of the Charitable
Foundation," and "Restrictions on Acquisition of
the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and
Bylaws."
EXPIRATION DATE FOR THE
SUBSCRIPTION OFFERING........ The Expiration Date for the Subscription Offering
is 12:00 noon, Eastern Time on November 13, 1998
unless extended by the Bank and the Company and
subject to any applicable regulatory approval.
See "The Conversion-- Subscription Offering and
Subscription Rights."
EXPIRATION DATE FOR THE
DIRECT COMMUNITY OFFERING... The Expiration Date for the Direct Community
Offering is 12:00 noon, Eastern Time on November
13, 1998, unless extended by the Bank and the
Company and subject to any applicable regulatory
approval. See "The Conversion--Direct Community
Offering."
MARKET FOR STOCK.............. As a mutual institution, the Bank has never
issued capital stock and, consequently, there is
no existing market for the Common Stock. The Bank
has requested that Trident Securities undertake
to match offers to buy and offers to sell the
Common Stock, and Trident Securities intends to
list the Common Stock over-the-counter through
the National Daily Quotation Service "Pink Sheet"
published by the National Quotation Bureau, Inc.
NO BOARD RECOMMENDATIONS...... The Bank's Board of Directors and the Company's
Board of Directors are not making any
recommendations to depositors or other potential
investors regarding whether such persons should
purchase the Common Stock. An investment in the
Common Stock must be made pursuant to each
investor's evaluation of his or her best
interests.
STOCK INFORMATION CENTER...... If you have any questions regarding the
Conversion, call the Stock Information Center at
(617) 696-9373.
9
<PAGE>
SELECTED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected financial and other data of the Bank. These
financial data are derived in part from, and should be read in conjunction with,
the Financial Statements of the Bank and Notes thereto presented elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MAY 31, ---------------------------------------------
1998 (1) 1997 1996 1995 1994 1993
----------- --------- ------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.................... $ 63,203 $54,630 $50,778 $43,069 $41,074 $37,863
Loans (2)....................... 47,165 44,451 40,064 32,727 30,080 27,256
Securities (3):
Available for sale........... 4,613 3,023 4,841 5,675 6,913 7,719
Held to maturity............. 2,914 2,979 -- -- -- --
Deposits (4).................... 54,697 42,931 34,224 32,261 31,070 29,148
FHLB advances................... 3,094 6,436 11,605 6,247 5,997 4,635
Surplus......................... 5,098 4,987 4,595 4,398 3,824 3,972
Allowance for possible loan
losses....................... 472 349 322 300 446 785
Non-performing loans (5)........ 65 115 392 52 886 2,436
Non-performing assets (6)....... 65 115 932 1,314 1,613 2,627
</TABLE>
<TABLE>
<CAPTION>
FOR THE
FIVE MONTHS
ENDED MAY 31, FOR THE YEAR ENDED DECEMBER 31,
-------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income............ $1,828 $1,580 $3,856 $3,674 $3,351 $2,916 $3,286
Interest expense........................ 933 807 1,956 1,888 1,622 1,308 1,560
------ ------ ------ ------ ------ ------ ------
Net interest income.................. 895 773 1,900 1,786 1,729 1,608 1,726
Provision (credit) for possible
loan losses.......................... 64 -- (90) 14 70 (203) (9)
------ ------ ------ ------ ------ ------ ------
Net interest income after
provision (credit) for possible
loan losses....................... 831 773 1,990 1,772 1,659 1,811 1,735
Noninterest income...................... 255 167 485 224 242 102 195
Noninterest expense..................... 936 745 1,971 1,753 1,561 1,717 1,420
------ ------ ------ ------ ------ ------ ------
Income before income tax
expense........................... 150 195 504 243 340 196 510
Provision for income taxes.............. 44 58 137 51 30 58 35
------ ------ ------ ------ ------ ------ ------
Net income.............................. $ 106 $ 137 $ 367 $ 192 $ 310 $ 138 $ 475
====== ====== ====== ====== ====== ====== ======
</TABLE>
(Continued on following page)
10
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
FIVE MONTHS ENDED
MAY 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------
1998 (1) 1997 (1) 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL RATIOS AND OTHER
DATA (7):
PERFORMANCE RATIOS:
Return on average assets.......... 0.43% 0.65% 0.72% 0.40% 0.74% 0.36% 1.16%
Return on average surplus......... 5.02 7.05 7.68 4.29 7.55 3.53 12.51
Average surplus to average assets. 8.66 9.22 9.31 9.40 9.85 10.20 9.27
Surplus to total assets at end
of period........................ 8.07 9.21 9.13 9.05 10.21 9.31 10.49
Interest rate spread (8).......... 3.39 3.52 3.49 3.80 3.95 4.01 4.04
Net interest margin (9)........... 3.89 3.92 3.93 4.11 4.38 4.39 4.39
Average interest-earning assets
to average interest-bearing
liabilities.................... 112.35 109.60 110.76 107.18 110.36 110.54 108.93
Total noninterest expense to
average assets................... 3.85 3.54 3.84 3.67 3.73 4.48 3.47
Efficiency ratio (10)............. 81.40 79.30 82.62 87.20 79.17 100.43 73.93
Net interest income to operating
expenses......................... 95.61 103.66 96.42 101.87 110.79 93.66 121.50
REGULATORY CAPITAL RATIOS (11):
Leverage capital.................. 8.63 9.20 9.50 8.90 10.46 9.31 10.49
Total risk-based capital.......... 13.58 15.79 15.40 18.90 17.78 16.18 18.02
ASSET QUALITY RATIOS:
Total non-performing loans (5).... $ 65 $ 106 $ 115 $ 392 $ 52 $ 886 $ 2,436
Real estate owned, net............ -- 141 -- 540 1,262 727 191
Total non-performing assets (6)... 65 247 115 932 1,314 1,613 2,627
Non-performing loans as a
percent of loans (5)(12)......... 0.15% 0.28% 0.28% 1.00% 0.16% 2.90% 8.68%
Non-performing assets as a
percent of total assets (6)...... 0.10 0.48 0.21 1.84 3.05 3.93 6.94
Allowance for possible loan
losses as a percent of
loans (2)(12).................. 1.09 0.94 0.84 0.83 0.92 1.46 2.80
Allowance for possible loan
losses as a percent of total
non-performing loans (2)(5).... 726.15 338.68 303.48 82.14 576.92 50.34 32.22
Net charge-offs (recoveries) as
a percent of loans (12).......... (0.14) (0.10) (0.28) (0.02) 0.83 0.44 0.72
OTHER DATA:
Number of full service banking
offices.......................... 2 2 2 2 1 1 1
</TABLE>
- --------------------
(1) The data presented for the five months ended May 31, 1998 and 1997 was
derived from unaudited financial statements and reflect, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such
interim periods. Interim results at and for the five months ended May 31,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
(2) Loans consist of loans receivable, including loans held for sale, minus the
allowance for possible loan losses and deferred loan fees. The allowance
for possible loan losses at May 31, 1998 and 1997 and December 31, 1997,
1996, 1995, 1994 and 1993 was $472,000, $359,000, $349,000, $322,000,
$300,000, $446,000 and $785,000, respectively.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as of October 31, 1993.
(4) Deposits include core deposit accounts (savings, negotiable order of
withdrawal ("NOW"), money market and noninterest-bearing checking
accounts), certificate of deposit accounts and mortgagors' escrow accounts.
(5) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Bank's policy to generally cease
accruing interest on all loans 90 days or more past due. See "Business of
the Bank--Delinquent Loans, Classified Assets and Real Estate Owned ."
(6) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO").
(7) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. Performance ratios are based on average monthly balances during the
indicated periods and annualized performance results.
(8) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(9) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(10) The efficiency ratio represents the ratio of non-interest expense divided
by the sum of net interest income and non-interest income.
(11) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--Federal Regulations-
-Capital Requirements." See "Regulatory Capital Compliance" for the Bank's
pro forma capital levels as a result of the Offerings.
(12) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
11
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Common Stock being offered.
LOW RETURN ON EQUITY FOLLOWING THE CONVERSION WHICH MAY NEGATIVELY INFLUENCE
MARKET PRICE AND LIQUIDITY
At May 31, 1998, the Bank's ratio of surplus to total assets was 8.07%.
The Company's equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of May 31, 1998, assuming the sale of
Common Stock at the midpoint of the Estimated Price Range, the Company's ratio
of stockholders' equity to total assets would have been 14.5%. The Company's
ability to deploy this new capital through investments in interest-earning
assets, such as loans and securities, which bear rates of return comparable to
its current investments, will be significantly affected by industry competition
for such investments. The Company currently anticipates that it will take time
to prudently deploy such new capital. As a result, the Company's return on
equity initially is expected to be below its historical return on equity and may
be below peer group institutions after the Conversion. Additionally, due to the
Bank's planned expansion activities and the implementation of stock-based
benefit plans such as the ESOP and the Stock-Based Incentive Plan, the Company's
future expenses will be increased, thereby, adversely affecting its net income
and return on equity. For the five months ended May 31, 1998, the Bank's
average return on equity was 5.02%. Based on data prepared by the FDIC, the
average return on equity for all Massachusetts savings institutions under $100
million was 7.94% for the quarter ended March 31, 1998. While the Company
anticipates that its average return on equity may improve and may approach
industry or peer averages in the future, no assurances can be made that the
Company will be able to generate a return on equity which approaches the level
of the industry or its peers.
WEAKNESS OF REGIONAL AND LOCAL ECONOMY
Economic conditions at the local and national levels, as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, significantly affect the operations of financial institutions such as
the Bank. The New England region of the United States, including the greater
Boston metropolitan area (the Bank's primary market area) experienced a
significant economic decline beginning approximately in 1988. This decline
adversely affected employment levels, the real estate markets and the financial
services industry in the Bank's market area. Over the past decade, due
primarily to the reduction in manufacturing jobs in Eastern Massachusetts, the
Bank's primary market area has generally experienced higher unemployment rates
than national averages and the levels experienced by the Commonwealth of
Massachusetts as a whole. As of September 1998, the unemployment rate for
Massachusetts was 4.34% as compared to the national level of 4.06%. The median
household income for the Boston metropolitan area was $36,952 as compared to the
national level of $30,056. As a result of the decline in the regional economy,
delinquencies increased and the underlying values of properties located in the
Bank's primary market area declined from the values experienced in the late
1980s. The effects of the economic downturn were especially pronounced in the
commercial real estate and condominium markets, where prices declined
substantially in many cases. The declining rental market and decrease in market
values of properties in turn adversely affected the ability of borrowers to
repay or refinance their commercial real estate and construction loans.
Additionally, numerous failures of financial institutions operating in the New
England region resulted in the placement of commercial and residential
properties into the hands of federal liquidators, contributing to the oversupply
of properties available-for-sale and also contributed to a further decline of
real estate prices. The economic conditions affecting the Bank's primary market
area also resulted in reduced loan demand and increased competition for the
existing lower level of loan demand.
During the past few years there has been improvement in the economies and
real estate markets of many New England areas, particularly in and around the
greater Boston metropolitan area, and the market values of residential and
commercial properties in those areas have stabilized and, strengthened to a
level which, in some areas, approaches the market values existing before the
downturn in the late 1980s. A slowdown in the recovery of the Bank's primary
market area or downturn in the local and regional economy or real estate market
could adversely affect the financial condition and results of operations of the
Company and Bank in the future.
12
<PAGE>
INCREASED LENDING RISKS ASSOCIATED WITH MULTI-FAMILY REAL ESTATE, COMMERCIAL
REAL ESTATE, CONSTRUCTION AND LIMITED DOCUMENTATION LENDING
Although the Bank's level of multi-family real estate, commercial real
estate and construction lending has historically been relatively modest in
comparison to its traditional one- to four-family residential lending, the Bank
intends to increase its emphasis on multi-family, commercial real estate and
construction lending. At May 31, 1998, the Bank's multi-family, commercial real
estate and construction loan portfolios totalled $8.9 million, or 18.6%, of
total loans. Of this amount, $2.6 million, or 5.5%, consisted of multi-family
loans, $1.6 million, or 3.4%, consisted of commercial real estate loans and $4.6
million, or 9.7%, consisted of advanced construction loans. Multi-family and
commercial real estate loans are generally viewed as exposing the lender to
greater credit risk than one- to four-family residential loans and typically
involve higher loan principal amounts. Repayment of multi-family and commercial
real estate loans generally is dependent, in large part, on sufficient income
from the property to cover operating expenses and debt service. Although multi-
family and commercial real estate values have stabilized in recent periods, the
decline in real estate values experienced in the Bank's primary market area in
the late 1980s and early 1990s was more pronounced with respect to multi-family
and commercial real estate properties than with one- to four-family residential
properties. Economic events and government regulations, which are outside the
control of the borrower or lender, could impact the value of the property
securing the loan or the future cash flow of the affected properties. See "--
Weakness of Regional and Local Economy" and "Business of the Bank--Lending
Activities."
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate,
and is generally considered to be the riskiest form of real estate lending.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction
and other assumptions, including the estimated time to sell residential
properties. Unforeseen problems may occur during the construction and
development which may increase the cost to the borrower and, result in the
borrower's inability to complete construction. Additionally, unanticipated
delays may jeopardize the availability or terms of permanent financing and may
also affect the ability of the Bank to realize an acceptable return on the
investment as a result of changed economic conditions and lowered demand for the
completed property. Moreover, if the estimated value of the property proves to
be inaccurate, the Bank may be confronted with having a loan secured by a
property, which when completed, has a value insufficient to assure full
repayment.
The Bank also makes real estate loans which are underwritten utilizing more
limited documentation; placing primary reliance upon a borrower's level of
equity in the property securing the loan or level of downpayment. In this
regard, the Bank does not require the independent verification of income and
employment records. When underwriting these loans the Bank does, however,
require and rely upon a satisfactory credit history and executed tax returns.
These limited documentation, or "Low Doc", loans are generally secured by owner-
occupied one- to four-family properties and are offered with both fixed and
adjustable rates of interest. Low Doc loans involve a higher degree of risk as
there is limited verified knowledge of the borrower's level of income or ability
to service the indebtedness which, in turn, may result in higher rates of
defaults. In recognition of the increased risks associated with Low Doc loans,
the Bank requires that borrowers pay a premium in the form of higher interest
rates and loan fees and provide larger down payments (75% maximum loan-to-value
ratio) in exchange for more expedient loan processing by virtue of less income
and asset information. As of May 31, 1998, Low Doc loans totalled $1.7 million,
or 3.6% of the Bank's total loans. Low Doc loans have only been offered by the
Bank since March 1998. Accordingly, no assurances can be given that the demand
for such loans will continue in the future or that the origination of such loans
will continue to increase at the current volume.
As a consequence of the Bank's increased emphasis on and increased
investment in multi-family, commercial real estate and construction loans and
the growth of the Bank's Low Doc loan portfolio, the Bank may determine it
necessary to increase the level of its provision for possible loan losses over
that experienced in past years. Such additional or increased provisions for
possible loan losses would adversely affect the Bank's net income. Management
believes that the current allowance for possible loan losses is adequate at May
31, 1998. See "Business of the Bank--Allowance for Possible Loan Losses."
13
<PAGE>
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the year 2000. While
the Bank maintains an internal computer system for certain operating functions,
the substantial majority of the Bank's data processing is out-sourced to a third
party vendor. The Bank has adopted a "Year 2000 Policy" and is in the process of
reviewing its internal systems and has reviewed the Year 2000 compliance of its
third party data processing vendor. In connection with such review, the Bank
determined that its current third party data processing vendor is not Year 2000
compliant and, accordingly, has formally agreed to engage a new third party data
processing vendor. Such new third party vendor has provided the Bank with
written assurances that the system and the software which it is licensed to use
are Year 2000 compliant. The Bank's new third party data processor has begun to
test the integration of the system with its licensed software to ensure that the
integrated system will be Year 2000 compliant, together, and expects to achieve
such compliance by February 1999, at which time the Bank expects to begin
utilizing such third party vendor's services.
The Bank's operations may also be affected by the Year 2000 compliance of
its significant customers, suppliers and other vendors. The Bank has initiated
communications with its significant customers to make them aware of the Year
2000 issue. Given the composition of the Bank's loan portfolio, which consists
primarily of loans on residential and mixed use properties whose cash flows
depended on payments of leases by tenants that are unlikely to be materially
affected by Year 2000 issues, the Bank does not believe that it has a material
amount of loans to individuals or entities that are susceptible to Year 2000
issues such that their noncompliance with Year 2000 issues will materially
affect their ability to repay such loans. In addition, the Bank has begun the
process of requesting information related to the Year 2000 compliance of its
significant suppliers and other vendors. However, the Bank does not currently
have complete information concerning the compliance status of its significant
suppliers and other vendors. In the event that any of the Bank's significant
customers and suppliers do not successfully achieve Year 2000 compliance in a
timely manner, the Bank's business or operations could be adversely affected. If
significant suppliers fail to meet Year 2000 operating requirements, the Bank
intends to engage alternative suppliers.
The Bank is currently engaging in an upgrade of its technology systems in
addition to implementing its Year 2000 policy. The Bank has budgeted
approximately $200,000 in connection with the future costs associated with
achieving Year 2000 compliance and its related technology systems upgrade. To
date, the Bank has expended approximately $54,000 on Year 2000 issues and
related technology updates. Material costs, if any, that may arise from the
failure to achieve Year 2000 compliance by either the Bank's third party data
processing vendor, its significant customers, or its significant suppliers and
other vendors is not currently determinable. In the event that the Bank's
progress towards becoming Year 2000 complaint is deemed inadequate, regulatory
action may be undertaken.
SENSITIVITY TO CHANGES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the Bank's results of operations and
financial condition are largely dependent on movements in market interest rates
and its ability to manage its assets and liabilities in response to such
movements.
At May 31, 1998, the Bank's total interest-bearing liabilities maturing or
repricing within one year were less than its total interest-earning assets
maturing or repricing in the same time period by $5.1 million, representing a
cumulative one-year interest sensitivity gap as a percentage of total assets of
7.99%. Therefore, the yield on interest-earning assets of the Bank may adjust
to changes in interest rates faster than the cost of the Bank's interest-bearing
liabilities and the Bank's net income may be adversely affected during periods
of declining interest rates. Increases in interest rates also could adversely
affect the type (fixed-rate or adjustable-rate) and amount of loans originated
by the Bank and the average life of loans and securities which, in turn, could
adversely impact the yields earned on the Bank's loan and securities portfolios
as well as the amount of secondary market activity in which the Bank engages.
The Bank has historically managed its interest rate risk by generally selling
all fixed-rate one- to four-family loans, emphasizing the origination and
retention of adjustable-rate loans and investing in securities with shorter
stated or estimated maturities. However, the Bank intends to retain certain
one- to four-family fixed-rate loans for its portfolio, based on various
factors, including its asset/liability position and market interest rates. See
"Management's Discussion
14
<PAGE>
and Analysis of Financial Condition and Results of Operations--Management of
Interest Rate Risk and Market Risk Analysis."
Increases in market interest rates would result in an increase in the
interest rates on the Bank's adjustable-rate loans, thereby causing higher loan
payment amounts by the borrowers which, in turn, may result in elevated
delinquencies on such loans. Increases in the level of interest rates may also
adversely affect the value of the Bank's investment and mortgage-backed
securities and other interest-earning assets and, in turn, its results of
operations or surplus. At May 31, 1998, the Bank's securities available-for-
sale had an estimated fair value of $4.6 million, which was $100,000 greater
than the amortized cost of $4.5 million. At the same date, the Bank's
securities held-to-maturity had an estimated fair value of $2.9 million, which
was approximately the same as their amortized cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk and Market Risk Analysis," "Business of Bank--
Lending Activities--One- to Four-Family Lending" and "--Investment Activities."
LIMITED MARKET FOR COMMON STOCK
The Bank is a mutual co-operative bank and, therefore, has never issued
stock. Consequently, as of the date of this Prospectus, no public market exists
for the Common Stock to be issued in the Conversion. The Bank has requested
that Trident Securities undertake to match offers to buy and offers to sell the
Common Stock, and Trident Securities intends to list the Common Stock over-the-
counter through the National Daily Quotation Service "Pink Sheet" published by
the National Quotation Bureau, Inc. However, a liquid public trading market
will depend upon the presence in the market place of both willing buyers and
willing sellers at any given time. Due to the relatively small size of the
offering, it is highly improbable that a stockholder base sufficiently large to
create an active trading market will develop and be maintained. THEREFORE, A
PURCHASER OF THE COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND
SHOULD RECOGNIZE THAT THE ABSENCE OF AN ACTIVE TRADING MARKET MAY MAKE IT
DIFFICULT TO SELL THE COMMON STOCK AFTER THE CONVERSION AND THERE CAN BE NO
ASSURANCE THAT THE TRADING PRICE OF THE COMMON STOCK WILL REMAIN AT OR ABOVE THE
INITIAL PURCHASE PRICE. IN ADDITION, THE AMOUNT SPENT BY A PURCHASER FOR COMMON
STOCK IS AN INVESTMENT IN SECURITIES, AND IS NOT OF AN INSURABLE TYPE.
THEREFORE, A PURCHASER COULD SUSTAIN A LOSS OF THE PRINCIPAL OF HIS OR HER
INVESTMENT.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Bank's primary market area,
the greater Boston metropolitan area, is a highly competitive market for
financial services. The Bank faces direct competition from a significant number
of financial institutions operating in its market area, many with a state-wide
or regional presence and, in some cases, a national presence. This competition
arises from commercial banks, savings banks, other co-operative banks, mortgage
brokers, mortgage banking companies, credit unions and other providers of
financial services, many of which are significantly larger than the Bank and,
therefore, have greater financial and marketing resources than those of the
Bank. In addition, the Bank has experienced significant competition from credit
unions in all areas within its primary market area, some of which are
significant in asset size. Federal and state credit unions have a significant
competitive advantage over banks and savings institutions as they do not pay
income taxes. This advantage, which is unique to credit unions, places
significant competitive pressure on the Bank's loan and deposit pricing
policies, which directly affects the Bank's profitability. See "Business of the
Bank--Market Area and Competition."
EFFECTS OF THE ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides that
the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. The contribution of
Common Stock to the Foundation will be dilutive to the interests of stockholders
and will have an adverse impact on the reported earnings of the Company in 1998,
the year in which the Foundation will be funded.
DILUTION OF STOCKHOLDERS' INTERESTS. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to 5% of the
Common Stock to be sold in the Conversion. At the minimum, midpoint, maximum
and supermaximum of the Estimated Price Range, the contribution to the
Foundation would equal
15
<PAGE>
25,225, 29,675, 34,125 and 39,245 shares, with a value of $252,250, $296,750,
$341,250 and $392,450, respectively, based on the Purchase Price of $10.00 per
share. Assuming the sale of Common Stock at the minimum, midpoint, maximum and
supermaximum of the Estimated Price Range and establishment of the Foundation,
the Company will have 529,700, 623,175, 716,650 and 824,149 shares issued and
outstanding of which the Foundation will own 25,225, 29,675, 34,125 and 39,245
shares, or 4.8%, 4.8%, 4.8% and 4.8%, respectively. AS A RESULT, PERSONS
PURCHASING SHARES OF COMMON STOCK IN THE CONVERSION WILL HAVE THEIR OWNERSHIP
AND VOTING INTERESTS IN THE COMPANY DILUTED BY 4.8%, AS COMPARED TO COMPLETING
THE CONVERSION WITHOUT THE FOUNDATION. SEE "PRO FORMA DATA."
IMPACT ON EARNINGS. The contribution of Common Stock to the Foundation
will have an adverse impact on the Company's earnings in the year in which the
contribution is made. The Company will recognize the full expense in the amount
of the contribution of Common Stock to the Foundation in the quarter in which it
occurs, which is expected to be the fourth quarter of 1998. The amount of the
contribution will range from $252,250 to $341,250, based on the minimum and
maximum of the Estimated Price Range. The contribution expense will be
partially offset by the tax benefit related to the contribution. The Company
and the Bank have been advised by their independent tax advisors that the
contribution to the Foundation will be tax deductible, subject to an annual
limitation based on 10% of the Company's annual taxable income before the
charitable contribution deduction. Assuming a contribution of $341,250 in
Common Stock (based on the maximum of the Estimated Price Range), the Company
estimates a net tax effected expense of $232,050 (based upon a 32% tax rate).
If the Foundation had been established at December 31, 1997, the Bank would have
reported a net gain of $134,950 for the year ended December 31, 1997 rather than
reporting net income of $367,000. Management cannot predict earnings for 1998,
but expects that the establishment and funding of the Foundation will have an
adverse impact on the Company's earnings for the year. The contribution to the
Foundation will supplement and therefore lessen the Bank's current charitable
contributions within its community. The Company and the Bank do not currently
anticipate making additional contributions to the Foundation within the first
five years following the initial contribution.
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that the Foundation would qualify as a Section
501(c)(3) exempt organization under the Internal Revenue Code of 1986, as
amended (the "Code"), and would be classified as a private foundation. The
Foundation will submit a request to the Internal Revenue Service ("IRS") to be
recognized as an exempt organization. The Company and the Bank have received an
opinion of their independent tax advisors that the Foundation would qualify as a
Section 501(c)(3) exempt organization under the Code, except that such opinion
does not consider the impact of the regulatory condition agreed to by the
Foundation that Common Stock issued to the Foundation be voted in the same ratio
as all other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. See "The Conversion--Establishment of the
Charitable Foundation." The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the Company
for such stock, subject to an annual limitation based on 10% of the Company's
annual taxable income before the charitable contribution deduction. The
Company, however, would be able to carry forward any unused portion of the
deduction for five years following the contribution. Thus, while the Company
would have received a charitable contribution deduction of approximately $32,000
in 1997 (based upon the sale of stock at the maximum of the Estimated Price
Range and a contribution of $341,250 of Common Stock and the Bank's pre-tax
income for 1997), the Company is permitted under the Code to carryover the
excess contribution in the five following years. Assuming the sale of Common
Stock at the maximum of the Estimated Price Range, the Company estimates that
substantially all of the deduction should be deductible over the six-year
period. Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company will be entitled to the deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's tax benefit related
to the Foundation would have to be fully expensed, resulting in a further
reduction in earnings in the year in which the IRS makes such a determination.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE FOUNDATION IS NOT
ESTABLISHED AS PART OF THE CONVERSION. The establishment of the Foundation was
taken into account by FinPro in determining the estimated pro forma market value
of the Common Stock of the Company. In the event the Bank's Voting Depositors
approve the Plan but not the establishment of the Foundation, the Bank intends
to complete the Conversion without the establishment of the Foundation. For a
discussion of the Foundation and its effect on the Conversion, including if the
Voting Depositors do not approve the establishment of the Foundation, see "The
Conversion--Establishment of the
16
<PAGE>
Charitable Foundation--Regulatory Conditions Imposed on the Foundation." The
aggregate price of the shares of Common Stock being offered in the Subscription
and Direct Community Offerings is based upon the independent appraisal prepared
by FinPro of the estimated pro forma market value of the Common Stock of the
Company. The pro forma aggregate price of the Common Stock being offered for
sale in the Conversion is currently estimated to be $5.0 million, $5.9 million,
$6.8 million and $7.8 million at the minimum, midpoint, maximum and supermaximum
of the Estimated Price Range, respectively. The pro forma price to book ratio
and the pro forma price to earnings ratio, are 63.21% and 15.43x, respectively,
at the midpoint of the Estimated Price Range. In the event that the Conversion
did not include the Foundation, FinPro has estimated that the estimated pro
forma market value of the Common Stock would be $6.5 million at the midpoint
based on a pro forma price to book ratio and a pro forma price to earnings ratio
that are substantially the same as the independent appraisal at 63.21% and
16.67x, respectively. The amount of Common Stock being offered for sale in the
Conversion at the midpoint of the Estimated Price Range is approximately
$565,000 less than the estimated amount of Common Stock that would be offered in
the Conversion without the Foundation based on the estimate provided by FinPro.
Accordingly, certain account holders of the Bank who subscribe to purchase
Common Stock in the Subscription Offering would receive fewer shares depending
on the size of a shareholder's stock order and the amount of his or her
qualifying deposits in the Bank and the overall level of subscriptions. See
"Comparison of Valuation and Pro Forma Information with No Foundation." This
estimate by FinPro was prepared solely for purposes of providing subscribers
with information with which to make an informed decision on the Conversion.
The Bank's regulatory capital is significantly in excess of its regulatory
capital requirements and will further exceed such requirements following the
Conversion. The Bank's leverage and risk-based capital ratios at May 31, 1998
were 8.63% and 13.58%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Price Range, the Bank's pro forma leverage and risk-
based capital ratios at May 31, 1998 would be 11.60% and 17.97%, respectively.
On a consolidated basis, the Company's pro forma stockholders' equity would be
$9.9 million, or approximately 14.51% of pro forma consolidated assets, assuming
the sale of shares at the midpoint of the Estimated Price Range. Pro forma
stockholders' equity per share and pro forma net earnings per share would be
$15.82 and $0.25, respectively. If the Foundation was not being established in
the Conversion, based on the FinPro estimate, the Company's pro forma
stockholders' equity would be approximately $10.3 million, or approximately
15.04% of pro forma consolidated assets at the midpoint of the estimate, and pro
forma stockholders' equity per share and pro forma net earnings per share would
be substantially similar with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion, the
Foundation will own 4.8% of the total shares of the Common Stock outstanding.
Such shares will be owned solely by the Foundation, however, pursuant to a
condition imposed by the FDIC, the shares of Common Stock held by the Foundation
must be voted in the same ratio as all other voted shares of the Company's
Common Stock on all proposals considered by the stockholders of the Company. As
the Foundation's Board of Directors will be comprised initially of members of
the Board of Directors of the Company or the Bank or officers of the Company or
the Bank, in the event that the FDIC waived the voting restriction, management
of the Company and the Bank may benefit to the extent that the Board of
Directors of the Foundation determined to vote the shares of Common Stock held
by the Foundation in favor of proposals supported by the Company and the Bank.
Furthermore, in such an event, when the Foundation's shares are combined with
shares purchased directly by officers and directors of the Company, shares held
by the Stock-Based Incentive Plan trust, and shares held by the ESOP trust, the
aggregate of such shares could exceed 20% of the Company's outstanding Common
Stock, which could enable management to defeat stockholder proposals requiring
80% approval. Consequently, such potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management.
The establishment of the Foundation is subject to the approval of the
Bank's Voting Depositors.
ANTI-TAKEOVER PROVISIONS WHICH MAY DISCOURAGE TAKEOVER ATTEMPTS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Charter and
Bylaws, as well as certain federal and state regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings of shareholders, limits on the ability to vote Common Stock
in excess of 10% of outstanding shares, and certain uniform price provisions
17
<PAGE>
for certain business combinations. The Code of Massachusetts Regulations and the
Bank's Charter prohibit, for a period of three years following the date of
conversion, offers to acquire or the acquisition of beneficial ownership of more
than 10% of the outstanding stock of the Bank. Any person, or group acting in
concert, violating this restriction may not vote the Bank's or the Company's
securities in excess of 10%. These provisions in the Bank's and the Company's
governing instruments may discourage potential proxy contests and other
potential takeover attempts, particularly those which have not been negotiated
with the Board of Directors and, thus, generally may serve to perpetuate current
management. See "Restrictions on Acquisition of the Company and the Bank."
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Bank and the Company expect to purchase approximately 12.9%, 11.0%, 9.6%
or 8.3% of the shares of Common Stock to be sold in the Conversion, based upon
the minimum, midpoint, maximum and supermaximum of the Estimated Price Range,
respectively, exclusive of shares that may be attributable to directors and
officers through the Stock-Based Incentive Plan and the ESOP, which such plans
may give directors, executive officers and employees the potential to control
the voting of approximately 34.9%, 33.0%, 31.6% and 30.3% of the Common Stock at
the maximum of the Estimated Price Range. Additionally, the Foundation will hold
Common Stock in an amount equal to 4.8% of the Common Stock issued in the
Conversion. However, pursuant to voting restrictions imposed by the FDIC, such
Common Stock must be voted in the same ratio as all other voted shares of Common
Stock. In the event an unconditional waiver was granted by the FDIC, such
shares would be voted as determined by the Board of Directors of the Foundation
which will initially be comprised of Directors of the Bank or the Company or
Officers of the Bank or the Company. Management's potential voting control
could, together with additional stockholder support, defeat stockholder
proposals requiring 80% approval of stockholders. As a result, this potential
voting control may preclude takeover attempts that certain stockholders deem to
be in their best interest and may tend to perpetuate existing management. See
"The Conversion--Establishment of the Charitable Foundation," and "Restrictions
on Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws"
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL PROVISIONS. The Company and the
Bank intend to enter into employment or change in control agreements with
certain officers of the Bank and the Company which will provide for benefits and
cash payments in the event of their termination following a change in control of
the Company or the Bank. These agreements may have the effect of increasing the
cost of acquiring the Company or the Bank, thereby discouraging future attempts
to take over the Company or the Bank. Additionally, the Bank intends to adopt
an employee severance compensation plan, which similarly provides a cash payment
and benefits to eligible employees upon such employees' termination following a
change in control of the Company or Bank, also may have the effect of increasing
the cost of acquiring the Company or Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms of
the employment agreements, change in control agreements and the employee
severance compensation plan would be approximately $883,000. However, the
actual amount to be paid in the event of a change in control of the Bank or the
Company cannot be estimated at this time because the actual amount is based on
the average salary of the employees and other factors existing at the time of
the change in control. See "Management of the Bank--Employment Agreements," "--
Change in Control Agreements," "--Employee Severance Compensation Plan," "--
Other Benefit Plans--Stock-Based Incentive Plan" and "Restrictions on
Acquisition of the Company and the Bank--Restrictions in the Company's
Certificate of Incorporation and Bylaws,"
POSSIBLE DILUTIVE EFFECT OF STOCK-BASED INCENTIVE PLAN
STOCK-BASED INCENTIVE PLAN. The Company intends to adopt a Stock-Based
Incentive Plan which would provide for the granting of options to purchase
common stock ("Stock Options"), awards of common stock ("Stock Awards"), and
certain related rights to eligible officers, employees and directors of the
Company and Bank. While the Company currently anticipates granting Stock
Options and Stock Awards under a single plan, it may establish separate plans to
provide for such awards. In the event such plan is adopted within one year
after the Conversion, applicable regulations require the plan to be approved by
stockholders at a meeting of stockholders which may be held no earlier than six
months after completion of the Conversion. It is anticipated the Stock-Based
Incentive Plan will provide for the granting of options to purchase shares of
Common Stock equal to 10% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (52,970, 62,318, 71,665
and 82,415 shares at the minimum, midpoint, maximum and supermaximum of the
Estimated Price Range, respectively). The exercise of such Stock Options may be
satisfied by the issuance of authorized but unissued shares. Under certain
circumstances, such options may be exercised and sold on the same day, thereby
eliminating any risk to officers and directors in exercising options in the
event that the market price exceeds the exercise price. If all of the Stock
Options were to be exercised using authorized but unissued Common Stock the
voting interests of existing stockholders at that
18
<PAGE>
time would be diluted by 9.1%. The Stock-Based Incentive Plan will also provide
for the granting of Stock Awards in an amount equal to 4% of the shares of
Common Stock issued in the Conversion, including shares issued to the Foundation
(21,188, 24,927, 28,666 and 32,966 shares at the minimum, midpoint, maximum and
supermaximum of the Estimated Price Range, respectively). If the Stock-Based
Incentive Plan is funded by the issuance of authorized but unissued shares, the
voting interests of existing stockholders at that time will be diluted by 3.8%.
Shares of common stock used to satisfy Stock Awards will be acquired by the Plan
or a trust established for the Plan either through open market purchases or from
authorized but unissued Common Stock. See "Management of the Bank--Other Benefit
Plans--Stock-Based Incentive Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of FinPro that subscription rights granted
to Eligible Account Holders have no value. However, this opinion is not binding
on the IRS. If the subscription rights granted to Eligible Account Holders or
Supplemental Eligible Account Holders are deemed to have an ascertainable value,
such recipients could be taxed upon receipt or exercise of such subscription
rights. Additionally, the Bank could recognize a gain for tax purposes on such
distribution. Whether subscription rights are considered to have ascertainable
value is an inherently factual determination. See "The Conversion--Effects of
Conversion" and "--Tax Aspects."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Direct Community Offerings. In the event that the Estimated
Price Range is so increased, it is expected that the Company will sell up to
784,904 shares of Common Stock at the Purchase Price for an aggregate purchase
price of up to $7.8 million. An increase in the number of shares issued will
decrease a subscriber's pro forma net earnings per share and stockholders'
equity per share and will increase the Company's pro forma consolidated
stockholders' equity and net earnings. Such an increase will also increase the
Purchase Price as a percentage of pro forma stockholders' equity per share and
net earnings per share.
ROLE OF FINANCIAL ADVISOR/BEST EFFORTS OFFERING
The Bank has engaged Trident Securities as a financial and marketing
advisor, and Trident Securities has agreed to use its best efforts to assist the
Bank and the Company in its solicitation of subscriptions and purchase orders
for Common Stock in the Offerings. Trident Securities has not prepared any
report or opinion constituting recommendations or advice to the Bank. In
addition, Trident Securities has expressed no opinion as to the prices at which
Common Stock to be issued in the Offerings may trade. Furthermore, Trident
Securities has not verified the accuracy or completeness of the information
contained in the Prospectus. See "The Conversion--Marketing and Underwriting
Arrangements."
POTENTIAL DELAYS OF CONSUMMATION OF THE CONVERSION
Orders submitted in the Offerings are irrevocable. The Company and the
Bank expect to complete the Conversion within the time periods indicated in this
Prospectus. Nevertheless, it is possible that several factors, including, but
not limited to, a delay in receiving regulatory approval of the final updated
appraisal prepared by FinPro, a delay in processing orders in the event the
Offerings are oversubscribed or other actions taken in connection with the
Conversion could significantly delay the completion of the Conversion.
Subscribers will have no access to subscription funds and/or shares of Common
Stock until the Conversion is completed or terminated. In the event the
Conversion is terminated, subscribers will be refunded their subscription funds,
together with interest at a rate equal to the Bank's interest rate paid on
passbook accounts, or will have their withdrawal authorization terminated. See
"The Conversion."
Additionally, while many savings institutions have established and funded
charitable foundations as part of conversions in the last two years, the
establishment and funding of a charitable foundation as part of a conversion of
a Massachusetts-chartered mutual savings institution to stock form is innovative
and has, to the Bank's knowledge, never been done in the Commonwealth of
Massachusetts. As such, the Foundation may be subject to potential challenges
notwithstanding that the Board of Directors of the Company and the Board of
Directors of the Bank have carefully considered the various factors involved in
the establishment of the Foundation in reaching their determination
19
<PAGE>
to establish the Foundation as part of the Conversion. See "The Conversion--
Establishment of the Charitable Foundation--Purpose of the Foundation." If
challenges were to be instituted seeking to require the Bank to eliminate
establishment of the Foundation in connection with the Conversion, no assurances
can be made that the resolution of such challenges would not result in a delay
in the consummation of the Conversion or that any objecting persons would not be
ultimately successful in obtaining such removal or other relief against the
Company or the Bank. Additionally, if the Company and the Bank are forced to
eliminate the Foundation, the Company may be required to resolicit subscribers
in the Offerings.
MASSACHUSETTS FINCORP, INC.
Massachusetts Fincorp, Inc. is a Delaware corporation recently organized by
the Bank for the purpose of acquiring all of the capital stock of the Bank to be
issued in the Conversion. The Company expects to receive approval from the
Office of Thrift Supervision ("OTS") to become a savings and loan holding
company and, upon completion of the Conversion, will be subject to regulation by
the OTS. See "The Conversion--General" and "Regulation and Supervision--Holding
Company Regulation." Upon consummation of the Conversion, the Company will have
no significant assets other than all of the shares of the Bank's capital stock
acquired in the Conversion and an amount equal to 50% of the net proceeds of the
Conversion, including the loan to the ESOP Loan Subsidiary, and will have no
significant liabilities. The Company intends to use a portion of the net
proceeds it retains to form and capitalize the ESOP Loan Subsidiary which will
loan funds to the ESOP to purchase 8% of the stock issued in connection with the
Conversion, including shares issued to the Foundation. Based on certain
regulatory and market conditions, the Company and the Bank may, however,
alternatively choose to fund the ESOP's stock purchases through a loan by a
third party financial institution. The remaining net proceeds will be used for
general business activities, including the funding of the Stock-Based Incentive
Plan. Initially, net proceeds are expected to be invested by the Company in a
deposit account in the Bank. See "Use of Proceeds." The management of the
Company is set forth under "Management of the Company." Initially, the Company
will neither own nor lease any property, but will instead use the premises,
equipment and furniture of the Bank. At the present time, the Company does not
intend to employ any persons other than certain officers who are currently
officers of the Bank but will utilize the support staff of the Bank from time to
time. Additional employees will be hired as appropriate to the extent the
Company expands its business in the future.
Management believes that the holding company structure will provide
flexibility to diversify its business activities through existing or newly
formed subsidiaries (which subsidiaries could be financial institutions), or
through acquisitions of or mergers with other financial institutions and
financial services related companies. Although there are no current
arrangements, understandings or agreements regarding any such opportunities, the
Company will be in a position after the Conversion, subject to regulatory
limitations and the Company's financial position, to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of the Company are anticipated to be funded by the proceeds to be retained by
the Company, income thereon and through dividends from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, 1442 Dorchester Avenue, Boston, Massachusetts 02122. Its telephone
number is (617) 825-5555.
THE MASSACHUSETTS CO-OPERATIVE BANK
The Bank was originally organized in 1908 as a Massachusetts-chartered
mutual co-operative bank. The Bank's deposit accounts are insured to the
maximum allowable amount by the Bank Insurance Fund ("BIF") of the FDIC and the
Share Insurance Fund. The Bank conducts business from its main office located
in the Dorchester section of Boston, Massachusetts, its other full service
banking office located in East Milton, Massachusetts, and its two loan
origination offices located in Wakefield and Norwell, Massachusetts. At May 31,
1998, the Bank had total assets of $63.2 million, total deposits of $54.7
million, surplus of $5.1 million and had a leverage capital ratio of 8.63% and a
total risk-based capital ratio of 13.58%. The Bank is subject to comprehensive
examination, supervision and regulation by the Commissioner and the FDIC. See
"Regulation and Supervision."
The Bank is a community-oriented savings institution whose principal
business consists of accepting retail deposits from the general public in its
primary deposit market area, consisting of those areas surrounding its full-
service banking offices, and investing those deposits together with funds
generated from operations and borrowings primarily in mortgage loans secured by
one- to four-family residences and, to a lesser extent, multi-family and
20
<PAGE>
commercial real estate loans, construction loans and consumer loans. The Bank
also invests in mortgage-backed securities, securities issued by the U.S.
Government, and other investments permitted by applicable laws and regulations.
Although the Bank originates loans throughout Massachusetts and New Hampshire,
the Bank's primary market area for lending consists of the greater Boston
metropolitan area. See "Business of the Bank."
At May 31, 1998, the Bank's gross loan portfolio totalled $47.7 million, or
75.4% of total assets, of which $38.1 million were one- to four-family
residential mortgage loans, $2.6 million were multi-family real estate loans,
$1.6 million were commercial real estate loans, $4.6 million were construction
loans, $512,000 were home equity lines of credit and $182,000 were consumer
loans, consisting of automobile loans and loans on savings accounts. The Bank
currently originates one- to four-family mortgage loans, generally secured by
properties located in the Bank's primary market area, primarily for sale in the
secondary market, generally retaining for its portfolio all adjustable-rate
mortgage ("ARM") loans and selling all fixed-rate loans. However, the Bank
intends to begin to retain certain one- to four-family fixed-rate loans for its
portfolio based on various factors, including its asset/liability position and
market interest rates. At May 31, 1998, the Bank was servicing $4.7 million of
loans for others which servicing rights were derived from loans sold by the
Bank. See "Business of the Bank."
The Bank's securities investment activities primarily consist of
investments in: (i) mortgage-backed securities, generally consisting of those
guaranteed or issued by Governmental-sponsored and federal agencies such as the
Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and, to a lesser extent, the Government
National Mortgage Association ("Ginnie Mae"); (ii) U.S. Government and agency
obligations; and (iii) corporate equity securities and debt obligations. At May
31, 1998, the Bank's securities portfolio totalled $7.5 million, or 11.9% of
total assets, of which $4.6 million, or 61.3%, was categorized as available-for-
sale. See "Business of the Bank--Investment Activities."
At May 31, 1998, the Bank's deposit accounts totalled $54.7 million, or
94.1% of total liabilities, of which $27.1 million, or 46.6%, were comprised of
passbook saving accounts, retail checking/NOW accounts, money market accounts
and commercial checking accounts (collectively, "core deposits"). In addition
to core deposits, the Bank had $27.6 million of certificate accounts, or 47.5%
of total liabilities, of which $21.2 million were certificates of deposit with
maturities of one year or less and $8.5 million were certificates of deposit
with balances of $100,000 or more ("jumbo deposits"). The Bank also utilizes
advances from the FHLB-Boston as a source of funds. At May 31, 1998, such
advances totalled $3.1 million, or 5.3% of total liabilities. See "Business of
the Bank--Sources of Funds."
The Bank's executive office is located at 1442 Dorchester Avenue, Boston,
Massachusetts 02122. Its telephone number is (617) 825-5555.
MASSACHUSETTS CO-OPERATIVE CHARITABLE FOUNDATION
In furtherance of the Bank's commitment to its local community, the Bank's
Plan of Conversion provides for the establishment of a charitable foundation in
connection with the Conversion. The Plan provides that the Bank and the Company
will create the Massachusetts Co-operative Charitable Foundation, which will be
incorporated under Delaware law as a non-stock corporation. The Foundation will
be funded with shares of Common Stock contributed by the Company, as further
described below. The Company and the Bank believe that the funding of the
Foundation with Common Stock of the Company is a means of establishing a common
bond between the Bank and its community and thereby enables the communities in
which the Bank maintains a banking office to share in the potential growth and
success of the Company over the long term. While the Bank has made charitable
contributions in the past, the Bank has not previously formed a charitable
foundation nor has it made contributions to charitable organizations of the
magnitude of the contribution that will be made to the Foundation in the
Conversion. By further enhancing the Bank's visibility and reputation in its
local community, the Bank believes that the Foundation will enhance the long-
term value of the Bank's community banking franchise. See "The Conversion--
Establishment of the Charitable Foundation--Structure of the Foundation."
The members of the Foundation will be the Board of Directors of the
Foundation. The authority for the affairs of the Foundation will be vested in
the Board of Directors of the Foundation, which initially will be comprised of
existing Directors of the Company or the Bank or officers of the Company or the
Bank, who will receive no fees for serving on the Foundation's Board of
Directors. The Directors of the Foundation will be responsible for establishing
the policies of the Foundation with respect to grants or donations by the
Foundation, consistent with the purposes for which the Foundation was
established. Although no formal policy governing Foundation grants exists
21
<PAGE>
at this time, the Foundation's Board of Directors will adopt such a policy upon
establishment of the Foundation. It is anticipated that the Foundation will make
grants and donations to nonprofit organizations and community groups within the
communities in which the Bank maintains a banking office. The Directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock held by the Foundation.
However, establishment of the Foundation is subject to certain regulatory
conditions, including a requirement that the Common Stock of the Company held by
the Foundation be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company. See
"The Conversion--Establishment of the Charitable Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of authorized
but unissued Common Stock equal to 5% of the Common Stock sold in the Offerings,
or 25,225, 29,675, 34,125 and 39,245 shares at the minimum, midpoint, maximum
and supermaximum, respectively, of the Estimated Price Range, respectively.
Such contribution, once made, will not be recoverable by the Company or the
Bank. Assuming the sale of shares at the maximum of the Estimated Price Range
and the issuance of shares to the Foundation, the Company will have 716,650
shares issued and outstanding, of which the Foundation will own 34,125 shares,
or 4.8%. DUE TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO THE
FOUNDATION, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 4.8%. SEE "PRO FORMA
DATA." The establishment of the Foundation was taken into account in
determining the estimated pro forma market value of the Bank. In the event the
Conversion did not include the Foundation, FinPro has estimated that the pro
forma market value of the Bank would be $6.5 million at the midpoint of the
Estimated Price Range rather than $6.2 million. See "Risk Factors--Effects of
the Establishment of the Charitable Foundation--Comparison of Valuation and
Other Factors Assuming the Foundation is Not Established as Part of the
Conversion" and "Pro Forma Data."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, which is expected
to be offset in part by a corresponding tax benefit, during the quarter in which
the contribution is made, which is expected to be the fourth quarter of 1998.
Such expense will reduce earnings and have a material impact on the Company's
earnings for the fiscal year in which it is made. While management cannot
predict earnings for 1998, it expects that the establishment and funding of the
Foundation will have an adverse impact on the Company's earnings for the year in
which it is made. Assuming a contribution of $341,250 in Common Stock in 1998,
based on the maximum of the Estimated Price Range and assuming a tax rate of
32%, the Company estimates a net tax effected expense of $232,050. If the
Foundation had been established at December 31, 1997, the Bank would have
reported a net gain of $134,950 for the year ended December 31, 1997, rather
than reporting net income of $367,000. For further discussion of the Foundation
and its impact on purchasers in the Conversion, see "Risk Factors--Effects of
the Establishment of the Charitable Foundation," "Pro Forma Data" and "The
Conversion--Establishment of the Charitable Foundation."
The establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form is innovative and has
only been done in a limited number of instances. As such, the establishment of
the Foundation in connection with the Conversion and the Commissioner's approval
and FDIC's non-objection to the Plan of Conversion may be subject to potential
challenges which could result in delays in the Conversion.
22
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At May 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 May 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 the Stock
Awards expected to be acquired by the Stock-Based Incentive Plan are deducted
from pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT MAY 31, 1998 BASED UPON THE SALE AT $10.00 PER SHARE
------------------------------------------------------------------------------------
504,475 SHARES 593,500 SHARES 682,525 SHARES 784,904 SHARES
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF THE OF THE OF THE MAXIMUM OF THE
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
MAY 31, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
---------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
---------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible Assets............ $63,203 --% $64,838 --% $65,162 --% $65,487 --% $65,861 --%
Average Tangible
Assets (3)............... $58,370 --% $60,005 --% $60,329 --% $60,654 --% $61,028 --%
Risk-Weighted Assets....... $40,596 --% $41,413 --% $41,576 --% $41,738 --% $41,925 --%
GAAP Capital (4)........... $ 5,098 8.07% $ 6,733 10.38% $ 7,057 10.83% $ 7,382 11.27% $ 7,756 11.78%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Leverage Capital:
Capital Level (5)........ $ 5,039 8.63% $ 6,674 11.12% $ 6,998 11.60% $ 7,323 12.07% $ 7,697 12.61%
Requirement (6).......... 2,335 4.00 2,400 4.00 2,413 4.00 2,426 4.00 2,441 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................... $ 2,704 4.63% $ 4,274 7.12% $ 4,585 7.60% $ 4,897 8.07% $ 5,256 8.61%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based Capital:
Capital Level (5)(7)..... $ 5,511 13.58% $ 7,146 17.25% $ 7,470 17.97% $ 7,795 18.68% $ 8,169 19.48%
Requirement.............. 3,248 8.00 3,313 8.00 3,326 8.00 3,339 8.00 3,354 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess................... $ 2,263 5.58% $ 3,833 9.25% $ 4,144 9.97% $ 4,456 10.68% $ 4,815 11.48%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial or economic conditions following the commencement of the
Subscription and Direct Community Offerings.
(2) Leverage capital levels are shown as a percentage of average tangible
assets. At May 31, 1998, the Bank had no intangible assets. Risk-based
capital levels are calculated on the basis of a percentage of risk-weighted
assets.
(3) Average tangible assets are for the five month period ended May 31, 1998.
(4) GAAP is defined as Generally Accepted Accounting Principles.
(5) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock. These levels also assume funding
by the Bank of the Stock Awards equal to 4% of the Common Stock issued and
repayment of the Company's loan to the ESOP Loan Subsidiary to enable the
ESOP to purchase 8% of the Common Stock issued, including shares issued to
the Foundation. See "Management of the Bank--Other Benefit Plans" for a
discussion of the Stock-Based Incentive Plan and ESOP.
(6) The current leverage capital requirement for FDIC-insured banks is 3% of
total adjusted assets for FDIC-insured 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 FDIC-insured banks is 4% to 5%. See "Regulation and
Supervision--Federal Regulations--Capital Requirements." The Company will
not be subject to regulatory capital requirements.
(7) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of May 31, 1998.
23
<PAGE>
USE OF PROCEEDS
Although net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is anticipated that net
proceeds from the sale of the Common Stock will be between $4.5 million to $6.3
million (or $7.3 million if the Estimated Price Range is increased by 15%). See
"Pro Forma Data" and "The Conversion--Stock Pricing" as to the assumptions used
to arrive at such amounts. The Company will be unable to utilize any of the net
proceeds of the Offerings until the consummation of the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings. Based on net proceeds of $4.5 million to $6.3 million, the Company
expects to utilize between $2.2 million and $3.1 million of net proceeds to
purchase the common stock of the Bank. Such portion of net proceeds received by
the Bank from the Company will be added to the Bank's general funds which the
Bank currently intends to utilize for general corporate purposes, including
investment in loans and the repayment of FHLB borrowings. Consistent with its
expansion strategy, the Bank is actively pursuing establishing a de novo branch
location. The Bank expects to incur capital expenditures of approximately $1.5
million in connection with the establishment of a de novo branch office and
relocation of its administrative and executive offices. Accordingly, the Bank
and the Company may use a portion of the Conversion proceeds to fund the
establishment of such branch office. The Bank has entered into an agreement to
purchase a building for $975,000 for this purpose and expects to open the
facility in the Spring of 1999, subject to zoning approvals. To the extent that
the Stock-Based Incentive Plan which the Company or the Bank intend to adopt
subsequent to the Conversion is not funded with authorized but unissued common
stock of the Company, the Company or Bank may use net proceeds from the
Conversion to fund the purchase of stock to be awarded under such program. See
"Risk Factors--Anti-Takeover Provisions Which May Discourage Takeover Attempts--
Employment Contracts and Change in Control Payments," "--Possible Dilutive
Effect of Stock-Based Incentive Plan" and "Management of the Bank--Other Benefit
Plans--Stock-Based Incentive Plan." The Bank has not yet determined the
approximate amount of net proceeds to be used for any of the purposes mentioned
above.
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $4.5 million to $6.3
million will be between $2.2 million and $3.1 million) to capitalize the ESOP
Loan Subsidiary which intends to loan funds to the ESOP to enable the ESOP to
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. Based upon the sale of 504,475, 593,500, 682,525, and
784,904 shares at the minimum, midpoint, maximum and supermaximum of the
Estimated Price Range, and the issuance of shares to the Foundation, the amount
of the loan to the ESOP would be $423,760, $498,540 $573,320 or $659,320,
respectively, with a term of 10 years at the prevailing prime rate of interest,
which currently is 8.5%. The Company and Bank may alternatively choose to fund
the ESOP's stock purchases through a loan by a third party financial
institution. See "Management of the Bank--Other Benefit Plans--Employee Stock
Ownership Plan." The remaining net proceeds retained by the Company will
initially be invested in a deposit account at the Bank, which such funds will be
used by the Bank for general business purposes, including investment in loans,
investment-grade debt securities and the repayment of borrowed funds.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of savings associations
and commercial banks or their assets, including those located within the Bank's
market area, or diversification into other banking related businesses. The
Company and the Bank have no current arrangements, understandings or agreements
regarding any such transactions. The Company, upon the Conversion, will be a
unitary savings and loan holding company, which under existing laws would not be
restricted as to the types of business activities in which it may engage. See
"Regulation and Supervision--Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless previously approved, the Company, pursuant
to applicable regulations, may not repurchase any Common Stock in the first year
after conversion. If approval is obtained to repurchase common stock during the
first year after conversion, then such repurchase may not be greater than 5% of
the capital stock issued. Further, the Company may not repurchase any of its
Common Stock if the repurchases would cause the Bank to become
"undercapitalized" within the meaning of the FDIC prompt corrective action
regulation. The Company has no current intention of implementing a stock
repurchase program and any determination to do so in the future will depend on
the financial condition of the Company, market conditions and
24
<PAGE>
satisfaction of any applicable laws or regulations. See "Regulation and
Supervision--Prompt Corrective Regulatory Action."
Based upon facts and circumstances following the Conversion and subject to
applicable regulatory requirements, the Board of Directors may determine to
repurchase stock in the future. Such facts and circumstances may include but
not be limited to: (i) market and economic factors such as the price at which
the stock is trading in the market, the volume of trading, the attractiveness of
other investment alternatives in terms of the rate of return and risk involved
in the investment, the ability to increase the book value and/or earnings per
share of the remaining outstanding shares, and the opportunity to improve the
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Company and its shareholders.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare regular or special dividends on the Common Stock, subject
to statutory and regulatory requirements. Under the current dividend policy of
the Company, the Company does not expect to pay cash dividends during the two
year period following the Conversion and, thereafter, will consider paying cash
dividends. Declarations of dividends by the Board of Directors, if any, will
depend upon a number of factors, including the amount of net proceeds retained
by the Company in the Conversion, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, the Company's
and the Bank's financial condition and results of operations, tax considerations
and general economic conditions. No assurances can be given, however, that any
dividends will be paid or, if commenced, will continue to be paid.
A Massachusetts co-operative bank may only pay dividends on its capital
stock if such payment would not impair the Bank's capital stock and surplus
account. Additionally, the Bank will not be permitted to pay dividends to the
Company on its capital stock if its stockholders' equity would be reduced below
the amount required for the liquidation account. See "The Conversion--
Liquidation Rights."
Unlike the Bank, the Company is not subject to the restrictions imposed by
the Massachusetts Banking Law on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by the Company and
earnings thereon. The Company is subject, however, to the requirements of
Delaware law, which generally limit dividends to an amount equal to the excess
of the net assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
MARKET FOR THE COMMON STOCK
The Bank is a mutual co-operative bank and, therefore, has never issued
stock. Consequently, as of the date of this Prospectus, no public market exists
for the Common Stock to be issued in the Conversion. The Bank has requested
that Trident Securities undertake to match offers to buy and offers to sell the
Common Stock, and Trident Securities intends to list the Common Stock over-the-
counter through the National Daily Quotation Service "Pink Sheet" published by
the National Quotation Bureau, Inc. However, a public trading market will
depend upon the presence in the market place of both willing buyers and willing
sellers at any given time. Due to the relatively small size of the offering, it
is highly improbable that a stockholder base sufficiently large to create an
active trading market will develop and be maintained. THEREFORE, A PURCHASER OF
THE COMMON STOCK SHOULD HAVE A LONG-TERM INVESTMENT INTENT AND SHOULD RECOGNIZE
THAT THE ABSENCE OF AN ACTIVE TRADING MARKET MAY MAKE IT DIFFICULT TO SELL THE
COMMON STOCK AFTER THE CONVERSION AND MAY HAVE AN ADVERSE EFFECT ON THE PRICE OF
THE COMMON STOCK.
Pursuant to the Plan, the Company is required to use its best efforts to
assist a market maker in maintaining a market for the stock and list or quote
such stock on a national or regional exchange. To the extent the Company's
stock qualifies for quotation on the NASDAQ stock market or listing on a
regional or national exchange, the Company will attempt to qualify for such
listing or quotation and encourage and assist a market maker for its stock.
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
May 31, 1998, and the pro forma consolidated capitalization of the Company after
giving effect to the Conversion, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
504,475 593,500 682,525 784,904 SHARES
SHARES SHARES SHARES (15% ABOVE
(MINIMUM OF (MIDPOINT OF (MAXIMUM OF MAXIMUM OF
BANK ESTIMATED ESTIMATED ESTIMATED ESTIMATED
HISTORICAL PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (1)
---------- ------------ ------------ ------------ ---------------
(IN THOUSANDS)
Deposits (2)........................................... $54,697 $ 54,697 $ 54,697 $ 54,697 $54,697
FHLB advances.......................................... 3,094 3,094 3,094 3,094 3,094
------- -------- -------- -------- -------
Total deposits and borrowed funds...................... $57,791 $ 57,791 $ 57,791 $ 57,791 $57,791
======= ======== ======== ======== =======
Stockholders' equity:
Preferred Stock, $.01 par value, 500,000 shares
authorized; none to be issued.................... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value, 2,500,000 shares
authorized; shares to be issued as reflected..... -- 5 6 7 8
Additional paid-in capital (3)...................... -- 4,788 5,705 6,622 7,677
Surplus (4)......................................... 5,038 5,038 5,038 5,038 5,038
Less:
Expense of contributions to Foundation.............. -- (252) (297) (341) (392)
Plus:
Tax effect of contribution to Foundation (5)........ -- 81 95 109 126
Accumulated other comprehensive income.............. 60 60 60 60 60
Less:
Common Stock acquired by the ESOP (6)............... -- (424) (499) (573) (659)
Common Stock acquired by the Stock-Based
Incentive Plan (7)............................... -- (212) (249) (287) (330)
------- -------- -------- -------- -------
Total stockholders' equity............................. $ 5,098 $ 9,084 $ 9,859 $ 10,635 $11,528
======= ======== ======== ======== =======
</TABLE>
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Direct Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals. Amount includes mortgagors'
escrow accounts of $178,000.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of Common Stock to the Foundation at a value of $10.00 per
share. No effect has been given to the issuance of additional shares of
Common Stock pursuant to the Company's Stock-Based Incentive Plan intended
to be adopted by the Company and presented for approval of stockholders at a
meeting of stockholders following the Conversion. The Stock-Based Incentive
Plan would provide the grant of stock options to purchase an amount of
Common Stock equal to 10% of the shares of Common Stock issued in the
Conversion. See "Management of the Bank--Other Benefit Plans--Stock-Based
Incentive Plan."
(4) The surplus of the Bank will be substantially restricted after the
Conversion. See "The Conversion--Liquidation Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 32% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused portion of
the deduction for five years following the year in which the contribution is
made.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP and
the funds used to acquire the ESOP shares will be borrowed from the ESOP
Loan Subsidiary. The Common Stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. See "Management of the Bank--Other
Benefit Plans--Employee Stock Ownership Plan" and "--Stock-Based Incentive
Plan."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock sold in the Conversion and issued to the Foundation
is purchased by the Stock-Based Incentive Plan through open market
purchases. The Common Stock purchased by the Stock-Based Incentive Plan is
reflected as a reduction of stockholder's equity. See "Risk Factors--
Possible Dilutive Effect of Stock-Based Incentive Plan," Footnote 3 to the
tables under "Pro Forma Data" and "Management of the Bank--Other Benefit
Plans--Stock-Based Incentive Plans."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $4.5 million and $6.3 million based upon the
following assumptions: (i) $700,000 will be sold to executive officers,
directors and employees of the Bank and Company, the ESOP will purchase 8% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, and the remaining shares will be sold in the
Subscription and Direct Community Offerings; (ii) Trident Securities will
receive a fee equal to 2.0% of the aggregate Purchase Price of the shares sold
in the Subscription Offering and Direct Community Offering, except that no fee
will be paid with respect to shares purchased by the Employee Plans, including
the ESOP, officers, employees, directors of the Bank and Company and their
associates; (iii) the Company will issue to the Foundation an amount of Common
Stock equal to 5% of the Common Stock sold in the Conversion from authorized but
unissued shares; and (iv) Conversion expenses, excluding the marketing fees paid
to Trident Securities, will be approximately $425,000. Actual Conversion
expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the five months ended
May 31, 1998 and for the year ended December 31, 1997 have been calculated as if
the Common Stock had been sold at the beginning of the respective periods and
the net proceeds had been invested at 5.43% (the one year U.S. Treasury bill
rate as of May 31, 1998). The tables do not reflect the effect of withdrawals
from deposit accounts for the purchase of Common Stock. The pro forma after-tax
yield for the Company and the Bank is assumed to be 3.69% for both the five
months ended May 31, 1998 and the year ended December 31, 1997 (based on an
assumed tax rate of 32%). 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 and the effect of the issuance of shares to the Foundation. 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
Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following tables summarize historical data of the Bank and the
consolidated pro forma data of the Company at or for the five months ended May
31, 1998 and the year ended December 31, 1997, based on the assumptions set
forth above and in the table and should not be used as a basis for projections
of market value of the Common Stock following the Conversion. The tables below
give effect to stock which may be reserved for grant under the Stock-Based
Incentive Plan, which is expected to be adopted by the Company following the
Conversion. See Footnote 3 to the tables and "Management of the Bank--Other
Benefit Plans." No effect has been given in the tables to the possible issuance
of additional shares of Common Stock upon the exercise of Stock Options to be
granted under the Stock-Based Incentive Plan, nor does book value give any
effect to the liquidation account to be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders or, in the event of
liquidation of the Bank, to the tax effect of the bad debt reserve and other
factors. See Footnote 5 to the tables below, "Management of the Bank--Other
Benefit Plans" and "The Conversion--Liquidation Rights." THE FOLLOWING TABLES
ASSUME THAT THE FOUNDATION IS APPROVED AS PART OF THE CONVERSION AND THEREFORE
GIVE EFFECT TO THE ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S
COMMON STOCK TO THE FOUNDATION CONCURRENTLY WITH THE COMPLETION OF THE
CONVERSION. THE VALUATION RANGE TAKES INTO ACCOUNT THE DILUTIVE IMPACT OF THE
ISSUANCE OF SHARES TO THE FOUNDATION.
27
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE FIVE MONTHS ENDED MAY 31, 1998
---------------------------------------------------------------------------
504,475 593,500 682,525 784,904
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.................................... $ 5,045 $ 5,935 $ 6,825 $ 7,849
Plus: Shares issued to the Foundation
(equal to 5% of stock issued in
Conversion)................................ 252 297 341 392
-------- -------- -------- --------
Pro forma market capitalization................... $ 5,297 $ 6,232 $ 7,166 $ 8,241
======== ======== ======== ========
Gross proceeds.................................... $ 5,045 $ 5,935 $ 6,825 $ 7,849
Less: Offering expenses and commissions.......... (504) (521) (537) (556)
-------- -------- -------- --------
Estimated net proceeds............................ 4,541 5,414 6,288 7,293
Less: Common Stock purchased by ESOP............. (424) (499) (573) (659)
Common Stock purchased by
Stock-Based Incentive Plan................... (212) (249) (287) (330)
-------- -------- -------- --------
Estimated net proceeds, as adjusted.............. $ 3,905 $ 4,666 $ 5,428 $ 6,304
======== ======== ======== ========
Net income (1):
Historical....................................... $ 106 $ 106 $ 106 $ 106
Pro forma income on net proceeds, as adjusted.... 60 72 83 97
Less: Pro forma ESOP adjustment (2).............. (12) (14) (16) (19)
Pro forma Stock Based Incentive Plan
adjustment (3)............................. (12) (14) (16) (19)
-------- -------- -------- --------
Pro forma net income....................... $ 142 $ 150 $ 157 $ 165
======== ======== ======== ========
Per share net income (1):
Historical....................................... $ 0.22 $ 0.18 $ 0.16 $ 0.14
Pro forma income on net proceeds, as adjusted.... 0.12 0.13 0.13 0.13
Less: Pro forma ESOP adjustment (2).............. (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Based Incentive Plan
adjustment (3)............................. (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net income per share............. $ 0.30 $ 0.27 $ 0.25 $ 0.23
======== ======== ======== ========
Stockholders' equity:
Historical....................................... $ 5,098 $ 5,098 $ 5,098 $ 5,098
Estimated net proceeds........................... 4,541 5,414 6,288 7,293
Plus: Tax benefit of Foundation (1)............. 81 95 109 126
Less: Common Stock acquired by ESOP (2)......... (424) (499) (573) (659)
Less: Common Stock acquired
by Stock-Based Incentive Plan (3)........... (212) (249) (287) (330)
-------- -------- -------- --------
Pro forma stockholders' equity (3)(4)(5)....... $ 9,084 $ 9,859 $ 10,635 $ 11,528
======== ======== ======== ========
Stockholders' equity per share (3)(6):
Historical....................................... $ 9.62 $ 8.18 $ 7.11 $ 6.19
Estimated net proceeds........................... 8.57 8.69 8.77 8.85
Plus: Tax benefit of Foundation................. 0.15 0.15 0.15 0.15
Less: Common Stock acquired by ESOP (2)......... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by
Stock Based Incentive Plan (3).............. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity
per share (3)(4)(5)........................... $ 17.14 $ 15.82 $ 14.83 $ 13.99
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share.................. 58.34% 63.21% 67.43% 71.48%
Offering price to pro forma net
earnings per share (8)........................... 13.89x 15.43x 16.67x 18.12x
</TABLE>
(See footnotes on next page)
28
<PAGE>
- ---------------------
(1) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. The tax benefits
related to the contribution are subject to an annual limitation based on 10%
of the Company's annual taxable income before the charitable contribution
deduction. The Company, however, may only carry forward any unused
deduction for five years following the contribution. In that event, the
Company will recognize an after-tax expense (assuming a 32% tax rate) for
the amount of the contribution to the Foundation which is expected to be
$171,000, $202,000, $232,000 and $267,000 at the minimum, midpoint, maximum
and maximum as adjusted, of the Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
ESOP Loan Subsidiary, a wholly owned subsidiary of the Company and the pro
forma ESOP amortized expenses are presented net of taxes using an effective
combined federal and state income tax rate of 32%. See "Use of Proceeds."
The ESOP Loan Subsidiary will be formed and capitalized by the Company in
connection with the consummation of the Conversion. The amount to be
borrowed is reflected as a reduction of stockholders' equity. The Bank
intends to make annual contributions to the ESOP in an amount at least equal
to the principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 10 equal annual installments
of principal, with an assumed interest rate at 8.5%. The pro forma net
earnings assumes: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the five months ended May 31,
1998, and was made at the end of the period; (ii) that 1,766, 2,077,2,389,
and 2,747 shares at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, were committed to be released during the five
months ended May 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--Other
Benefit Plans--Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-Based
Incentive Plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. For
purposes of this table, the pro forma Stock-Based Incentive Plan amortized
expenses are presented net of taxes using an effective combined federal and
state income tax rate of 32%. If the Stock-Based Incentive Plan is approved
by stockholders, the Stock-Based Incentive Plan intends to acquire an amount
of Common Stock equal to 4% of the shares of Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 21,188, 24,927, 28,666 and 32,966 shares of Common Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. In calculating the pro forma effect of the Stock-Based
Incentive Plan, it is assumed that the shares were acquired by the Stock-
Based Incentive Plan at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock-Based Incentive
Plan instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.28, $0.26, $0.23 and $0.21 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $16.49, $15.21, $14.27 and $13.45 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the stockholder approval of
the Stock-Based Incentive Plan will be obtained, or that the actual purchase
price of the shares will be equal to the Purchase Price. See "Management of
the Bank--Other Benefit Plans--Stock-Based Incentive Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock upon the exercise of options to be granted under the Stock-Based
Incentive Plan. An amount equal to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 52,970, 62,318, 71,665 and 82,415 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance of
Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.26, $0.24, $0.21 and $0.20 respectively, and the pro forma
stockholders' equity per share would be $16.50, $15.29, $14.40 and $13.63,
respectively. See "Risk Factors--Possible Dilutive Effect of Stock-Based
Incentive Plan" and "Management of the Bank--Other Benefit Plans--Stock-
Based Incentive Plan."
(5) The surplus of the Bank will continue to be substantially restricted after
the Conversion. See "Dividend Policy" and "The Conversion--Liquidation
Rights."
(6) Stockholders' equity per share data is based upon 489,089, 575,398, 661,708
and 760,964 shares outstanding representing shares sold in the conversion
and shares contributed to the Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Direct Community Offerings.
(8) Based on pro forma net earnings for the five months ended May 31, 1998 that
have been annualized.
29
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------
504,475 593,500 682,525 784,904
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM (MIDPOINT (MAXIMUM (15% ABOVE
OF OF OF MAXIMUM OF
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE) (7)
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds......................................... $ 5,045 $ 5,935 $ 6,825 $ 7,849
Plus: Shares issued to the Foundation (equal to 5%
of stock issued in Conversion).................. 252 297 341 392
-------- -------- -------- --------
Pro forma market capitalization........................ $ 5,297 $ 6,232 $ 7,166 $ 8,241
======== ======== ======== ========
Gross proceeds......................................... $ 5,045 $ 5,935 $ 6,825 $ 7,849
Less: Offering expenses and commissions............... (504) (521) (537) (556)
-------- -------- -------- --------
Estimated net proceeds................................. 4,541 5,414 6,288 7,293
Less: Common Stock purchased by ESOP.................. (424) (499) (573) (659)
Common Stock purchased by
Stock Based Incentive Plan..................... (212) (249) (287) (330)
-------- -------- -------- --------
Estimated net proceeds, as adjusted................... $ 3,905 $ 4,666 $ 5,428 $ 6,304
======== ======== ======== ========
Net income (1):
Historical............................................ $ 367 $ 367 $ 367 $ 367
Pro forma income on net proceeds,
as adjusted..................................... 144 172 200 233
Less: Pro forma ESOP adjustment (2)................... (29) (34) (39) (45)
Pro forma Stock Based Incentive Plan
adjustment (3).................................. (29) (34) (39) (45)
-------- -------- -------- --------
Pro forma net income............................ $ 453 $ 471 $ 489 $ 510
======== ======== ======== ========
Per share net income (1):
Historical............................................ $ 0.75 $ 0.63 $ 0.55 $ 0.48
Pro forma income on net proceeds,
as adjusted.......................................... 0.29 0.30 0.30 0.30
Less: Pro forma ESOP adjustment (2)................... (0.06) (0.06) (0.06) (0.06)
Pro forma Stock Based Incentive Plan
adjustment (3).................................. (0.06) (0.06) (0.06) (0.06)
-------- -------- -------- --------
Pro forma net income per share.................. $ 0.92 $ 0.81 $ 0.73 $ 0.66
======== ======== ======== ========
Stockholders' equity:
Historical............................................ $ 4,987 $ 4,987 $ 4,987 $ 4,987
Estimated net proceeds................................ 4,541 5,414 6,288 7,293
Plus: Tax benefit of Foundation (1).................. 81 95 109 126
Less: Common Stock acquired by ESOP (2).............. (424) (499) (573) (659)
Less: Common Stock acquired
by Stock-Based Incentive Plan (3).............. (212) (249) (287) (330)
-------- -------- -------- --------
Pro forma stockholders' equity (3)(4)(5)............. $ 8,973 $ 9,748 $ 10,524 $ 11,417
======== ======== ======== ========
Stockholders' equity per share (3)(6):
Historical............................................ $ 9.41 $ 8.00 $ 6.96 $ 6.05
Estimated net proceeds................................ 8.57 8.69 8.77 8.85
Plus: Tax benefit of Foundation...................... 0.15 0.15 0.15 0.15
Less: Common Stock acquired by ESOP (2).............. (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by
Stock-Based Incentive Plan (3)................. (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity
per share (3)(4)(5)................................. $ 16.93 $ 15.64 $ 14.68 $ 13.85
======== ======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share........................ 59.07% 63.94% 68.12% 72.20%
Offering price to pro forma net
earnings per share.................................. 10.87x 12.35x 13.70x 15.15x
</TABLE>
(See footnotes on next page)
30
<PAGE>
- --------------------
(1) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. The tax benefits
related to the contribution are subject to an annual limitation based on 10%
of the Company's annual taxable income before the charitable contribution
deduction. The Company, however, may only carry forward any unused
deduction for five years following the contribution. In that event, the
Company will recognize an after-tax expense (assuming a 32% tax rate) for
the amount of the contribution to the Foundation which is expected to be
$171,000, $202,000, $232,000 and $267,000 at the minimum, midpoint, maximum
and maximum as adjusted, of the Estimated Price Range, respectively.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
ESOP Loan Subsidiary, a wholly owned subsidiary of the Company and the pro
forma ESOP amortized expenses are presented net of taxes using an effective
combined federal and state income tax rate of 32%. See "Use of Proceeds."
The ESOP Loan Subsidiary will be formed and capitalized by the Company in
connection with the consummation of the Conversion. The amount to be
borrowed is reflected as a reduction of stockholders' equity. The Bank
intends to make annual contributions to the ESOP in an amount at least equal
to the principal and interest requirement of the debt. The Bank's total
annual payment of the ESOP debt is based upon 10 equal annual installments
of principal, with an assumed interest rate at 8.5%. The pro forma net
earnings assumes: (i) that the Bank's contribution to the ESOP is
equivalent to the debt service requirement for the year ended December 31,
1997, and was made at the end of the period; (ii) that 4,238, 4,985, 5,733,
and 6,593 shares at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, were committed to be released during the year
ended December 31, 1997 at an average fair value of $10.00 per share in
accordance with SOP 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "Management of the Bank--Other Benefit Plans--
Employee Stock Ownership Plan."
(3) Gives effect to the Stock Awards available for grant under the Stock-Based
Incentive Plan expected to be adopted by the Company following the
Conversion and presented for approval at a meeting of stockholders. For
purposes of this table, the pro forma Stock-Based Incentive Plan amortized
expenses are presented net of taxes using an effective combined federal and
state income tax rate of 32%. If the Stock-Based Incentive Plan is approved
by stockholders, the Stock-Based Incentive Plan intends to acquire an amount
of Common Stock equal to 4% of the shares of Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 21,188, 24,927, 28,666 and 32,966 shares of Common Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or from
authorized but unissued shares of Common Stock or treasury stock of the
Company, if any. In calculating the pro forma effect of the Stock-Based
Incentive Plan, it is assumed that the shares were acquired by the Stock-
Based Incentive Plan at the beginning of the period presented in open market
purchases at the Purchase Price and that 20% of the amount contributed was
an amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock-Based Incentive
Plan instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 4.0% and pro forma net earnings per
share would be $0.90, $0.80, $0.72 and $0.65 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $16.29, $15.04, $14.12 and $13.32 at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the stockholder approval of
the Stock-Based Incentive Plan will be obtained, or that the actual purchase
price of the shares will be equal to the Purchase Price. See "Management of
the Bank--Other Benefit Plans--Stock-Based Incentive Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock upon the exercise of options to be granted under the Stock-Based
Incentive Plan. An amount equal to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 52,970, 62,318, 71,665 and 82,415 shares at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock-Based Incentive Plan. The issuance of
Common Stock pursuant to the exercise of options under the Stock-Based
Incentive Plan will result in the dilution of existing stockholders'
interests. Assuming all options were exercised at the end of the period at
an exercise price of $10.00 per share, the pro forma net earnings per share
would be $0.83, $0.74, $0.66 and $0.60 respectively, and the pro forma
stockholders' equity per share would be $16.31, $15.13, $14.26 and $13.50,
respectively. See "Risk Factors--Possible Dilutive Effect of Stock-Based
Incentive Plan" and "Management of the Bank--Other Benefit Plans--Stock-
Based Incentive Plan."
(5) The surplus of the Bank will continue to be substantially restricted after
the Conversion. See "Dividend Policy" and "The Conversion--Liquidation
Rights."
(6) Stockholders' equity per share data is based upon 489,089, 575,398, 661,708
and 760,964 shares outstanding representing shares sold in the conversion
and shares contributed to the Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15% as
a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Direct Community Offerings.
31
<PAGE>
COMPARISON OF VALUATION AND
PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, FinPro has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $6.5 million, at the
midpoint, which is approximately $268,000 greater than the pro forma aggregate
market capitalization of the Company if the Foundation is included, and would
result in approximately a $565,000, or 9.5%, increase, in the amount of Common
Stock offered for sale in the Conversion. The pro forma price to book ratio
would be the same under both the current appraisal and the estimate of the value
of the Company without the Foundation. Further, assuming the midpoint of the
Estimated Price Range, pro forma stockholders' equity per share and pro forma
earnings per share would be approximately the same with the Foundation as
without the Foundation. In this regard, pro forma stockholders' equity and pro
forma net income per share are $15.82 and $0.27, respectively, with the
Foundation, and $15.82 and $0.25, respectively, without the Foundation, at the
midpoint of the estimate. In addition, the pro forma price to book ratio and
the pro forma price to earnings ratio are 63.21% and 15.43x, respectively, with
the Foundation and 63.21% and 16.27%, respectively, without the Foundation, at
the midpoint of the estimate. There is no assurance that in the event the
Foundation was not formed that the appraisal prepared at that time would have
concluded that the pro forma market value of the Company would be the same as
that estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, assuming the Conversion was completed at
May 31, 1998.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
---------------------- ----------------------- ---------------------- ----------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount..... $ 5,045 $ 5,525 $ 5,935 $ 6,500 $ 6,825 $ 7,475 $ 7,849 $ 8,596
Pro forma market
capitalization............... 5,297 5,525 6,232 6,500 7,166 7,475 8,241 8,596
Total assets.................. 67,189 67,551 67,964 68,391 68,740 69,231 69,633 70,197
Total liabilities............. 58,104 58,104 58,104 58,104 58,104 58,104 58,104 58,104
Pro forma stockholders'
equity....................... 9,084 9,446 9,859 10,286 10,635 11,126 11,528 12,092
Pro forma consolidated net
earnings..................... 142 147 150 156 157 165 165 176
Pro forma stockholders'
equity per share............. 17.14 17.10 15.82 15.82 14.83 14.88 13.99 14.07
Pro forma consolidated net
earnings per share........... 0.30 0.28 0.27 0.25 0.25 0.24 0.23 0.23
Pro Forma Pricing Ratios:
Offering price as a
percentage of pro forma
stockholders' equity per
share...................... 58.34% 58.48% 63.21% 63.21% 67.43% 67.20% 71.48% 71.07%
Offering price to pro forma
net earnings per share..... 13.89x 14.88x 15.43x 16.67x 16.67x 17.36x 18.12x 18.12x
Offering price to assets.... 7.88% 8.18% 9.17% 9.50% 10.43% 10.80% 11.84% 12.25%
Pro Forma Financial Ratios:
Return on assets............. 0.51% 0.52% 0.53% 0.55% 0.55% 0.57% 0.57% 0.60%
Return on stockholders'
equity...................... 3.75% 3.73% 3.65% 3.64% 3.54% 3.56% 3.44% 3.49%
Stockholders' equity to
assets...................... 13.52% 13.98% 14.51% 15.04% 15.47% 16.07% 16.56% 17.23%
</TABLE>
32
<PAGE>
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
The following Statements of Income and Comprehensive Income of the Bank for
each of the years in the three year period ended December 31, 1997 have been
audited by Wolf & Company, P.C., independent certified public accountants, whose
report thereon appears elsewhere in this Prospectus. With respect to the
unaudited information for the five months ended May 31, 1998 and 1997, in the
opinion of management, all adjustments necessary for a fair presentation of such
interim periods have been included and are of a normal recurring nature.
Results for the five months ended May 31, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. These
statements should be read in conjunction with the 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>
FIVE MONTHS ENDED
MAY 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans....................... $1,589,482 $1,383,915 $3,359,390 $3,243,577 $2,874,807
Interest and dividends on investments............ 195,261 145,452 370,640 389,638 418,638
Interest on short-term investments............... 15,963 29,367 81,666 6,699 --
Interest on Federal funds sold................... 27,527 20,955 44,585 34,228 57,843
---------- ---------- ---------- -------- ---------
Total interest and dividend income............ 1,828,233 1,579,689 3,856,281 3,674,142 3,351,288
---------- ---------- ---------- ---------- ----------
Interest expense:
Interest on deposits............................. 838,520 618,933 1,583,437 1,248,032 1,258,305
Interest on borrowed funds....................... 95,224 188,368 372,583 640,201 364,037
---------- ---------- ---------- ---------- ----------
Total interest expense........................ 933,744 807,301 1,956,020 1,888,233 1,622,342
---------- ---------- ---------- ---------- ----------
Net interest income................................. 894,489 772,388 1,900,261 1,785,909 1,728,946
Provision (credit) for possible loan losses......... 63,662 -- (90,000) 14,148 70,148
---------- ---------- ---------- ---------- ----------
Net interest income, after provision (credit)
for possible loan losses......................... 830,827 772,388 1,990,261 1,771,761 1,658,798
---------- ---------- ---------- ---------- ----------
Other income:
Customer service fees............................ 65,261 76,211 176,794 143,693 121,268
Loan fees and gain on sale of loans and
loan servicing rights......................... 160,439 73,424 211,724 20,475 86,157
Net gain (loss) on sales of securities available
for sale...................................... 11,454 8,346 42,439 23,798 (3,548)
Co-operative Central Bank Share Insurance Fund
special dividend.............................. -- -- 34,816 31,801 31,301
Miscellaneous.................................... 17,748 9,214 19,316 4,747 7,146
---------- ---------- ---------- ---------- ----------
Total other income............................ 254,902 167,195 485,089 224,514 242,324
---------- ---------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits................... 501,690 434,985 1,115,585 884,717 752,065
Occupancy and equipment.......................... 142,115 113,367 286,250 272,417 178,665
Data processing.................................. 61,600 53,777 135,727 133,196 126,909
Foreclosed real estate, net...................... -- (19,711) (24,991) (35,491) 21,632
Other general and administrative................. 230,171 162,687 458,245 498,278 481,326
---------- ---------- ---------- ---------- ----------
Total operating expenses...................... 935,576 745,105 1,970,816 1,753,117 1,560,597
---------- ---------- ---------- ---------- ----------
Income before income tax provision.................. 150,153 194,478 504,534 243,158 340,525
Income tax provision................................ 44,445 57,566 137,000 51,000 30,000
---------- ---------- ---------- ---------- ----------
Net income.......................................... 105,708 136,912 367,534 192,158 310,525
---------- ---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during
the period.................................. 13,132 13,793 49,842 18,443 261,913
Less: reclassification adjustment for (gains)
losses included in net income............. (6,872) (5,008) (25,463) (14,279) 2,129
---------- ---------- ---------- ---------- ----------
Other comprehensive income, net of tax.............. 6,260 8,785 24,379 4,164 264,042
---------- ---------- ---------- ---------- ----------
Comprehensive income................................ $ 111,968 $ 145,697 $ 391,913 $ 196,322 $ 574,567
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Bank's Financial Statements and notes thereto, each
appearing elsewhere in the Prospectus. In addition to historical information,
the following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements as a result of
certain factors, including those discussed in "Risk Factors" contained elsewhere
in this Prospectus.
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
the Bank's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Bank also generates non-interest income such as service charges
and other fees. The Bank's noninterest expenses primarily consist of employee
compensation and benefits, depreciation and repairs, data processing fees,
office building expenses and other operating expenses. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory agencies. The Bank exceeded all of its regulatory
capital requirements at May 31, 1998. See "Regulatory Capital Compliance" for a
discussion of the historical and pro forma capital of the Bank and capital
requirements. See also "Regulation and Supervision--Federal Regulations--
Capital Requirements."
MANAGEMENT STRATEGY
The Bank's operating strategy has in the past consisted of maintaining
profitability and managing its interest rate risk mainly by originating fixed-
rate one- to four-family mortgage loans primarily for sale, generally on a
servicing released basis, and originating adjustable-rate one- to four-family
mortgage loans for investment. The Bank has also pursued a growth strategy to
broaden the Bank's lending and deposit base through the establishment of a
de novo branch office in 1996 and two loan origination centers in the greater
Boston metropolitan area in 1997 and 1998. The Bank is actively pursuing the
establishment of another de novo branch office. The Bank has made substantial
infrastructure investments recently, including staffing, offices and technology,
to support future growth.
The principal components of the Bank's operating strategy have included:
(1) Enhancing net income by emphasizing loan volume and creating an
infrastructure which can support increased loan volume;
(2) Controlling interest rate risk by retaining adjustable-rate loans and
generally selling fixed-rate one-to four-family loans on a servicing
released basis;
(3) Investing funds not utilized for loan originations, primarily in
shorter-term U.S. Government and agency obligations, mortgage-backed
securities and corporate equity securities and debt obligations;
(4) Placing increased emphasis on attracting retail deposits, including
consumer checking and money market accounts; and
(5) Increasing its loan and deposit market share and retaining existing
deposit accounts by offering competitive rates on its deposit and loan
products and opening new branch offices in and around its primary
market area.
The Bank has recently modified its operating strategy by beginning to
retain certain fixed-rate loans for its portfolio to expand its asset base and
operations. The Bank believes the increased capital base resulting from the
Conversion will allow the Bank to increase its asset base, expand its market
area and increase operating efficiencies.
34
<PAGE>
MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Bank monitors its interest
rate risk as such risk relates to its operating strategies. The Bank's Board of
Directors has established an Asset/Liability Committee, responsible for
reviewing its asset/liability policies and interest rate risk position, which
meets on a quarterly basis and reports trends and interest rate risk position to
the Board of Directors on a quarterly basis. The extent of the movement of
interest rates is an uncertainty that could have a negative impact on the
earnings of the Bank. See "Risk Factors--Sensitivity to Changes in Interest
Rates."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and sale in the secondary
market of fixed-rate mortgage loans; (2) retaining substantially all adjustable-
rate mortgage loans; (3) investing primarily in short-term U.S. Government and
agency obligations or mortgage-backed securities with shorter estimated
maturities; and (4) utilizing FHLB advances to better structure maturities of
its interest rate sensitive liabilities. The Bank currently does not
participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments.
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 said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At May 31, 1998, the Bank's 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
7.99%. 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, the Bank, having a positive gap position, would
be in a better position to invest in higher yielding assets which, consequently,
may result in the yield on its assets increasing at a pace more closely matching
the increase in the cost of interest-bearing liabilities than if it had a
negative gap. During a period of falling interest rates, an institution with a
positive gap would tend to have its assets repricing at a faster rate than one
with a negative gap, which consequently, may tend to restrain the growth of its
net income or result in a decrease in interest income.
35
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at May 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 May 31,
1998, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three month period and subsequent selected
time intervals. For loans on residential properties, adjustable-rate loans, and
fixed-rate loans, actual repricing and maturity dates were used. Mortgage-backed
securities were assumed to prepay at rates between 8.5% and 10.2% annually.
Savings accounts were assumed to decay at 10%, 10%, 10%, 10%, 10% and 50%, money
market savings accounts were assumed to decay at 100%, 0%, 0%, 0%, 0% and 0% and
NOW accounts were assumed to decay at 15%, 15%, 15%, 15%, 15% and 25% for the
periods of one year or less, more than one year to two years, more than two
years to three years, more than three years to four years, more than four years
to five years and more than five years, respectively. Prepayment and deposit
decay rates can have a significant impact on the Bank's estimated gap. While the
Bank believes such assumptions to be reasonable, there can be no assurance that
assumed prepayment rates and decay rates will approximate actual future loan
prepayment and deposit withdrawal activity. See "Business of the Bank--Lending
Activities," "--Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
AT MAY 31, 1998
--------------------------------------------------------------------------------------------
MORE THAN MORE THAN MORE THAN MORE THAN
1 YEAR 1 YEAR TO 2 YEARS TO 3 YEARS TO 4 YEARS TO MORE THAN TOTAL FAIR
OR LESS 2 YEARS 3 YEARS 4 YEARS 5 YEARS 5 YEARS AMOUNT VALUE (5)
------- --------- ---------- ---------- ---------- --------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS (1):
Federal funds sold and short
term investments........... $ 4,032 $ -- $ -- $ -- $ -- $ -- $ 4,032 $ 4,032
Securities.................... 3,560 250 499 538 -- 1,953 6,800 6,801
Mortgage loans, net (2)(3).... 23,464 10,535 6,917 1,805 981 3,335 47,037 46,918
Other......................... 818 41 23 7 2 243 1,134 1,134
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets...................... $31,874 $10,826 $ 7,439 $ 2,350 $ 983 $ 5,531 $59,003 $58,885
======= ======= ======= ======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts.............. $ 957 $ 957 $ 957 $ 957 $ 957 $ 5,056 $ 9,841 $ 9,841
Money market accounts......... 779 -- -- -- -- -- 779 779
NOW accounts.................. 1,761 1,761 1,761 1,761 1,761 2,937 11,742 11,742
Certificates of deposit....... 21,828 5,237 522 33 6 2 27,628 27,670
FHLB advances................. 1,498 -- -- -- -- 1,596 3,094 3,300
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.............. $26,823 $ 7,955 $ 3,240 $ 2,751 $ 2,724 $ 9,591 $53,084 $53,332
======= ======= ======= ======= ======= ======= ======= =======
Interest sensitivity gap (4).. $ 5,051 $ 2,871 $ 4,199 $ (401) $(1,741) $(4,060) $ 5,919 $ 5,553
======= ======= ======= ======= ======= ======= ======= =======
Cumulative interest
sensitivity gap............. $ 5,051 $ 7,922 $12,121 $11,720 $ 9,979 $ 5,919 $ 5,919 $ 5,553
======= ======= ======= ======= ======= ======= ======= =======
Cumulative interest
sensitivity gap as a
percentage of total assets.. 7.99% 12.53% 19.18% 18.54% 15.79% 9.37% 9.37% 8.79%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning assets..... 8.56% 13.43% 20.54% 19.86% 16.91% 10.03% 10.03% 9.43%
Cumulative net interest-
earning assets as a
percentage of cumulative
interest-bearing
liabilities................. 118.83% 122.78% 128.75% 128.75% 122.94% 111.15% 111.15% 110.41%
</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 purposes of the gap analysis, the allowance for possible loan losses and
non-performing loans have been excluded.
(3) Loans held for sale are included in the one year or less category.
(4) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
(5) Fair value of securities, including mortgage-backed securities, is based on
quoted market prices, where available. If quoted market prices are not
available, fair value is based on quoted market prices of comparable
instruments. Fair value of loans is, depending on the type of loan, based
on carrying values or estimates based on discounted cash flow analyses.
Fair value of deposit liabilities are either based on carrying amounts or
estimates based on a discounted cash flow calculation. Fair values for FHLB
advances are estimated using a discounted cash flow analysis that applies
interest rates concurrently being offered on advances of aggregated expected
monthly maturities on FHLB advances.
36
<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 income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
depends on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
37
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Bank at May 31, 1998 and for the five months ended May 31, 1998
and 1997, and for the years ended December 31, 1997, 1996 and 1995. The average
yields and costs are derived by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average monthly balances. The yields and costs
include fees which are considered adjustments to yields. Loans on nonaccrual
status are included in the average balances of loans shown in the table.
Interest earned on loans is net of reserves for uncollected interest.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED MAY 31,
AT MAY 31, -------------------------------------------------------
1998 1998 1997
--------------------------- --------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold and
short-term investments........... $ 4,032 $ 50 2.98% $ 1,947 $ 50 6.16% $ 2,406 $ 51 5.09%
Securities......................... 6,800 164 5.79 6,443 164 6.11 4,294 121 6.76
Mortgage loans, net................ 47,037 1,583 8.08 45,915 1,583 8.27 39,693 1,378 8.33
Other.............................. 1,134 27 5.71 905 27 7.16 929 27 6.98
------- ------ ------- ------ ------- ------
Total interest-earning assets.... 59,003 1,824 7.42 55,210 1,824 7.93 47,322 1,577 8.00
------ ------ ------
Noninterest-earning assets............ 3,473 2,579 2,960
------- ------- -------
Equity securities.................. 727 4 1.32 581 4 1.65 273 3 2.64
------- ------ ------- ------ ------- ------
Total assets..................... $63,203 1,828 $58,370 1,828 $50,555 1,580
======= ------ ======= ------ ======= ------
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Savings accounts................. $ 9,841 $ 80 1.95% $ 9,865 $ 80 1.95% $10,366 $ 104 2.41%
Money market accounts............ 779 10 3.08 889 10 2.70 1,117 12 2.58
NOW accounts..................... 11,742 179 3.66 9,868 179 4.35 4,382 54 2.96
Certificates of deposit.......... 27,628 569 4.94 24,741 569 5.52 19,649 449 5.48
------- ------ ------- ------ ------- ------
Total deposits................... 49,990 838 4.02 45,363 838 4.43 35,514 619 4.18
FHLB advances...................... 3,094 95 7.37 3,778 95 6.03 7,662 188 5.89
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.................... 53,084 933 4.22 49,141 933 4.56 43,176 807 4.49
------ ------ ------
Noninterest-bearing demand
checking accounts.................. 3,987 3,296 2,106
Non interest-bearing liabilities...... 1,034 880 613
------- ------- -------
Total liabilities................ 58,105 53,317 45,895
Total surplus......................... 5,098 5,053 4,660
------- ------- -------
Total liabilities and surplus...... $63,203 $58,370 $50,555
======= ======= =======
Net interest income................... $ 895 $ 895 $ 773
====== ====== ======
Net interest income/interest rate
spread............................. 3.20% 3.37% 3.51%
====== ====== ======
Net interest margin as a percent of
interest-earning assets............ 3.13% 3.89% 3.92%
====== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities....... 111.15% 112.35% 109.60%
====== ====== ======
</TABLE>
38
<PAGE>
AVERAGE BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Federal funds sold and
short-term investments............ $ 2,299 $ 126 5.48% $ 1,024 $ 41 4.00% $ 1,162 $ 58 4.99%
Securities.......................... 4,624 295 6.38 5,137 329 6.40 5,739 354 6.17
Mortgage loans, net................. 40,507 3,342 8.25 36,559 3,227 8.83 32,080 2,861 8.92
Other............................... 925 66 7.14 761 55 7.23 493 42 8.52
------- ------ ------- ------ ------- ------
Total interest-earning assets.... 48,355 3,829 7.92 43,481 3,652 8.40 39,474 3,315 8.40
------ ------ ------
Noninterest-earning assets.......... 2,625 4,082 1,969
------- ------- -------
Equity securities................ 368 27 7.34 151 22 14.57 344 36 10.47
------- ------ ------- ------ ------- ------
Total assets.................. $51,348 3,856 $47,714 3,674 $41,787 3,351
======= ------ ======= ------ ======= ------
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Savings accounts................. $10,328 $ 244 2.36% $ 9,854 $ 240 2.44% $ 9,967 $ 244 2.45%
Money market accounts............ 1,079 28 2.59 1,290 33 2.56 1,532 39 2.55
NOW accounts..................... 5,377 173 3.20 2,612 49 1.88 2,404 45 1.87
Certificates of deposit.......... 20,471 1,138 5.56 16,405 926 5.64 16,690 930 5.57
------- ------ ------- ------ ------- ------
Total deposits................ 37,255 1,583 4.25 30,161 1,248 4.14 30,593 1,258 4.11
FHLB advances.................... 6,402 373 5.83 10,406 640 6.15 5,175 364 7.03
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities.. 43,657 1,956 4.48 40,567 1,888 4.65 35,768 1,622 4.53
------ ------ ------
Noninterest-bearing demand
checking accounts................... 2,255 2,043 1,342
Non interest-bearing liabilities....... 653 620 563
------- ------- -------
Total liabilities................ 46,565 43,230 37,673
Total surplus.......................... 4,783 4,484 4,114
------- ------- -------
Total liabilities and surplus....... $51,348 $47,714 $41,787
======= ======= =======
Net interest income.................... $1,900 $1,786 $1,729
====== ====== ======
Net interest income/interest rate
spread.............................. 3.44% 3.75% 3.87%
====== ====== ======
Net interest margin as a percent of
interest-earning assets............. 3.93% 4.11% 4.38%
====== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities....... 110.76% 107.18% 110.36%
====== ====== ======
</TABLE>
39
<PAGE>
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
COMPARED TO COMPARED TO COMPARED TO
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------- -----------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
------------- -------------- --------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------ ---- ----- ------ ---- ----- ------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
short-term investments..... $(11) $ 10 $ (1) $ 66 $ 19 $ 85 $ (6) $(11) $(17)
Securities.................. 55 (12) 43 (34) -- (34) (38) 13 (25)
Mortgage loans, net......... 215 (10) 205 334 (219) 115 396 (30) 366
Other....................... -- -- -- 10 1 11 21 (8) 13
---- ---- ---- ----- ----- ----- ---- ---- ----
Total interest-earning
assets.................. 259 (12) 247 376 (199) 177 373 (36) 337
---- ---- ---- ----- ----- ----- ---- ---- ----
INTEREST-BEARING
LIABILITIES:
Savings accounts............ (5) (19) (24) 10 (6) 4 (2) (2) (4)
Money market accounts....... (2) -- (2) (5) -- (5) (6) -- (6)
NOW accounts................ 91 34 125 74 50 124 4 -- 4
Certificates of deposit..... 117 3 120 227 (15) 212 (8) 4 (4)
FHLB advances............... (98) 5 (93) (235) (32) (267) 327 (51) 276
---- ---- ---- ----- ----- ----- ---- ---- ----
Total interest-bearing
liabilities............ 103 23 126 71 (3) 68 315 (49) 266
---- ---- ---- ----- ----- ----- ---- ---- ----
Net change in net interest
income (1).................... $156 $(35) $121 $ 305 $(196) $ 109 $ 58 $ 13 $ 71
==== ==== ==== ===== ===== ===== ==== ==== ====
</TABLE>
- --------------------------------------------
(1) Net interest income does not include dividends received on equity
securities.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1998 AND DECEMBER 31, 1997
The Bank's total assets increased $8.6 million, or 15.7%, to $63.2 million
at May 31, 1998 from $54.6 million at December 31, 1997. The increase in assets
was primarily due to increases in cash and cash equivalents, loans, and
securities. Asset growth was primarily attributable to a $4.2 million, or 282%,
growth in cash and cash equivalents from $1.5 million at December 31, 1997 to
$5.7 million at May 31, 1998. Asset growth was also concentrated in loans
and loans held for sale, net, which increased $2.7 million, or 6.1%, to
$47.2 million at May 31, 1998 compared to $44.5 million at December 31, 1997,
primarily due to an increase in construction loans, which increased by
$2.5 million, or 114% and mortgage loans held for sale, which increased by
$1.3 million, or 40.3%. The increase in loans reflects increased marketing
efforts of the Bank to generate these types of loans, as well as a favorable
interest rate environment. Management anticipates that loans will continue to
increase in the future and is currently expanding the Bank's mortgage loan
origination staff in order to accommodate the increase in loans and the Bank's
anticipated increase in the retention of fixed-rate loans.
Securities available for sale increased $1.6 million, or 52.6%, from
$3.0 million at December 31, 1997 to $4.6 million at May 31, 1998. This increase
was primarily due to a $1.5 million increase in U.S. Government and federal
agency securities.
The growth in assets was funded primarily by an increase in deposits of
$11.8 million, or 27.4%, to $54.7 million at May 31, 1998 as compared to
$42.9 million at December 31, 1997. Certificate of deposit accounts increased
$5.9 million, or 27.2%, primarily due to increased deposit accounts resulting
primarily from the promotion
40
<PAGE>
of new competitively priced deposit products and continuing deposit growth from
the branch office which opened in 1996. Interest-bearing checking and demand
deposit accounts increased $6.1 million, or 59.4%, due to the promotion of a
competitively priced tiered rate checking account for retail customers. Deposit
increases were utilized to repay $3.3 million in FHLB advances.
Nonperforming assets totalled $65,000 at May 31, 1998 as compared to
$115,000 at December 31, 1997, a decrease of $50,000, or 43.5%. Surplus
increased $111,000 from $5.0 million, or 9.1% of total assets at December 31,
1997, to $5.1 million, or 8.1% of total assets at May 31, 1998. The increase in
surplus was due to net income during the five month period ended May 31, 1998.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
The Bank's total assets increased $3.9 million, or 7.6%, to $54.6 million
at December 31, 1997 from $50.8 million at December 31, 1996. The increase in
total assets was primarily the result of an increase in the mortgage loan and
securities portfolios. Loans and loans held for sale, net, increased
$4.4 million, or 10.9%, to $44.5 million at December 31, 1997 from $40.0 million
at December 31, 1996. The increase in loans resulted from the increase of
$1.6 million, or 16.7%, in fixed-rate one- to four-family mortgage loans, a
$689,000, or 46.6%, increase in advanced construction loans and a $1.8 million,
or 128%, increase in loans available for sale. The increase in loans primarily
reflects the opening of a new loan origination office in Wakefield,
Massachusetts, an increase in the number of loan originators, increased
marketing efforts, and a favorable interest rate environment.
The increase in total assets was primarily funded by a $4.8 million
increase in interest-bearing checking and demand deposit accounts and a
$4.3 million increase in certificate of deposit accounts. The Bank's total
deposits increased $8.7 million, or 25.4%, to $42.9 million at December 31, 1997
from $34.2 at December 31, 1996. The increase in deposits was mainly the result
of opening a new retail branch office in East Milton, Massachusetts in August
1996. Deposit growth was used to fund loan production and reduce borrowings from
the FHLB-Boston, which decreased $5.2 million, or 44.5%, to $6.4 million at
December 31, 1997 as compared to $11.6 million at December 31, 1996.
Nonperforming assets totalled $115,000 at December 31, 1997 compared to
$932,000 at December 31, 1996, a decrease of $817,000, or 87.7%. The decrease
is primarily due to a $277,000, or 70.8%, reduction in non-accrual loans and a
$540,000 decrease in REO to a zero balance resulting from the sale of its
remaining parcel of REO.
Surplus increased $392,000 from $4.6 million, or 9.0% of total assets at
December 31, 1996, to $5.0 million, or 9.1% of total assets at December 31,
1997. The increase in surplus was due to net income during the year ended
December 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE FIVE MONTHS ENDED MAY 31, 1998 AND 1997
GENERAL. The Bank's net income for the five months ended May 31,1998 was
$106,000, a decrease of $31,000, or 22.6%, as compared to $137,000 for the same
period in 1997. The reduction in net income was primarily attributable to a
$64,000 increase in the provision for loan losses resulting from management's
ongoing assessment of the loan loss allowance along with increasing portfolio
balances. Net interest income increased $122,000, or 15.8%, as the result of an
increase in interest-earning assets in excess of interest-bearing liabilities.
Non-interest income increased by $88,000, or 52.7%, which was due to the
recognition of the sale of loans of $87,000 for the five months ended May 31,
1998 as compared to $73,000 for the five months ended May 31, 1997. These
increases were offset by an increase in non-interest expense of $191,000, or
25.6%, of which $60,000 was the result of an increase in salaries and employee
benefits due to the opening of a new loan origination office and the hiring of
additional personnel. Also included in the increase of non-interest expense was
a $57,000 increase in other operating expenses primarily due to increased
marketing and advertising costs. The Bank's promotional activities related to
new deposit accounts were reflected in the Bank's increase in deposits which
increased $13.7 million, or 33.5%, for the five months ended May 31, 1998
compared to the same period during 1997.
INTEREST INCOME. Interest income for the five months ended May 31, 1998
was $1.8 million as compared to $1.6 million for five months ended May 31,1997,
an increase of $248,000, or 15.7%. The increase in interest income was
primarily the result of a $7.9 million, or 16.7%, increase in the average
balance of interest-earning assets
41
<PAGE>
to $55.2 million for the five months ended May 31, 1998, from $47.3 million for
five months ended May 31, 1997. The increase in average interest-earning assets
was primarily the result of a $6.2 million increase in loans, due to increased
originations of adjustable-rate one-to four-family mortgage loans, construction
loans and mortgage loans held for sale. The effect of higher average balances in
interest-earning assets resulted in an increase in interest income, but was
offset, in part, by lower average yields on interest-earning assets. The average
yield on interest-earning assets decreased 7 basis points to 7.93% during the
five months ended May 31, 1998 as compared to an average yield of 8.00% for five
months ended May 31, 1997. The decline was caused by falling interest rates
which stimulated consumer mortgage refinancing activity.
INTEREST EXPENSE. Interest expense for the five months ended May 31, 1998
was $933,000 compared to $807,000 for the same period in 1997, an increase of
$126,000, or 15.6%. This increase reflects both an increase in average
interest-bearing liabilities of $6.0 million and an increase in average rates
paid. The increase in average interest-bearing liabilities was due primarily to
an increase in the form of interest-bearing checking accounts which increased
$5.5 million, or 125%, to $9.9 million for the five months ended May 31, 1998 as
compared to $4.4 million for the five months ended May 31, 1997. The increase
in checking accounts during the first five months of 1998 was primarily due to
the Bank's promotion of a tiered interest rate checking product for retail
customers which were priced at competitive rates to attract new deposit
relationships and continued deposit growth at the Bank's new branch office
which opened in August 1996. As a result, despite a declining interest rate
environment, the Bank's overall cost of funding increased from 4.49% for
the five months ended May 31, 1997 to 4.56% for the same period in 1998.
Certificate of deposit accounts increased $5.1 million, or 25.9%, to
$24.7 million for the five months ended May 31,1998 as compared to $19.6 for
the same period in 1997.
NET INTEREST INCOME. Net interest income increased $122,000, or 15.8%, to
$895,000 for the five months ended May 31, 1998 from $773,000 for the five
months ended May 31, 1997. The increase was a combination of an increase in
average interest-earning assets in excess of interest-bearing liabilities of
$1.9 million, offset by the effect of a 14 basis point decline in the interest
rate spread from 3.51% to 3.37%, which was due to a declining interest rate
environment.
PROVISION (CREDIT) FOR POSSIBLE LOAN LOSSES. The Bank's provision for
possible loan losses amounted to $64,000 for the five months ended May 31, 1998
in comparison to no provision for the same period in 1997. The increase in the
provision primarily reflected the increase in the Bank's overall loan portfolio,
management's ongoing review and evaluation of the general loan loss reserve, the
Bank's analysis of overall market conditions and the risk profile of the loan
portfolio due to increased volume in construction and commercial real estate
lending. The allowance for possible loan losses as a percent of loans was 1.09%
for the five months ended May 31, 1998 as compared to 0.94% for the same period
in 1997. Management believes that, based on information currently known to
management, the provision for possible loan losses and the allowance for
possible loan losses are currently reasonable and adequate to cover potential
losses reasonably expected in the existing loan portfolio. While management
estimates loan losses using the best available information, no assurance can be
given that future additions to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding problem loans, identification of additional problem loans and
other factors, both within and outside of management's control.
NON-INTEREST INCOME. Non-interest income increased $88,000, or 52.7%, to
$255,000 for the five months ended May 31, 1998, from $167,000 for the five
months ended May 31, 1997. The increase was primarily attributable to an $87,000
increase in the gain on the sale of loans during the five month period ended
May 31, 1998 due to increased originations of fixed-rate loans originated for
sale.
NON-INTEREST EXPENSE. Non-interest expense increased $191,000, or 25.6%,
to $936,000 for the five months ended May 31, 1998 from $745,000 for the five
months ended May 31, 1997. The increase was primarily attributable to salaries
and benefits increasing $60,000, or 14.6%, as the result of the addition of
staff due to the opening of a new loan origination office in January 1998,
normal salary increases and normal increases in the cost of insurance and
benefits. Occupancy expense increased $16,000 to $70,000 for the five months
ended May 31, 1998 compared to $54,000 for the five months ended May 31, 1997
primarily due to the new loan origination office. Other operating expenses
increased $57,000, or 21.8%, to $319,000 for the five months ended May 31, 1998
compared to $262,000 for the five months ended May 31, 1997. The primary
component was a $36,000, or 118%, increase in advertising
42
<PAGE>
and marketing expenses associated with the Bank's promotional activities
regarding its deposit products. The increase was also attributable to increased
data processing, professional fees and directors' fees.
INCOME TAX EXPENSE. Income tax expense decreased $14,000, or 24.1%, to
$44,000 for the five months ended May 31, 1998 from $58,000 for the five months
ended May 31, 1997. This decrease was primarily due to the decrease of $45,000
in pre-tax income. Taxes were provided at an effective rate of 29.6%,
consistent with the prior year. The effective tax rate of 29.6% was lower than
the Bank's 34.0% statutory tax rate primarily due to state taxes, net of federal
tax benefit and the utilization of capital loss carryforwards and tax credits
which are estimated to be fully utilized by the Bank.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL. Net income increased $175,000, or 91.1%, to $367,000 for the year
ended December 31, 1997 from $192,000 for the year ended December 31, 1996. The
increase was primarily attributable to increased interest income due to
increased loan origination activity and a $104,000 decrease in the Bank's loan
loss provision due to a reduction in non-accrual loans and classified assets.
Other income increased $261,000, or 117%, which was primarily the result of
gains on the sale of loans available for sale. These increases in income were
partially offset by an increase in non-interest expense of $218,000, or 12.4 %,
which was primarily attributable to increases in salaries and benefits, due to
additional staffing for the Bank's new retail branch office which opened in
August 1996 and a new loan origination office which opened in January 1996.
INTEREST INCOME. Interest income for the year ended December 31, 1997
increased $182,000, or 5.0%, to $3.9 million as compared to $3.7 million for the
year ended December 31, 1996. The increase in interest income during 1997 was
primarily attributable to an increase in the average balances of interest-
earning assets, due primarily to an increase in the average balance of mortgage
loans, net, which increased by $3.9 million, or 10.8%, to $40.5 million for the
year ended December 31, 1997 from $36.6 million for the year ended December 31,
1996. The increase was partially offset by a 48 basis point decrease in the
weighted average yield on interest-earning assets to 7.92% for the year ended
December 31, 1997 from 8.40% for the year ended December 31, 1996, which
decrease was primarily due to a lower market interest rate environment. The
increase in loans reflects an increase in one-to-four family loans of $4.7
million and an increase in available for sale loans of $1.8 million. As a
result, interest income on loans increased $115,000, or 3.5%, to $3.4 million
for the year ended December 31, 1997 as compared to $3.2 million for the year
ended December 31, 1996.
INTEREST EXPENSE. Interest expense increased $68,000, or 3.6%, to $2.0
million for year ended December 31, 1997 from $1.9 million for year ended
December 31, 1996. This increase was primarily due to the growth in the Bank's
deposit base as the result of the Bank's new branch office and was offset with a
decrease in the average balance of borrowings from the FHLB-Boston. The growth
in the deposit base consisted of a $2.8 million increase in average balances of
interest-bearing checking accounts, and a $4.1 million increase in average
balances of certificate of deposit accounts. These increases were partially
offset by a decrease in the average cost of funds due to a $4.0 million decrease
in FHLB advances, and a 32 basis point decrease in the average cost of FHLB
advances to 5.83% for year ended December 31, 1997 from 6.15% for the year ended
December 31, 1996.
NET INTEREST INCOME. Net interest income increased $114,000, or 6.4%, to
$1.9 million for the year ended December 31, 1997 from $1.8 million for the same
period in 1996. The increase was due to a combination of an increase in average
interest-earning assets in excess of interest-bearing liabilities of $1.8
million, offset by the effect of a 31 basis point decline in the interest rate
spread which decreased to 3.44% from 3.75%.
PROVISION (CREDIT) FOR POSSIBLE LOAN LOSSES. The Bank experienced a credit
to income of $90,000 from a reduction in the Bank's allowance for loan losses
for the year ended December 31, 1997 resulting in a decrease in the provision
for possible loan losses of $104,000 from the prior year's level of $14,000.
The reduction in the allowance was based on management's evaluation of existing
real estate market conditions, improvement in the level of charge-offs,
classified assets and recoveries of $128,000 in charged-off loans for the year
ended December 31, 1997 as well as the relative stabilization of general
economic conditions in the Bank's primary market area. The increased values in
properties also resulted in increased collateral margins. Non-performing loans
decreased $277,000, or 70.7%, to $115,000 for the year ended December 31, 1997
from $392,000 for the year ended December 31, 1996, as the result of prepayment
of certain loans on a non-accrual status.
43
<PAGE>
NON-INTEREST INCOME. Non-interest income increased $261,000, or 117%, to
$485,000 for the year ended December 31, 1997 from $224,000 for the year ended
December 31, 1996. This increase was primarily due to a $192,000 increase on
the sale of loans available-for-sale due to improved product pricing, operating
efficiency and improved quality control. Additionally, the Bank realized losses
of $35,000 on unlocked loans due to a decline in interest rates. The increase
was also due to a $33,000 increase in customer service fees due to an increased
volume of checking accounts and fee increases, and a $19,000 gain on the sale of
available-for-sale securities.
NON-INTEREST EXPENSE. Non-interest expense for the year ended December 31,
1997 increased $218,000, or 12.4%, to $2.0 million from $1.8 million for the
year ended December 31, 1996. This increase was primarily due to a $231,000
increase in salaries and employee benefits as a result of a full years expense
relating to increased personnel for the Bank's new branch office and new loan
origination office which opened during 1996. Occupancy and equipment increased
$14,000, or 5.1%, as the result of depreciation and general operating costs
resulting from the opening of the new branch office.
INCOME TAX EXPENSE. Income tax expense increased $86,000, or 169%, to
$137,000 for the year ended December 31, 1997 from $51,000 for the year ended
December 31, 1996. The effective tax rates for the years ended December 31,
1997 and 1996 were 27.2% and 21.0%, respectively, which are below the statutory
rate due to the utilization of the valuation reserve.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL. Net income decreased $118,000, or 38.1%, to $192,000 for the year
ended December 31, 1996 from $310,000 for the year ended December 31, 1995. The
decrease in net income was primarily due to non-interest expense increasing
$192,000, or 12.3%, to $1.8 million for the year ended December 31, 1996 as
compared to $1.6 million for the same period in 1995. The increase in non-
interest expense was the direct result of the opening of a new branch office in
August 1996 and the cost associated with hiring new personnel and increases in
occupancy and depreciation expense. The increase in non-interest expense was
partially offset by an increase of $57,000 in net interest income.
INTEREST INCOME. Interest income increased $323,000, or 9.6%, to $3.7
million for the year ended December 31, 1996 from $3.4 million for the year
ended December 31, 1995. The increase was primarily due to an increase of
average interest-earning assets. The average balance of interest-earning assets
increased by $4.0 million, or 10.2%, to $43.5 million for the year ended
December 31, 1996 from $39.5 million for the year ended December 31, 1995. The
increase in average interest-earning assets was primarily attributable to a $4.5
million increase in mortgage loans to $36.6 million for the year ended December
31, 1996 from $32.1 million for the year ended December 31, 1995. The increase
was partially offset by a $704,000 decrease in a combination of short-term
investments and debt securities as funds were invested in higher yielding loans.
INTEREST EXPENSE. Interest expense increased $266,000, or 16.4%, to $1.9
million for the year ended December 31, 1996 from $1.6 million for the year
ended December 31, 1995. The increase was primarily due to a $5.2 million
increase in the average balance of FHLB advances, to $10.4 million for the year
ended December 31, 1996 from $5.2 million for the year ended December 31, 1995.
Interest paid on deposits remained fairly stable decreasing $10,000, or 0.8%, to
$1.2 million for the year ended December 31, 1996 from $1.3 million for the year
ended December 31, 1995.
NET INTEREST INCOME. Net interest income increased $57,000, or 3.3%, to
$1.8 million for the year ended December 31, 1996 from $1.7 for the same period
in 1995. The increase was primarily due to an increase in average interest-
earning assets of $4.0 million.
PROVISION (CREDIT) FOR POSSIBLE LOAN LOSSES. The Bank's provision for
possible loan losses decreased $56,000, or 80.0%, to $14,000 for the year ended
December 31, 1996 from $70,000 for the same period in 1995. The decrease was
based on management's normal review of the general reserve, a $181,000 recovery
of charged-off loans in 1996 compared to $75,000 in 1995, classified assets and
delinquencies, all of which reflected decreases in the year ended December 31,
1996. Non-performing loans increased $340,000 to $392,000 for the year ended
December 31, 1996 compared to $52,000 for the year ended December 31, 1995.
These loans were under a workout
44
<PAGE>
agreement and no additional reserve was required. These loans were paid off in
their entirety in March 1997. Classified assets also decreased $500,000 for the
year ended December 31, 1996.
NON-INTEREST INCOME. Non-interest income decreased $18,000, or 7.4%, to
$224,000 for the year ended December 31, 1996 from $242,000 for the year ended
December 31, 1995. This decrease was primarily due to a $66,000 decrease in
loan fees and loans categorized as available-for-sale, which was partially
offset by a $22,000 increase in customer fees to $144,000 for the year ended
December 31, 1996 from $121,000 for the year ended December 31, 1995. The
increase in fees was the result of changes and increases in the Bank's customer
account fee structure. In addition, realized gains on securities available-for-
sale increased $27,000 to $24,000 for the year ended December 31, 1996 from a
loss of $3,000 for the same period in 1995.
NON-INTEREST EXPENSE. Non-interest expense increased $192,000, or 12.3%,
to $1.8 million for the year ended December 31, 1996 from $1.6 million for the
year ended December 31, 1995. The overall increase was primarily due to a
combination of increases in salaries and employee benefits, occupancy and
equipment, and general administrative expense. Salaries and employee benefits
increased $133,000, or 17.6%, to $885,000 for the year ended December 31, 1996
compared to $752,000 for the year ended December 31, 1995. Occupancy expense
increased $94,000, or 52.5%, to $272,000 for the year ended December 31, 1996
compared to $179,000 for the same period in 1995. General and administrative
expenses increased $17,000, or 3.5%, to $498,000 for the year ended December 31,
1996 as compared to $481,000 for the year ended December 31, 1995. These
increases were all the result of hiring additional personnel related to the
opening of the Bank's new branch office in August 1996, and were partially
offset with a $57,000 decrease in foreclosed real estate from $22,000 for the
year ended December 31, 1995 to a $35,000 recovery of expense in 1996.
INCOME TAX EXPENSE. Income tax expense increased $21,000, or 70.0%, to
$51,000 for the year ended December 31, 1996 from $30,000 for the year ended
December 31, 1995. The effective tax rates for the years ended December 31,
1996 and 1995 were 21.0% and 8.8%, respectively, which are below the statutory
rate due to the utilization of the valuation reserve.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans and proceeds from maturing securities and borrowings from
FHLB-Boston. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit outflows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The primary investing activities of the Bank are the origination of
primarily residential one-to four-family mortgage loans and, to a lesser extent,
multi-family and commercial real estate loans, construction loans, home equity
lines of credit and consumer loans and the investment in mortgage-backed
securities, U.S. Government and agency obligations and corporate equity
securities and debt obligations. These activities are funded primarily by
principal and interest payments on loans, maturing of investment securities,
deposit growth and the utilization of FHLB advances. During the five months
ended May 31, 1998 and the years ended December 31, 1997 and 1996, the Bank's
loan originations totalled $27.8 million, $37.3 million and $35.1 million,
respectively. For the five months ended May 31, 1998 and the years ended
December 31, 1997 and 1996, the Bank's investments in U.S. Government and agency
obligations and corporate equity securities and debt obligations totalled $6.5
million, $5.0 million and $3.3 million, respectively. The Bank experienced a
net increase in total deposits of $11.7 million, $8.7 million and $2.0 million
for the five months ended May 31, 1998 and the years ended December 31, 1997 and
1996, respectively. Deposit flows are affected by the overall level of interest
rates, the interest rates and products offered by the Bank and its local
competitors and other factors. The Bank closely monitors its liquidity position
on a daily basis. In the event the Bank should require funds beyond its ability
to generate them internally, additional sources of funds are available through
FHLB advances. See "Business of the Bank--Sources of Funds--Borrowed Funds."
At May 31, 1998, the Bank had $3.1 million of outstanding FHLB borrowings.
Outstanding commitments for all loans totalled $4.7 million at May 31,
1998. Management of the Bank anticipates that it will have sufficient funds
available to meet its current loan commitments. Certificates of deposit which
are scheduled to mature in one year or less from May 31, 1998 totalled $21.2
million. From December 31, 1997 to May 31, 1998, the Bank experienced a 89.15%
retention rate of funds maturing from certificates of deposit.
45
<PAGE>
It has been and will continue to be a priority of management to retain time
deposits. The Bank relies primarily on competitive rates, customer service, and
long-standing relationships with customers to retain deposits. From time to
time, the Bank will also offer competitive special products to its customers to
increase retention. Based upon the Bank's experience with deposit retention and
current retention strategies, management believes that, although it is not
possible to predict future terms and conditions upon renewal, a significant
portion of such deposits will remain with the Bank.
At May 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $5.0 million, or 8.63% of adjusted
assets, which is above the required level of $2.3 million, or 4.00%, and risk-
based capital of $5.5 million, or 13.58% of adjusted assets, which is above the
required level of $3.2 million, or 8.00%. See "Regulatory Capital Compliance."
The capital injection resulting from the Conversion will significantly
increase liquidity and capital resources. Over time, the initial level of
liquidity will be reduced as net proceeds are utilized for general corporate
purposes, including the funding of lending activities and the expansion of
facilities. See "Use of Proceeds." Specifically, the Bank expects to incur
capital expenditures of approximately $1.5 million in connection with the
establishment of a de novo branch office and relocation of its administrative
offices, and approximately $200,000 in connection with achieving Year 2000
compliance and upgrading its related technology systems. The Bank's financial
condition and the results of operations will be enhanced by the capital
injection, resulting in increased net earning assets and net income. However,
due to the large increase in equity resulting from the capital injection, return
on equity will be adversely impacted immediately following the Conversion. See
"Risk Factors--Low Return on Equity Following the Conversion Which May
Negatively Influence Market Price and Liquidity."
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the year 2000.
While the Bank maintains an internal computer system for certain operating
functions, the substantial majority of the Bank's data processing is out-sourced
to a third party vendor. The Bank has adopted a "Year 2000 Policy" and is in
the process of reviewing its internal systems and has reviewed the Year 2000
compliance of its third party data processing vendor In connection with such
review, the Bank determined that its current third party data processing vendor
is not Year 2000 compliant and, accordingly, has formally agreed to engage a new
third party data processing vendor. Such new third party vendor has provided the
Bank with written assurances that the system and the software which it is
licensed to use are Year 2000 compliant. The Bank's new third party data
processor has begun to test the integration of the system with its licensed
software to ensure that the integrated system will be Year 2000 compliant,
together, and expects to achieve such compliance by February 1999, at which time
the Bank expects to begin utilizing such third party vendor's services.
The Bank's operations may also be affected by the Year 2000 compliance of
its significant customers, suppliers and other vendors. The Bank has initiated
communications with its significant customers to make them aware of the Year
2000 issue. Given the composition of the Bank's loan portfolio, which consists
primarily of loans on residential and mixed use properties whose cash flows
depended on payments of leases by tenants that are unlikely to be materially
affected by Year 2000 issues, the Bank does not believe that it has a material
amount of loans to individuals or entities that are susceptible to Year 2000
issues such that their noncompliance with Year 2000 issues will materially
affect their ability to repay such loans. In addition, the Bank has begun the
process of requesting information related to the Year 2000 compliance of its
significant suppliers and other vendors. However, the Bank does not currently
have complete information concerning the compliance status of its significant
suppliers and other vendors. In the event that any of the Bank's significant
customers and suppliers do not successfully achieve Year 2000 compliance in a
timely manner, the Bank's business or operations could be adversely affected.
If significant suppliers fail to meet Year 2000 operating requirements, the Bank
intends to engage alternative suppliers.
The Bank is currently engaging in an upgrade of its technology systems in
addition to its implementing its Year 2000 policy. The Bank has budgeted
approximately $200,000 in connection with the costs associated with achieving
Year 2000 compliance and its related technology systems upgrade. To date, the
Bank has expended approximately $54,000 on Year 2000 issues and related
technology updates. Material costs, if any, that may arise
46
<PAGE>
from the failure to achieve Year 2000 compliance by either the Bank's third
party data processing vendor, its significant customers, or its significant
suppliers and other vendors is not currently determinable. In the event that the
Bank's progress towards becoming Year 2000 compliant is deemed inadequate,
regulatory action may be undertaken.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which generally 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 ACCOUNTING STANDARDS
The Bank will be required to account for the ESOP under SOP 93-6. SOP 93-6
measures compensation expense recorded by employers for leveraged ESOPs using
the fair value of ESOP shares. Under SOP 93-6, the Company will recognize
compensation cost equal to the fair value of the ESOP shares during the periods
in which they become committed to be released. To the extent that the fair
value of the Bank's ESOP shares differ from the cost of such shares, this
differential will be charged or credited to equity. Employers with internally
leveraged ESOPs will not report the loan receivable from the ESOP as an asset
and will not report the ESOP debt as a liability. See "Management of the Bank--
Other Benefit Plans--Employee Stock Ownership Plan."
In November 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123" ). This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Company to choose either the new
fair value based method, or the current accounting prescribed by Accounting
Principles Board ("APB") Opinion 25, using the intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS No. 123 requires
pro forma disclosures of net earnings and earnings per share computed as if the
fair value based method had been applied in APB Opinion 25. SFAS No. 123
applies to all stock-based employee compensation plans in which an employer
grants shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock, (e.g., stock option plans, stock purchase plans, restricted
stock plans, and stock appreciation rights). SFAS No. 123 also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by nonemployees or to acquire goods or
services from outside suppliers or vendors. The recognition provisions of SFAS
No. 123 for companies choosing to adopt the new fair value based method of
accounting for stock-based compensation arrangements may be adopted immediately
and will apply to all transactions entered into in fiscal years then beginning
after December 15, 1995. The disclosure provisions of SFAS No. 123 are
effective for fiscal years beginning after December 15, 1995, however,
disclosure of the pro forma net earnings and earnings per share, as if the fair
value method of accounting for stock-based compensation had been elected is
required for all awards granted in fiscal years beginning after December 31,
1994. The Company expects to account for its stock-based compensation
arrangements as prescribed in APB Opinion 25 upon the consummation of the
Conversion.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), which supersedes FASB Statements No. 76, "Extinguishments of Debt," and
No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse."
This statement amends FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and amends and extends to all
servicing assets and liabilities, the accounting standards for mortgage
servicing rights not set forth in SFAS No. 65, and supersedes SFAS No. 122.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted
47
<PAGE>
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in exchange. SFAS No. 125 further requires
that liabilities and derivatives incurred or obtained by transferors as part of
a transfer of financial assets be initially measured at fair value, if
practicable. It also requires that servicing assets and other retained interests
in the transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interest, if any, based on their
relative fair values on the date of the transfer. SFAS No. 125 also requires
that servicing assets and liabilities be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values. SFAS No. 125 requires that debtors reclassify
financial assets pledged as collateral and that secured parties recognize those
assets and their obligation to return them to certain circumstances in which the
secured party has taken control of those assets. SFAS No. 125 requires that a
liability be derecognized if and only if either (i) the debtor pays the creditor
and is relieved of its obligation or the liability of (ii) the debtor is legally
released from being the primary obligor under the liability either judicially or
by the creditor. Therefore, a liability is not considered extinguished by an in-
substance defeasance. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and was adopted by the Bank on January 1, 1997. Such adoption was not
material to the Bank.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure. This Statement continues the previous
disclosure requirements found in APB Opinions No. 10, "Omnibus Opinion -1996,"
and No. 15, "Earnings Per Share," and FASB Statement No. 47, "Disclosure of
Long-Term Obligations" and eliminates the exemption of nonpublic entities from
certain disclosure requirements of Opinion 15. Additionally, this Statement
consolidates capital disclosure requirements for ease of retrieval and greater
visibility to nonpublic entities. This Statement is effective for financial
statements for periods ending after December 15, 1997 and is not expected to
have a material impact on the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income is defined in FASB Concepts Statement 6 as the "change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." The Statement is effective for fiscal years beginning
after December 15, 1997 and was adopted on January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements. This Statement requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This Statement supersedes FASB Statement No.
14, "Financial Reporting for Segments of a Business Enterprise." Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This Statement is effective for financial statements for periods
beginning after December 15, 1997 and is not expected to have a material impact
on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pensions and other postretirement benefits. This
Statement supersedes FASB Statements No. 87, "Employers' Accounting for
Pensions," No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits other than Pensions." This
Statement is effective for fiscal years beginning after December 15, 1997 and is
not expected to have a material impact on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This Statement amends FASB Statement
No. 52, "Foreign Currency Translation" to permit special accounting for a hedge
of a foreign currency forecasted transaction with a derivative. It supersedes
FASB Statements No. 80, "Accounting for Futures Contracts," No. 105, "Disclosure
of Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of
48
<PAGE>
Credit Risk," and No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments." It amends Statement No. 107,
"Disclosures about Fair Value of Financial Instruments" to include in Statement
107 the disclosure provisions about concentrations of credit risk from Statement
105. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
the Company.
BUSINESS OF THE COMPANY
The Company was organized in July 1998 by the Board of Directors of the
Bank for the purpose of becoming a holding company to own all of the outstanding
capital stock of the Bank. Upon consummation of the Conversion, it is
anticipated that the Bank will become a wholly-owned subsidiary of the Company.
Upon the consummation of the Conversion, the Company will be a savings and loan
holding company regulated by the OTS. See "Regulation and Supervision--Holding
Company Regulation."
The Company is currently not an operating company. Following the
Conversion, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains in a deposit account in the Bank. In addition, the Company intends to
form and capitalize the ESOP Loan Subsidiary which subsidiary will loan funds to
enable the ESOP to purchase 8% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation; however, a third-party
lender may be utilized to lend funds to the ESOP. See "Use of Proceeds." In
the future, the Company may acquire or organize other operating subsidiaries,
including other financial institutions and financial services companies. There
are presently no other agreements, understandings or plans for an expansion of
the Company's operations. Initially, the Company will neither own nor lease any
property from any third party, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers of the Bank, who will not be
separately provided cash compensation by the Company. The Company may utilize
the support staff of the Bank from time to time, if needed. Additional
employees will be hired as appropriate to the extent the Company expands its
business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented co-operative bank which was originally
organized in 1908 as The Massachusetts Co-operative Bank, a Massachusetts-
chartered mutual co-operative bank. The Bank's principal business consists of
the acceptance of retail deposits from the general public in the areas
surrounding its two full-service banking offices and the investment of those
deposits, together with funds generated from operations and borrowings,
primarily in mortgage loans secured by one- to four-family residences and, to a
lesser extent, multi-family and commercial real estate loans, construction
loans, home equity lines of credit and consumer loans. However, in the future,
the Bank intends to increase its emphasis on multi-family, commercial real
estate and construction lending. The Bank operates through its two full-service
banking offices and its two loan origination offices, all of which are located
in the greater Boston metropolitan area. The Bank originates loans for
investment and loans for sale in the secondary market, generally releasing the
servicing rights to all loans sold. The Bank also invests in mortgage-backed
securities, securities issued by the U.S. Government and other investments
permitted by applicable laws and regulations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Management Strategy."
The Bank's revenues are derived principally from the generation of interest and
fees on loans originated and, to a lesser extent, interest and dividends on
investment securities. The Bank's primary sources of funds are retail savings
deposits and, to a lesser extent, principal and interest payments on loans and
investment securities, advances from the FHLB-Boston and proceeds from the sale
of loans.
MARKET AREA AND COMPETITION
The Bank's main office is headquartered in the Dorchester section of
Boston, Massachusetts. The Bank's primary deposit gathering area is concentrated
in the communities surrounding its main office located in Dorchester and other
full-service banking office located in East Milton, Massachusetts. The Bank
also maintains two loan origination offices located in the Boston suburban
communities of Wakefield and Norwell, Massachusetts. All of the Bank's banking
and loan origination offices are located within 30 miles of Boston. Although the
Bank originates loans
49
<PAGE>
throughout Massachusetts and New Hampshire, the Bank's primary lending area is
the greater Boston metropolitan area.
The Dorchester section of Boston, Massachusetts is a fully-developed and
densely populated urban area located south of downtown Boston. The major
traffic roadways running through Dorchester, including U.S. Interstate Highway
93, are heavily traveled and lined with commercial and retail business
operations. The greater Boston metropolitan area benefits from the presence of
numerous institutions of higher education, medical care and research facilities
and the corporate headquarters of several significant investment and technology
companies employing individuals with specialized skills. These firms and
businesses, along with tourism, form the backbone of the economy of the greater
Boston metropolitan area.
New England had generally lagged behind the rest of the nation in coming
out of the recession of the late 1980s and early 1990s. During that time, the
market values of many one- to four-family residences declined throughout the
region. Loan demand diminished and competition for such loans increased.
However, over the past few years, the regional economy in the Bank's primary
market area, based on economic indicators such as unemployment rates,
residential and commercial real estate values and vacancy rates and household
income trends, has stabilized and strengthened to a level which, in some areas,
approaches the market values existing before the downturn in the late 1980s. As
of September 1998, the unemployment rate for Massachusetts was 4.34% compared to
the national level of 4.06%. The median household income for the Boston area was
$36,952 as compared to the national level of $30,056. See "Risk Factors--
Weakness of Regional and Local Economy."
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly
larger and have greater financial resources than the Bank. The Bank's
competition for loans comes principally from commercial banks, savings banks,
co-operative banks, credit unions, mortgage brokers, mortgage banking companies
and insurance companies. Its most direct competition for deposits has
historically come from savings, co-operative and commercial banks and credit
unions. In addition, the Bank faces significant competition for deposits from
non-bank institutions such as brokerage firms and insurance companies in such
instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as
a result of the lifting of restrictions on the interstate operations of
financial institutions. The Bank has also experienced significant competition
from credit unions which have a competitive advantage as they do not pay state
or federal income taxes. Such competitive advantage has placed increased
pressure on the Bank with respect to its loan and deposit pricing. See "Risk
Factors--Highly Competitive Industry and Geographic Area."
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged
by the Bank on loans are affected principally by the demand for such loans, the
supply of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board ("FRB"), legislative tax policies and governmental budgetary
matters.
The Bank's loan portfolio primarily consists of first mortgage loans
secured by one- to four-family residences most of which are located in the
Bank's primary market area. At May 31, 1998, the Bank's gross loan portfolio
totalled $47.7 million, of which $38.1 million were one- to four-family
residential mortgage loans, or 79.9% of total loans. At such date, the
remainder of the loan portfolio consisted of $2.6 million of multi-family loans,
or 5.5% of total loans; $1.6 million of commercial real estate loans, or 3.4% of
total loans; $4.6 million of construction loans, or 9.7% of total loans;
$512,000 of home equity lines of credit, or 1.1% of total loans; $182,000 of
consumer loans, or 0.4% of total loans, consisting of $80,000 of loans on
savings accounts and $102,000 of automobile loans; and $25,000 of other loans
consisting of unsecured personal loans.
50
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
AT MAY 31, 1998 1997 1996 1995
--------------------- -------------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------ -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.......... $38,087 79.87% $37,953 84.61% $33,248 82.26% $26,973 81.54%
Multi-family................. 2,637 5.53 2,460 5.48 2,754 6.81 2,403 7.26
Commercial real estate....... 1,598 3.35 1,485 3.31 1,898 4.70 1,877 5.67
Construction, net of due
mortgagors................ 4,645 9.74 2,169 4.84 1,480 3.66 714 2.16
Home equity lines............ 512 1.07 560 1.25 720 1.78 824 2.49
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans...... 47,479 99.56 44,627 99.49 40,100 99.21 32,791 99.12
------- ------ ------- ------ ------- ------ ------- ------
Consumer loans:
Auto loans................... 102 0.21 119 0.27 100 0.25 59 0.18
Loans on savings accounts.... 80 0.17 76 0.17 132 0.33 115 0.35
------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans...... 182 0.38 195 0.44 232 0.58 174 0.53
------- ------ ------- ------ ------- ------ ------- ------
Other loans..................... 25 0.06 35 0.07 86 0.21 118 0.35
------- ------ ------- ------ ------- ------ ------- ------
Total loans..................... 47,686 100.00% 44,857 100.00% 40,418 100.00% 33,083 100.00%
====== ====== ====== ======
Less:
Deferred loan fees............. (49) (57) (32) (56)
Allowance for possible loan
losses.................... (472) (349) (322) (300)
------- ------- ------- -------
Loans, net...................... $47,165 $44,451 $40,064 $32,727
======= ======= ======= =======
</TABLE>
ORIGINATION, SALE AND SERVICING OF LOANS. The Bank's mortgage lending
activities are conducted primarily by its commissioned loan personnel operating
at its two full service banking offices and two loan origination offices. All
loans originated by the Bank are underwritten by the Bank pursuant to the Bank's
policies and procedures. The Bank originates both adjustable-rate and fixed-
rate mortgage loans. The Bank's ability to originate fixed- or adjustable-rate
loans is dependent upon the relative customer demand for such loans, which is
affected by the current and expected future level of interest rates.
Generally, all adjustable-rate mortgage loans originated by the Bank are
originated for investment. While the Bank has historically originated all
fixed-rate one- to four-family mortgage loans for sale in the secondary market
to either Fannie Mae or private investors, the Bank intends to begin to retain
certain one- to four-family fixed-rate loans for its portfolio, based on various
factors, including its asset/liability position and market interest rates. The
one- to four-family mortgage loan products currently originated for sale by the
Bank include a variety of loans which conform to the underwriting standards
specified by Fannie Mae ("conforming loans") and, to a lesser extent, loans
which do not conform to Fannie Mae standards due to loan amounts ("jumbo
loans"). The Bank also originates mortgage loans insured by the Federal Housing
Authority ("FHA") and Veterans Administration ("VA"). All one- to four-family
mortgage loans sold by the Bank are sold pursuant to master commitments
negotiated with Fannie Mae and other investors to purchase loans meeting such
investors' defined criteria. Although the Bank has entered into such master
commitment contracts, such contracts generally do not require the purchasers to
buy or the Bank to deliver a specific amount of mortgage loans. All conforming
loans currently sold by the Bank are sold to Fannie Mae and private investors
and all non-conforming loans which are sold are generally sold to private
investors. Sales of loans are made without recourse to the Bank in the event of
default by the borrower. The Bank generally retains the servicing rights on the
mortgage loans sold to Fannie Mae and releases the servicing rights on the
mortgage loans sold to private investors.
At May 31,1998, the Bank was servicing $4.7 million of loans for others,
primarily consisting of conforming fixed-rate mortgage loans sold by the Bank.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, supervising
foreclosures and property dispositions in the event of unremedied defaults,
making certain insurance and tax payments on behalf of the borrowers and
generally administering the loans. Substantially all of the loans currently
being serviced for others are
51
<PAGE>
loans which have been sold by the Bank. The gross servicing fee income from
loans sold is generally 25 basis points of the total balance of the loan
serviced.
During the years ended December 31, 1997 and December 31, 1996, the Bank
originated $30.4 million and $31.4 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $4.8 million and $7.4 million,
respectively, were retained by the Bank. The Bank recognizes, at the time of
sale, the cash gain or loss on the sale of the loans based on the difference
between the net cash proceeds received and the carrying value of the loans sold.
On January 1, 1996, the Bank implemented SFAS No. 122 pursuant to which the
value of servicing rights may be recognized as an asset of the Bank. In the
five months ended May 31, 1998 and 1997 and in the two years ended December 31,
1997, the fair market value of servicing rights under SFAS No. 122 and SFAS
No. 125 were not material and were not recognized in the financial statements
for those periods. The Bank has, in the past, from time-to-time, participated in
loans, primarily multi-family and commercial real estate loans and, at May 31,
1998, had $286,000 in loan participation interests.
The following table set forth the Bank's loan originations, sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS FOR THE YEAR ENDED
ENDED MAY 31, DECEMBER 31,
---------------- ----------------------------
1998 1997 1997 1996 1995
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans:
Balance outstanding at beginning of period.. $44,857 $40,418 $40,418 $33,083 $30,582
Loans originated:
One-to four-family.................... 22,811 10,395 30,371 31,420 17,263
Multi-family.......................... 386 257 453 715 651
Commercial real estate................ 140 -- -- 82 --
Construction.......................... 4,325 1,174 6,284 2,158 963
Home equity lines..................... 79 -- 43 303 85
Auto loans............................ 5 9 93 96 38
Loans on savings accounts............. 43 3 51 274 50
Other loans........................... 7 -- 1 68 84
------ ------ ------ ------ ------
Total loans originated............. 27,796 11,838 37,296 35,116 19,134
Less:
Principal repayments..................... 7,572 4,191 11,326 8,117 5,908
Sales of loans........................... 17,395 8,807 21,520 19,234 10,043
Transfers to real estate owned........... -- -- -- 257 336
Principal charged off.................... -- 5 11 173 346
------- ------- ------- ------- -------
Total loans........................... 47,686 39,253 44,857 40,418 33,083
Less:
Loans held for sale, net................. 4,470 1,089 3,185 1,398 360
------- ------- ------- ------- -------
Loans receivable held for investment
at end of period...................... $43,216 $38,164 $41,672 $39,020 $32,723
======= ======= ======= ======= =======
</TABLE>
52
<PAGE>
LOAN MATURITY. The following table shows the remaining contractual
maturity of the Bank's loan portfolio at May 31, 1998. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $7.5 million for
the five months ended May 31, 1998, and $11.4 million, $8.1 million, and
$5.9 million for the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT MAY 31, 1998
------------------------------------------------------------------------------------------
ONE- TO HOME LOANS ON TOTAL
FOUR- MULTI- COMMERCIAL EQUITY AUTO SAVINGS OTHER LOANS
FAMILY FAMILY REAL ESTATE CONSTRUCTION LINES LOANS ACCOUNTS LOANS RECEIVABLE
-------- ------- ----------- ------------ ------ ------- -------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year............... $ 1,014 $ 120 $ -- $3,651 $ -- $ -- $ 76 $ 10 $ 4,871
------- ------ -------- ------ ----- ----- ---- ---- --------
After one year:
More than one
year to three years...... 881 522 736 374 93 47 4 9 2,666
More than three years
to five years............ 472 1,244 272 358 58 55 -- 6 2,465
More than five years
to 10 years.............. 1,492 149 57 44 -- -- -- -- 1,742
More than 10 years
to 20 years.............. 3,941 350 533 52 -- -- -- -- 4,876
More than 20 years (1)...... 30,287 252 -- 166 361 -- -- -- 31,066
------- ------ -------- ------ ----- ----- ---- ---- --------
Total due after
May 31, 1999............. 37,073 2,517 1,598 994 512 102 4 15 42,815
------- ------ -------- ------ ----- ----- ---- ---- --------
Total amount due
(gross).................. $38,087 $2,637 $1,598 $4,645 $512 $102 $ 80 $ 25 $47,686
======= ====== ======== ====== ===== ===== ==== ==== -------
Less:
Deferred loan fees, net..................................................................................... (49)
Allowance for possible
loan losses.............................................................................................. (472)
-------
Total loans, net.............................................................................................. $47,165
=======
</TABLE>
- ---------------------------------
(1) Included in amounts due more than 20 years are mortgage loans held for sale
totalling $4.5 million. Although these loans have a maturity date of more
than 20 years, they are typically sold within 90 days.
53
<PAGE>
The following table sets forth at May 31, 1998, the dollar amount of gross
loans receivable contractually due after May 31, 1999, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MAY 31, 1999
---------------------------
FIXED ADJUSTABLE TOTAL
------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family......... $14,305 $22,768 $37,073
Multi-family................ 338 2,179 2,517
Commercial real estate...... 57 1,541 1,598
Construction................ 492 502 994
Home equity lines........... -- 512 512
------- ------- -------
Total mortgage loans..... 15,192 27,502 42,694
------- ------- -------
Consumer loans:
Auto loans.................. 102 -- 102
Loans on savings accounts... 4 -- 4
------- ------- -------
Total consumer loans..... 106 -- 106
------- ------- -------
Other loans.................... 15 -- 15
------- ------- -------
Total loans........... $15,313 $27,502 $42,815
======= ======= =======
</TABLE>
ONE- TO FOUR-FAMILY LENDING. The Bank currently offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans with maturities of up to 30 years secured
by one- to four-family residences substantially all of which are located in the
Bank's primary market area. One- to four-family mortgage loan originations are
generally obtained from the Bank's in-house loan representatives and
commissioned personnel, from existing or past customers, through advertising,
and through referrals from local builders, real estate brokers and attorneys.
At May 31, 1998, the Bank's one- to four-family mortgage loans totalled $38.1
million, or 79.9% of total loans. Of the one- to four-family mortgage loans
outstanding at that date, 39.6% were fixed-rate mortgage loans and 60.4% were
ARM loans.
The Bank currently offers fixed-rate mortgage loans with terms from 15 to
30 years. While the Bank has historically sold substantially all of the fixed-
rate mortgage loans which it has originated, on a going forward basis, the Bank
intends to selectively retain certain fixed-rate loans for its portfolio, based
on the asset quality and coupon rates of such loans. Generally, the Bank
releases servicing rights on loans sold to private investors and retains
servicing rights on loans sold to Fannie Mae. The Bank currently offers a
number of ARM loans with terms of up to 30 years and interest rates which adjust
every one or three years from the outset of the loan or which adjust annually
after a five year initial fixed period. The interest rates for the Bank's ARM
loans are indexed to the applicable Constant Maturity Treasury ("CMT") Index.
The Bank's ARM loans generally provide for periodic (not more than 2%) and
overall (not more than 6%) caps on the increase or decrease in the interest rate
at any adjustment date and over the life of the loan.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the risks associated with adjustable-rate loans but also limit
the interest rate sensitivity of such loans.
Generally, the Bank originates one- to four-family residential mortgage
loans in amounts of up to 95% of the appraised value or selling price of the
property securing the loan, whichever is lower, with the exception of certain
loans in the Bank's "First-Time Home Buyer" program, which allows for a 97%
loan-to-value ("LTV") ratio. Private Mortgage Insurance ("PMI") may be required
for loans with a LTV ratio of greater than 80%. Mortgage loans originated by
the Bank generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent. Due-
on-sale clauses are an important means of adjusting the yields on the Bank's
fixed-rate mortgage loan
54
<PAGE>
portfolio and the Bank has generally exercised its rights under these clauses.
The Bank requires fire, casualty, title and, in certain cases, flood insurance
on all properties securing real estate loans made by the Bank.
In an effort to provide financing for moderate income and first-time home
buyers, the Bank offers FHA and VA loans and has its own First-Time Home Buyer
loan program. These programs offer residential mortgage loans to qualified
individuals. These loans are offered with adjustable- and fixed-rates of
interest and terms of up to 30 years. Such loans may be secured by a one- to
four-family residential property, in the case of FHA and VA loans, and must be
secured by a single family owner-occupied unit in the case of First-Time Home
Buyer loans. These loans are originated using modified underwriting guidelines,
in the case of FHA and VA loans, and the same underwriting guidelines as are the
Bank's other one- to four-family mortgage loans, in the case of First-Time Home
Buyer loans. All such loans are originated in amounts of up to 97% of the lower
of the property's appraised value or the sale price. Private mortgage insurance
is required on all such loans.
The Bank also originates "investor rehab loans" to local contractors and
investors for the improvement and remodeling of existing non-owner occupied one-
to four-family residential properties. Such first mortgage loans are originated
with a maximum LTV ratio of 80% of the purchase price of the property plus up to
80% of the cost of the improvements, as confirmed by an independent appraiser.
Investor rehab loans are offered with terms of one-year and fixed-rates of
interest, generally 1.5% above the prime rate of interest as reported in The
Wall Street Journal. During the term of the loan, the borrower is required to
remit monthly payments of interest only. The principal balance of such loan is
due at the end of the one-year term. The Bank primarily relies on the
borrower's income statements and tax returns when underwriting such loans. The
Bank generally requires personal and/or corporate guarantees on such loans. At
May 31, 1998, investor rehab loans totalled $1.6 million, or 4.2% of one- to
four-family loans, and 3.3% of the Bank's total loans.
In March 1998, the Bank also began to offer a limited documentation
mortgage loan product ("Low Doc" loans). Such loans are secured by owner-
occupied one- to four-family properties and are offered with both fixed and
adjustable rates of interest. The terms and interest rate caps of Low Doc
loans are generally the same as those of the Bank's other fixed and adjustable-
rate one- to four-family loan products; however, borrowers pay a premium in the
form of higher interest rates and loan fees and provide larger down payments
(75% maximum LTV ratio) in exchange for more expedient loan processing by virtue
of less income and asset information as compared to loans underwritten in
conformance with Fannie Mae standards. When underwriting a Low Doc loan, the
Bank requires executed income tax returns and a satisfactory credit report but
does not verify employment status. At May 31, 1998, Low Doc loans totalled
$1.7 million, or 4.5% of one- to four-family loans, and 3.6% of the Bank's total
loans. The Bank has not emphasized the origination of these loans, but due to
consumer demand, the Bank expects that this portfolio will continue to grow in
the future. See "Risk Factors--Increased Lending Risks Associated with Multi-
Family Real Estate, Commercial Real Estate, Construction and Limited
Documentation Lending."
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank originates
multi-family and commercial real estate loans that are generally secured by five
or more unit apartment buildings and properties used for business purposes such
as small office buildings, restaurants or retail facilities primarily located in
the Bank's primary market area. The Bank's multi-family and commercial real
estate underwriting policies provide that such real estate loans may be made in
amounts of up to 80% of the appraised value of the property, subject to the
Bank's current loans-to-one-borrower limit, which at May 31, 1998 was
$1.0 million. The Bank's multi-family and commercial real estate loans may be
made with terms of up to 10 years and are offered with interest rates that
adjust periodically. In reaching its decision on whether to make a multi-family
or commercial real estate loan, the Bank considers the net operating income of
the property, the borrower's expertise, credit history and profitability and the
value of the underlying property. The Bank has generally required that the
properties securing these real estate loans have debt service coverage ratios
(the ratio of earnings before debt service to debt service) of at least 1.30x.
Environmental impact surveys are generally required for all commercial real
estate loans. Generally, all multi-family and commercial real estate loans made
to corporations, partnerships and other business entities require personal
guarantees by the principals. On an exception basis, the Bank may not require a
personal guarantee on such loans depending on the creditworthiness of the
borrower and the amount of the downpayment and other mitigating circumstances.
The Bank's multi-family real estate loan portfolio at May 31, 1998 was
$2.6 million, or 5.5% of total loans, and the Bank's commercial real estate loan
portfolio at such date was $1.6 million, or 3.4% of total loans. The largest
multi-family
55
<PAGE>
or commercial real estate loan in the Bank's portfolio (excluding loan
participation interests) at May 31, 1998 was a performing $407,000 loan secured
by a 10-unit multi-family property located in Quincy, Massachusetts.
Loans secured by multi-family and commercial real estate properties
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks through its underwriting
standards. See "Risk Factors--Increased Lending Risks Associated with Multi-
Family Real Estate, Commercial Real Estate, Construction and Limited
Documentation Lending."
CONSTRUCTION LENDING. The Bank originates fixed-rate construction loans
for the development of one- to four-family residential properties primarily
located in the Bank's primary market area. Although the Bank does not generally
make loans secured by raw land, the Bank's policies permit the origination of
such loans. Construction loans are generally offered to experienced local
developers operating in the Bank's primary market area and, to a lesser extent,
to individuals for the construction of their primary residence. Construction
loans are generally offered with terms of up to 12 months and may be made in
amounts of up to 70% of the appraised value of the property, as improved, in the
case of construction loans to developers, up to 90% of the appraisal value of
the property, as improved, in the case of construction loans to individuals for
the construction of their primary residence and up to 50% of the appraised value
of the property in the case of land loans. Construction loan proceeds are
disbursed periodically in increments as construction progresses and as
inspections by the Bank's lending officers warrant. Generally, if the borrower
is a corporation, partnership or other business entity, personal guarantees by
the principals are required for all construction loans.
At May 31, 1998, the Bank's largest construction loan was a $466,000
performing loan, with a $420,000 carrying balance secured by a one- to four-
family residential property located in Lexington, Massachusetts. At May 31,
1998, the Bank had $4.6 million of advanced construction loans which amounted to
9.7% of the Bank's total loans.
Construction financing is generally considered to involve a higher degree
of credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction
compared to the estimated cost (including interest) of construction and other
assumptions, including the estimated time to sell residential properties. If
the estimate of value proves to be inaccurate, the Bank may be confronted with a
project, when completed, having a value which is insufficient to assure full
repayment. See "Risk Factors--Increased Lending Risks Associated with Multi-
Family Real Estate, Commercial Real Estate, Construction and Limited
Documentation Lending."
HOME EQUITY LINES OF CREDIT. Substantially all of the Bank's home equity
lines of credit are secured by second mortgages on owner-occupied one- to four-
family residences located in the Bank's primary market area. At May 31, 1998,
these loans totalled $512,000, or 1.1% of the Bank's total loans. Home equity
lines of credit generally have adjustable-rates of interest which adjust on a
monthly basis. The adjustable-rate of interest charged on such loans is indexed
to the prime rate as reported in The Wall Street Journal. Home equity lines of
credit generally have an 18% lifetime limit on interest rates. Generally, the
maximum combined LTV ratio on home equity lines of credit is 70%. The
underwriting standards employed by the Bank for home equity lines of credit
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan and the value of the collateral securing the loan. The stability
of the applicant's monthly income may be determined by verification of gross
monthly income from primary employment and, additionally, from any verifiable
secondary income. Creditworthiness of the applicant is of primary
consideration.
CONSUMER LENDING. Consumer loans at May 31, 1998 amounted to $182,000, or
0.4% of the Bank's total loans, and consisted primarily of new and used
automobile loans and passbook loans. Such loans are generally originated in the
Bank's primary market area and generally are secured by automobiles and deposit
accounts.
56
<PAGE>
Loans on savings accounts are generally secured by deposit accounts.
Automobile loans have a maximum borrowing limitation of 80% of the sale price of
the automobile or average value in the National Automobile Dealer's Association
price guide (the "bluebook"), whichever is lower. At May 31, 1998, automobile
loans totalled $102,000, or 56.0% of consumer loans and 0.21% of the Bank's
total loans; and loans on savings accounts totalled $80,000, or 44.0% of
consumer loans and 0.17% of the Bank's total loans.
Loans secured by rapidly depreciable assets such as automobiles entail
greater risks than one- to four-family residential mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. The Board of
Directors has established the Security Committee (the "Committee") of the Board
which considers and approves all loans within its designated authority as
established by the Board. In addition, the Board of Directors has authorized
certain officers of the Bank (the "designated officers") to consider and approve
all loans within their designated authority as established by the Board.
The Board of Directors has authorized the following persons and groups of
persons to approve loans up to the amounts indicated: one- to four-family
mortgage loans, multi-family loans, commercial real estate loans, construction
loans and home equity lines in amounts up to $500,000 may be approved by any of
the designated officers, if the loan is to be sold on the secondary market, or
two of the designated officers, if the loan is to be retained in the Bank's
portfolio; except that home equity lines in amounts of up to $50,000 may be
approved by any of the designated officers. All loans in excess of $500,000 and
up to $1.0 million require the approval of the Committee; and all loans in
excess of $1.0 million require the approval of the full Board of Directors.
Automobile loans in amounts up to $10,000 may be approved by any of the
designated officers; automobile loans in excess of $10,000 and up to $20,000 may
be approved by either the Bank's President and Chief Executive Officer or the
Bank's Senior Vice President of Lending; automobile loans in excess of $20,000
require the approval of two of the designated officers. Loans on savings
accounts may be approved by any branch manager. Such loans are fully secured by
the savings account or certificate of deposit utilized in connection with the
securitization of the loan.
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
DELINQUENCIES, CLASSIFIED ASSETS AND REAL ESTATE OWNED. Reports listing
all delinquent accounts are generated and reviewed by management on a monthly
basis and the Board of Directors performs a monthly review of all loans or
lending relationships delinquent 60 days or more. The procedures taken by the
Bank with respect to delinquencies vary depending on the nature of the loan,
period and cause of delinquency and whether the borrower is habitually
delinquent. When a borrower fails to make a required payment on a loan, the
Bank takes a number of steps to have the borrower cure the delinquency and
restore the loan to current status. The Bank generally sends the borrower a
written notice of non-payment after the loan is first past due. The Bank's
guidelines provide that telephone and written correspondence will be attempted
to ascertain the reasons for delinquency and the prospects of repayment. When
contact is made with the borrower at any time prior to foreclosure, the Bank
will attempt to obtain full payment, offer to work out a repayment schedule with
the borrower to avoid foreclosure or, in some instances, accept a deed in lieu
of foreclosure. In the event payment is not then received or the loan not
otherwise satisfied, additional letters and telephone calls generally are made.
If the loan is still not brought current or satisfied and it becomes necessary
for the Bank to take legal action, which typically occurs after a loan is 90
days or more delinquent, the Bank will commence foreclosure proceedings against
any real property that secured the loan. If a foreclosure action is instituted
and the loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Bank, becomes real estate owned.
57
<PAGE>
Federal regulations and the Bank's internal policies require that the Bank
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. The Bank currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An
asset is considered Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have all of the weaknesses inherent in those
classified Substandard with the added characteristic that the weaknesses present
make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. Assets
classified as Loss are those considered uncollectible and of such little value
that their continuance as assets, without the establishment of a specific loss
reserve, is not warranted. Assets which do not currently expose the Bank to a
sufficient degree of risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "Special
Mention."
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Bank classifies one or more assets,
or portions thereof, as Loss, it is required either to establish a specific
allowance for losses equal to 100% of the amount of the 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 allowances is subject to review by the FDIC and
Commissioner, which can order the establishment of additional general or
specific loss allowances. The FDIC, in conjunction with the other federal
banking agencies, recently adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management has
established acceptable allowance evaluation processes that meet the objectives
set forth in the policy statement. While the Bank believes that it has
established an adequate allowance for possible loan losses, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to materially increase at that time its allowance for possible
loan losses, thereby negatively affecting the Bank's financial condition and
earnings at that time. Although management believes that adequate specific and
general loan loss allowances have been established, future provisions are
dependent upon future events such as loan growth and portfolio diversification
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
Management of the Bank reviews and classifies its assets on a quarterly
basis, and the Board of Directors reviews the results of the reports on a
quarterly basis. The Bank classifies its assets in accordance with the
management guidelines described above. At May 31, 1998, the Bank had
$1.0 million, or 1.6%, of assets designated as Substandard, consisting of eight
one-to four-family mortgage loans and two multi-family mortgage loans. At such
date, the Bank had no loans classified as Special Mention, Doubtful or Loss. At
May 31, 1998, these classified assets represented 2.1% of loans receivable.
58
<PAGE>
NONPERFORMING ASSETS. The following table sets forth information regarding
nonperforming loans and REO. At May 31, 1998, the Bank had no REO in its
portfolio. It is the general policy of the Bank to cease accruing interest on
loans 90 days or more past due and to fully reserve for all previously accrued
interest. If interest payments on all non-accrual loans for the five months
ended May 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995
had been made in accordance with original loan agreements, interest income of
$5,000, $8,000, $9,000, $38,000 and $14,000, respectively, would have been
recognized.
<TABLE>
<CAPTION>
AT MAY 31, AT DECEMBER 31,
--------------- ------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family................................... $ 65 $ 106 $ 115 $ 392 $ 52
Real estate owned, net (1)............................... -- 141 -- 540 1,262
----- ----- ----- ----- ------
Total non-performing assets........................ $ 65 $ 247 $ 115 $ 932 $1,314
===== ===== ===== ===== ======
Non-performing loans as a percent of loans (2)(3)........ 0.15% 0.28% 0.28% 1.01% 0.16%
Non-performing assets as a percent of total assets (3)... 0.10% 0.48% 0.21% 1.84% 3.05%
</TABLE>
- -------------------------
(1) Real estate owned balances are shown net of related loss allowances.
(2) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(3) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of non-accruing loans and all loans 90 days or
more past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest or
principal.
At May 31, 1998, the Bank had one non-performing loan in the amount of
$65,000 which is secured by a one-to four-family property.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
its loan portfolio in consideration of the trends in its loan portfolio, the
national and regional economies and the real estate market in the Bank's primary
lending area. The allowance for possible 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. The Bank's loan loss allowance determinations also incorporate
factors and analyses which consider the potential principal loss associated with
the loan, costs of acquiring the property securing the loan through foreclosure
or deed in lieu thereof, the periods of time involved with the acquisition and
sale of such property, and costs and expenses associated with maintaining and
holding the property until sale and the costs associated with the Bank's
inability to utilize funds for other income producing activities during the
estimated holding period of the property.
Management periodically calculates a loan loss allowance sufficiency
analysis based upon the loan portfolio composition, asset classifications, loan-
to-value ratios, potential impairments in the loan portfolio and other factors.
The analysis is compared to actual losses, peer group comparisons and economic
conditions. As of May 31, 1998, the Bank's allowance for possible loan losses
was $472,000, or 1.09% of total loans, and 726.2% of nonperforming loans as
compared to $349,000, or 0.84% of total loans, and 303.5% of nonperforming loans
as of December 31, 1997. The Bank had total nonperforming loans of $65,000 and
$115,000 at May 31, 1998 and December 31, 1997, respectively, and nonperforming
loans to total loans of 0.15% and 0.28%, respectively. The Bank will continue
to monitor and modify its allowance for possible loan losses as conditions
dictate. Management believes that, based on information available at May 31,
1998, the Bank's allowance for possible loan losses was sufficient to cover
losses inherent in its loan portfolio at that time. However, no assurances can
be given that the Bank's level of allowance for possible loan losses will be
sufficient to cover future loan losses incurred by the Bank or that further
future adjustments to the allowance for possible loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current level
of the
59
<PAGE>
allowance for possible loan losses. In addition, the FDIC and the Commissioner,
as an integral part of their examination processes, periodically review the
Bank's allowance for possible loan losses. Such agencies may require the Bank to
make additional provisions for estimated loan losses based upon judgments
different from those of management.
The following table sets forth activity in the Bank's allowance for
possible loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE
FIVE MONTHS AT OR FOR THE
ENDED MAY 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------
1998 1997 1997 1996 1995
-------- ------ ------ ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................. $ 349 $ 322 $ 322 $ 300 $ 446
Provision (credit) for possible loan losses..... 64 -- (90) 14 70
Charge-offs:
One- to four-family.......................... -- -- 11 173 346
Auto loans................................... -- 5 -- -- --
------ ------ ------ ----- ------
Total charge-offs...................... -- 5 11 173 346
------ ------ ------ ----- ------
Recoveries:
One- to four-family.......................... 59 42 128 179 74
Auto loans................................... -- -- -- 2 1
------ ------ ------ ----- ------
Total recoveries....................... 59 42 128 181 75
Transfer from allowance for losses
on foreclosed real estate.................... -- -- -- -- 55
------ ------ ------ ----- ------
Net charge-offs (recoveries).................... (59) (37) (117) (8) 271
------ ------ ------ ----- ------
Balance at end of period........................ $ 472 $ 359 $ 349 $ 322 $ 300
====== ====== ====== ===== ======
Allowance for possible loan losses as
a percent of loans (1)....................... 1.09% 0.94% 0.84% 0.83% 0.92%
Allowance for possible loan losses as
a percent of nonperforming loans............. 726.2% 338.7% 303.5% 82.1% 576.9%
</TABLE>
- -------------
(1) Loans, net, excluding the allowance for possible loan losses.
60
<PAGE>
The following table sets forth a breakdown of the allowance for possible
loan losses by loan category at the dates indicated. Management believes that
the allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not restrict
the use of the allowance to absorb losses in any other loan category.
<TABLE>
<CAPTION>
AT MAY 31,
----------------------------------------
1998 1997
------------------ -------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family....... $233 79.87% $177 83.59%
Multi-family.............. 123 5.53 77 6.41
Commercial real estate.... 16 3.35 16 4.07
Construction.............. 93 9.74 15 3.82
Home equity lines......... 3 1.07 3 1.54
Consumer loans............ 4 0.38 3 0.40
Other..................... -- 0.06 -- 0.17
Unallocated............... -- -- 68 --
---- ------ ---- ------
Total allowance for
possible loan losses..... $472 100.00% $359 100.00%
==== ====== ==== ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family....... $157 84.61% $174 82.26% $132 81.54%
Multi-family.............. 57 5.48 95 6.81 102 7.26
Commercial real estate.... 15 3.31 19 4.70 19 5.67
Construction.............. 22 4.84 15 3.66 7 2.16
Home equity lines......... 3 1.25 4 1.78 4 2.49
Consumer loans............ 3 0.44 5 0.58 4 0.53
Other..................... -- 0.07 -- 0.21 -- 0.35
Unallocated............... 92 -- 10 -- 32 --
---- ------ ---- ------ ---- ------
Total allowance for
possible loan losses..... $349 100.00% $322 100.00% $300 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
61
<PAGE>
REAL ESTATE OWNED. At May 31, 1998, the Bank had no REO in its portfolio.
When the Bank does acquire property through foreclosure or deed in lieu of
foreclosure, it is initially recorded at the lower of the recorded investment in
the corresponding loan or the fair value of the related assets at the date of
foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Bank provides for a specific valuation allowance and
charges operations for the diminution in value.
INVESTMENT ACTIVITIES
The Board of Directors sets the investment policy and procedures of the
Bank. This policy generally provides that investment decisions will be made
based on the safety of the investment, liquidity requirements of the Bank and,
to a lesser extent, potential return on the investments. In pursuing these
objectives, the Bank considers the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification. While the Board of Directors has final authority and
responsibility for the securities investment portfolio, the Board has delegated
day-to-day oversight of the Bank's investments to the President of the Bank. On
a monthly basis, the Board reviews and evaluates all investment activities for
safety and soundness, adherence to the Bank's investment policy and assurance
that authority levels are maintained.
As required by SFAS No. 115, the Bank has established an investment
portfolio of securities that are categorized as held-to-maturity, available-for-
sale or held for trading. The Bank generally invests in securities as a method
of utilizing funds not utilized for loan origination activity and as a method of
maintaining liquidity at levels deemed appropriate by management. The Bank does
not currently maintain a portfolio of securities categorized as held for
trading. At May 31, 1998, the available-for-sale securities portfolio totalled
$4.6 million, or 7.3% of assets and the held-to-maturity portfolio totalled $2.9
million, or 4.6% of assets.
The Bank currently does not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Similarly, the Bank does not invest in mortgage-related
securities which are deemed to be "high risk," or purchase bonds which are not
rated investment grade.
MORTGAGE-BACKED SECURITIES. The Bank currently purchases mortgage-backed
securities in order to: (i) achieve positive interest rate spreads with minimal
administrative expense; and (ii) lower its credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and Ginnie Mae. The Bank
invests in mortgage-backed securities insured or guaranteed by Fannie Mae,
Freddie Mac and Ginnie Mae. At May 31, 1998, mortgage-backed securities
totalled $1.0 million, or 1.6%, of total assets and 1.7% of total interest
earning assets, all of which were classified as available-for-sale. At May 31,
1998, all of the mortgage-backed securities were backed by adjustable-rate
loans. The mortgage-backed securities portfolio had a stated rate of 6.6% at
May 31, 1998. The estimated fair value of the Bank's mortgage-backed securities
at May 31, 1998, was $1.0 million, which is $47,000 more than the amortized cost
of $988,000. Investments in mortgage-backed securities involve a risk that
actual prepayments may differ from estimate prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby changing the net
yield on such securities. There is also reinvestment risk associated with the
cash flows from such securities or in the event such securities are redeemed by
the issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
U.S. GOVERNMENT AND FEDERAL AGENCY OBLIGATIONS. At May 31, 1998, the
Bank's U.S. Government and federal agency obligations securities portfolio
totalled $3.9 million, of which $2.9 million, or 72.8%, were classified as
available-for-sale. Such portfolio at May 31, 1998 primarily consisted of
short- to medium-term (maturities of one to five years) securities issued by
federal agencies.
CORPORATE EQUITY SECURITIES AND DEBT OBLIGATIONS. The Bank currently
invests in the equity securities and debt obligations of United States
corporations. At May 31, 1998, the Bank's equity securities portfolio totalled
$727,000, or 1.2% of total assets, all of which were classified as available-
for-sale. Such portfolio consisted of $561,000 of common stock and $166,000 in
preferred stock issued by corporate issuers. The Bank's current policies
generally provide that the maximum equity investment in any one corporation
shall not exceed 3% of the Bank's
62
<PAGE>
surplus and reserves and the maximum aggregate investment in any one industry
shall not exceed 15% of the Bank's surplus and reserves. At May 31, 1998, the
Bank had $1.8 million, or 2.9% of total assets, of corporate debt obligations,
all of which were investment grade, with maturities of two years or less. The
Bank's current policies generally provide that the average maturity of the
Bank's portfolio of corporate debt securities may not exceed 5 years and 80% of
such obligations shall mature in 3 years or less. The Bank's policies further
provide that the Bank's total portfolio of corporate debt, commercial paper and
consumer loans may not exceed 30% of total assets.
Investments in corporate equity securities and debt obligations involve
risk as they are not insured or guaranteed by the U.S. government or any agency
thereof, generally not secured by collateral and generally rely upon future
income from the operations of the issuer for repayment of principal and
interest.
The following table sets forth at the dates indicated certain information
regarding the amortized cost and market values of the Bank's investment
securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
AT MAY 31, 1998 1997 1996 1995
-------------------- ------------------ ------------------ ---------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---------- --------- ---------- ------- ---------- ------ ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities (1):
Held to maturity:
U.S. Government and federal
agency................................ $1,065 $1,066 $1,499 $1,500 $ -- $ -- $ -- $ --
Corporate debt........................... 1,849 1,849 1,480 1,483 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total securities held to maturity..... 2,914 2,915 2,979 2,983 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Available for sale:
U.S. Government and federal
agency................................ 2,840 2,851 1,340 1,353 1,512 1,482 1,514 1,508
Corporate debt........................... -- -- -- -- 1,580 1,599 2,346 2,380
Mortgage-backed securities............... 988 1,035 1,015 1,044 1,475 1,503 1,641 1,658
Marketable equity securities............. 682 727 575 626 238 257 130 129
------ ------ ------ ------ ------ ------ ------ ------
Total securities available for sale... 4,510 4,613 2,930 3,023 4,805 4,841 5,631 5,675
------ ------ ------ ------ ------ ------ ------ ------
Total securities................... $7,424 $7,528 $5,909 $6,006 $4,805 $4,841 $5,631 $5,675
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) On October 31, 1993, the Bank adopted SFAS 115 and, accordingly, there
were no investment securities categorized as held to maturity during the
years ended December 31, 1996 and 1995.
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of May 31, 1998.
<TABLE>
<CAPTION>
AT MAY 31, 1998
------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS TOTAL
------------------- ------------------- ------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- --------- -------- ---------- --------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S Government and
federal agency......... $ 750 6.13% $ 250 5.60% $ 65 6.59% $ -- --% $1,065 6.03%
Corporate debt........... 504 7.86 1,345 8.09 -- -- -- -- 1,849 8.03
------ ------ ------- ------- ------
Total held-to-maturity. 1,254 6.82 1,595 7.70 65 6.59 -- -- 2,914 7.30
------ ------ ------- ------- ------
Available for sale:
Mortgage-backed
securities........... -- -- -- -- -- -- 1,035 4.94 1,035 4.94
U.S. Government and
federal agency....... 500 5.50 1,498 5.98 853 6.62 -- -- 2,851 6.08
Marketable equity
securities........... -- -- -- -- -- -- -- -- 727 --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total available for
sale................ 500 5.50 1,498 5.98 853 6.62 1,035 4.94 4,613 5.79
------ ------ ------- ------- ------
Total securities...... $1,754 6.45% $3,093 6.87% $918 6.62% $1,035 4.94% $7,527 6.44%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
63
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, repayments and prepayments of loans, cash flows
generated from operations and FHLB advances are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings,
retail checking/NOW accounts, commercial checking accounts, money market
accounts, club accounts and certificate of deposit accounts. The Bank offers
certificate of deposit accounts with balances in excess of $100,000 at
preferential rates (jumbo certificates) and also offers Individual Retirement
Accounts ("IRAs") and other qualified plan accounts.
At May 31, 1998, the Bank's deposits totalled $54.7 million, or 94.1%, of
total liabilities. For the year ended December 31, 1997, the average balance of
core deposits (savings, NOW, money market and noninterest-bearing checking
accounts) totalled $19.0 million, or 48.2% of total average deposits. At May
31, 1998, the Bank had a total of $27.6 million in certificates of deposit, of
which $21.2 million had maturities of one year or less. For the year ended
December 31, 1997, the average balance of core deposits represented
approximately 48.2% of total deposits and certificate accounts represented
51.8%, as compared to core deposits representing 49.1% of total deposits and
certificate accounts representing 50.9% of deposits for the year ended December
31, 1996. See "Risk Factors--Sensitivity to Changes in Interest Rates."
Although the Bank has a significant portion of its deposits in core deposits,
management monitors activity on the Bank's core deposits and, based on
historical experience and the Bank's current pricing strategy, believes it will
continue to retain a large portion of such accounts. The Bank is not limited
with respect to the rates it may offer on deposit products.
Since 1996, the Bank has experienced a significant increase in total
deposits, from $34.2 million at December 31, 1996 to $54.7 million at May 31,
1998. Such increase in total deposits is mainly due to the opening of a new
branch office in 1996 and offering new competitively priced deposit products to
attract new deposit relationships. As a result, despite a declining interest
rate environment in recent years, the Bank's overall cost of funding has
generally increased. In addition, and consistent with its expansion strategy,
the Bank is actively seeking to establish a de novo branch office. The Bank
expects to continue to emphasize deposit growth through the establishment of the
new branch office and increased marketing efforts.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its banking offices are located. The Bank relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions affect the Bank's ability to attract and retain deposits.
The Bank uses traditional means of advertising its deposit products, including
radio and print media and generally does not solicit deposits from outside its
market area. While certificate accounts in excess of $100,000 are accepted by
the Bank, and may be subject to preferential rates, the Bank does not actively
solicit such deposits as such deposits are more difficult to retain than core
deposits. Although the Bank's policies do permit the use of brokered deposits,
the Bank does not currently accept brokered deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE
FIVE MONTHS ENDED
MAY 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------
1998 1997 1997 1996 1995
--------- --------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals)............. $10,927 $6,162 $7,124 $ 715 $ (67)
Interest credited on deposit accounts.. 839 620 1,583 1,248 1,258
------- ------ ------ ------ ------
Total increase in deposit accounts..... $11,766 $6,782 $8,707 $1,963 $1,191
======= ====== ====== ====== ======
</TABLE>
64
<PAGE>
At May 31, 1998, the Bank had outstanding $8.5 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
- --------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less.................. $ 456 5.02%
Over three through six months......... 2,389 5.47
Over six through 12 months............ 3,360 5.85
Over 12 months........................ 2,249 5.81
------
Total................................. $8,454 5.69%
======
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented.
<TABLE>
<CAPTION>
AT MAY 31, 1998 AT DECEMBER 31, 1997
---------------------------------- ------------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- ---------- ---------- ---------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market deposits........... $ 889 1.83% 2.70% $ 1,079 2.73% 2.59%
Demand accounts................. 3,296 6.77 -- 2,255 5.71 --
NOW accounts.................... 9,868 20.28 4.35 5,377 13.61 3.20
Regular and other savings....... 9,865 20.27 1.95 10,328 26.14 2.36
Total certificates of deposit... 24,741 50.85 5.52 20,471 51.81 5.56
------- ------ ------- ------
Total deposits............ $48,659 100.00% 4.43 $39,510 100.00% 4.25
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
AVERAGE OF TOTAL AVERAGE AVERAGE OF TOTAL AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
--------- --------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market deposits.......... $ 1,290 4.01% 2.56% $ 1,532 4.80% 2.55%
Demand accounts................ 2,043 6.34 -- 1,342 4.20 --
NOW accounts................... 2,612 8.11 1.88 2,404 7.53 1.87
Regular and other savings...... 9,854 30.60 2.44 9,967 31.21 2.45
Total certificates of deposit.. 16,405 50.94 5.64 16,690 52.26 5.57
------- ------ ------- ------
Total deposits.............. $32,204 100.00% 4.14 $31,935 100.00% 4.11
======= ====== ======= ======
</TABLE>
BORROWED FUNDS. As part of its operating strategy, the Bank utilizes
advances from the FHLB as an alternative to retail deposits to fund its
operations. By utilizing FHLB advances, which possess varying stated
maturities, the Bank can meet its liquidity needs without otherwise being
dependent upon retail deposits, which have no stated maturities (except for
certificates of deposit), which are interest rate sensitive and which are
subject to withdrawal from the Bank at any time. These FHLB advances are
collateralized primarily by certain of the Bank's mortgage loans and mortgage-
backed securities and secondarily by the Bank's investment in capital stock of
the FHLB. FHLB advances are made pursuant to several different credit programs,
each of which has its own interest
65
<PAGE>
rate and range of maturities. The maximum amount that the FHLB will advance to
member institutions, including the Bank, fluctuates from time-to-time in
accordance with the policies of the FHLB. See "Regulation and Supervision--
Federal Home Loan Bank System." At May 31, 1998, the Bank had $3.1 million in
outstanding advances from the FHLB compared to $6.4 million at December 31,
1997.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE FIVE
MONTHS ENDED AT OR FOR THE YEAR ENDED
MAY 31, DECEMBER 31,
------------------------- -------------------------------------
1998 1997 1997 1996 1995
----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances:
Average balance outstanding............ $3,778 $7,662 $6,402 $10,406 $5,175
Maximum amount outstanding at any
month-end during the period......... 4,298 9,251 9,251 13,493 6,247
Balance outstanding at end of period... 3,094 5,603 6,436 11,605 6,247
Weighted average interest rate during
the period.......................... 6.01% 5.78% 5.87% 5.70% 6.40%
Weighted average interest rate at end
of period........................... 6.48% 6.07% 6.11% 5.80% 6.51%
</TABLE>
SUBSIDIARY ACTIVITIES
Mass Securities Corporation ("MSC") was organized in March 1998 for the
sole purpose of acquiring and holding investment securities of a type that are
permissible for banks to hold under applicable law. MSC was established to
qualify as a "securities corporation" for Massachusetts tax purposes. See
"Federal and State Taxation--State Taxation." The Bank has recently established
a second subsidiary ("Mass SEC Corp II") for the similar purpose. The results
of operations of these subsidiaries will be consolidated in the results and
operations of the Company.
66
<PAGE>
PROPERTIES
The Bank currently conducts its business through its main office located in
the Dorchester section of Boston, Massachusetts and one other full-service
banking office and two loan origination centers, all of which are located in the
greater Boston metropolitan area. Consistent with its expansion strategy, the
Bank is actively pursuing establishing a de novo branch location. Upon the
establishment of the new branch office, the Bank intends to relocate its
administrative functions to the new location. The Bank expects to incur capital
expenditures of up to $1.5 million in connection with the establishment of a de
novo branch office and relocation of its administrative offices. The Bank has
entered into an agreement to purchase a building for $975,000 for this purpose
and expects to open the facility in the Spring of 1999, subject to zoning
approvals. Once such branch is established, the Company believes that the
Bank's facilities will be adequate to meet the then present and immediately
foreseeable needs of the Bank and the Company. The following table does not
reflect such new branch office.
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY
OR LEASEHOLD
ORIGINAL YEAR DATE OF LEASE IMPROVEMENTS
LOCATION LEASED OR OWNED LEASED OR ACQUIRED EXPIRATION AT MAY 31, 1998
- -------- --------------- ------------------ ----------------- -----------------
(IN THOUSANDS)
MAIN OFFICE:
<S> <C> <C> <C> <C>
1442 Dorchester Avenue (1) (1) (1) $184
Boston, MA 02122
BANKING OFFICE:
561 Adams Street Owned 1996 -- 755
East Milton, MA 02186
LOAN ORIGINATION CENTERS:
607 North Avenue, D-12 Leased 1997 February 1999 --
Wakefield, MA 01880
200 Cordwainer Drive Leased 1998 January 1999 (2) --
Norwell, MA 02061 ----
Total $939
====
</TABLE>
- ----------------------------
(1) This property is comprised of two adjacent parcels of land. The Bank owns
one of the parcels, which it obtained in 1908, and leases the other, which
lease began in June 1986. With respect to the leased parcel, the Bank is
currently in the first year of the second of three five-year renewal
options. The current option period will expire in May 2003.
(2) The Bank has an option to renew this lease for an additional three-year
period.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Bank.
PERSONNEL
As of May 31, 1998, the Bank had 38 full-time employees and no part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank considers its relationship with its employees to be good. See
"Management of the Bank--Other Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
67
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank will report their income on a
consolidated basis, using a calendar year and the accrual method of accounting
and will be subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's treatment
of its reserve for bad debts discussed below. The following discussion of tax
matters material to the operations of the Company and Bank is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
or the Massachusetts Department of Revenue ("Massachusetts DOR") in the past
five years.
BAD DEBT RESERVES. The Small Business Job Protection Act of 1996 (the
"1996 Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad debt
reserves. The effect of the 1996 Act on the Bank is discussed below. Prior to
the enactment of the 1996 Act, the Bank was permitted to establish tax reserves
for bad debts and to make annual additions thereto, which additions, within
specified formula limits, were deducted in arriving at the Bank's taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8% of the Bank's
taxable income (the "PTI Method"), computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve. The Bank's deduction with respect to
non-qualifying loans was required to be computed under the Experience Method.
THE 1996 ACT. Under the 1996 Act, for its current and future taxable
years, as a "Small Bank" the Bank is permitted to make additions to its tax bad
debt reserves under an Experience Method based on total loans. The Federal
income tax reserve for loan losses at the Bank's base year amounted to
approximately $1.2 million. If any portion of the reserve is used for purposes
other than to absorb the losses for which established, 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 only to absorb loan losses, a deferred income tax liability of
approximately $495,000 has not been provided.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. The term "non-dividend
distributions" is defined as distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not cause this pre-1988 reserve to be included in the Bank's
income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not in
excess of the amount of such reserves) would be includable in income for federal
income tax purposes, assuming a 35% federal corporate income tax rate. See
"Regulation and Supervision" and "Dividend Policy" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be
offset by net operating loss carry forwards. The adjustment to AMTI based on
book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of .12% of the excess of AMTI (with certain
modifications) over $2 million, is imposed on
68
<PAGE>
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. The Bank does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
STATE TAXATION
MASSACHUSETTS COMMONWEALTH TAXATION. Prior to July, 1995, the Bank was
subject to an annual Massachusetts excise (income) tax equal to 12.54% of its
pre-tax income. In 1995, legislation was enacted to reduce the Massachusetts
bank excise (income) tax rate and to allow Massachusetts-based financial
institutions to apportion income earned in other states. Further, this
legislation expands the applicability of the tax to non-bank entities and out-
of-state financial institutions. The Massachusetts excise tax rate for co-
operative banks is currently 10.91% of federal taxable income, adjusted for
certain items. This rate will be reduced over the next year so that the Bank's
tax rate will become 10.5% by December 31, 1999. Taxable income includes gross
income as defined under the Code, plus interest from bonds, notes and evidences
of indebtedness of any state, including Massachusetts, less deductions, but not
the credits, allowable under the provisions of the Code. No deductions, however,
are allowed for dividends received until July 1, 1999. In addition, carry
forwards and carrybacks of net operating losses are not allowed.
A financial institution or business corporation is generally entitled to
special tax treatment as a "security corporation," provided that: (a) its
activities are limited to buying, selling, dealing in or holding securities on
its own behalf and not as a broker; and, (b) it has applied for, and received,
classification as a "security corporation" by the Commissioner of the
Massachusetts DOR. A security corporation that is also a bank holding company
under the Code is subject to a tax equal to 0.33% of its gross income. A
security corporation that is not a bank holding company under the Code is
subject to a tax equal to 1.32% of its gross income. The Bank has received an
opinion for Grant Thornton LLP that the ownership of 100% of the stock the ESOP
Loan Subsidiary by the Company will not prevent the Company from qualifying as a
security corporation, provided that the Company: (a) applies for, and receives,
security corporation classification by the Massachusetts DOR; and (b) does not
conduct any activities deemed impermissible under the governing statutes and the
various regulations, directives, letter rulings and administrative
pronouncements issued by the Massachusetts DOR.
The Bank's subsidiary, MSC, was established solely for the purpose of
acquiring and holding investments which are permissible for banks to hold under
Massachusetts law. MSC is classified with the Massachusetts DOR as a "security
corporation" under Massachusetts law, qualifying it to take advantage of the
1.32% income tax rate on Massachusetts securities corporations.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION AND SUPERVISION
GENERAL
As a co-operative bank chartered by the Commonwealth of Massachusetts, the
Bank is subject to extensive regulation under state law with respect to many
aspects of its banking activities; this state regulation is administered by the
Commissioner. In addition, as a bank whose deposits are insured by the FDIC
under the BIF, the Bank is subject to deposit insurance assessments by the FDIC,
the FDIC has examination and supervisory authority over the Bank, with a broad
range of enforcement powers and the FDIC regulates the Bank's activities and
operations. Finally, the Bank is required to maintain reserves against deposits
according to a schedule established by the Federal Reserve System. These laws
and regulations have been established primarily for the protection of
depositors, customers and borrowers of the Bank, not bank stockholders.
69
<PAGE>
The following discussion of the laws and regulations material to the
operations of the Company and Bank are brief summaries thereof, do not purport
to be complete and are qualified in their entirety by reference to such laws and
regulations. The Holding Company will also be required to file certain reports
with, and otherwise comply with the rules and regulations, of the OTS, the
Commissioner and of the Securities and Exchange Commission ("SEC") under the
federal securities laws. Certain of the regulatory requirements applicable to
the Bank and to the Holding Company are referred to below or elsewhere herein.
MASSACHUSETTS BANKING LAWS AND SUPERVISION
Massachusetts co-operative banks are regulated and supervised by the
Commissioner. The Commissioner is required to regularly examine each state-
chartered bank. The approval of the Commissioner is required to establish or
close branches, to merge with another bank, to form a holding company, to issue
stock or to undertake many other activities. Any Massachusetts bank that does
not operate in accordance with the regulations, policies and directives of the
Commissioner is subject to sanctions. The Commissioner may under certain
circumstances suspend or remove directors or officers of a bank who have
violated the law, conducted a 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.
All Massachusetts-chartered co-operative banks are required to be members
of the Co-operative Central Bank and are subject to its assessments. The Co-
operative Central Bank maintains the Share Insurance Fund, a private deposit
insurer, which insures all deposits in member banks in excess of FDIC deposit
insurance limits. In addition, the Co-operative Central Bank acts as a source of
liquidity to its members in supplying them with low-cost funds, and purchasing
certain qualifying obligations from them.
Major changes in Massachusetts law in 1982 and 1983 substantially expanded
the powers of co-operative banks, and made their powers virtually identical to
those of state-chartered commercial banks. The powers which Massachusetts-
chartered co-operative banks can exercise under these laws are summarized below.
LENDING ACTIVITIES. A Massachusetts-chartered co-operative bank may make a
wide variety of mortgage loans. Fixed-rate loans, adjustable-rate loans,
variable-rate loans, participation loans, graduated payment loans, construction
loans, condominium and co-operative loans, second mortgage loans and other types
of loans may be made in accordance with applicable regulations. Mortgage loans
may be made on real estate in Massachusetts or in another New England state if
the bank making the loan has an office there or under certain other
circumstances. In addition, certain mortgage loans may be made on improved real
estate located anywhere in the United States. Commercial loans may be made to
corporations and other commercial enterprises with or without security. With
certain exceptions, such loans may be made without geographic limitation.
Consumer and personal loans may be made with or without security and without
geographic limitation. Loans to individual borrowers generally will be limited
to 20% of the total of the Bank's capital accounts and stockholders' equity.
INVESTMENTS AUTHORIZED. Massachusetts-chartered co-operative banks have
broad investment powers under Massachusetts law, including so-called "leeway"
authority for investments that are not otherwise specifically authorized. The
investment powers authorized under Massachusetts law are restricted by federal
law to permit, in general, only investments of the kinds that would be permitted
for national banks. The Bank has authority to invest in all of the classes of
loans and investments that are permitted by its existing loan and investment
policies.
PAYMENT OF DIVIDENDS. A co-operative bank may only pay dividends on its
capital stock if such payment would not impair the bank's capital stock and
surplus account. No dividends may be paid to stockholders of a bank if such
dividends would reduce stockholders' equity of the bank below the amount of the
liquidation account required by Massachusetts conversion regulations.
BRANCHES. With the approval of the Commissioner, branches may be
established in any city or town in Massachusetts; in addition, co-operative
banks may operate automated teller machines at any of their offices or, with the
Commissioner's approval, anywhere in Massachusetts. Sharing of ATMs or
"networking" is also permitted with the Commissioner's approval. Massachusetts-
chartered co-operative banks may also operate ATMs outside of Massachusetts if
permitted to do so by the law of the jurisdiction in which the ATM is located.
70
<PAGE>
INTERSTATE ACQUISITIONS. In 1996, the Massachusetts legislature passed a
new interstate banking statute in anticipation of the June 1, 1997 effective
date of the federal interstate banking law. Pursuant to this statute, 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
depends 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 establish de novo branches in New
Hampshire.
PARITY REGULATION. The 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 not otherwise 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 at least a "satisfactory" Community
Reinvestment Act, as amended ("CRA") rating at the most recent examination by
the Commissioner or other applicable federal bank 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 or mortgage in certain types of home equity loans, financing of
mutual fund distributions, engagement in lease financing transactions,
investment in community development and public welfare projects, and the
provision of tax planning and preparation, payroll and financial planning
services, among others. The procedures and requirements for engaging in such
activities range from an application process, expedited review and notice
process to activities requiring 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
this prospectus, the Bank was "well 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
procedure and requirements of Massachusetts regulation.
OTHER POWERS. Massachusetts-chartered co-operative banks may also lease
machinery and equipment, act as trustee or custodian for tax qualified
retirement plans, establish trust departments and act as professional trustee or
fiduciary, provide payroll services for their customers, issue or participate
with others in the issuance of mortgage-backed securities and establish mortgage
banking companies and discount securities brokerage operations. Some of these
activities require the prior approval of the Commissioner.
FEDERAL REGULATIONS
CAPITAL REQUIREMENTS. Under FDIC regulations, federally insured state-
chartered banks that are not members of the Federal Reserve System ("state non-
member banks"), such as the Bank, are required to comply with minimum leverage
capital requirements. For an institution determined by the FDIC to not be
anticipating or experiencing significant growth and to have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and to be in general a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Ranking
System (the rating system) established by the Federal Financial Institutions
Examination Council, the minimum capital leverage requirement is a ratio of Tier
1 capital to total assets of 3%. For all other institutions, the minimum
leverage capital ratio is 3% plus an additional "cushion" amount of at least 100
to 200 basis points. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships).
The FDIC has also adopted risk-based capital guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework designed
to make regulatory capital requirements sensitive to differences in risk
profiles among banking organizations. The FDIC guidelines require state non-
member banks to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory 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. For example,
71
<PAGE>
under the FDIC's risk-weighting system, cash and securities backed by the full
faith and credit of the U.S. government are given a 0% risk weight. Mortgage-
backed securities that qualify under the Secondary Mortgage Enhancement Act,
including those issued, or fully guaranteed as to principal and interest, by
Fannie Mae or Freddie Mac, are assigned a 20% risk weight. Single-family first
mortgages not more than 90 days past due with loan-to-value ratios under 80%,
multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios
under 80% and average annual occupancy rates over 80%, and certain qualifying
loans for the construction of one- to four-family residences pre-sold to home
purchasers, are assigned a risk weight of 50%. Consumer loans and commercial
real estate loans, repossessed assets and assets more than 90 days past due, as
well as all other assets not specifically assigned categories are risk weighted
at 100%.
State non-member banks must maintain a minimum ratio of qualifying capital
to risk-weighted assets of at least 8%, of which at least one-half be Tier 1
capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock,
preferred stock with a maturity of over 20 years, and certain other capital
instruments. The includable amount of Tier 2 capital cannot exceed the amount of
the institution's Tier 1 capital. Qualifying total capital is further reduced by
the amount of the bank's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks and certain other deductions.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
for insured institutions to ensure that those standards take adequate account of
interest-rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as to reflect the actual performance and expected risk of
loss on multi-family residential loans.
The following is a summary of the Bank's regulatory capital at May 31,
1998:
GAAP Capital to Total Assets.............. 8.1%
Total Capital to Risk-Weighted Assets..... 13.6%
Tier I Leverage Ratio..................... 8.6%
Tier I to Risk-Weighted Assets............ 12.4%
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate risk
in assessing a bank's capital adequacy. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies
also have issued a joint policy statement providing guidance on interest rate
risk management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
The agencies have determined not to proceed with a previously issued proposal to
develop a supervisory framework for measuring interest rate risk and an explicit
capital component for interest rate risk.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things: internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted final regulations and Interagency Guidelines
Establishing Standards for Safety and Soundness (the "Guidelines") to implement
these safety and soundness standards. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems,
internal audit system, credit underwriting, loan documentation, interest rate
risk exposure, asset growth, asset quality, earnings and compensation, and fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the Federal Deposit
Insurance Act, as amended, ("FDI Act"). The final regulation establishes
deadlines for the submission and review of such safety and soundness compliance
plans.
72
<PAGE>
REAL ESTATE LENDING POLICIES. Under FDIC regulations which became effective
March 19, 1993, state-chartered non-member banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interest in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non owner occupied, one- to four-family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
INVESTMENT ACTIVITIES
Since the enactment of the FDICIA, all state-chartered FDIC insured banks,
including co-operative banks, have generally been limited to activities as
principal and equity investments of the type and in the amount authorized for
national banks, notwithstanding state law. FDICIA and the FDIC regulations
thereunder permit certain exceptions to these limitations. For example, certain
state chartered banks, such as the Bank, may, with FDIC approval, continue to
exercise state authority to invest in common or preferred stocks listed on a
national securities exchange or the Nasdaq National Market 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. In
addition, the FDIC is authorized to permit such institutions to engage in state
authorized activities or investments that do not meet this standard (other than
non-subsidiary equity investments) for institutions that meet all applicable
capital requirements if it is determined that such activities or investments do
not pose a significant risk to the BIF. The FDIC has recently proposed
revisions to its regulations governing the procedures for institutions seeking
approval to engage in such activities or investments. These proposed revisions
would, among other things, streamline certain application procedures for healthy
banks and impose certain quantitative and qualitative restrictions on a bank's
dealings with its subsidiaries engaged in activities not permitted for national
bank subsidiaries. All non-subsidiary equity investments, unless otherwise
authorized or approved by the FDIC, must have been divested by December 19,
1996, pursuant to a FDIC-approved divestiture plan unless such investments were
grandfathered by the FDIC. The Bank received grandfathering authority from the
FDIC in February, 1993 to invest in listed stocks and/or registered shares
subject to the maximum permissible investment of 100% of Tier 1 capital, as
specified by the FDIC's regulations, or the maximum amount permitted by
Massachusetts Commonwealth Banking Law, whichever is less. Such grandfathering
authority is subject to termination upon the FDIC's determination that such
investments pose a safety and soundness risk to the Bank or in the event the
Bank converts its charter, other than a mutual to stock conversion, or undergoes
a change in control. As of May 31, 1998, the Bank had $727,000 of securities
which were subject to such grandfathering authority.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
73
<PAGE>
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and is not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4% or
greater, and generally a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally a
leverage ratio of less than 4%. An institution is deemed to be "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a
Tier I risk-based capital ratio of less than 3%, or a leverage ratio of less
than 3%. An institution is deemed to be "critically undercapitalized" if it has
a ratio of tangible equity (as defined in the regulations) to total assets that
is equal to or less than 2%. As of May 31, 1998, the Bank was a "well
capitalized" institution and immediately upon completion of the Conversion
expects to be a "well capitalized" institution.
"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 institutions in an
amount equal to the lesser of 5.0% of the Bank's total assets when deemed
undercapitalized or the amount necessary to achieve the status of adequately
capitalized. 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 but not limited to 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 dismiss
directors or officers, and restrictions on interest rates paid on deposits,
compensation of executive officers and capital distributions by the parent
holding company. "Critically undercapitalized" institutions also may not,
beginning 60 days after becoming "critically undercapitalized," make any payment
of principal or interest on certain subordinated debt or extend credit for a
highly leveraged transaction or enter into any material transaction outside the
ordinary course of business. In addition, "critically undercapitalized"
institutions are subject to appointment of a receiver or conservator.
Generally, subject to a narrow exception, the appointment of a receiver or
conservator is required for a "critically undercapitalized" institution within
270 days after it obtains such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity that
controls, is controlled by, or is under common control with the savings
institution , other than a subsidiary. In a holding company context, at a
minimum, the parent holding company of a savings institution and any companies
which are controlled by such parent holding company are affiliates of the
savings institution . Generally, Section 23A limits the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such savings institution'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 on 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 institution or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings
institution 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 institution, 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 institution'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
institution, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings
institution. Any
74
<PAGE>
"interested" director may not participate in the voting. The loan amount (which
includes all other outstanding loans to such person and their related interests)
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 be made on terms substantially the same as offered in
comparable transactions to other persons, except that such insiders may receive
preferential loans made pursuant to a benefit or compensation program that is
widely available to the Bank's employees and does not give preference to the
insider over the employees. Section 22(g) of the Federal Reserve Act places
additional limitations on loans to executive officers.
ENFORCEMENT
The FDIC has extensive enforcement authority over insured co-operative
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
to unsafe or unsound practices.
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 non-member bank if that bank was "critically undercapitalized" on average
during the calendar quarter beginning 270 days after the date on which the
savings institution 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 Regulatory Action." The FDIC
may also appoint itself as conservator or receiver for an insured state non-
member savings institution under certain circumstances on the basis of the
institution's financial condition or upon the occurrence of certain events,
including: (i) insolvency (whereby the assets of the savings institution 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 savings institution 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.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized,
(2) adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $47.8 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts greater than $47.8
million, the reserve requirement is $1.43
75
<PAGE>
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $47.8
million. The first $4.7 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements.
Because required reserves must be maintained in the form of either vault cash,
a non-interest-bearing account at a Federal Reserve Bank or a pass-through
account as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
COMMUNITY REINVESTMENT ACT
Under the CRA, as implemented by FDIC regulations, a state non-member 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 an 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. The CRA was amended, effective July 1, 1990, to require
public disclosure of an institution's CRA rating and require the FDIC to provide
a written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system which replaced the five-tiered numerical rating
system. The Bank's latest CRA rating, received from the FDIC was
"Satisfactory."
In April 1995, the FDIC and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefitting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small banks would be
assessed pursuant to a streamlined approach focusing on a lesser range of
information and performance standards. The term "small bank" is defined as
including banks with less than $250 million in assets or an affiliate of a
holding company with banking and thrift assets of less than $1 billion, which
would include the Bank.
MASSACHUSETTS REGULATION. The Bank is also subject to provisions of the
Massachusetts law which impose continuing and affirmative obligations upon
banking institutions organized in Massachusetts to serve the credit needs of its
local community ("MCRA"), which are similar to those imposed by the CRA. The
MCRA also requires the Commissioner to consider a bank's MCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Bank's latest MCRA rating received from the
Division of Banks was "Satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB stock at May 31, 1998 of
$763,000. FHLB advances must be secured by specified types of collateral and
all long-term advances may only be obtained for the purpose of providing funds
for residential housing finance. At May 31, 1998, the Bank had $3.1 million in
FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
76
<PAGE>
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the five months ended May 31, 1998 and 1997 and
the years ended December 31, 1997, 1996 and 1995, cash dividends from the FHLB
to the Bank amounted to approximately $20,000, $20,000, $49,000, $38,000 and
$28,000, respectively. Further, there can be no assurance that the impact of
recent or future legislation on the FHLBs will not also cause a decrease in the
value of the FHLB stock held by the Bank.
HOLDING COMPANY REGULATION
Federal law allows a state co-operative bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by the
OTS rather than as a bank holding company by the Federal Reserve Board. The
Bank has made such election and expects to receive approval from the OTS to
become a savings and loan holding company prior to consummation of the
Conversion. The Company will be regulated as a non-diversified unitary savings
and loan holding company within the meaning of the HOLA. As such, the Company
will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. Additionally, the Bank will be required to
notify the OTS at least 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, as
amended ("BHC Act"), subject to the prior approval of the OTS, and to other
activities authorized by OTS regulation. Multiple savings and loan holding
companies are prohibited from acquiring or retaining, with certain exceptions,
more than 5% of a non-subsidiary company engaged in activities other than those
permitted by the HOLA.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings association or holding company thereof or
from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In
evaluating applications by holding companies to acquire savings association, the
OTS must consider the financial and managerial resources and future prospects of
the company and institution involved, the effect of the acquisition on the risk
to the insurance funds, the convenience and needs of the community and
competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by savings
and loan holding companies; and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions. In a
savings and loan holding company structure, the Bank is prohibited from
extending credit to affiliates not engaged exclusively in activities permissible
for a bank holding company and may not invest in the securities of an affiliate,
except a subsidiary.
In order to elect and continue to be regulated as a savings and loan
holding company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to qualify
as a QTL, the Bank must maintain compliance with the test for a "domestic
building and loan association," as defined in the Code, or with a Qualified
Thrift Lender Test ("QTL Test"). Under the QTL Test, a savings institution is
required to maintain at least 65% of its "portfolio assets" (total assets less:
(i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business) in
certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12 month period. A holding company of a
77
<PAGE>
savings institution that fails to qualify as a QTL must either convert to a bank
holding company and thereby become subject to the regulation and supervision of
the Federal Reserve Board or operate under certain restrictions. As of May 31,
1998, the Bank maintained in excess of 65% of its portfolio assets in qualified
thrift investments. The Bank also met the QTL test in each of the prior 12
months and, therefore, met the QTL test. Recent legislative amendments have
broadened the scope of "qualified thrift investments" that go toward meeting the
QTL test to fully include credit card loans, student loans and small business
loans.
MASSACHUSETTS HOLDING COMPANY REGULATION. In addition to the federal
holding company regulations, a bank holding company organized or doing business
in Massachusetts may be also subject to regulation under the Massachusetts law.
The term "bank holding company," for the purposes of Massachusetts law, is
defined generally to include any company: (i) which, directly or indirectly,
owns, controls or holds with power to vote more than 25% of the voting stock of
each of two or more banking institutions, including commercial banks and state
savings banks, co-operative banks and savings and loan associations and national
banks, federal savings banks and federal savings and loan associations; (ii)
which controls the election of a majority of the directors of each of two or
more banking institutions; or (iii) if the company is a banking institution,
which, directly or indirectly, owns, controls or holds 25% or more of the voting
stock of one or more banking institutions or which controls the election of a
majority of directors of one or more banking institutions. In general, a
holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
Massachusetts law. Under Massachusetts law, the prior approval of the Board of
Bank Incorporation is required before: (1) any action is taken that causes any
company to become a bank holding company; (2) any action is taken to acquire
direct or indirect ownership or control of any additional voting stock in any
such banking institution; (3) any bank holding company acquires direct or
indirect ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Although the Company will not be a bank holding company
for purposes of Massachusetts law upon the Effective Date of the Conversion, any
future acquisition of ownership, control, or the power to vote 25% or more of
the voting stock of another banking institution or bank holding company would
cause it to become such. The Company has no current plan or arrangement to
acquire ownership or control, directly or indirectly, of 25% or more of the
voting stock of another banking institution.
INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, will be limited under
HOLA with respect to its acquisition of a savings association located in a state
other than Massachusetts. In general, a savings and loan holding company may
not acquire an additional savings association subsidiary that is located in a
state other than the home state of its first savings association subsidiary
unless such an interstate acquisition is permitted by the statutes of such other
state. Many states permit such interstate acquisitions if the statutes of the
home state of the acquiring savings and loan holding company satisfy various
reciprocity conditions. Massachusetts is one of a number of states that permit,
subject to the reciprocity conditions of the Massachusetts Banking Law, out-of-
state bank and savings and loan holding companies to acquire Massachusetts
savings associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition of
a bank located outside of the holding company's home state regardless of whether
the acquisition is permitted under the law of the state of the acquired bank.
The Federal Reserve Board may not approve an acquisition under the BHC Act that
would result in the acquiring holding company controlling more than 10% of the
deposits in the United States or more than 30% of the deposits in any particular
state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. Out-of-state branches of banking institutions are
authorized under the Massachusetts Banking Law, but similar authority does not
exist generally under the laws of most other states. The Interstate Banking Act
permitted, beginning June 1, 1997, the responsible federal banking agencies to
approve merger transactions between banks located in different states,
regardless of whether the merger would be prohibited under the law of the two
states. The Interstate Banking Act also permitted a state to "opt in" to the
provisions of the Interstate Banking Act prior to June 1, 1997, and permitted
78
<PAGE>
a state to "opt out" of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Accordingly, the Interstate Banking
Act, beginning June 1, 1997, permitted a bank, such as the Bank, to acquire
branches in a state other than Massachusetts unless the other state had opted
out of the Interstate Banking Act. The Interstate Banking Act also authorizes de
novo branching into another state if the host state enacts a law expressly
permitting out of state banks to establish such branches within its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if any,
is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will
have to establish appropriate corporate law, tax and regulatory structures to
adjust to the growth of new interstate banks.
THRIFT RECHARTERING
The Bank is subject to extensive regulation and supervision as a co-
operative bank. In addition, the Company, as a savings and loan holding
company, will be subject to extensive regulation and supervision. Such
regulations, which affect the Bank on a daily basis, may be changed at any time,
and the interpretation of the relevant law and regulations is also subject to
change by the authorities who examine the Bank and interpret those laws and
regulations. Any change in the regulatory structure or the applicable statutes
or regulations, whether by the Commissioner, the OTS, the FDIC or the Congress,
could have a material impact on the Company, the Bank, its operations or the
Conversion.
Recently enacted legislation provides that the BIF and the Savings
Association Insurance Fund ("SAIF") will merge on January 1, 1999 if there are
no more savings associations as of that date. Several bills have been
introduced in the current Congress that would eliminate the federal thrift
charter and the OTS. The bill that was recently passed by the House of
Representatives would subject unitary savings and loan holding companies to the
activities restriction generally applicable to other depository institution
holding companies under the legislation and would not require state savings
institutions, such as the Bank, to change their charter. A grandfathering
provision would allow existing unitary savings and loan holding companies to
continue to engage in activities permitted a unitary savings and loan holding
company under existing law and that grandfather could be transferred to
acquirers. Unless the grandfather date in the bill is changed, the Company
would not qualify for the grandfather if the legislation is enacted. The Bank
is unable to predict whether the legislation will be enacted or, given such
uncertainty, determine the extent to which the legislation, if enacted, would
affect its business. The Bank is also unable to predict whether the SAIF and
BIF will eventually be merged.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion (the "Registration Statement"). Upon completion of the
Conversion, the Company's Common Stock will be registered with the SEC under the
Exchange Act. The Company will then be subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
79
<PAGE>
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each
of which approximately contains one-third of the Board. The directors shall be
elected by the stockholders of the Company for staggered three year terms, or
until their successors are elected and qualified. One class of directors,
consisting of Messrs. Paul C. Green, John B. Byrne, John E. Hurley, Jr. and
Robert E. McGovern, has a term of office expiring at the first annual meeting of
stockholders, a second class, consisting of Messrs. John R. Byrne, Richard F.
Cahill, W. Craig Dolan and John P. O'Hearn, Jr., has a term expiring at the
second annual meeting of stockholders and a third class, consisting of Messrs.
Robert H. Quinn, Joseph W. Sullivan and Ms. Diane Valle, has a term of office
expiring at the third annual meeting of stockholders.
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. Information concerning the
principal occupations, employment and other information for each executive
officer during the past five years is set forth under "Management of the Bank--
Biographical Information."
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
- ---- ---------------------------------
<S> <C>
Paul C. Green......................... President and Chief Executive Officer
Ruth J. Rogers........................ Chief Financial Officer, Treasurer and Corporate
Secretary
Anthony A. Paciulli................... Senior Vice President
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board of Directors.
Except for directors' fees, since the formation of the Company, none of the
executive officers, directors or other personnel has received remuneration from
the Company. Information concerning the principal occupations, employment and
other information concerning the directors and officers of the Company during
the past five years is set forth under "Management of the Bank--Biographical
Information."
80
<PAGE>
MANAGEMENT OF THE BANK
DIRECTORS
The Directors of the Company are also Directors of the Bank. Upon
consummation of the Conversion, the current Directors of the Bank will become
Directors of the stock chartered Bank. The following table sets forth certain
information regarding the Board of Directors of the Bank.
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE (1) POSITION(S) HELD WITH THE BANK SINCE EXPIRES
- ---- --------- -------------------------------- -------- ---------
<S> <C> <C> <C> <C>
Paul C. Green................ 48 Director, President, Chief Executive 1991 1999
Officer and Chairman of the Board
John B. Byrne................ 85 Director 1977 1999
John R. Byrne................ 56 Director 1983 2000
Richard F. Cahill............ 55 Director 1984 2000
W. Craig Dolan............... 59 Director and Clerk 1973 2000
John E. Hurley, Jr........... 56 Director 1981 1999
Robert E. McGovern........... 79 Director 1972 1999
John P. O'Hearn, Jr.......... 59 Director and Vice President 1973 2000
Robert H. Quinn.............. 70 Director 1974 2001
Joseph W. Sullivan........... 60 Director 1977 2001
Diane Valle.................. 44 Director 1983 2001
</TABLE>
- --------------------------
(1) As of May 31, 1998.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth certain information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION(S) HELD WITH THE BANK
- ---- ---------- ----------------------------------
<S> <C> <C>
Anthony A. Paciulli............. 49 Senior Vice President
Ruth J. Rogers.................. 47 Chief Financial Officer and Treasurer
Kenneth R. Bordewieck........... 44 Vice President
</TABLE>
- ----------------------
(1) As of May 31, 1998.
The executive officers of the Bank are elected annually and will hold
office in the converted Bank until the annual meeting of the Board of Directors
of the Bank held immediately after the first annual meeting of stockholders of
the Bank subsequent to Conversion, and until their successors are elected and
qualified or until death, resignation, retirement or removal by the Board of
Directors. Officers are re-elected by the Board of Directors annually.
81
<PAGE>
BIOGRAPHICAL INFORMATION
DIRECTORS
Paul C. Green has served as President and Chief Executive Officer of the
Bank since February 1991. Prior to 1991, Mr. Green was an executive officer at
a thrift institution located in the greater Boston metropolitan area.
John B. Byrne is the former President and Treasurer of Byrne, Daily & Pike
Insurance Agency located in East Milton, Massachusetts. Mr. Byrne is now
retired. He has been a director of the Bank since 1977. Mr. Byrne is the
father of John R. Byrne.
John R. Byrne is the President and Treasurer of Byrne, Daily & Pike
Insurance Agency located in East Milton, Massachusetts. He has served as a
director of the Bank since 1983. Mr. Byrne is the son of John B. Byrne.
Richard F. Cahill is the President and Chief Executive Officer of Jack
Conway & Co, Inc., a real estate firm located in Hanover, Massachusetts. He has
served as a director of the Bank since 1984.
W. Craig Dolan is President of James W. Dolan, Inc., a funeral home located
in the Dorchester section of Boston, Massachusetts. Mr. Dolan has been a
director of the Bank since 1973. Mr. Dolan is the Clerk of the Board of
Directors.
John E. Hurley, Jr. is a probation officer for the Chelsea District Court
in Chelsea, Massachusetts. He has served as a director of the Bank since 1981.
Robert E. McGovern has served as a director of the Bank since 1972. Until
his retirement in 1981, he was a real estate director for the Boston
Redevelopment Authority in Boston, Massachusetts.
John P. O'Hearn, Jr. is Executive Vice President of Meredith & Grew, Inc.,
a real estate firm located in Boston, Massachusetts. He has served as a
director of the Bank since 1973 and as a Vice President since 1995.
Robert H. Quinn is a partner in the law firm of Quinn & Morris, located in
Boston, Massachusetts. He has been a member of the Board of Directors since
1974.
Joseph W. Sullivan is the former President of Neponset Lincoln Mercury, an
automobile dealership located in the Dorchester section of Boston,
Massachusetts. Mr. Sullivan is now retired. He has served as a director of the
Bank since 1977.
Diane Valle is President of Harbor Greenery, a retail florist located in
Boston, Massachusetts. Ms. Valle has been a director of the Bank since 1983.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Anthony A. Paciulli has been Senior Vice President of the Bank since March
1994. From 1988 to 1994, Mr. Paciulli held several senior officer positions
(including vice president, loan officer, sales manager and regional manager)
with several different mortgage companies and financial institutions, all of
which were located in the greater Boston metropolitan area.
Ruth J. Rogers has been Treasurer of the Bank since August 1993. In June
1998, Ms. Roger was named Chief Financial Officer and Treasurer of the Bank.
From 1970 to 1992, Ms. Rogers was Vice President and Assistant Controller of
Guaranty First Trust Co., Waltham, Massachusetts.
82
<PAGE>
Kenneth R. Bordewieck has been Vice President of the Bank since August
1998. Since 1976, Mr. Bordewieck has held various positions with several
different financial institutions located in the greater Boston metropolitan
area.
MEETINGS AND COMMITTEES OF THE BOARDS OF DIRECTORS OF THE BANK AND THE COMPANY
The Bank's Board of Directors meets monthly and may have additional special
meetings as may be called in the manner specified in the Bylaws. During the
year ended December 31, 1997, the Board held 12 meetings.
The Board of Directors of the Bank has established the following
committees:
The Finance Committee consists of Messrs. Hurley, O'Hearn, Quinn and
Sullivan. This committee reviews the Bank's audit, financial and call reports.
The committee meets quarterly and met four times in 1997.
The Security Committee consists of Messrs. John R. Byrne, Cahill and
McGovern. This committee recommends the Bank's lending policies, reviews loans
made by the Bank and approves large loans within its delegated authority. See
"Business of the Bank--Lending Activities--Loan Approval Procedures and
Authority." The committee meets monthly or on an as-needed basis and met 12
times in 1997.
The Personnel Committee consists of Messrs. Dolan, Green, Hurley, Sullivan
and Ms. Valle. This Committee reviews the Bank's policies and budget and is
responsible for officer evaluations. The Committee makes recommendations to the
full Board with regard to compensation matters and the budget. The Committee
meets annually.
Additionally, the Bank has a number of other management committees
including the Asset/Liability Committee, the Compliance Committee and the Year
2000 Committee.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Hurley, O'Hearn and
Quinn; the Pricing Committee consisting of Messrs. Green, Hurley, O'Hearn and
Quinn; the Compensation Committee consisting of Messrs. John R. Byrne, Cahill,
Green and Ms. Valle; and the Nominating Committee consisting of Messrs. John B.
Byrne, Dolan, McGovern and Sullivan.
DIRECTOR COMPENSATION
Non-employee Directors of the Bank are currently paid an annual retainer of
$6,600. Each member of the Bank's Security Committee is currently paid an
annual retainer of $1,800. In addition, the Clerk of the Bank receives $50 for
each monthly Board meeting that he attends. All directors of the Company will,
upon consummation of the Conversion, be paid an annual retainer fee of $1,800.
83
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1997, to the Chief Executive Officer ("Named Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
--------------------------------------- --------------------------------- ------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING LTIP ALL OTHER
SALARY BONUS ANNUAL STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($) (2) (#) (4) ($) (5) ($) (6)
- --------------------------- ---------------------------------------- -------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul C. Green
President and
Chief Executive Officer..... 1997 $96,000 $19,600 $ -- $ -- -- $ -- $ 7,895
- ----------------------------
</TABLE>
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the Named Executive Officer under the Bank's 401(k) Plan.
(2) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10% of
the individual's total salary and bonus for the year; (b) payments of above-
market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; or (e) preferential discounts on
stock. For 1997, the Bank had no restricted stock or stock related plans in
existence.
(3) Does not include awards pursuant to the Stock-Based Incentive Plan which may
be granted in conjunction with a meeting of shareholders of the Company,
subject to regulatory and shareholder approval, as such awards were not
earned, vested or granted in 1997. For a discussion of the terms of the
Stock-Based Incentive Plan which is intended to be adopted by the Company,
see "--Other Benefit Plans--Stock-Based Incentive Plan." For 1997, the
Bank had no stock plans in existence.
(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 Company, see
"--Other Benefit Plans--Stock-Based Incentive Plan."
(5) For 1997, there were no payouts or awards under any long-term incentive
plan.
(6) Other compensation includes the Bank's matching contribution under the
Bank's 401(k) Plan.
EMPLOYMENT AGREEMENTS
Upon the Conversion, the Bank and the Company each intend to enter into
employment agreements with Paul Green, Ruth Rogers and Anthony Paciulli
(individually, the "Executive") (collectively, the "Employment Agreements"). The
Employment Agreements are intended to ensure that the Bank and the Company will
be able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank and the Company depends to a significant
degree on the skills and competence of the above referenced officers.
The Employment Agreements will provide for a three-year term for Mr. Green
and a one-year term for Ms. Rogers and Mr. Paciulli. The term of the Company
Employment Agreements shall be extended on a daily basis unless written notice
of non-renewal is given by the Board of Directors and the term of the Bank
Employment Agreements shall be renewable on an annual basis. The Employment
Agreements provide that the Executive's base salary will be reviewed annually.
The base salaries which will be effective for such Employment Agreements for
Messrs. Green and Paciulli and Ms. Rogers will be $120,750, $99,300 and
$69,000, respectively. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to executive personnel. The
Employment Agreements provide for termination by the Bank or the Company for
cause, as defined in the Employment Agreements, at any time. In the event the
Bank or the Company chooses to terminate the Executive's employment for reasons
other than for cause, or in the event of the Executive's resignation from the
Bank and the Company upon: (i) failure to re-elect the Executive to his current
offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) a reduction in the benefits and
perquisites being provided to the Executive in the Employment Agreement;
(v)liquidation or dissolution of the Bank or the Company; or (vi) a breach of
the Employment Agreement by the Bank or the Company, the Executive or, in the
event of death, his beneficiary would be entitled to receive an amount equal to
the remaining base salary payments due to the Executive for the remaining term
of the Employment Agreement and the contributions that would have been made on
the Executive's behalf to any employee benefit plans of the Bank and the Company
during the remaining term of the Employment
84
<PAGE>
Agreement. The Bank and the Company would also continue and pay for the
Executive's life, health, dental and disability coverage for the remaining term
of the Employment Agreement. Upon any termination of the Executive, the
Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in the
event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for thirty-
six months in the case of Mr. Green and 12 months in the case of Mr. Paciulli
and Ms. Rogers. Notwithstanding that both the Bank and Company Employment
Agreements provide for a severance payment in the event of a change in control,
the Executive would only be entitled to receive a severance payment under one
agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid by
the Bank. Payment under the Company's Employment Agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the Employment
Agreements shall be paid by the Bank or Company, respectively, if the Executive
is successful on the merits pursuant to a legal judgment, arbitration or
settlement. The Employment Agreements also provide that the Bank and Company
shall indemnify the Executive to the fullest extent allowable under
Massachusetts and Delaware law, respectively. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on cash compensation paid to the officers who will
receive Employment Agreements over the past five fiscal years and excluding any
benefits under any employee benefit plan which may be payable, would be
approximately $602,000.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into a three-year Change in
Control Agreements with Mr. Bordewieck, who will not be covered by an employment
agreement. The Change in Control Agreement shall be renewable on an annual
basis. The Change in Control Agreement will provide that in the event that
voluntary or involuntary termination follows a change in control of the Company
or the Bank, the officer would be entitled to receive a severance payment equal
to three times the officer's average annual compensation for the five most
recent taxable years. The Bank would also continue and pay for the officer's
life, health and disability coverage for thirty-six months following
termination. In the event of a change in control of the Company or the Bank,
the total payments that would be due under the Change in Control Agreement,
based solely on the current annual compensation paid to the officer covered by
the Change in Control Agreement and excluding any benefits under any employee
benefit plan which may be payable, would be approximately $195,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon Conversion, establish The
Massachusetts Co-operative Bank Employee Severance Compensation Plan ("Severance
Plan") which will provide eligible employees with severance pay benefits in the
event of a change in control of the Bank or the Company following Conversion.
Management personnel with Employment Agreements or Change in Control Agreements
are not eligible to participate in the Severance Plan. Generally, employees are
eligible to participate in the Severance Plan if they have completed at least
one year of service with the Bank. The Severance Plan vests in each participant
a contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or the
Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least one year of service and he is
an officer of the Bank or Company, he will be entitled to a cash severance
payment equal to two months of base pay for every year of service up to a
maximum of two years' base salary and, if he not an officer an amount equal to
one month base pay for each year of service up to a maximum of two years' base
salary. Such payments may tend to discourage takeover attempts by increasing
costs to be incurred by the Bank in the event of a takeover. In the event the
provisions of the Severance Plan are triggered, the total amount of payments
that would be due thereunder, based solely upon current salary levels, would be
approximately $86,000. However, it is management's belief that substantially
all of the Bank's employees would be retained in their current positions in the
event of a change in control, and that any amount payable under
85
<PAGE>
the Severance Plan would be considerably less than the total amount that could
possibly be paid under the Severance Plan.
INSURANCE PLANS
All full-time employees of the Bank upon completion of the applicable
introductory period, are covered as a group for comprehensive hospitalization,
including major medical and long-term disability insurance.
OTHER BENEFIT PLANS
401(K) PLAN. In 1994, the Bank became a participating employer in the
Defined Contribution Plan (Plan A) of the Co-operative Banks Employees
Retirement Program (the "401(k) Plan"), a tax-qualified profit sharing plan with
a qualified cash or deferred arrangement under Section 401(k) of the Code. The
401(k) Plan provides participants with savings and retirement benefits based on
employee elective, pre-tax deferrals of compensation. The 401(k) Plan also
provides for employer contributions based on participants' elective deferrals
(i.e., "matching contributions"), as well as other discretionary employer
contributions.
Generally, employees of the Bank may begin participating in the 401(k) Plan
upon the completion of six months of service with the Bank and the attainment of
age twenty-one. Participants may make salary reduction contributions to the
401(k) Plan up to the lesser of 12% of their compensation (as determined in
accordance with the applicable provisions of the plan) or the legally
permissible limit ($10,000 for 1998). A participant is always 100% vested in
his or her elective deferrals under the 401(k) Plan. Participants become
vested in contributions made to the 401(k) Plan by the Bank, including matching
contributions, at the rate of twenty percent per year beginning after completion
of their second year of vesting service. Accordingly, participants become fully
vested in employer contributions to the 401(k) Plan after completing six years
of vesting service. Participants also become fully vested in employer
contributions to the 401(k) Plan upon the attainment of their early retirement
age while an employee of the Bank, upon their death, or upon termination of the
plan. For the year ended December 31, 1997, the Bank made matching
contributions to the 401(k) Plan on behalf of Mr. Green totaling $6,175. The
Bank did not make any employer contributions to the Plan, other than matching
contributions, during 1997. Currently, participants may invest their accounts
under the 401(k) Plan in and among seven investment funds established and
maintained by the Co-operative Bank Employees Retirement Association ("CBERA").
Generally, distributions from the 401(k) Plan may commence only upon a
participant's disability or upon a participant's separation from service with
the Bank for any reason, including death. However, participants may request
loans from the 401(k) Plan under certain circumstances. Distributions from the
401(k) Plan are generally subject to federal and state income taxes and
distributions made prior to a participant attaining age 59 1/2 are also
generally subject to a federal excise tax.
PENSION PLAN. The Bank also maintains a tax-qualified defined benefit
pension plan for its employees (the "Pension Plan"). Generally, employees of
the Bank begin participating in the Pension Plan upon the completion of six
months of service with the Bank and the attainment of age twenty-one. The Bank
makes contributions to the Pension Plan sufficient to fund benefits determined
according to a formula set forth in the plan. Participants generally become
vested in their accrued benefits under the Pension Plan at the rate of twenty
percent per year beginning after completion of their second year of vesting
service. Accordingly, participants become fully vested in their accrued benefit
under the Pension Plan after completing six years of vesting service.
Participants also become fully vested in their accrued benefits under the
Pension Plan upon the attainment of their early retirement age while an employee
of the Bank, upon their death, or upon termination of the plan.
EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish a tax-
qualified ESOP in connection with the Conversion. All eligible employees of the
Bank as of the effective date of the Conversion, may participate in the ESOP.
Subsequently, all eligible employees of the Bank may participate in the ESOP
upon the completion of one year of service with the Bank (with credit given for
service with the Bank prior to adoption of the plan) and attainment of age 21.
With the consent of the Bank, an affiliate of the Bank may adopt the ESOP for
the benefit of its employees.
86
<PAGE>
The Bank expects a committee of the Board of Directors to serve as the
administrative committee of the ESOP (the ''ESOP Committee''). The Committee
will appoint an unrelated corporate trustee for the ESOP prior to the
Conversion. Among other matters, the ESOP Committee may generally instruct the
trustee regarding investment of funds contributed to the ESOP, subject to the
terms of the plan and the trust agreement. The Bank expects the ESOP to
purchase 8% of the Common Stock issued in the Conversion, including shares
issued to the Foundation. As part of the Conversion, and in order to fund the
ESOP's purchase of the Common Stock to be issued in the Conversion, the ESOP
intends to borrow funds either from the ESOP Loan Subsidiary or a third-party
lender equal to 100% of the aggregate purchase price of the Common Stock. The
trustee of the ESOP will repay the loan principally from the Bank's annual
contributions to the ESOP over an expected period of ten years. Subject to
receipt of any necessary regulatory approvals or opinions, the Bank may make
contributions to the ESOP for repayment of the loan since participants in the
ESOP are employees of the Bank or, alternatively, the Bank may reimburse the
Company for contributions made by the Company with respect to employees of the
Bank. The Bank expects the initial interest rate (which may be fixed or
variable) for the loan to be at or near the prime rate on or about the date of
Conversion.
The trustee of the ESOP will pledge shares of Common Stock purchased by the
ESOP in connection with the Conversion as collateral for the loan and will hold
the shares in a suspense account. As the trustee repays the loan, the trustee
will release a portion of the shares from the suspense account and allocated
them to the accounts of participants in the ESOP. The trustee will release the
pledged shares annually from the suspense account in an amount proportional to
the repayment of the ESOP loan and allocate the released shares to the
participants as follows: first, if applicable, a portion of the shares released
during the plan year will be allocated to a special "matching" account under the
ESOP equal in value to the amount of matching contribution, if any, to which the
participant would be entitled under the terms of the 401(k) Plan for the plan
year. Second, the remaining shares released from the suspense account will be
allocated to participants' accounts in an amount proportional to each
participant's compensation (as determined under the terms of the plan) relative
to all participants' compensation for the plan year. The trustee will then
allocate the released shares (as well as any other non-matching contributions to
the ESOP) among the accounts of eligible participants on the basis of each
participant's compensation for the year of allocation relative to all
participants' compensation for the year of allocation.
Participants will become vested in contributions made to the ESOP by the
Bank, including any matching contributions relating to employee deferrals under
the 401(k) Plan, at the rate of twenty percent per year beginning after
completion of their second year of vesting service (with credit given for
service with the Bank prior to its adoption of the ESOP). Accordingly,
participants will become fully vested in their accounts under the ESOP after
completing six years of vesting service. The Bank expects that participants
will also become fully vested in their accounts under the ESOP upon the
attainment of their early retirement age while an employee of the Bank, upon
their death, upon a change in control of the Bank or the Company, or upon
termination of the plan. Benefits generally become distributable under the ESOP
and become subject to income tax upon death, retirement, disability or other
separation from service.
The ESOP trustee will vote all allocated shares held in the ESOP in
accordance with the instructions of the plan participants. The ESOP trustee,
subject to its fiduciary duties under ERISA, will vote the unallocated shares
(i.e., those held in the suspense account) and allocated shares for which it
receives no proper voting instructions in a manner calculated to most accurately
reflect the instructions it receives from participants regarding the allocated
stock. In the event no shares have been allocated under the ESOP at the time
such shares are to be voted, each participant shall be deemed to have one share
allocated to his account for voting purposes.
MANAGEMENT SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In connection with the
Conversion and implementation of the ESOP, the Bank intends to implement a non-
qualified deferred compensation arrangement known as a "Management Supplemental
Executive Retirement Plan" (the "MSERP"). The Bank intends the MSERP to make
up lost ESOP benefits to designated participants who retire, who terminate
employment in connection with a change in control, or whose participation in the
ESOP ends due to termination of the ESOP in connection with a change in control
(regardless of whether the individual terminates employment) prior to the
complete repayment of the ESOP loan. Generally, upon the retirement of an
eligible individual (designated by the Board of Directors of the Bank or a
participating affiliate of the Bank) or upon a change in control of the Bank or
the Company prior to complete repayment of the ESOP Loan, the MSERP will provide
the individual with a benefit determined by first (i) projecting the number of
shares that would have been allocated to the individual under the ESOP if the
individual
87
<PAGE>
had remained employed throughout the term of the ESOP loan (measured from the
individual's first date of ESOP participation) and (ii) reducing that number by
the number of shares actually allocated to the individual's account under the
ESOP; and second, by multiplying the number of shares that represent the
difference between such figures by the average fair market value of the Common
Stock over the preceding five years. The individual's benefits become payable
under the MSERP upon the participant's retirement (in accordance with the
standard retirement policies of the Bank) or upon the change in control of the
Bank or the Company. The Bank may establish a grantor trust in connection with
the MSERP to satisfy the obligations of the Bank with respect to the MSERP. The
assets of the grantor trust would remain subject to the claims of the Bank's
general creditors in the event of the Bank's insolvency until paid to the
individual pursuant to the terms of the MSERP.
STOCK-BASED INCENTIVE PLAN. Following the Conversion, the Board of
Directors of the Company intends to adopt the Stock-Based Incentive Plan which
will provide for the granting of options to purchase Stock Options, Stock
Awards, Limited Option Rights and Limited Stock Rights to eligible officers,
employees, and directors of the Company and Bank. The Company may provide such
stock based benefits under the Stock-Based Incentive Plan or may establish one
or more separate plans which would provide for the benefits described herein.
In the event the Stock-Based Incentive Plan (or any separate plan(s)) is
adopted within one year after conversion, applicable regulations require such
plan to be approved by a majority of the Company's stockholders at a meeting of
stockholders to be held no earlier than six months after the completion of the
Conversion. Under the Stock-Based Incentive Plan, the Company intends to grant
Stock Options in an amount equal to 10% of the shares of Common Stock issued in
the Conversion, including shares issued to the Foundation (52,970, 62,318,
71,665 and 82,415 shares based upon the minimum, midpoint, maximum and
supermaximum of the Estimated Price Range), and intends to grant Stock Awards in
an amount equal to 4% of the shares of Common Stock issued in the Conversion,
including shares issued to the Foundation (21,188, 24,927, 28,666 and 32,966
shares based upon the minimum, midpoint, maximum and supermaximum of the
Estimated Price Range). Any Common Stock awarded under the Stock-Based
Incentive Plan will be awarded at no cost to the recipients. The plan may be
funded through the purchase of Common Stock by a trust established in connection
with the Stock-Based Incentive Plan (or any separate plan(s)) or from
authorized but unissued shares. The Board intends to appoint an independent
fiduciary to serve as trustee of a trust to be established in connection with
the Stock-Based Incentive Plan. In the event that additional authorized but
unissued shares are acquired by the Stock-Based Incentive Plan after the
Conversion, the interests of existing shareholders would be diluted. See "Pro
Forma Data."
The grants of Stock Options and Stock Awards will be designed to attract
and retain qualified personnel in key positions, provide officers and key
employees with a propriety interest in the Company as an incentive to contribute
to the success of the Company and reward key employees for outstanding
performance. All employees of the Company and its subsidiaries, including the
Bank, will be eligible to participate in the Stock-Based Incentive Plan. It is
expected that the committee administering the plan will determine the terms of
awards granted to officers and employees. The committee will also determine
whether Stock Options will be Incentive or Non-Statutory Stock Options, as
defined below, the number of shares subject to each stock option and Stock
Award, the exercise price of each Non-Statutory Stock Option, whether Stock
Options may be exercised by delivering other shares of Common Stock, and when
Stock Options become exercisable or Stock Awards vest. Only employees may
receive grants of Incentive Stock Options. Therefore, under the Stock-Based
Incentive Plan, directors may receive only grants of Non-Statutory Stock
Options. If such plan is adopted within one year after conversion, FDIC
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the stock options available under the Stock-Based
Incentive Plan (or any separate plan for officers and employees) and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate, of the stock options available under the Stock-Based Incentive Plan
(or any separate plan for directors). FDIC regulations also provide that no
individual officer or employee of the Bank may receive more than 25% of the
restricted stock awards available under the Stock-Based Incentive Plan (or any
separate plan for officers and employees) and non-employee directors may not
receive more than 5% individually, or 30% in the aggregate, of the restricted
stock awards available under the Stock-Based Incentive Plan (or any separate
plan for directors).
The Stock-Based Incentive Plan will provide for the grant of: (i) Stock
Options intended to qualify as incentive Stock Options under Section 422 of the
Code ("Incentive Stock Options"); (ii) Stock Options that do not so qualify
("Non-Statutory Stock Options"); and (iii) limited option rights ("Limited
Option Rights"). Limited Option Rights are exercisable only upon a change in
control of the Bank or the Company. It is anticipated that all Stock
88
<PAGE>
Options granted contemporaneously with stockholder approval of the Stock-Based
Incentive Plan will qualify as Incentive Stock Options to the extent permitted
under Section 422 of the Code. Unless sooner terminated, the Stock-Based
Incentive Plan will be in effect for a period of ten years from the earlier of
adoption by the Board of Directors or approval by the Company's Stockholders.
Subject to stockholder approval, the Company intends to grant Stock Options with
Limited Option Rights under the plan at an exercise price equal to at least the
fair market value of the underlying Common Stock on the date of grant.
An individual will not be deemed to have received taxable income upon the
grant or exercise of any Incentive Stock Option, provided that such shares
received through the exercise of such option are not disposed of by the employee
for at least one year after the date the stock is received in connection with
the stock option exercise and two years after the date of grant of the stock
option (a "disqualifying disposition"). No compensation deduction will be
available to the Company as a result of the grant or exercise of Incentive Stock
Options unless there has been a disqualifying disposition. In the case of a
Non-Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an individual will realize ordinary income upon exercise
of the stock option (or upon the disqualifying disposition) in an amount equal
to the amount by which the exercise price exceeds the fair market value of the
Common Stock purchased by exercising the stock option on the date of exercise.
The amount of any ordinary income realized by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an Incentive
Stock Option will be a deductible expense to the Company for tax purposes. In
the case of Limited Rights, the option holder will have to include the amount
paid to him or her upon exercise in his gross income for federal income tax
purposes in the year in which the payment is made and the Company will be
entitled to a deduction for federal income tax purposes of the amount paid.
The Stock-Based Incentive Plan will provide for the granting of Stock
Awards and Limited Stock Rights. Limited Stock Rights would be exercisable by
participants upon a change in control of the Company or Bank as described in the
plan. Subject to any applicable Massachusetts or FDIC regulations, upon the
exercise of a Limited Stock Right, the recipient will be entitled to receive a
cash payment equal to the fair market value of all unvested Stock Awards in
exchange for any rights to such unvested Stock Awards. Grants of Stock Awards
and Limited Stock Rights to officers and employees may be made in the form of
base grants and/or performance grants (the vesting of which would be contingent
upon performance goals established by the committee administering the plan). In
establishing any performance goals, the committee may utilize the annual
financial results of the Bank, actual performance of the Bank as compared to
targeted goals such as the ratio of the Bank's net worth to total assets, the
Bank's return on average assets, or such other performance standards as
determined by the committee with the approval of the Board of Directors.
When a participant becomes vested with respect to Stock Award, the
participant will realize ordinary income equal to the fair market value of the
Common Stock at the time of vesting (unless the participant made an election
pursuant to Section 83(b) of the Code). The amount of income recognized by the
participants will be a deductible expense for tax purposes for the Bank. When
restricted Stock Awards become vested and shares of Common Stock are actually
distributed to participants, the participants would receive amounts equal to any
accrued dividends with respect thereto. Prior to vesting, recipients of Stock
Awards may direct the voting of the shares awarded to them. Shares not subject
to grants and shares allocated subject to the achievement of performance goals
will be voted by the trustee in proportion to the directions provided with
respect to shares subject to grants. Vested shares will be distributed to
recipients as soon as practicable following the day on which they vest.
The vesting periods for awards under the Stock-Based Incentive Plan will be
determined by the Committee administering the Plan. If the Stock-Based
Incentive Plan (or any separate plans for employees and directors) is adopted
within one year after conversion, awards would become vested and exercisable
subject to applicable regulations, which such regulations require that any
awards begin vesting no earlier than one year from the date of shareholder
approval of the plan and, thereafter, vest at a rate of no more than 20% per
year and may not be accelerated except in the case of death or disability.
Stock Options could be exercisable for three months following the date on which
the employee or director ceases to perform services for the Bank or the Company,
except that in the event of death or disability, options accelerate and become
fully vested and could be exercisable for up to one year thereafter or such
longer period as determined by the Company. In the case of death or disability,
Stock Options may be exercised for a period of 12 months. However, any
Incentive Stock Options exercised more than three months following the date the
employee ceases to perform services as an employee would be treated as a Non-
Statutory Stock Option. In the event of retirement, if the optionee continues
to perform services as a director or consultant on behalf
89
<PAGE>
of the Bank, the Company or an affiliate, unvested options would continue to
vest in accordance with their original vesting schedule until the optionee
ceases to serve as a consultant or director. In the event of death, disability
or normal retirement, the Company, if requested by the optionee, or the
optionee's beneficiary, could elect, in exchange for vested options, to pay the
optionee, or the optionee's beneficiary in the event of death, the amount by
which the fair market value of the Common Stock exceeds the exercise price of
the options on the date of the employee's termination of employment.
Subject to any applicable regulatory requirements and stockholder
approvals, the Stock-Based Incentive Plan (or any separate plans for employees
and directors) may be amended subsequent to the expiration of the one-year
period to provide for accelerated vesting of previously granted Stock Options or
Stock Awards in the event of a change in control of the Company or the Bank. A
change in control would generally be considered to occur when a person or group
of persons acting in concert acquires beneficial ownership of 20% or more of any
class of equity security of the Company or the Bank or in the event of a tender
or exchange offer, merger or other form of business combination, sale of all or
substantially all of the assets of the Company or the Bank or contested election
of directors which resulted in the replacement of a majority of the Board of
Directors by persons not nominated by the directors in office prior to the
contested election.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Since 1991, the Bank has maintained a policy prohibiting making loans to
executive officers and directors. However in 1998, the Bank made a one-time
exception to this policy and refinanced a loan to a member of the Board of
Directors which loan was initially originated by the Bank prior to 1991 (the
"1998 Refinanced Loan"). As of May 31, 1998, the Bank had eight loans
outstanding to directors totalling $422,000, all of which loans (except for the
1998 Refinanced Loan) were originated prior to 1991. All advances made to
directors since 1991 consist of advances made under the line of credit
agreements made with the directors prior to 1991. All of such related party
loans and advances (including the 1998 Refinanced Loan) were made by the Bank in
the ordinary course of business with no favorable terms and do not involve more
than the normal risk of collectibility or present unfavorable features.
90
<PAGE>
SUBSCRIPTIONS OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the number of shares of Common Stock that
the executive officers and directors, and their associates, propose to purchase,
assuming shares of Common Stock are issued at the minimum and maximum of the
Estimated Price Range, including the effect of shares issued to the Foundation,
and that sufficient shares will be available to satisfy their subscriptions.
The table also sets forth the total expected beneficial ownership of Common
Stock as to all directors and executive officers as a group.
<TABLE>
<CAPTION>
AT THE AT THE
MINIMUM OF THE MAXIMUM OF THE
ESTIMATED PRICE RANGE (1) ESTIMATED PRICE RANGE (1)
---------------------------- -------------------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---- ------ --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Paul C. Green.............. $100,000 10,000 1.89% 10,000 1.39%
John B. Byrne.............. 100,000 (2) 10,000 1.89 10,000 1.39
John R. Byrne.............. 100,000 (2) 10,000 1.89 10,000 1.39
Richard F. Cahill.......... 15,000 1,500 0.28 1,500 0.21
W. Craig Dolan............. 25,000 2,500 0.47 2,500 0.35
John E. Hurley, Jr......... 10,000 1,000 0.19 1,000 0.14
Robert E. McGovern......... 10,000 1,000 0.19 1,000 0.14
John P. O'Hearn, Jr........ 100,000 (2) 10,000 1.89 10,000 1.39
Robert H. Quinn............ 10,000 1,000 0.19 1,000 0.14
Joseph W. Sullivan......... 100,000 (2) 10,000 1.89 10,000 1.39
Diane Valle................ 35,000 3,500 0.66 3,500 0.49
Anthony A. Paciulli........ 20,000 2,000 0.38 2,000 0.28
Ruth J. Rogers............. 50,000 5,000 0.94 5,000 0.70
Kenneth R. Bordewieck...... 10,000 1,000 0.19 1,000 0.14
-------- ---------- ------- ------ -----
All directors and executive
officers as a group (14) $685,000 68,500 12.94% 68,500 9.54%
======== ========== ======= ====== =====
</TABLE>
- --------------------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
orders by the ESOP. Intended purchases by the ESOP are expected to be 8% of
the shares issued in the Conversion, including shares issued to the
Foundation. Also does not include Common Stock which may be awarded under
the Stock-Based Incentive Plan to be adopted equal to 4% of the Common Stock
issued in the Conversion, including shares issued to the Foundation, and
Common Stock which may be purchased pursuant to options which may be granted
under the Stock-Based Incentive Plan equal to 10% of the number of shares of
Common Stock issued in the Conversion, including shares issued to the
Foundation.
(2) Such amount represents the maximum allowable purchase for such individual.
91
<PAGE>
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE COMMISSIONER OF BANKS OF THE
COMMONWEALTH OF MASSACHUSETTS HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO
APPROVAL BY THE DEPOSITORS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND THE
SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL BY THE
COMMISSIONER DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF
CONVERSION BY SUCH AGENCY.
GENERAL
On May 6, 1998, the Bank's Board of Directors unanimously adopted the Plan
of Conversion, which was subsequently amended, pursuant to which the Bank will
be converted from a Massachusetts-chartered mutual co-operative bank to a
Massachusetts-chartered stock co-operative bank. It is currently intended that
all of the capital stock of the Bank will be held by the Company, which is
incorporated under Delaware law. The Plan has been approved by the Commissioner
and the Bank has received a notice of intent not to object to the Plan from the
FDIC, subject to, among other things, approval of the Plan by the Bank's
depositors entitled to vote on such matters ("Voting Depositors"). A special
meeting of the Bank's Voting Depositors has been called for this purpose to be
held on November 12, 1998 (the "Special Meeting").
The Company expects to receive approval from the OTS to become a savings
and loan holding company and to acquire all of the common stock of the Bank to
be issued in the Conversion. The Company plans to retain 50% of the net
proceeds from the sale of the Common Stock and to use the remaining 50% to
purchase all of the common stock of the Bank to be issued in the Conversion.
The Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock of the Company or all of the common stock of the Bank, if
the holding company form of organization is not utilized, to be issued in the
Conversion.
The Plan provides that the Board of Directors of the Bank, at any time
prior to the issuance of the Common Stock and for any reason, may decide not to
use the holding company form of organization in implementing the Conversion.
Such reasons may include possible delays resulting from overlapping regulatory
processing, or policies or conditions, which could adversely affect the Bank's
or the Company's ability to consummate the Conversion and transact its business
after the Conversion as contemplated herein and in accordance with the Bank's
operating policies. In the event that such a decision is made, the Bank will
withdraw the Company's Registration Statement from the SEC and will take all
steps necessary to complete the Conversion without the Company, including filing
any necessary documents with the Commissioner, FDIC and any other appropriate
regulatory authority. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the Commissioner, the Bank will
issue and sell the common stock of the Bank and subscribers will be notified of
the elimination of the Company and resolicited (i.e., be permitted to affirm
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest, or be permitted to modify or
rescind their subscriptions) and notified of the time period within which
subscribers must affirmatively notify the Bank of their intention to affirm,
modify or rescind their subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to the
conversion of the Bank from the mutual to stock form of organization and the
sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
co-operative bank to a capital stock co-operative bank and (ii) the Company will
offer Common Stock for sale in the Subscription Offering to Eligible Account
Holders, Supplemental Eligible Account Holders, Employee Plans, including the
ESOP, and Directors, Officers and employees who do not otherwise qualify as
Eligible or Supplemental Eligible Account Holders. Concurrently with the
Subscription Offering, subject to the approval of the Commissioner, shares will
be offered in the Direct Community Offering to certain members of the general
public, subject to the prior rights of holders of subscription rights. It is
anticipated that all shares not subscribed for in the Subscription and Direct
Community Offerings will be offered for sale by the Company to the general
public in a Syndicated Community Offering. The Bank and Company have the right
to accept or reject, in whole or in part, any orders to purchase shares of the
Common Stock received in the Direct Community Offering or Syndicated Community
Offering.
92
<PAGE>
The aggregate price of the shares of Common Stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
FinPro of the estimated pro forma market value of the Common Stock giving effect
to the Conversion. All shares of Common Stock to be issued and sold in the
Conversion will be sold at the same price. FinPro's independent appraisal will
be updated and the final price of the shares will be determined at the
completion of the Subscription and Direct Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
independent appraisal has been performed by FinPro, a consulting firm
experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for a determination of the estimated pro forma market value of
the Common Stock.
The following is a brief summary of material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available upon written or telephone request to the
Bank and is available for inspection at the main office of the Bank. The Plan
is also filed as an Exhibit to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to its local community,
the Plan of Conversion provides for the establishment of a charitable foundation
in connection with the Conversion. The Plan provides that the Bank and the
Company will establish the Foundation, which will be incorporated under Delaware
law as a non-stock corporation, and will fund the Foundation with Common Stock
of the Company, as further described below. The Company and the Bank believe
that the funding of the Foundation with Common Stock of the Company is a means
of establishing a common bond between the Bank and its community and thereby
enables the Bank's community to share in the potential growth and success of the
Company over the long-term. By further enhancing the Bank's visibility and
reputation in its local community, the Bank believes that the Foundation will
enhance the long-term value of the Bank's community banking franchise. The
Foundation will be dedicated to charitable purposes within the communities in
which the Bank maintains a banking office, including community development
activities. The establishment of the Foundation is subject to approval by the
Voting Depositors at the Special Meeting.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community activities
within the Bank's local community. The Bank received a "satisfactory" CRA
rating in its last CRA examination. The Bank's latest MCRA rating received from
the Commissioner was "satisfactory." The Foundation is being formed as a
complement to the Bank's existing community activities, not as a replacement for
such activities. The Bank intends to continue to emphasize community lending
and community activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in manners that are not
presently available to the Bank. The Bank believes that the Foundation will
enable the Company and the Bank to assist within the communities in which the
Bank maintains a banking office in areas beyond community development and
lending and will enhance its current activities under the CRA. In this regard,
the Board of Directors believes the establishment of a charitable foundation is
consistent with the Bank's commitment to community service. The Board further
believes that the funding of the Foundation with Common Stock of the Company is
a means of enabling the Bank's community to share in the potential growth and
success of the Company long after completion of the Conversion. The Foundation
will accomplish that goal by providing for continued ties between the Foundation
and Bank, thereby forming a partnership within the communities in which the Bank
maintains a banking office. The establishment of the Foundation will also
enable the Company and the Bank to develop a unified charitable donation
strategy and will centralize the responsibility for administration and
allocation of corporate charitable funds. Charitable foundations have been
formed by other financial institutions for this purpose, among others. The
Bank, however, does not expect the contribution to the Foundation to take the
place of the Bank's traditional community lending and charitable activities.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's Board of Directors will be comprised of 11 members, all of whom
are existing Directors of the Company or the Bank or officers of the Company or
the Bank. A Nominating Committee of the Board will nominate individuals
eligible for election to the board of directors. The members of the Foundation,
who are comprised of its Board members, will elect the Directors at the annual
meeting
93
<PAGE>
of the Foundation from those nominated by the Nominating Committee. Directors
will be divided into three classes with each class appointed for three-year
terms. The certificate of incorporation of the Foundation provides that the
corporation is organized exclusively for charitable purposes, including
community development, as set forth in Section 501(c)(3) of the Code. The
Foundation's certificate of incorporation further provides that no part of the
net earnings of the Foundation will inure to the benefit of, or be distributable
to, its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the Board
of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The Directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the Common Stock of the Company held by the
Foundation. However, all shares of Common Stock held by the Foundation will be
voted in the same ratio as all other shares of the Common Stock on all proposals
considered by stockholders of the Company; provided, however, that the FDIC may
waive the voting restriction under certain circumstances, such as if the
restriction would result in the loss of the tax-exempt status of the Foundation.
In the event that the FDIC were to waive the voting requirement or the voting
restriction becomes unenforceable, the FDIC may, at that time, impose additional
conditions relating to the control of the Common Stock held by the Foundation.
There can be no assurances that the FDIC would grant a waiver of such voting
restriction, unconditional or otherwise.
The Foundation's place of business will be located at the Company's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 5% of the total amount of Common Stock to be sold
in connection with the Conversion. At the minimum, midpoint, maximum and
supermaximum of the Estimated Price Range, the contribution to the Foundation
would equal 25,225, 29,675, 34,125 and 39,245 shares, which would have a market
value of $252,250, $296,750, $341,250 and $392,450, respectively, assuming the
Purchase Price of $10.00 per share. The Company and the Bank determined to fund
the Foundation with Common Stock rather than cash because it desired to form a
bond within the communities in which the Bank maintains a banking office in a
manner that would allow those communities to share in the potential growth and
success of the Company and the Bank over the long-term. The funding of the
Foundation with stock also provides the Foundation with a potentially larger
endowment than if the Company contributed cash to the Foundation since, as a
shareholder, the Foundation will share in the potential growth and success of
the Company. As such, the contribution of stock to the Foundation has the
potential to provide a self-sustaining funding mechanism which reduces the
amount of cash that the Company, if it were not making the stock donation, would
have to contribute to the Foundation in future years in order to maintain a
level amount of the charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Company's Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time to
time as may be permitted to provide the Foundation with additional liquidity.
As a private foundation under Section 501(c)(3) of the Code, the Foundation will
be required to distribute annually in grants or donations, a minimum of 5% of
the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the
amount of Common Stock that may be sold by the Foundation in any one year shall
not exceed 5% of the average market value of the assets held by the Foundation,
except where the Board of Directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a long-term reduction of the value of the Foundation's assets and/or would
otherwise jeopardize the Foundation's capacity to carry out its charitable
purposes. Upon completion of the Conversion and the contribution of shares to
the Foundation immediately following the Conversion, the Company would have
529,700, 623,175, 716,650 and 824,149 shares issued and outstanding at the
minimum, midpoint, maximum and supermaximum of the Estimated Price Range.
Because the Company will have an increased number of shares outstanding, the
voting and ownership interests of
94
<PAGE>
shareholders in the Company's common stock would be diluted by 4.8%, as compared
to their interests in the Company if the Foundation was not established. For
additional discussion of the dilutive effect, see "Pro Forma Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
will qualify as a Section 501(c)(3) exempt organization under the Code, and will
be classified as a private foundation. The Foundation will submit a request to
the IRS to be recognized as an exempt organization. As long as the Foundation
files its application for tax-exempt status within 15 months from the date of
its organization, and provided the IRS approves the application, the effective
date of the Foundation's status as a Section 501(c)(3) organization will be the
date of its organization. The Company's independent accountants, however, have
not rendered any advice on the regulatory condition to the contribution agreed
to by the Foundation which requires that all shares of Common Stock of the
Company held by the Foundation must be voted in the same ratio as all other
outstanding shares of Common Stock of the Company on all proposals considered by
stockholders of the Company. See "--Regulatory Conditions Imposed on the
Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions to
a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to be
valid. Under the Code, the Company may deduct up to 10% of its taxable income
before the charitable contribution deduction in any one year and any
contributions made by the Company in excess of the deductible amount will be
deductible over each of the five succeeding taxable years, subject to a 10%
limitation each year. The Company and the Bank believe that the Conversion
presents a unique opportunity to establish and fund a charitable foundation
given the substantial amount of additional capital being raised in the
Conversion. In making such a determination, the Company and the Bank considered
the dilutive impact of the contribution of Common Stock to the Foundation on the
amount of Common Stock available to be offered for sale in the Conversion.
Based on such consideration, the Company and Bank believe that the contribution
to the Foundation in excess of the 10% annual limitation is justified given the
Bank's capital position and its earnings, the substantial additional capital
being raised in the Conversion and the potential benefits of the Foundation
within the communities in which the Bank maintains a banking office. In this
regard, assuming the sale of the Common Stock at the midpoint of the Estimated
Price Range, the Company would have pro forma consolidated capital of $9.9
million or 14.51% of pro forma consolidated assets and the Bank's pro forma
leverage and risk-based capital ratios would be 11.60% and 17.97%, respectively.
See "Regulatory Capital Compliance," "Capitalization," and "Comparison of
Valuation and Pro Forma Information with No Foundation." Thus, the amount of
the contribution will not adversely impact the financial condition of the
Company and the Bank and the Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and the
Bank's pro forma capital positions. As such, the Company and the Bank believe
that the contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent tax
advisors that the Company's contribution of its own stock to the Foundation
should not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution less the nominal par value that the Foundation is
required to pay the Company for such stock, subject to a limitation based on 10%
of the Company's annual taxable income before the charitable contribution
deduction. The Company would be able to carry forward for federal income tax
purposes any unused portion of the deduction for five years following the
contribution. However, the Company would not be able to carry forward any
unused portion of its charitable contribution for Commonwealth of Massachusetts
income tax purposes. If the Foundation had been established in 1997, assuming
the sale of the Common Stock at the maximum Estimated Price Range, the Company
would have received a charitable contribution deduction of approximately $32,000
(based on the Bank's pre-tax income for 1997, an assumed tax rate of 32% and a
contribution of Common Stock equal to $341,250). The Company is permitted under
the Code to carry over the excess contribution over the five year period
following the contribution to the Foundation. Assuming the close of the
Offerings at the midpoint of the Estimated Price Range, the Company estimates
that all of the deduction should be deductible over the six-year period.
Neither the Company nor the Bank expect to make any further contributions to the
Foundation within the first five years following the initial contribution.
After that time, the Company and the Bank may consider future contributions to
the Foundation. Any such decisions would be based on an assessment of, among
other factors, the financial condition of the Company and the Bank at that time,
the interests of shareholders and depositors of the Company and the Bank, and
the financial condition and operations of the Foundation.
95
<PAGE>
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company will be entitled to a deduction for
the charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that the
deduction will be permitted. In such event, the Company's tax benefit related
to the contribution to the Foundation would be expensed without tax benefit,
resulting in a reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors--Effects of the Establishment of the
Charitable Foundation."
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the Foundation's managers and a concise statement
of the purpose of each grant.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's non-objection to
the Bank's Conversion: (i) the Foundation will be subject to examination by the
FDIC; (ii) the Foundation must comply with supervisory directives imposed by the
FDIC; (iii) the Foundation will operate in accordance with written policies
adopted by the Foundation's board of directors, including a conflict of interest
policy acceptable to the FDIC; (iv) the Foundation shall not engage in self-
dealing and shall comply with all laws necessary to maintain its tax-exempt
status under the Code; and (v) any shares of Common Stock of the Company held by
the Foundation must be voted in the same ratio as all other shares of Common
Stock of the Company voted on all proposals considered by stockholders of the
Company; provided, however, the FDIC may waive this voting restriction under
certain circumstances, such as in the event the restriction would result in the
loss of the tax-exempt status of the Foundation, but may impose additional
conditions as part of the granting of such waiver. There can be no assurances
that the FDIC would grant a waiver, unconditional or otherwise, of the voting
restriction. If the voting restriction is waived or becomes unenforceable, the
FDIC may impose such other conditions relating to control of the Foundation's
Common Stock as is determined by the FDIC to be appropriate at the time. The
Foundation will also be subject to substantially similar conditions imposed by
the Commissioner and the Massachusetts Division of Banks, as well as the
requirement that the Foundation be approved by the affirmative vote of more than
two-thirds of the Voting Depositors present and voting at the Special Meeting.
The Foundation will be considered as a separate matter from approval of the
Plan. If the Bank's Voting Depositors approve the Plan, but not the
establishment of the Foundation, the Bank intends to complete the Conversion
without the establishment of the Foundation. Failure to approve the Foundation
may materially increase the pro forma market value of the Common Stock being
offered for sale in the Offerings since the Valuation Range, as set forth
herein, takes into account the dilutive impact of the issuance of shares to the
Foundation. If the pro forma market value of the Common Stock without the
Foundation is either greater than $7.8 million or less than $5.0 million, the
Bank will establish a new Offering Range and commence a resolicitation of
subscribers (i.e., subscribers will be permitted to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscriptions funds
will be promptly refunded with interest at the Bank's passbook rate of interest,
or be permitted to increase, decrease, or cancel their subscriptions). Any
change in the Estimated Price Range must be approved by the Commissioner and the
FDIC. See "The Conversion--Stock Pricing." A resolicitation, if any, following
the conclusion of the Subscription and Community Offerings would not exceed 45
days unless further extended by the Commissioner and the FDIC for periods of up
to 90 days not to extend beyond May 6, 2000.
PURPOSES OF CONVERSION
The Bank, as a Massachusetts-chartered mutual co-operative bank, does not
have stockholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, the Bank will be structured in the form
used by commercial banks, most business entities and a growing number of savings
institutions. The
96
<PAGE>
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate and by enhancing
future access to capital markets. The sale of the Common Stock in the Conversion
will enhance the net worth position of the Bank to better enable the Bank to (i)
expand its franchise through increased lending, (ii) diversify its products
offered to customers and (iii) expand through the establishment of new branch
offices or mortgage origination locations and the acquisition of other financial
institutions or their assets.
The holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. While there are benefits
associated with the holding company form of organization, such form of
organization may involve additional costs associated with its maintenance and
regulation as a savings and loan company, such as additional administrative
expenses, taxes and regulatory filings or examination fees.
The potential impact of Conversion upon the Bank's capital base is
significant. At May 31, 1998, the Bank had Tier I Leverage capital of $5.1
million, or 8.63% of average assets. Assuming that $5.4 million (based on the
$5.9 million at the midpoint of the Estimated Price Range) of net proceeds are
realized from the sale of Common Stock (see "Pro Forma Data" for the basis of
this assumption) and assuming that 50% of the net proceeds are used by the
Company to purchase the capital stock of the Bank, the Bank's Tier I Leverage
capital would increase to $7.0 million, resulting in a pro forma leverage
capital ratio of 11.60% giving effect to the Conversion. In the event that the
holding company form of organization is not utilized and all the net proceeds,
at the midpoint of the Estimated Price Range, are retained by the Bank, the
Bank's Tier I Leverage capital would increase to $10.5 million, resulting in a
pro forma Tier I Leverage capital ratio of 17.40% at May 31, 1998. The
investment of the net proceeds from the sale of the Common Stock will provide
the Bank with additional income to further increase its capital position.
After completion of the Conversion, the unissued Common Stock and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present time,
the Company has no plans with respect to additional offerings of securities,
other than the issuance of additional shares upon exercise of stock options
under the Stock-Based Incentive Plan or the possible issuance of authorized but
unissued shares to the Stock-Based Incentive Plan. Following the Conversion,
the Company will also be able to use stock-based benefit plans to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank--Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual co-operative bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, mutual co-operative bank depositors normally have no way to
realize the value of their ownership interest, which may have realizable value
only in the unlikely event that the mutual co-operative bank is liquidated. In
such event, the depositors of record at that time, as owners, would have a claim
to share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual co-operative bank converts to stock form, depositors lose all
rights to the net worth of the mutual co-operative bank, except to the extent
depositors have rights to claim a pro rata share of funds representing
97
<PAGE>
the liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable capital stock is created and offered to
depositors which represents the ownership of the institution's net worth. THE
COMMON STOCK IS SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS
NOT INSURED BY THE FDIC, THE SHARE INSURANCE FUND OR ANY OTHER GOVERNMENTAL
AGENCY. Certificates are issued to evidence ownership of the permanent stock.
The stock certificates are transferable, and therefore the stock may be sold or
traded if a purchaser is available with no effect on any deposit account the
seller may hold in the institution.
No assets of the Company or the Bank will be distributed in connection with
the Conversion other than pursuant to the payment of expenses incurred in
connection therewith.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
Commissioner, the FDIC and the Share Insurance Fund. After Conversion, the Bank
will continue to provide services for depositors and borrowers under current
policies by its present management and staff.
The Directors of the Bank at the time of Conversion will serve as Directors
of the Bank after the Conversion. The Directors of the Company will consist of
the same individuals who will serve on the Board of Directors of the Bank. All
officers of the Bank at the time of Conversion will retain their positions after
the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC and the Share Insurance Fund to the same extent as before
the Conversion. Depositors will continue to hold their existing passbooks and
other evidences of their accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as it was contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF SHAREHOLDERS. At present, all depositors of the
Bank are shareholders of, and have voting rights in, the Bank as to all matters
requiring membership action. Upon Conversion, depositors will cease to be
shareholders and will no longer be entitled to vote at meetings of the Bank.
Upon Conversion, all voting rights in the Bank will be vested in the Company as
the sole stockholder of the Bank. Exclusive voting rights with respect to the
Company will be vested in the holders of Common Stock. Depositors of the Bank
will not have voting rights after the Conversion except to the extent that they
become stockholders of the Company through the purchase of Common Stock.
TAX EFFECTS. The Bank has received opinions with regard to Federal and
Massachusetts taxation which indicate that the adoption and implementation of
the Plan of Conversion set forth herein will not be taxable for Federal or
Massachusetts tax purposes to the Bank or its Eligible Account Holders or
Supplemental Eligible Account Holders or the Company, subject to the limitations
and qualifications in such opinions. See "--Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual co-operative bank were to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would have a claim to receive such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account," if any, to certain depositors (as
described in "--Liquidation Rights," below), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital stock.
Pursuant to applicable rules and regulations, a post-Conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and in
such a transaction, the liquidation account would be required to be assumed by
the surviving institution.
98
<PAGE>
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent appraisal. The Bank and the Company
have retained FinPro, which is experienced in the evaluation and appraisal of
business entities, to make such appraisal. For its services in making such
appraisal, FinPro will receive a fee of $21,500 including fees related to the
preparation of a business plan for the Company and the Bank, and will be
reimbursed for certain of its expenses. The Bank and the Company have agreed to
indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as the independent appraiser, except where
FinPro's liability results from its negligence or willful misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Financial Statements. FinPro also
considered the following factors, among others: the present and projected
operating results and financial condition of the Company and the Bank, including
liquidity, capitalization, asset composition, funding mix, amount of intangible
assets owned, and level of interest rate risk; the economic, demographic and
competitive aspects of the Bank's existing marketing area; the quality and depth
of the Bank's management; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other savings institutions; the aggregate
size of the offering of the Common Stock; the impact of Conversion on the Bank's
net worth and earnings potential; the proposed dividend policy of the Company
and the Bank; the trading market for securities of comparable institutions and
general conditions in the market for such securities; and recent regulatory
matters. In particular, the appraisal considered the Bank's financial condition
and projected and historical operating results, including income and expense
trends, asset size, loan portfolio composition, non-performing loans and assets,
interest rate sensitivity position, capital position, and yields on assets and
costs of liabilities in comparison to other publicly-traded thrifts with assets
less than $100 million and who had loans held for sale in their portfolio. The
Board of Directors of the Bank and Board of Directors of the Company have
reviewed the appraisal of FinPro in determining the reasonableness and adequacy
of such appraisal consistent with applicable regulations and have reviewed the
methodology and reasonableness of assumptions utilized by FinPro in the
preparation of such appraisal and established the Estimated Price Range in a
manner consistent with this appraisal.
On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion dated as of July 22, 1998, the estimated pro forma market
value of the Common Stock being sold in connection with the Conversion ranged
from a minimum of $5.0 million to a maximum of $6.8 million with a midpoint of
$5.9 million. The Board of Directors established the Estimated Price Range of
$5.0 million to $6.8 million within the Valuation Price Range based on the
issuance of 504,475 to 682,525 shares at the Purchase Price of $10.00 per share.
The Estimated Price Range may be amended with the approval of the Commissioner
and FDIC, if required, if necessitated by subsequent developments in the
financial condition of the Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES OF
COMMON STOCK. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE INDEPENDENTLY THE
ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS THE BANK AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SUCH
SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES
AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE
PRO FORMA MARKET VALUE THEREOF.
Following commencement of the Subscription and Direct Community Offerings,
the maximum of the Estimated Price Range may be increased up to 15% and the
number of shares of Common Stock being sold in the Conversion may be increased
to 784,904 shares due to regulatory considerations, or changes in the market and
general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the Estimated Price Range to fill unfilled orders in the
Subscription and Direct Community Offerings.
99
<PAGE>
No sale of shares of Common Stock in the Conversion may be consummated
unless prior to such consummation FinPro confirms that nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
it to conclude that the aggregate price is materially incompatible with the
estimate of the pro forma valuation of the aggregate market value of the Common
Stock at the time of the sale of the Common Stock. If such is not the case, a
new Estimated Price Range may be set, a new Subscription and Direct Community
Offering and/or Syndicated Community Offering may be held or such other action
may be taken as the Company and the Bank shall determine and the Commissioner
and FDIC may permit.
Copies of the appraisal report of FinPro including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Direct Community Offerings, the total number of shares to
be sold in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and the FinPro estimate of the pro forma
market value of the Common Stock ranging from a minimum of $5.0 million to a
maximum, as increased by 15%, of $7.8 million, the number of shares of Common
Stock expected to be sold is between a minimum of 504,475 shares and a maximum,
as adjusted by 15%, of 784,904 shares. The actual number of shares issued
between this range will depend on a number of factors and shall be determined by
the Bank and Company subject to the approval of the Commissioner and FDIC.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Price Range or more than 15% above the maximum of the Estimated Price Range, if
the Plan is not terminated by the Company and the Bank after consultation with
the Commissioner and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Price Range must be
approved by the Commissioner and FDIC. If the number of shares issued in the
Conversion is increased due to an increase of up to 15% in the Estimated Price
Range to reflect changes in market or financial conditions, persons who
subscribed for the maximum number of shares will not be given the opportunity to
subscribe for an adjusted maximum number of shares. See "--Limitations on
Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net earnings
and stockholders' equity on a per share basis while increasing pro forma net
earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale
of Common Stock in the Conversion will be increased by a number of shares equal
to 5% of the Common Stock sold in the Conversion to fund the Foundation.
Assuming the sale of shares in the Offerings at the maximum of the Estimated
Price Range and approval of the Foundation by Voting Depositors, the Company
will issue 34,125 shares of its Common Stock from authorized but unissued shares
to the Foundation immediately following the completion of the Conversion. In
that event, the Company will have total shares of Common Stock outstanding of
716,650 shares. Of that amount, the Foundation will own 4.8%. Funding the
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
Conversion by 4.8% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
100
<PAGE>
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders of
deposit accounts with the Bank who had a balance of $50 or more as of April 30,
1997 ("Eligible Account Holders"); (2) holders of deposit accounts with a
balance of $50 or more as of March 31, 1998 ("Supplemental Eligible Account
Holders"); (3) the Employee Plans, including the ESOP; and (4) Directors,
Officers and employees who do not otherwise qualify as Eligible or Supplemental
Eligible Account Holders. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of all subscriptions of all
persons having prior rights in the Subscription Offering and to the maximum and
minimum purchase limitations set forth in the Plan of Conversion and as
described below under "--Limitations on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable subscription
rights to subscribe for in the Subscription Offering up to the greater of: (1)
$100,000 of Common Stock but which may be increased to 5% of the Common Stock
offered or decreased to 0.10% of the Common Stock offered without the further
approval of the Voting Depositors or resolicitation of subscribers; (2) one-
tenth of one percent (.10%) of the total offering of shares of Common Stock; or
(3) fifteen times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the Eligible Account Holder's
Qualifying Deposit (defined by the Plan as any deposit account in the Bank with
a balance of $50 or more as of April 30, 1997) and the denominator is the total
amount of Qualifying Deposits of all Eligible Account Holders ($37,995,336), in
each case on the Eligibility Record Date. All of such subscription rights
amounts are subject to the overall maximum purchase limitation. See "--
Limitations on Common Stock Purchases." Subscription rights received by
officers and directors of the Bank and their associates based on increased
deposits in the Bank in the one-year period preceding April 30, 1997 will be
subordinated to all other subscription rights of Eligible Account Holders.
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such shares
eligible for subscription, the shares of Common Stock will be allocated so as to
permit each 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 among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective Qualifying Deposits bear to the total amount of Qualifying Deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled;
provided, however, that no fractional shares shall be issued. If the amount so
allocated exceeds the amount subscribed for by any one or more Eligible Account
Holders, the excess shall be reallocated (one or more times as necessary) among
those Eligible Account Holders whose subscriptions are still not fully satisfied
on the same principle until all available shares have been allocated or all
subscriptions satisfied.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
less shares being allocated than if all accounts had been disclosed.
PRIORITY 2: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares remaining after the satisfaction of subscriptions by
Eligible Account Holders, each Supplemental Eligible Account Holder will
receive, without payment therefor, as second priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
greater of: (1) $100,000 of Common Stock but which may be increased to 5% of the
Common stock offered or decreased to 0.10% of the Common Stock offered without
the further approval of the Voting Depositors or resolicitation of subscribers;
(2) one tenth of one percent (.10%) of the total offering of shares of Common
Stock; or (3) fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Common Stock to be issued
by a fraction of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit and the denominator is the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders, in each case
on the Supplemental Eligibility Record Date. All of such subscription rights
amounts are subject to the overall maximum purchase limitation. See "--
Limitations on Common Stock Purchases."
101
<PAGE>
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of shares eligible for subscription after the satisfaction of
subscriptions by Eligible Account Holders, the shares of Common Stock will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, 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 among the
remaining subscribing Supplemental Eligible Account Holders whose subscriptions
remain unfilled in the proportion that the amounts of their respective
qualifying deposits bear to the total amount of Qualifying Deposits of all
remaining Supplemental Eligible Account Holders whose subscriptions remain
unfilled; provided, however, that no fractional shares shall be issued. If the
amount so allocated exceeds the amount subscribed for by any one or more
Supplemental Eligible Account Holders, the excess shall be reallocated (one or
more times as necessary) among those Supplemental Eligible Account Holders whose
subscriptions are still not fully satisfied on the same principle until all
available shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to list
an account could result in less shares being allocated than if all accounts had
been disclosed. The subscription rights received by Eligible Account Holders
will be applied in partial satisfaction of the subscription rights to be
received as a Supplemental Eligible Account Holder.
PRIORITY 3: EMPLOYEE PLANS. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders and Supplemental Eligible Account Holders, the Employee Plans, including
the ESOP, will receive, without payment therefor, as third priority,
nontransferable subscription rights to purchase, in the aggregate, up to 8% of
Common Stock issued in the Conversion, including any increase in the number of
shares of Common Stock to be issued in the Conversion after the date hereof as a
result of an increase of up to 15% in the maximum of the Estimated Price Range.
The ESOP intends to purchase 8% of the shares to be issued in connection with
the Conversion, including shares issued to the Foundation, or 42,376, 49,854,
57,332 and 65,932 shares at the minimum, midpoint, maximum and supermaximum of
the Estimated Price Range, respectively. If, after the filling of subscriptions
of Eligible Account Holders and Supplemental Eligible Account Holders, a
sufficient number of shares are not available to fill the subscriptions by the
ESOP, the subscription by the ESOP shall be filled to the maximum extent
possible. If all the shares of Common Stock offered in the Subscription
Offering are purchased by Eligible Account Holders and Supplemental Account
Holders, then the ESOP will purchase shares in the open market following
consummation of the conversion. The ESOP shall not be deemed to be an Associate
or Affiliate of, or a Person Acting in Concert with, any Director or Officer of
the Company or the Bank. Subscriptions by the ESOP will not be aggregated with
shares of Common Stock purchased directly by or which are otherwise attributable
to any other participants in the Subscription and Direct Community Offerings,
including subscriptions of any of the Bank's Directors, Officers, employees or
associates thereof. See "Management of the Bank--Other Benefit Plans--Employee
Stock Ownership Plan."
PRIORITY 4: DIRECTORS, OFFICERS AND EMPLOYEES. Directors, Officers and
employees of the Company and the Bank shall be entitled to purchase up to 30% of
the total offering of shares of capital stock, but only to the extent that
shares are available after satisfying the subscriptions of Eligible Account
Holders, Supplemental Eligible Account Holders and the Tax-Qualified Employee
Stock Benefit Plan. The shares shall be allocated among Directors, Officers and
employees on an equitable basis such as by giving weight to the period of
service, compensation and position of the individual, subject to the 5%
limitation on the amount of shares which may be purchased by any Person or
Participant, together with any associate or group of persons Acting in Concert.
However, Directors and Officers of the Bank and the Company shall not be deemed
to be associates or Persons Acting in Concert solely as a result of their board
membership or employment. However, the Company and the Bank have committed to
the FDIC that the Directors, Officers and employees of the Company and the Bank
will not purchase in such fourth priority an aggregate amount which exceeds 22%
of the stock issued in the Conversion.
To ensure proper allocation of stock, each Director, Officer and employee
must list on his or her stock order form all accounts in which such Director,
Officer and employee has an ownership interest. Failure to list an account
could result in less shares being allocated than if all accounts had been
disclosed.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on the Expiration Date (November 13, 1998) at 12:00 noon, Eastern
time, unless extended for up to 45 days by the Bank and Company or
102
<PAGE>
such additional periods with the approval of the Commissioner and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. The Bank will not execute orders until all
shares of Common Stock have been subscribed for or otherwise sold. If all shares
have not been subscribed for or sold within 45 days after the Expiration Date,
unless such period is extended with the consent of the Commissioner and FDIC,
all funds delivered to the Bank pursuant to the Subscription Offering will be
returned promptly to the subscribers with interest and all withdrawal
authorizations will be cancelled. If an extension beyond the 45 day period
following the Expiration Date is granted, the Bank will notify subscribers of
the extension of time and of any rights of subscribers to modify or rescind
their subscriptions and have their funds returned promptly with interest, and of
the time period within which subscribers must affirmatively notify the Bank of
their intention to confirm, modify, or rescind their subscription. If an
affirmative response to any resolicitation is not received by the Company from a
subscriber, such order will be rescinded and all subscription funds will be
promptly returned with interest. Such extensions may not go beyond May 6, 2000.
DIRECT COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, Supplemental Eligible Account
Holders, the ESOP and Directors, Officers and employees, the Bank has determined
to offer shares pursuant to the Plan to certain members of the general public
with a preference given to Preferred Subscribers. Such persons, together with
associates of and persons Acting in Concert with such persons, may purchase up
to $100,000 of Common Stock, subject to the maximum overall purchase limitation
and exclusive of shares issued pursuant to an increase in the Estimated Price
Range by up to 15%. See "--Limitations on Common Stock Purchases." This amount
may be increased to up to a maximum of 5% of the Common Stock issued or
decreased to less than $100,000 at the discretion of the Company and the Bank,
subject to the approval of the Commissioner and the FDIC. Orders accepted in
the Direct Community Offering shall be filled up to a maximum of 2% of the total
offering and thereafter remaining shares shall be allocated on an equal number
of shares basis per order until all orders have been filled. THE OPPORTUNITY TO
SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE DIRECT COMMUNITY OFFERING CATEGORY
IS SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE DISCRETION, TO
ACCEPT OR REJECT ANY SUCH ORDERS, IN WHOLE OR IN PART, EITHER AT THE TIME OF
RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
The Direct Community Offering may be commenced at any time during the
Subscription Offering or subsequent thereto.
RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Holding Company will make reasonable efforts to comply with the
securities laws of all states of the United States in which persons entitled to
subscribe for Conversion Stock pursuant to the Plan reside. However, no such
person will be offered any subscription rights or sold any Conversion Stock
under the Plan who resides in a foreign country or who resides in a state of the
United States with respect to which the Bank determines that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to such persons.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Trident Securities as a financial and
marketing advisor to advise the Company and the Bank with respect to the
Subscription and Direct Community Offerings. Trident Securities is a
registered broker-dealer and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Trident Securities will assist the Company and the Bank
in the Conversion by, among other things: (i) developing marketing materials;
(ii) targeting potential investors in the Subscription Offering and other
investors eligible to participate in the Direct Community Offering; (iii)
soliciting potential investors by phone or in person; (iv) training management
and staff to perform tasks in connection with the Conversion; (v) managing and
setting up the Stock Information Center; and (vi) managing the subscription
campaign.
The Bank will pay Trident Securities a management fee in the amount of
$10,000 and a commission equal to 2.0% of the aggregate dollar amount of all
stock sold in the Subscription and Direct Community Offerings. Such amount is
exclusive of any shares sold to the ESOP, Directors, Officers, employees and
associates as defined the Bank's Plan of Conversion. Such fees will be paid
upon completion of the Conversion. Trident Securities shall be reimbursed for
its expenses, in an amount not to exceed $15,000 and its legal fees, in an
amount not to exceed
103
<PAGE>
$30,000. Trident Securities has not prepared any report or opinion constituting
a recommendation or advice to the Company or the Bank or to persons who
subscribe in the Offerings, nor has it prepared an opinion as to the fairness to
the Company or the Bank of the Purchase Price or the terms of the Offerings.
Trident Securities expresses no opinion as to the prices at which Common Stock
to be issued in the Offerings may trade. The Bank has agreed to indemnify
Trident Securities against certain liabilities including certain liabilities
under the Securities Act and certain misrepresentations or breaches by the
Company or the Bank relating to the agreement with Trident Securities. Total
marketing fees to Trident Securities are expected to be $78,750 to $131,000 at
the minimum and supermaximum of the Estimated Price Range, respectively. See
"Pro Forma Data" for the assumptions used to arrive at these estimates.
Directors and Officers of the Company and Bank may participate in the
solicitation of offers to purchase Common Stock. Questions of prospective
purchasers will be directed to Officers or registered representatives. Other
employees of the Bank may participate in the Offerings in ministerial capacities
or providing clerical work in effecting a sales transaction. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. The Company will rely on
Rule 3a4-1 under the Exchange Act, and sales of Common Stock will be conducted
within the requirements of Rule 3a4-1, so as to permit Directors, officers and
employees to participate in the sale of Common Stock. No Director, Officer or
employee of the Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND DIRECT COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Subscription and Direct Community Offerings, an
executed stock order form and certification form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by 12:00 noon, Eastern Time, on the Expiration Date. Stock order forms
which are: (i) returned as undeliverable by the United States Postal Service;
(ii) not received by such time; (iii) executed defectively; or (iv) received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank and Company are not obligated to accept
orders submitted on photocopied or facsimilied stock order forms and will not
accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company and Bank shall have the right, each
in their sole discretion, to permit institutional investors to submit
irrevocable orders together with a legally binding commitment for payment and to
thereafter pay for the shares of Common Stock for which they subscribe in the
Direct Community Offering at any time prior to 48 hours before the completion of
the Conversion. The Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription and Direct Community Offerings, unless such period has been
extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Directors, Officers and employees are properly identified as
to their stock purchase priorities, depositors as of the Eligibility Record Date
(April 30, 1997) and the Supplemental Eligibility Record Date (March 31, 1998)
must list all accounts on the stock order form giving all names, account
numbers and social security/tax identification numbers relating to each account.
Failure to list all such names, account numbers and social security/tax
identification numbers relating to each account may result in a reduction in the
number of shares allocated to a subscribing member.
Payment for subscriptions may be made (i) in cash if delivered in person at
the Stock Information Center; (ii) by check, bank draft or money order, provided
that checks will only be accepted subject to collection; (iii) by authorization
of withdrawal from deposit accounts maintained with the Bank; or (iv) by
appropriate authorization of withdrawal from deposit accounts. The funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion, but a hold will be placed
104
<PAGE>
on such funds, thereby making them unavailable to the depositor until completion
or termination of the Conversion. No wire transfers or third party checks will
be accepted. Interest will be paid on payments made by cash, check, bank draft
or money order at the Bank's passbook rate of interest from the date payment is
received until the completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date of
the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be cancelled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription and Direct Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Company or the ESOP
Loan Subsidiary to lend to the ESOP, at such time, the aggregate Purchase Price
of the shares for which it subscribed.
Owners of self-directed IRAs and other Qualified Plan accounts, such as
Keogh accounts, may use the assets of such IRAs and other Qualified Plan
accounts, to purchase shares of Common Stock in the Subscription and Direct
Community Offerings, provided that such IRAs or other Qualified Plan accounts
are not maintained at the Bank. Persons with IRAs or Qualified Plan accounts
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of Common Stock in the Subscription and
Direct Community Offerings. In addition, the provisions of ERISA and IRS
regulations require that officers, directors and ten percent shareholders who
use self-directed IRA or Qualified Plan account funds to purchase shares of
Common Stock in the Subscription and Direct Community Offerings, make such
purchases for the exclusive benefit of the IRAs or Qualified Plan accounts. For
further information regarding the transfer of the above-mentioned accounts,
please call the Stock Information Center at (617) 696-9373.
Certificates representing shares of Common Stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Pursuant to the rules and regulations of the Commissioner and the FDIC, no
person with subscription rights may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Such rights may be exercised only by the person to whom they
are granted and only for his or her account. Stock purchased in the
Subscription Offering must be registered in the name(s) of the registered
account holder(s) and failure to do so will result in the rejection of the
order. Each person exercising such subscription rights will be required to
certify that he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
105
<PAGE>
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Direct Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Trident Securities acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. THE COMPANY
AND THE BANK HAVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Trident Securities nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Trident Securities has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "--Stock Pricing." Subject
to the overall maximum purchase limitation, no person, together with any
associate or group of persons Acting in Concert, will be permitted to subscribe
in the Syndicated Community Offering for more than $100,000 of Common Stock;
provided, however, that shares of Common Stock purchased in the Direct Community
Offering by any persons, together with associates of or persons Acting in
Concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
2.0% of the shares offered, exclusive of an increase in shares issued pursuant
to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a purchaser
may pay for his shares with funds held by or deposited with a selected dealer.
If an order form is executed and forwarded to the selected dealer or if the
selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before 12:00 noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase. Those indicating an
intent to purchase shall execute order forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before 12:00 noon of the next business day following the debit
date will send order forms and funds to the Bank for deposit in a segregated
account. Although purchasers' funds are not required to be in their accounts
with selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company with
the approval of the Commissioner and FDIC. Such extensions may not be beyond
May 6, 2000. See "--Stock Pricing" above for a discussion of rights of
subscribers, if any, in the event an extension is granted.
106
<PAGE>
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the greater of: (1) $100,000 of Common
Stock; (2) one-tenth of one percent (.10%) of the total offering of
shares of Common Stock; or (3) fifteen times the product (rounded down
to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the
numerator is the amount of the Eligible Account Holder's Qualifying
Deposit (defined by the Plan as any deposit account in the Bank with a
balance of $50 or more as of April 30, 1997) and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders, in
each case on the Eligibility Record Date, subject to the overall
maximum purchase limitation described in (8) below;
(3) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of: (1)
$100,000 of Common Stock; (2) one tenth of one percent (.10%) of the
total offering of shares of Common Stock; or (3) fifteen times the
product (rounded down to the next whole number) obtained by multiplying
the total number of shares of Common Stock to be issued by a fraction
of which the numerator is the amount of the Supplemental Eligible
Account Holder's Qualifying Deposit (defined by the Plan as any deposit
account in the Bank with a balance of $50 or more as of March 31, 1998)
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders, in each case on the Supplemental
Eligibility Record Date, subject to the overall maximum purchase
limitation described in (8) below;
(4) The Employee Plans, including the ESOP, are permitted to purchase, in
the aggregate, up to 10% of the shares of Common Stock issued in the
Conversion, including shares issued in the event of an increase in the
Estimated Price Range of 15%, and the ESOP intends to purchase 8% of
the shares of Common Stock issued in connection with the Conversion,
including shares issued to the Foundation;
(5) Directors, Officers and employees of the Holding Company and the Bank
shall be entitled to purchase up to 30% of the total offering of shares
of capital stock, but only to the extent that shares are available
after satisfying the subscriptions of Eligible Account Holders,
Supplemental Eligible Account Holders and the Tax-Qualified Employee
Stock Benefit Plan;
(6) Persons purchasing shares of Common Stock in the Direct Community
Offering, together with associates of and groups of persons Acting in
Concert with such persons, may purchase in the Direct Community
Offering up to $100,000 of Common Stock, subject to the overall maximum
purchase limitation described in (8) below;
(7) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons Acting in Concert
with such persons, may purchase in the Syndicated Community Offering up
to $100,000 of Common Stock subject to the overall maximum purchase
limitation described in (8) below and, provided further, that shares of
Common Stock purchased in the Direct Community Offering by any persons,
together with associates of and persons Acting in Concert with such
persons, will be aggregated with purchases in the Syndicated Community
Offering in applying the $100,000 purchase limitation; and
(8) Eligible Account Holders, Supplemental Eligible Account Holders and
Directors, Officers and employees may purchase stock in the Direct
Community Offering and Syndicated Community Offering, subject to the
purchase limitations described in (6) and (7) above, provided that,
except for the ESOP, the overall maximum number of shares of Common
Stock subscribed for or purchased in all categories of the Conversion
by any person, together with associates of and groups
107
<PAGE>
of persons Acting in Concert with such persons, shall not exceed 2.0%
of the shares of Common Stock offered in the Conversion and exclusive
of an increase in the total number of shares issued due to an increase
in the Estimated Price Range of up to 15%.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors of
the Bank or subscribers for Common Stock, both the individual amount permitted
to be subscribed for and the overall maximum purchase limitation may be
increased to up to a maximum of 5% of the Common Stock to be issued at the sole
discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of the Bank may be, given the opportunity to increase
their subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less than
1.0%, and the individual amount permitted to be subscribed for may not be
reduced by the Bank to less than .10% without the further approval of Voting
Depositors or resolicitation of subscribers. An Eligible Account Holder or
Supplemental Eligible Account Holder may not purchase individually in the
Subscription Offering the overall maximum purchase limit of 2.0% of the shares
offered, but may make such purchase, together with associates of and persons
Acting in Concert with such person, by also purchasing in other available
categories of the Conversion, subject to availability of shares and the maximum
overall purchase limit for purchases in the Conversion.
The term "Acting in Concert" is defined in the Plan of Conversion to mean:
knowing participation in a joint activity or interdependent conscious parallel
action toward a common goal whether or not pursuant to an express agreement; a
combination or pooling of voting or other interest in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise; or a
person or company which acts in concert with another person or company ("other
party") shall also be deemed to be Acting in Concert with any person or company
who is also in concert with that other party, except that any Tax-Qualified
Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan
will not be deemed to be Acting in Concert with any other Tax-Qualified Employee
Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan or with its
director or a person who serves in a similar capacity solely for the purpose of
determining whether stock held by the director and stock held by the plan will
be aggregated. The Holding Company and the Bank may presume that certain
Persons are Acting in Concert based upon, among other things, joint account
relationships and the fact that such Persons have filed joint Schedules 13D with
the SEC with respect to other companies. When Persons act together for such a
common purpose, their group is deemed to have acquired their stock.
The term "Associate" of a person is defined to mean: any corporation or
organization (other than the Company, the Bank or a majority-owned subsidiary of
the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as director or in a
similar fiduciary capacity except that (i) the term "Associate" does not include
any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified Employee
Stock Benefit Plan in which a person has a substantial beneficial interest or
serves as a director or in a similar fiduciary capacity; and (ii) for purposes
of aggregating total shares that may be held by Officers and Directors the term
"Associate" does not include any Tax-Qualified or Non-Tax-Qualified Employee
Stock Benefit Plan; and 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 Holding Company, the Bank, or any of its parents or subsidiaries.
Directors are not treated as associates of each other solely because of their
Board membership.
The term "Officer" means the chairman of the board, chief executive
officer, president, any officer at the level of vice president or above, clerk
and the treasurer of the Bank.
For a further discussion of limitations on purchases of a converting
institution's stock at the time of Conversion and subsequent to Conversion, see
"Management of the Bank--Subscriptions of Executive Officers and Directors,"
"The Conversion--Certain Restrictions on Purchase or Transfer of Shares After
Conversion" and "Restrictions on Acquisition of the Company and the Bank."
108
<PAGE>
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive their pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor would have a
claim to receive a pro rata share of any such remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total value
of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Bank. However, except as described below, their claim
would be solely in the amount of the balance in their deposit account plus
accrued interest. Such depositor would not have an interest in the value or
assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion. Such
liquidation account will not be reflected as an asset or liability on the
Company's or the Bank's financial statements subsequent to the Conversion.
Additionally, no dividends may be paid to stockholders of the Bank if such
dividends would reduce stockholders' equity in the Bank below the amount of such
liquidation account. Eligible Account Holders and Supplemental Eligible Account
Holders, if they were to continue to maintain their deposit account at the Bank,
would, on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including, but not limited to, demand
accounts, NOW accounts, money market deposit accounts, and certificate of
deposit accounts, with a balance of $50 or more held in the Bank on April 30,
1997 and March 31, 1998, respectively. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a claim to a pro rata interest in
the total liquidation account for each of his deposit accounts based on the
proportion that the balance of each such deposit account on the April 30, 1997
Eligibility Record Date or the March 31, 1998 Supplemental Eligibility Record
Date bore to the balance of all qualifying deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders on such date.
If, however, at the close of business on the last day of any period for
which the Bank or Company has prepared audited financial statements subsequent
to the effective date of the Conversion ("annual closing date"), the amount in
any deposit account is less than the amount in such deposit account on any other
annual closing date, then such person's interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is withdrawn or closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel with
respect to matters of federal income taxation material to the operations of the
Company and the Bank, and an opinion of its independent auditors with respect to
certain matters of Massachusetts commonwealth taxation material to the
operations of the Company and the Bank, that the Conversion will not be a
taxable transaction to the Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders, except as noted below. The federal and
Massachusetts tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.
No private ruling has been requested from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, which has been filed with the SEC as an exhibit to
the Company's Registration Statement that for federal income tax purposes, among
other matters: (i) the Bank's change in form from mutual to stock ownership will
constitute a reorganization under section 368(a)(1)(F) of the Internal Revenue
Code and neither the Bank nor the Company will recognize any gain or loss as a
result of the Conversion; (ii) no gain or loss will be recognized by the Bank or
the Company upon the purchase of the Bank's
109
<PAGE>
capital stock by the Company or by the Company upon the purchase of its Common
Stock in the Conversion; (iii) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in the Bank in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the Bank; (iv)
the tax basis of the depositors' deposit accounts in the Bank immediately after
the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible Account
Holder's or Supplemental Eligible Account Holder's interest in the liquidation
account will be zero; (vi) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the distribution
to them of nontransferable subscription rights to purchase shares of the Common
Stock, provided that the amount to be paid for the Common Stock is equal to the
fair market value of such stock; and (vii) the tax basis to the stockholders of
the Common Stock of the Company purchased in the Conversion will be the amount
paid therefor and the holding period for the shares of Common Stock purchased by
such persons will begin on the date on which their subscription rights are
exercised. Grant Thornton LLP has opined, subject to the limitations and
qualifications in its opinion, that: the foregoing tax effects of the Conversion
under Massachusetts law are substantially the same as they are under Federal
law. Certain portions of both the Federal and the state tax opinions are based
upon the opinion of FinPro that subscription rights issued in connection with
the Conversion will have no value.
In the opinion of FinPro, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common Stock
at a price equal to its estimated fair market value, which will be the same
price as the Purchase Price for the unsubscribed shares of Common Stock. If the
subscription rights granted to eligible subscribers are deemed to have an
ascertainable value, such recipients could be taxed either on the receipt or
exercise of such subscription rights.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by
Directors or Officers of the Bank or Company will be subject to a restriction
that the shares not be sold for a period of one year following the Conversion,
except in the event of the death of such Director or Officer. Each certificate
for such restricted shares will bear a legend giving notice of this restriction
on transfer, and instructions will be issued to the effect that any transfer
within such time period of any certificate or record ownership of such shares
other than as provided above is a violation of such restriction. Any shares of
Common Stock issued at a later date as a stock dividend, stock split, or
otherwise, with respect to such restricted stock will be subject to the
restriction that they may not be sold for a period of one year following the
Conversion. The Directors and Officers of the Bank or Company will also be
subject to the insider trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by Directors
or Officers (or any person who was an Officer or Director of the Bank after
adoption of the Plan of Conversion) during the three-year period following
Conversion may be made only through a broker or dealer registered with the SEC,
except with the prior written approval of the Commissioner. This restriction
does not apply, however, to the purchase of Common Stock pursuant to the Stock-
Based Incentive Plan.
Shares purchased by an affiliate of the Company will be subject to the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of: (i) 1% of the outstanding shares of the Company or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
110
<PAGE>
INTERPRETATION, AMENDMENT AND TERMINATION
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final; however, such interpretations have no binding effect on the
Commissioner or the FDIC. The Plan provides that, if deemed necessary or
desirable by the Board of Directors, the Plan may be substantively amended by
the Board of Directors as a result of comments from regulatory authorities or
otherwise, prior to the date of mailing of material to the Bank's Voting
Depositors in connection with the Special Meeting called to consider the Plan
and at any time thereafter with the concurrence of the Commissioner and the
FDIC, if required.
Completion of the Conversion requires the sale of all shares of the Common
Stock within 24 months following approval of the Plan by the Board of Directors
of the Bank. If this condition is not satisfied, the Plan will be terminated
and the Bank will continue its business in the mutual form of organization. The
Plan may be terminated by the board of directors at any time with the approval
of the Commissioner.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and, in connection therewith, new
Stock Charter and Bylaws to be adopted by Voting Depositors of the Bank eligible
to vote at the Special Meeting. The Plan also provides for the concurrent
formation of a holding company. See "The Conversion--General." As described
below and elsewhere herein, certain provisions in the Company's Certificate of
Incorporation and Bylaws and in its compensation arrangements provided for in
the Conversion, together with provisions of Delaware corporate law, may have
anti-takeover effects. In addition, the Bank's Charter and Bylaws and
compensation arrangements provided for in the Conversion may also have "anti-
takeover" effects. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might be
deemed to have a potential anti-takeover effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which 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 an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Company is necessarily general and reference should be made in
each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "Additional Information" as to how to
obtain a copy of these documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Exchange Act, and includes shares beneficially owned by such person or any of
his affiliates (as defined in the Certificate of Incorporation), shares which
such person or his affiliates have the right to acquire pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options or otherwise and shares as to which
such person and his affiliates have sole or shared voting or investment power,
but shall not include shares that are subject to a publicly solicited revocable
proxy and that are not otherwise deemed to be beneficially owned by such
111
<PAGE>
person and his affiliates. No Director or officer (or any affiliate thereof) of
the Company shall, solely by reason of any or all of such Directors or officers
acting in their capacities as such, be deemed to beneficially own any shares
beneficially owned by any other Director or officer (or affiliate thereof) nor
will the ESOP or any similar plan of the Company or the Bank or any director
with respect thereto (solely by reason of such director's capacity) be deemed to
beneficially own any shares held under any such plan. The Certificate of
Incorporation of the Company further provides that the provisions limiting
voting rights may only be amended upon the vote of the holders of at least 80%
of the voting power of all then outstanding shares of capital stock entitled to
vote thereon (after giving effect to the provision limiting voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of the members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of Directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the Whole Board of
Directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of Directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled for the
remainder of the unexpired term exclusively by a majority vote of the Directors
then in office. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the
Company. Directors may be removed by the shareholders only for cause by the
affirmative vote of the holders of at least 80% of the voting power of all then
outstanding shares of capital stock entitled to vote thereon.
In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by a resolution adopted by a majority of the whole Board of
Directors of the Company. The Certificate of Incorporation also provides that
any action required or permitted to be taken by the stockholders of the Company
may be taken only at an annual or special meeting and prohibits stockholder
action by written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the
issuance of 2.5 million shares of Common Stock and 500,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Company's
Board of Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these additional authorized shares may also be
used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of preferred
stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of preferred stock,
the Board has the power to the extent consistent with its fiduciary duty to
issue a series of preferred stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board currently has no plans for the issuance of additional
shares, other than the issuance of shares in the Conversion, including shares
contributed to the Foundation, and the issuance of additional shares upon
exercise of stock options.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH INTERESTED
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business combination
involving
112
<PAGE>
an Interested Stockholder (as defined below) except (i) in cases where the
proposed transaction has been approved by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were Directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares. In each such case,
where stockholder approval is required, the approval of only a majority of the
outstanding shares of voting stock is sufficient. The term "Interested
Stockholder" is defined to include, among others, any individual, a group acting
in concert, corporation, partnership, association or other entity (other than
the Company or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of voting stock of the
Company. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include: (i) any merger or
consolidation of the Company or any of its subsidiaries with any Interested
Stockholder or Affiliate (as defined in the Certificate of Incorporation) of an
Interested Stockholder or any corporation which is, or after such merger or
consolidation would be, an Affiliate of an Interested Stockholder; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or
with any Interested Stockholder or Affiliate of 25% or more of the assets of the
Company or combined assets of the Company and its subsidiary; (iii) the issuance
or transfer to any Interested Stockholder or its Affiliate by the Company (or
any subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or exceeds
25% of the fair market value of the Common Stock of the Company; (iv) the
adoption of any plan for the liquidation or dissolution of the Company proposed
by or on behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company with any of its subsidiaries which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company or subsidiary owned directly or indirectly, by an
Interested Stockholder or Affiliate thereof. The Directors and executive
officers of the Bank are purchasing in the aggregate approximately 9.6% of the
shares of the Common Stock based on the maximum of the Estimated Price Range. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation.
Additionally, if at a meeting of stockholders following the Conversion
stockholder approval of the proposed Stock-Based Incentive Plan is received, the
Company expects to acquire 4% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation, on behalf of the Stock-
Based Incentive Plan and expects to issue options to purchase up to 10% of the
Common Stock issued in connection with the Conversion, including shares issued
to the Foundation, under the Stock-Based Incentive Plan to directors and
executive officers. As a result, Directors, executive officers and employees
have the potential to control the voting of approximately 27.7% of the Company's
Common Stock on a fully diluted basis at the maximum of the Estimated Price
Range, thereby enabling them to prevent the approval of the transactions
requiring the approval of at least 80% of the Company's outstanding shares of
voting stock described herein above.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer of another "Person" (as defined therein), to (i) make a tender or exchange
offer for any equity security of the Company, (ii) merge or consolidate the
Company with another corporation or entity or (iii) purchase or otherwise
acquire all or substantially all of the properties and assets of the Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Company and the stockholders of the Company, give due
consideration to all relevant factors, including, without limitation, those
factors that directors of any subsidiary (including the Bank) may consider in
evaluating any action that may result in a change or potential change of control
of such subsidiary, and the social and economic effects of acceptance of such
offer on: the Company's present and future customers and employees and those of
its subsidiaries (including the Bank); the communities in which the Company and
the Bank operate or are located; the ability of the Company to fulfill its
corporate objectives as a bank holding company; and the ability of the Bank to
fulfill the objectives of a stock co-operative bank under applicable statutes
and regulations. By having these standards in the Certificate of Incorporation
of the Company, the Board of Directors may be in a stronger position to oppose
such a transaction if the Board concludes that the transaction would not be in
the best interest of the Company, even if the price offered is significantly
greater than the then market price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal
113
<PAGE>
certain provisions of the Certificate of Incorporation, including the provision
limiting voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
Directors, Director and officer indemnification by the Company and amendment of
the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws may
be amended by a majority of the whole Board of Directors, or by a vote of the
holders of at least 80% (after giving effect to the provision limiting voting
rights) of the total votes eligible to be voted at a duly constituted meeting of
stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 90 days' advance notice to the Secretary of the Company. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
Director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. Certain
provisions of the Stock-Based Incentive Plan provide for accelerated benefits to
participants in the event of a change in control of the Company or the Bank or a
tender or exchange offer for their stock. See "Management of the Bank--Other
Benefit Plans--Stock-Based Incentive Plan." The Company and the Bank have also
entered into agreements with key officers and intends to establish the Severance
Compensation Plan which will provide such officers and eligible employees with
additional payments and benefits on the officer's termination in connection with
a change in control of the Company or the Bank. See "Management of the Bank--
Employment Agreements," "--Change in Control Agreements" and "--Employee
Severance Compensation Plan." The foregoing provisions and limitations may make
it more difficult for companies or persons to acquire control of the Bank.
Additionally, the provisions could deter offers to acquire the outstanding
shares of the Company which might be viewed by stockholders to be in their best
interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the Company
and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
Interested Stockholder) may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either
114
<PAGE>
the business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and certain employee stock plans;
(iii) any business combination with an Interested Stockholder that is approved
by the board of directors and by a two-thirds vote of the outstanding voting
stock not owned by the Interested Stockholder; and (iv) certain business
combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the board of directors. A corporation may exempt
itself from the requirements of the statute by adopting an amendment to its
certificate of incorporation or bylaws electing not to be governed by Section
203. At the present time, the Board of Directors does not intend to propose any
such amendment.
RESTRICTIONS IN THE BANK'S NEW CHARTER AND BYLAWS
Although the Board of Directors of the Bank is not aware of any effort that
might be made to obtain control of the Bank after Conversion, the Board of
Directors believes that it is appropriate to adopt certain provisions permitted
by Massachusetts General Laws to protect the interests of the converted Bank and
its stockholders from any hostile takeover. Such provisions may, indirectly,
inhibit a change in control of the Company, as the Bank's sole stockholder. See
"Risk Factors--Anti-Takeover Provisions Which May Discourage Takeover Attempts."
The Bank's Stock Charter will contain a provision whereby the acquisition
of beneficial ownership of more than 10% of the issued and outstanding shares of
any class of equity securities of the Bank by any person (i.e., any individual,
corporation, group acting in concert, trust, partnership, joint stock company or
similar organization), either directly or through an affiliate thereof, will be
prohibited for a period of three years following the date of completion of the
Conversion. In the event shares are acquired in violation of this provision of
the Bank's Stock Charter, all shares beneficially owned by any person in excess
of 10% shall be considered "excess shares" and shall not be counted as shares
entitled to vote and shall not be voted by any person or counted as voting
shares in connection with any matters submitted to the stockholders for a vote.
This limitation shall not apply to any transaction in which the Bank forms a
holding company without a change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter or appraisal rights. In the event that holders of revocable proxies
for more than 10% of the shares of the Common Stock of the Company seek, among
other things, to elect one-third or more of the Company's Board of Directors, to
cause the Company's stockholders to approve the acquisition or corporate
reorganization of the Company or to exert a continuing influence on a material
aspect of the business operations of the Company, which actions could indirectly
result in a change in control of the Bank, the Board of Directors of the Bank
will be able to assert this provision of the Bank's Stock Charter against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Stock
Charter, the Board of Directors, in exercising its fiduciary duty, may assert
this provision if it were deemed to be in the best interests of the Bank, the
Company and its stockholders. It is unclear, however, whether this provision,
if asserted, would be successful against such persons in a proxy contest which
could result in a change in control of the Bank indirectly through a change in
control of the Company.
In addition, stockholders will not be permitted to call a special meeting
of stockholders or to cumulate their votes in the election of Directors.
Furthermore, the Bank's Bylaws provide for the election of three classes of
directors to staggered terms. The staggered terms of the Board of Directors
could have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board of Directors since only one-
third of the Board is elected each year. The purpose of these provisions is to
assure stability and continuity of management of the Bank in the years
immediately following the Conversion.
Finally, the Stock Charter provides for the issuance of shares of preferred
stock on such terms, including conversion and voting rights, as may be
determined by the Bank's Board of Directors without stockholder approval.
Although the Bank has no arrangements, understandings or plans at the present
time for the issuance or use of the shares of undesignated preferred stock (the
"Preferred Stock") proposed to be authorized, the Board of Directors believes
that the availability of such shares will provide the Bank with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which may arise. In the event of a proposed
115
<PAGE>
merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, the Board of Directors can authorize the issuance
of one or more series of Preferred Stock with rights and preferences which could
impede the completion of such a transaction. An effect of the possible issuance
of such Preferred Stock, therefore, may be to deter a future takeover attempt.
The Board of Directors does not intend to issue any Preferred Stock except on
terms which the Board deems to be in the best interest of the Bank and its then
existing stockholders.
REGULATORY RESTRICTIONS
MASSACHUSETTS DIVISION OF BANKS CONVERSION REGULATIONS. Regulations issued
by the Commissioner provide that for a period of three years following the date
of the completion of the Conversion, no person shall directly or indirectly
offer to acquire or acquire the beneficial ownership of more than ten percent
(10%) of any class of any equity security of the Company without prior written
notice to the Company and the prior written approval of the Commissioner. Where
any person, directly or indirectly, acquires beneficial ownership of more than
ten percent (10%) of any class of any equity security of the Company without
prior written notice to the Company and the prior written approval of the
Commissioner, the securities beneficially owned by such person in excess of ten
percent (10%) shall not be voted by any person or counted as voting shares in
connection with any matter submitted to the stockholders for a vote, and shall
not be counted as outstanding for purposes of determining the affirmative vote
necessary to approve any matter submitted to the stockholders for a vote. The
Commissioner may take any further action to enforce these regulatory
restrictions as he deems appropriate.
CHANGE IN BANK CONTROL ACT. In addition to the foregoing restrictions, the
acquisition of ten percent (10%) or more of the Common Stock outstanding may, in
certain circumstances, be subject to the provisions of the Change in Bank
Control Act. The FDIC has also adopted a regulation pursuant to the Change in
Bank Control Act which generally requires persons who at any time intend to
acquire control of an FDIC-insured state-chartered non-member bank, including a
converted co-operative bank such as the Bank, to provide 60 days prior written
notice and certain financial and other information to the FDIC.
The 60-day notice period does not commence until the information is deemed
to be substantially complete. Control for the purpose of this Act exists in
situations in which the acquiring party has voting control of at least twenty-
five percent (25%) of any class of the Bank's voting stock or the power to
direct the management or policies of the Bank. However, under FDIC regulations,
control is presumed to exist where the acquiring party has voting control of at
least ten percent (10%) of any class of the Bank's voting securities if (i) the
Bank has a class of voting securities which is registered under Section 12 of
the Exchange Act, or (ii) the acquiring party would be the largest holder of a
class of voting shares of the Bank. The statute and underlying regulations
authorize the FDIC to disapprove a proposed acquisition on certain specified
grounds. In addition, Massachusetts has its own Change in Control Act which
would be applicable to the Bank following the Conversion. In some
circumstances, similar filings with the Commissioner may be required under the
Massachusetts Change in Bank Control Act.
FRB REGULATIONS. In the event the Bank does not qualify to be a QTL,
attempts to acquire control of the Bank become subject to regulations of the FRB
under the Change in Bank Control Act.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 2.5 million shares of Common Stock
having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share (the "Preferred Stock"). Based on the sale
of Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 5% of the Common Stock sold in the
Conversion to the Foundation, the Company currently expects to issue up to
824,149 shares of Common Stock (based on the maximum of the Estimated Price
Range, as adjusted by 15%) and no shares of Preferred Stock in the Conversion.
Except for shares issued in connection with the Conversion, the Company
presently does not have plans to issue Common Stock. Each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of
116
<PAGE>
Common Stock. Upon payment of the Actual Purchase Price for the Common Stock, in
accordance with the Plan of Conversion, all such stock will be duly authorized,
fully paid and nonassessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR THE SHARE INSURANCE FUND.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulations. See "Dividend Policy" and "Regulation and
Supervision." The holders of Common Stock of the Company will be entitled to
receive and share equally in such dividends as may be declared by the Board of
Directors of the Company out of funds legally available therefor. If the
Company issues Preferred Stock, the holders thereof may have a priority over the
holders of the Common Stock with respect to dividends.
VOTING RIGHTS. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are required
to be presented to them under Delaware law or as are otherwise presented to them
by the Board of Directors. Except as discussed in "Restrictions on Acquisition
of the Company and the Bank," each holder of Common Stock will be entitled to
one vote per share. Stockholders will not have any right to cumulate votes in
the election of Directors. If the Company issues Preferred Stock, holders of the
Preferred Stock may also possess voting rights. Certain matters require an 80%
stockholder vote (after giving effect to the provision limiting voting rights).
See "Restrictions on Acquisition of the Company and the Bank."
As a Massachusetts-chartered mutual co-operative bank, corporate powers and
control of the Bank are vested in its Board of Directors, who elect the officers
of the Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion. Subsequent to Conversion, voting rights will be vested
exclusively in the owners of the shares of capital stock of the Bank, which will
be the Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the special liquidation account to Eligible
Account Holders and Supplemental Eligible Account Holders (see "The Conversion--
Liquidation Rights"), all assets of the Bank available for distribution. In the
event of liquidation, dissolution or winding up of the Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all of its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
INDEMNIFICATION AND LIMIT ON LIABILITY. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that 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, by reason
of the fact that he or she is or was a director or officer of the Company shall
be indemnified and held harmless by the Company to the fullest extent authorized
by the Delaware General Corporation Law against all expense, liability and loss
reasonably incurred. Under certain circumstances, the right to indemnification
shall include the right to be paid by the Company the expenses incurred in
defending any such proceeding in advance of its final disposition. In addition,
a Director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages except for liability for any breach of the
duty of loyalty, for acts or omissions not in good faith or which
117
<PAGE>
involve intentional misconduct or knowing violation of the law, under Section
174 of the Delaware General Corporation, or for any transaction from which the
Director derived an improper personal benefit.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
In the event the holding company form of organization is not utilized in
connection with the Conversion, the Bank may offer shares of its common stock in
connection with the Conversion. The following is a discussion of the capital
stock of the Bank.
The Stock Charter of the Bank, to be effective upon the Conversion,
authorize the issuance of capital stock consisting of 2.5 million shares of
common stock, par value $0.01 per share, and 500,000 shares of preferred stock,
par value $0.01 per share, which preferred stock may be issued in series and
classes having such rights, preferences, privileges and restrictions as the
Board of Directors may determine. Each share of common stock of the Bank will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. After the Conversion, the Board of Directors
will be authorized to approve the issuance of common stock up to the amount
authorized by the Stock Charter without the approval of the Bank's stockholders.
Assuming that the holding company form of organization is utilized, all of the
issued and outstanding common stock of the Bank will be held by the Company as
the Bank's sole stockholder.
THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL
NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC OR
THE SHARE INSURANCE FUND.
COMMON STOCK
DIVIDENDS. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See "Dividend
Policy" for certain restrictions on the payment of dividends and "Federal and
State Taxation--Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
VOTING RIGHTS. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Shareholders shall not be entitled to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the Bank--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
LIQUIDATION. In the event of any liquidation, dissolution, or winding up
of the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit accounts
and accrued interest thereon), and distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of the Bank available for distribution in cash or in
kind. If additional preferred stock is issued subsequent to the Conversion, the
holders thereof may also have priority over the holders of common stock in the
event of liquidation or dissolution.
118
<PAGE>
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the common stock of the Bank
will not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
CHANGES IN ACCOUNTANTS
Prior to the five months ended May 31, 1998, the Bank's financial
statements were audited by Wolf & Company, P.C. who resigned as of April 22,
1998, and Grant Thornton was engaged and continues as the independent auditors
of the Bank. The decision to change auditors was approved by the Board of
Directors. Accordingly, the balance sheet as of December 31, 1997, and related
statements of income and comprehensive income, surplus and cash flows for each
of the years in the three years ended December 31, 1997, and included in this
Prospectus, were audited by Wolf & Company, P.C.
For the three years ended December 31, 1997 and up to the date of
replacement of Wolf & Company, P.C., there were no disagreements with Wolf &
Company, P.C. on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of Wolf & Company, P.C., would have caused them to make
reference to the subject matter of the disagreement in connection with their
report. The independent auditors' report on the financial statements for the
year ended December 31, 1997 did not contain an adverse opinion or a disclaimer
of opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
EXPERTS
The financial statements of the Bank as of December 31, 1997, and for the
three years ended December 31, 1997 have been included in this Prospectus in
reliance upon the report of Wolf & Company, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro forma
market value of the Common Stock upon Conversion and its valuation with respect
to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and Company by Muldoon, Murphy &
Faucette, Washington, D.C., special counsel to the Bank and Company. The
federal income tax consequences of the Massachusetts Co-operative Charitable
Foundation will be passed upon for the Bank and the Company by Grant Thornton,
LLP, independent certified public accountants who have served as the Bank's and
the Company's independent tax advisors. Muldoon, Murphy & Faucette will rely as
to certain matters of Delaware law on the opinion of Morris, Nichols, Arsht &
Tunnell. Massachusetts commonwealth income tax consequences will be passed upon
by Grant Thornton LLP. Certain legal matters will be passed upon for Trident
Securities by Vorys, Sater, Seymour and Pease LLP.
119
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the Registration Statement. Such information,
including the Conversion Valuation Appraisal Report, which is an exhibit to the
Registration Statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
In addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
Conversion Valuation Appraisal Report may also be inspected by members of the
Bank at the offices of the Bank during normal business hours. This Prospectus
contains a description of the material terms and features of all material
contracts, reports or exhibits to the Registration Statement required to be
described; however, the statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed an application for approval of conversion with the
Commissioner. This Prospectus omits certain information contained in that
application. The application may be examined at the Office of the Commissioner,
Commonwealth of Massachusetts, Leverett Saltonstall Building, Room 2004, 100
Cambridge Street, Boston, Massachusetts 02202.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the Exchange
Act. Under the Plan, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan to eliminate the concurrent formation of
the Company as part of the Conversion, the Bank will register its stock with the
Federal Deposit Insurance Corporation under Section 12(g) of the Exchange Act
and, upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Plan of Conversion, Certificate of Incorporation and the
Bylaws of the Company and the Stock Charter and Bylaws of the Bank are available
without charge from the Bank. The Bank's main office is located at 1442
Dorchester Avenue, Boston, Massachusetts 02122. Its telephone number is (617)
825-5555.
120
<PAGE>
THE MASSACHUSETTS CO-OPERATIVE BANK
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report...................................... F-2
Balance Sheets as of May 31, 1998 (unaudited) and
December 31, 1997 and 1996....................................... F-3
Statements of Income and Comprehensive Income for the Five
Months Ended May 31, 1998 and 1997 (unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995..................... 33
Statements of Changes in Surplus for the
Five Months Ended May 31, 1998 (unaudited) and for the
Years Ended December 31, 1997, 1996 and 1995..................... F-4
Statements of Cash Flows for the Five Months Ended
May 31, 1998 and 1997 (unaudited) and for the Years Ended
December 31, 1997, 1996 and 1995................................. F-5 -- F-6
Notes to Financial Statements..................................... F-7 -- F-28
All schedules are omitted because they are not required or applicable,
or the required information is shown in the financial statements or notes
thereto.
The financial statements of Massachusetts Fincorp, Inc. have been
omitted because Massachusetts Fincorp, Inc. has not yet issued any stock, has no
assets and no liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
[Letterhead of Wolf & Company, P.C. appears here]
INDEPENDENT AUDITORS' REPORT
The Finance Committee
Massachusetts Co-operative Bank
Dorchester, Massachusetts
We have audited the accompanying balance sheets of Massachusetts Co-operative
Bank as of December 31, 1997 and 1996, and the related statements of income and
comprehensive income, changes in surplus and cash flows for each of the years in
the three year period ended December 31, 1997. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Massachusetts Co-operative Bank
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ WOLF & COMPANY, P.C.
Boston, Massachusetts
March 6, 1998, except for Note M which
is as of May 6, 1998
F-2
<PAGE>
Massachusetts Co-operative Bank
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31, December 31,
--------------------------
1998 1997 1996
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 4,341,827 $ 1,320,315 $ 1,460,438
Federal fund sold 1,368,014 172,518 1,153,176
----------- ----------- -----------
Total cash and cash equivalents 5,709,841 1,492,833 2,613,614
Securities available for sale 4,613,051 3,022,890 4,840,831
Securities held to maturity 2,914,297 2,979,113 -
Federal Home Loan Bank stock, at cost 762,800 762,800 762,800
Mortgage loans held for sale 4,469,775 3,185,120 1,397,572
Loans 43,167,310 41,614,930 38,989,146
Less: allowance for possible loan losses (471,820) (349,404) (322,497)
----------- ----------- -----------
Loans, net 42,695,490 41,265,526 38,666,649
Foreclosed real estate - - 539,964
Banking premises and equipment, net 1,179,408 1,200,551 1,282,359
Accrued interest receivable 330,148 322,257 286,873
Due from Co-operative Central Bank 242,850 242,850 242,850
Other assets 285,351 156,549 144,249
----------- ----------- -----------
$63,203,011 $54,630,489 $50,777,761
=========== =========== ===========
<CAPTION>
LIABILITIES AND SURPLUS
<S> <C> <C> <C>
Deposits $54,518,401 $42,667,742 $33,874,469
Federal Home Loan Bank borrowings 3,093,888 6,435,707 11,605,266
Mortgagors' escrow accounts 178,280 263,368 349,661
Accrued expenses and other liabilities 313,956 277,154 353,760
----------- ----------- -----------
Total liabilities 58,104,525 49,643,971 46,183,156
----------- ----------- -----------
Commitments and contingencies
Surplus 5,038,546 4,932,838 4,565,304
Accumulated other comprehensive income 59,940 53,680 29,301
----------- ----------- -----------
Total surplus 5,098,486 4,986,518 4,594,605
----------- ----------- -----------
$63,203,011 $54,630,489 $50,777,761
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Massachusetts Co-operative Bank
STATEMENTS OF CHANGES IN SURPLUS
Five months ended May 31, 1998 (unaudited)
and years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Surplus Income (Loss) Total
---------- -------------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994 $4,062,621 $(238,905) $3,823,716
Net income for the year ended December 31, 1995 310,525 - 310,525
Other comprehensive income, net of tax - 264,042 264,042
---------- --------- ----------
Balance at December 31, 1995 4,373,146 25,137 4,398,283
Net income for the year ended December 31, 1996 192,158 - 192,158
Other comprehensive income, net of tax - 4,164 4,164
---------- --------- ----------
Balance at December 31, 1996 4,565,304 29,301 4,594,605
Net income for the year ended December 31, 1997 367,534 - 367,534
Other comprehensive income, net of tax - 24,379 24,379
---------- --------- ----------
Balance at December 31, 1997 4,932,838 53,680 4,986,518
Net income for the five months ended May 31, 1998
(unaudited) 105,708 - 105,708
Other comprehensive income, net of tax (unaudited) - 6,260 6,260
---------- --------- ----------
Balance at May 31, 1998 (unaudited) $5,038,546 $ 59,940 $5,098,486
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Massachusetts Co-operative Bank
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Five months ended
May 31, Year ended December 31,
--------------------------- -------------------------------------------
1998 1997 1997 1996 1995
------------- ------------ ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 105,708 $ 136,912 $ 367,534 $ 192,158 $ 310,525
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Provision (credit) for loan losses 63,662 - (90,000) 14,148 70,148
Depreciation and amortization expense 56,487 53,239 139,357 131,146 91,765
Net (gain) loss on sales of securities available
for sale (11,454) (8,346) (42,439) (23,798) 3,548
Net gain on sale of foreclosed real estate - (20,459) (41,366) (40,315) -
Provision for losses on foreclosed real estate - - - - 6,805
Loans originated for sale (18,680,228) (8,498,510) (23,307,569) (20,272,272) (10,769,456)
Principal balance of loans sold 17,395,573 8,806,957 21,520,021 19,234,391 10,043,256
Amortization of deferred loan (fees) costs (26,093) 1,414 (21,244) 9,847 15,559
Amortization of investment securities,
net of accretion 12,206 3,603 13,977 17,866 31,596
Increase in accrued interest receivable (7,891) (4,844) (35,384) (1,323) (14,053)
Decrease (increase) in other assets (167,802) 16,928 (11,116) 362,632 (327,446)
Deferred tax (benefit) 25,000 (39,000) (34,000) (44,000) -
Increase (decrease) in accrued expenses
and other liabilities 46,398 (136,799) (76,607) 203,818 (39,785)
------------ ----------- ------------ ------------ ------------
Net cash (used) provided by operating
activities (1,188,434) 311,095 (1,618,836) (215,702) (577,538)
------------ ----------- ------------ ------------ ------------
Cash flows from investing activities:
Purchase of securities available for sale (2,081,207) (137,756) (1,307,210) (198,952) (831,000)
Purchase of securities held to maturity (860,041) - (3,989,706) - -
Proceeds from maturities of securities available for sale - 300,000 2,077,469 750,000 1,389,150
Proceeds from maturities of securities held to maturity 162,000 - 1,000,938 - -
Proceeds from sales and calls of securities available
for sale 500,643 61,732 1,048,085 114,997 908,464
Proceeds from calls of securities held to maturity 750,000 - - - -
Purchase of Federal Home Loan Bank stock - - - (376,600) -
Principal payments received on mortgage-backed
securities 13,172 63,313 94,910 165,048 142,398
Loan (originations)/ principal payments, net (1,467,533) 909,300 (2,487,633) (6,580,283) (2,342,622)
Purchase of participants portion of real estate in
possession - - - - (296,000)
Proceeds from sales of foreclosed real estate - 419,330 581,330 1,020,876 67,754
Rent payments (disbursements) on real estate in
possession, net - - - (1,336) 21,621
Purchase of banking premises and equipment (35,344) (10,996) (57,549) (1,010,628) (75,645)
------------ ----------- ------------ ------------ ------------
Net cash (used) provided by investing
activities (3,018,310) 1,604,923 (3,039,366) (6,116,878) (1,015,880)
------------ ----------- ------------ ------------ ------------
</TABLE>
F-5
<PAGE>
Massachusetts Co-operative Bank
STATEMENTS OF CASH FLOWS - CONCLUDED
<TABLE>
<CAPTION>
Five months ended
May 31, Year ended December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $11,850,659 $ 6,953,439 $ 8,793,273 $ 1,856,049 $ 1,109,505
Net increase (decrease) in Federal Home Loan Bank
advances with maturities less than three months (1,839,000) - 837,000 (191,263) (494,000)
Federal Home Loan Bank advances with maturities
in excess of three months 500,000 - 2,500,000 10,000,000 4,250,000
Repayment of Federal Home Loan Bank advances
with maturities in excess of three months (2,002,819) (6,002,720) (8,506,559) (4,450,000) (3,506,039)
Net increase (decrease) in mortgagors' escrow accounts (85,088) (171,970) (86,293) 106,680 81,470
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 8,423,752 778,749 3,537,421 7,321,466 1,440,936
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents 4,217,008 2,694,767 (1,120,781) 988,886 (152,482)
Cash and cash equivalents at beginning of period 1,492,833 2,613,614 2,613,614 1,624,728 1,777,210
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,709,841 $ 5,308,381 $ 1,492,833 $ 2,613,614 $ 1,624,728
=========== =========== =========== =========== ===========
Supplementary Information:
- --------------------------
Interest paid on deposit accounts $ 805,156 $ 601,964 $ 1,583,437 $ 1,248,032 $ 1,258,305
Interest paid on borrowed funds 101,196 216,861 409,133 613,614 358,519
Income tax payments (refunds), net 180,000 85,000 91,269 (76,194) 91,961
Transfer from loans to foreclosed real estate - - - 256,698 737,459
Transfer foreclosed real estate to loans, net of allowance - - - - 401,485
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
The Bank provides a variety of financial services to individuals and small
businesses through its two banking locations and one loan production office in
eastern Massachusetts. Its primary deposit products are checking, savings and
term certificate accounts and its primary lending product is residential
mortgage 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 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,
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans and the deferred tax asset valuation reserve.
Reclassifications
-----------------
Certain amounts have been reclassified in the 1995 and 1996 financial
statements to conform to the 1997 presentation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include amounts due from banks and Federal funds
sold.
Investment Securities
---------------------
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments classified as "available for sale" are
reflected at fair value, with unrealized gains and losses excluded from
earnings and reported in determining comprehensive income and accumulated
other comprehensive income/(loss) as a component of surplus, net of tax
effects.
Federal Home Loan Bank stock is reflected at cost.
F-7
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Purchase premiums and discounts are recognized in interest income using a
method which approximates the interest method over the terms of the
investments. Declines in the value of held-to-maturity and available-for-sale
securities that are deemed to be other than temporary are reflected in
earnings when identified. Gains and losses on the sale of securities are
recorded on the trade date and determined using the specific identification
method.
Mortgage Loans Held for Sale
----------------------------
Mortgage loans originated for sale are carried at the lower of cost or
aggregate fair value. Net unrealized losses are recognized in a valuation
allowance by charges to earnings when applicable.
Loans
-----
The loan portfolio consists of mortgage and other loans to the Bank's
customers located in eastern Massachusetts. The ability of the Bank's debtors
to honor their contracts is dependent upon the economy in general and the real
estate and construction economic sectors.
Loans, as reported, have been reduced by net deferred loan fees, unadvanced
loan funds and the allowance for possible loan losses.
Interest on loans is not accrued on loans which are identified as impaired or
loans which are ninety days or more past due. Interest income previously
accrued on such loans is reversed against current period interest income.
Interest income on all non-accrual loans is recognized only to the extent of
interest payments received.
Loan origination and commitment fees and certain direct loan origination
costs, applicable to mortgage loans, are deferred and the net amount is
amortized to interest income over the contractual lives of the loans by the
interest method. Fees and costs applicable to other loans are not material
and are recognized in income as received or incurred.
Allowance for Possible Loan Losses
----------------------------------
The allowance for possible loan losses is established by a provision for
possible loan losses charged to earnings and is maintained at a level
considered adequate by management to provide for reasonably foreseeable loan
losses.
F-8
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The provision and the level of the allowance are evaluated on a regular basis
by management and is 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 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 a creditor 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
by the fair value of the collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Bank does not separately identify individual
loans held for sale and consumer loans for impairment disclosures.
Foreclosed Real Estate
----------------------
Foreclosed real estate includes both formally foreclosed property and
properties, whereby the Bank has taken physical possession of the property
without formal foreclosure proceedings.
Foreclosed real estate is initially recorded at fair value at the date of
acquisition. 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.
F-9
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 term
of the lease 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.
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.
Pension Plan
------------
It is the Bank's policy to fund pension plan costs in the year of accrual.
Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", effective for fiscal years beginning after December 15,
1997. Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Certain FASB
statements, however, require entities to report specific changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, as a separate component of the surplus section of the balance
sheet. Such items, along with net income, are components of comprehensive
income. SFAS No. 130 requires that all items of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. Additionally, SFAS No. 130 requires that the
accumulated balance of other comprehensive income be displayed separately in
the surplus section of the balance sheet. On January 1, 1998, the Bank
adopted this disclosure requirement.
F-10
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Concluded
Unaudited Interim Financial Statements
--------------------------------------
The financial statements and related notes as of May 31, 1998, and for the
five months ended May 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.
NOTE B - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities, with
gross unrealized gains and losses, follows:
<TABLE>
<CAPTION>
May 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
Debt securities:
U.S. Government and Federal agency $2,839,807 $ 12,321 $ (1,211) $2,850,917
Mortgage-backed 987,891 47,109 - 1,035,000
---------- -------- -------- ----------
Total debt securities 3,827,698 59,430 (1,211) 3,885,917
Marketable equity securities 682,007 62,560 (17,433) 727,134
---------- -------- -------- ----------
Total securities available for sale $4,509,705 $121,990 $(18,644) $4,613,051
========== ======== ======== ==========
Securities Held to Maturity
---------------------------
U.S. Government and Federal agency $1,064,834 $ 1,785 $ (433) $1,066,186
Corporate 1,849,463 2,374 (2,741) 1,849,096
---------- -------- -------- ----------
Total securities held to maturity $2,914,297 $ 4,159 $ (3,174) $2,915,282
========== ======== ======== ==========
</TABLE>
F-11
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
Debt securities:
U.S. Government and Federal agency $1,340,043 $ 14,375 $ (2,077) $1,352,341
Mortgage-backed 1,014,897 32,305 (2,861) 1,044,341
---------- -------- -------- ----------
Total debt securities 2,354,940 46,680 (4,938) 2,396,682
Marketable equity securities 575,270 62,833 (11,895) 626,208
---------- -------- -------- ----------
Total securities available for sale $2,930,210 $109,513 $(16,833) $3,022,890
========== ======== ======== ==========
Securities Held to Maturity
---------------------------
U.S. Government and Federal agency $1,499,025 $ 1,260 $ - $1,500,285
Corporate 1,480,088 3,343 (578) 1,482,853
---------- -------- -------- ----------
Total securities held to maturity $2,979,113 $ 4,603 $ (578) $2,983,138
========== ======== ======== ==========
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities Available for Sale
-----------------------------
U.S. Government and Federal agency $1,511,575 $ 2,591 $(32,397) $1,481,769
Corporate 1,580,453 19,022 - 1,599,475
Mortgage-backed 1,475,592 30,149 (2,654) 1,503,087
---------- -------- -------- ----------
Total debt securities 4,567,620 51,762 (35,051) 4,584,331
Marketable equity securities 237,726 24,215 (5,441) 256,500
---------- -------- -------- ----------
Total securities available for sale $4,805,346 $ 75,977 $(40,492) $4,840,831
========== ======== ======== ==========
</TABLE>
F-12
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - Continued
The amortized cost and estimated fair value of debt securities by contractual
maturity are as follows:
<TABLE>
<CAPTION>
May 31, 1998
----------------------------------------------
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Within 1 year $ 500,000 $ 500,145 $1,253,548 $1,254,803
Over 1 year through 5 years 1,499,254 1,498,042 1,595,636 1,594,258
After 5 years through 10 years 840,553 852,730 65,113 66,221
---------- ---------- ---------- ----------
2,839,807 2,850,917 2,914,297 2,915,282
Mortgage-backed securities 987,891 1,035,000 - -
---------- ---------- ---------- ----------
$3,827,698 $3,885,917 $2,914,297 $2,915,282
========== ========== ========== ==========
December 31, 1997
----------------------------------------------
Available for Sale Held to Maturity
---------------------- ----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Within 1 year $ 500,000 $ 497,923 $1,443,564 $1,443,795
Over 1 year through 5 years - - 785,549 788,083
After 5 years through 10 years 840,043 854,418 750,000 751,260
---------- ---------- ---------- ----------
1,340,043 1,352,341 2,979,113 2,983,138
Mortgage-backed securities 1,014,897 1,044,341 - -
---------- ---------- ---------- ----------
$2,354,940 $2,396,682 $2,979,113 $2,983,138
========== ========== ========== ==========
</TABLE>
F-13
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE B - INVESTMENT SECURITIES - Concluded
<TABLE>
<CAPTION>
December 31, 1996
----------------------
Available for Sale
----------------------
Amortized
Cost Fair Value
---------- ----------
<S> <C> <C>
Within 1 year $2,080,568 $2,102,181
Over 1 year through 5 years 500,000 495,782
After 5 years through 10 years 511,460 483,281
---------- ----------
3,092,028 3,081,244
Mortgage-backed securities 1,475,592 1,503,087
---------- ----------
$4,567,620 $4,584,331
========== ==========
</TABLE>
Sales and calls of securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
-------------------- ------------------------------
1998 1997 1997 1996 1995
-------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Proceeds from sales and calls $500,643 $ 61,732 $1,048,085 $114,997 $908,464
Gross gains from sales and calls 42,111 8,346 67,259 23,798 39,270
Gross losses from sales and calls 30,657 - 24,820 - 42,818
</TABLE>
F-14
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE C - LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
May 31, December 31,
----------- -------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Real estate mortgage loans:
Adjustable rate $27,366,395 $26,977,594 $27,216,773
Fixed rate 10,485,057 11,078,815 9,493,378
Construction loans 7,439,944 5,006,181 2,029,041
Equity lines of credit 512,057 560,375 726,958
----------- ----------- -----------
45,803,453 43,622,965 39,466,150
Less: Net deferred loan fees (48,995) (56,653) (31,613)
Unadvanced loan funds (2,794,565) (2,181,229) (764,882)
----------- ----------- -----------
42,959,893 41,385,083 38,669,655
----------- ----------- -----------
Other loans:
Personal loans 102,260 112,882 92,874
Unsecured loans 25,637 40,697 96,352
Collateral loans 79,520 76,268 130,265
----------- ----------- -----------
207,417 229,847 319,491
----------- ----------- -----------
Total loans 43,167,310 41,614,930 38,989,146
Less allowance for possible loan losses (471,820) (349,404) (322,497)
----------- ----------- -----------
Loans, net $42,695,490 $41,265,526 $38,666,649
=========== =========== ===========
</TABLE>
Mortgage loans serviced for others are not included in the accompanying balance
sheets. The unpaid principal of mortgage loans serviced for others was
$4,727,191, $3,412,215 and $4,263,727 at May 31, 1998 and December 31, 1997 and
1996, respectively. All loans serviced for others were sold without recourse
provisions.
F-15
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE C - LOANS - Concluded
An analysis of the allowance for possible loan losses for the periods indicated
follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
------------------- ---------------------------------
1998 1997 1997 1996 1995
-------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $349,404 $322,497 $322,497 $ 299,606 $ 446,231
Provision (credit) for possible loan losses 63,662 - (90,000) 14,148 70,148
Recoveries 58,754 41,107 127,830 181,621 74,240
Loans charged-off - (4,959) (10,923) (172,878) (346,178)
Transfer from allowance for possible
losses on foreclosed real estate - - - - 55,165
-------- -------- -------- --------- ---------
Balance at end of period $471,820 $358,645 $349,404 $ 322,497 $ 299,606
======== ======== ======== ========= =========
</TABLE>
At May 31, 1998 and December 31, 1997 and 1996, the recorded investment in
impaired loans totaled $272,273, $99,049 and $413,213 respectively, for which
there was no valuation allowance.
No additional funds are committed to be advanced in connection with impaired
loans.
For the five months ended May 31, 1998, and the years ended December 31, 1997
and 1996, the average recorded investment in impaired loans amounted to
$223,419, $182,896 and $289,889, respectively. Interest income recognized on
impaired loans was $3,292 and $-0- for the five months ended May 31, 1998 and
1997 and $28,992, $4,912 and $4,450 for the years ended December 31, 1997, 1996
and 1995, respectively.
Non-accrual loans totaled $64,798, $114,566 and $392,206 at May 31, 1998 and
December 31, 1997 and 1996, respectively. If interest payments on all non-
accrual loans for the five months ended May 31, 1998 and 1997 and the years
ended December 31, 1997, 1996 and 1995 had been made in accordance with
original loan agreements, interest income of approximately $5,000, $8,000,
$9,000, $38,000 and $14,000 would have been recognized on loans compared to
interest income actually recognized of approximately $1,000, $3,000, $8,000,
$23,000 and $4,000, respectively.
F-16
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE D - FORECLOSED REAL ESTATE
The composition of foreclosed real estate as of the dates indicated is as
follows:
<TABLE>
<CAPTION>
May 31, December 31,
---------------
1998 1997 1996
------- ----- --------
<S> <C> <C> <C>
Real estate in possession $ - $ - $539,964
Less allowance for losses - - -
------- ----- --------
$ - $ - $539,964
======= ===== ========
</TABLE>
An analysis of the allowance of losses for the periods indicated follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
------------- ------------------------
1998 1997 1997 1996 1995
------ ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ - $ - $ - $ - $ 163,718
Provision for losses on foreclosed
real estate - - - - 6,805
Charge-offs - - - - (115,358)
Transfer to allowance for loan losses - - - - (55,165)
------ ----- ----- ----- ---------
Balance at end of period $ - $ - $ - $ - $ -
====== ===== ===== ===== =========
</TABLE>
Foreclosed real estate expenses (income) include the following:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
---------------- -----------------------------
1998 1997 1997 1996 1995
----- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Gain on sale of foreclosed real estate, net $ - $(20,459) $(41,366) $(40,315) $ -
Provision for losses on foreclosed real estate - - - 6,805
Operating expenses, net of rental income - 748 16,375 4,824 14,827
----- -------- -------- -------- -------
$ - $(19,711) $(24,991) $(35,491) $21,632
===== ======== ======== ======== =======
</TABLE>
F-17
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE E - BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of banking
premises, leasehold improvements and equipment and their estimated useful lives
is as follows:
<TABLE>
<CAPTION>
May 31, December 31, Estimated
------------------------
1998 1997 1996 Useful Lives
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Banking Premises:
Land $ 170,000 $ 170,000 $ 170,000
Building and leasehold improvements 993,393 980,307 963,686 10 - 40 years
Equipment 740,220 720,116 691,127 3 - 10 years
---------- ---------- ----------
1,903,613 1,870,423 1,824,813
Less accumulated depreciation
and amortization (724,205) (669,872) (542,454)
---------- ---------- ----------
$1,179,408 $1,200,551 $1,282,359
========== ========== ==========
</TABLE>
Total depreciation and amortization expense amounted to $56,487 and $53,239 for
the five months ended May 31, 1998 and 1997 and $139,357, $131,146 and $91,765
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE F - DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
May 31, December 31,
------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Demand $ 4,705,716 $ 3,158,297 $ 1,862,452
NOW 11,742,421 7,158,012 3,651,211
Money market deposits 779,287 1,002,925 1,119,430
Regular and other savings 9,662,657 9,623,208 9,844,486
----------- ----------- -----------
Total non-certificate accounts 26,890,081 20,942,442 16,477,579
----------- ----------- -----------
Term certificates of $100,000 or more 8,454,789 6,120,848 3,917,542
Term certificates less than $100,000 19,173,531 15,604,452 13,479,348
----------- ----------- -----------
Total term certificates 27,628,320 21,725,300 17,396,890
----------- ----------- -----------
Total deposits $54,518,401 $42,667,742 $33,874,469
=========== =========== ===========
</TABLE>
F-18
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE F - DEPOSITS - Concluded
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
-------------------------- -----------------------------------------
1998 1997 1997 1996 1995
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Savings deposits $ 79,798 $ 104,182 $ 244,032 $ 240,060 $ 244,375
NOW checking 178,488 53,666 173,104 48,860 44,717
Money market accounts 10,429 11,798 27,864 33,046 38,630
Certificate of deposit accounts 569,805 449,287 1,138,437 926,066 930,583
-------- ----------- ---------- ----------- ------------
$838,520 $ 618,933 $1,583,437 $ 1,248,032 $1,258,305
======== =========== ========== =========== ============
</TABLE>
A summary of term certificates by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
May 31, 1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Amount Average Rate Amount Average Rate Amount Average Rate
----------- -------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $21,221,602 5.6% $15,399,624 5.5% $14,592,000 5.5%
Over 1 year to 2 years 5,840,929 5.8 4,600,447 5.8 1,966,000 5.7
Over 2 years to 3 years 529,037 5.6 1,692,907 5.8 739,000 6.0
Over 3 years 36,752 5.6 32,322 5.6 99,890 6.4
----------- ----------- -----------
$27,628,320 5.7% $21,725,300 5.6% $17,396,890 5.9%
=========== =========== ===========
</TABLE>
NOTE G - FEDERAL HOME LOAN BANK BORROWINGS
A summary of borrowed funds consisting of advances from the Federal Home Loan
Bank of Boston, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
May 31, 1998 1997 1996
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Amount Average Rate Amount Average Rate Amount Average Rate
---------- ------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $1,000,000 5.75% $4,500,000 5.18%-5.81% $ 8,500,000 5.73%-6.03%
Over 1 year to 3 years - - - - 2,000,000 5.18-5.33
Over 3 years to 5 years 1,500,000 5.59-8.11 1,000,000 8.11 1,000,000 8.11
Over 5 years 95,888 4.00 98,707 4.00 105,266 4.00
Overnight line of credit 498,000 6.03 837,000 7.05 - -
---------- ---------- -----------
$3,093,888 $6,435,707 $11,605,266
========== ========== ===========
</TABLE>
F-19
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE G - FEDERAL HOME LOAN BANK BORROWINGS - Concluded
All borrowings from the Federal Home Loan Bank of Boston are secured by a
blanket lien on qualified collateral, defined principally as 75% of the
carrying value of first mortgage loans on owner-occupied residential property
and 90% of the market value of U.S. Government and Federal agency securities.
Borrowings under the variable rate overnight line of credit are limited to
$4,300,000 as of May 31, 1998 and December 31, 1997 and 1996.
NOTE H - INCOME TAXES
Allocation of Federal and state income taxes between current and deferred
portions, is as follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
------------------ --------------------------------
1998 1997 1997 1996 1995
------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Current tax provision:
Federal $11,845 $ 64,566 $116,000 $ 15,000 $ 20,000
State 7,600 32,000 55,000 80,000 10,000
------- -------- -------- -------- ---------
19,445 96,566 171,000 95,000 30,000
------- -------- -------- -------- ---------
Deferred tax (benefit):
Federal 24,700 - 61,000 (29,000) 88,821
State 300 (10,000) - - 29,607
------- -------- -------- -------- ---------
25,000 (10,000) 61,000 (29,000) 118,428
------- -------- -------- -------- ---------
Change in valuation reserve - (29,000) (95,000) (15,000) (118,428)
------- -------- -------- -------- ---------
$44,445 $ 57,566 $137,000 $ 51,000 $ 30,000
======= ======== ======== ======== =========
</TABLE>
F-20
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE H - 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>
Five months
ended May 31, Year ended December 31,
--------------- --------------------------
1998 1997 1997 1996 1995
------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Tax provision at statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of Federal tax benefit 3.2 7.5 7.2 8.2 1.9
Change in valuation reserve - (14.9) (7.4) (6.1) (29.9)
Tax credits - - (11.3) (9.4) -
Other, net (7.6) 3.0 4.7 (5.7) 2.8
---- ----- ----- ---- -----
Effective tax rates 29.6% 29.6% 27.2% 21.0% 8.8%
==== ===== ===== ==== =====
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
May 31, December 31,
----------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax asset:
Federal $ 142,000 $ 153,000 $ 252,000
State 50,000 45,000 40,000
--------- --------- ---------
192,000 198,000 292,000
Valuation reserve on asset (109,000) (109,000) (231,000)
--------- --------- ---------
83,000 89,000 61,000
--------- --------- ---------
Deferred tax liability:
Federal (54,404) (36,000) (16,184)
State (19,000) (14,000) (7,000)
--------- --------- ---------
(73,404) (50,000) (23,184)
--------- --------- ---------
Net deferred tax asset $ 9,596 $ 39,000 $ 37,816
========= ========= =========
</TABLE>
F-21
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE H - INCOME TAXES - Concluded
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
May 31, December 31,
-------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net unrealized gain on securities available for sale $ (43,404) $ (39,000) $ (6,184)
Depreciation 9,000 9,000 11,000
Deferred loan fees 20,000 23,000 13,000
Allowance for loan losses 160,000 132,000 115,000
Other tax loss carryovers 3,000 27,000 135,000
Other (30,000) (4,000) 1,000
--------- --------- ---------
118,596 148,000 268,816
Valuation reserve (109,000) (109,000) (231,000)
--------- --------- ---------
Net deferred tax asset $ 9,596 $ 39,000 $ 37,816
========= ========= =========
</TABLE>
The valuation reserve decreased by $122,000 and $15,000 for the years ended
December 31, 1997 and 1996, respectively. The decreases were the result of the
utilization of previously unrecorded tax benefits that were used to offset
current year's taxable income. In addition, included in the 1997 decrease is a
$27,000 benefit that was the result of the expiration of capital loss carry
forwards. There was no change in the valuation reserve during the five months
ended May 31, 1998.
The Federal income tax reserve for loan losses at the Bank's base year amounted
to approximately $1,208,000. If any portion of the reserve is used for
purposes other than to absorb the losses for which established, 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 only to absorb loan losses, a deferred income tax liability
of approximately $495,000 has not been provided.
F-22
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE H - INCOME TAXES - Concluded
For the five months ended May 31, 1998 and 1997 and the years ended December
31, 1997, 1996 and 1995, the tax expense (benefit) allocated to the components
of comprehensive income amounted to $8,988, $15,077, $49,792, $(3,720) and
$141,077, respectively, for unrealized holding gains arising during the period
and $(4,582), $(3,338), $(16,976), $(9,519) and $1,419, respectively, for the
reclassification adjustment for gains (losses) realized in net income.
NOTE I - 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 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 its assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following tables) of total and Tier 1 capital (as defined) to average assets
(as defined). Management believes, as of May 31, 1998 and December 31, 1997
and 1996, that the Bank met all capital adequacy requirements to which they are
subject.
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, it must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the following tables. There are no conditions or events since
the notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios as of May 31, 1998 and December
31, 1997 and 1996 are also presented in the tables.
F-23
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE I - MINIMUM REGULATORY CAPITAL REQUIREMENTS - Concluded
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ --------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
May 31, 1998
------------
Total Capital to Risk
Weighted Assets $5,511 13.6% $3,248 8.0% $4,060 10.0%
Tier 1 Capital to Risk
Weighted Assets 5,039 12.4 1,624 4.0 2,436 6.0
Tier 1 Capital to
Average Assets 5,039 8.6 2,335 4.0- 2,919 5.0
2,919 5.0
December 31, 1997
-----------------
Total Capital to Risk
Weighted Assets $5,282 15.4% $ 2,745 8.0% $3,431 10.0%
Tier 1 Capital to Risk
Weighted Assets 4,933 14.4 1,372 4.0 2,059 6.0
Tier 1 Capital to
Average Assets 4,933 9.5 2,086- 4.0- 2,607 5.0
2,607 5.0
December 31, 1996
-----------------
Total Capital to Risk
Weighted Assets $4,888 18.9% $ 2,074 8.0% $2,593 10.0%
Tier 1 Capital to Risk
Weighted Assets 4,565 17.6 1,037 4.0 1,556 6.0
Tier 1 Capital to
Average Assets 4,565 8.9 2,048- 4.0- 2,560 5.0
2,560 5.0
</TABLE>
F-24
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE J - PENSION PLANS
The Bank provides for pension benefits for its eligible employees through
membership in the Co-operative Banks Employees Retirement Association defined
benefit pension plan. Each full time employee reaching the age of 21 and
having completed six months of service automatically becomes a participant in
the retirement plan. Part-time employees must complete 1,000 hours of service
in one consecutive twelve-month period beginning with such employee's date of
employment to automatically become a participant in the retirement plan.
Participants become fully vested when credited with five years of service
measured from their date of participation.
The plan is a multiemployer plan whereas the contributions by each bank are not
restricted to provide benefits for employees of the contributing bank and
information on the Bank's share of the actuarial present value of accumulated
plan benefits and the net assets at fair value available for benefits is not
determinable.
In addition to the defined benefit plan, the Bank adopted a Section 401(k) plan
which provides for voluntary contributions by participating employees ranging
from one percent to ten percent of their compensation, subject to certain
limitations. The Bank will match the employee's voluntary contribution up to
five percent of their compensation. Contributions made by the Bank amounted
to $18,874 and $12,511 for the five months ended May 31, 1998 and 1997 and
$34,754, $26,083 and $23,349 for the years ended December 31, 1997, 1996 and
1995, respectively.
Total pension expense amounted to $26,753 and $21,183 for the five months ended
May 31, 1998 and 1997 and $62,041, $57,675 and $49,663 for the years ended
December 31, 1997, 1996 and 1995, respectively.
NOTE K - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the financial statements.
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. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheets.
The Bank's exposure to credit loss is represented by the contractual amount
of these commitments. The Bank uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
F-25
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
At May 31, 1998 and December 31, 1997 and 1996, the following financial
instruments were outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
Contract Amount
-----------------------------------------
May 31, December 31, December 31,
1998 1997 1996
---------- --------------- ------------
<S> <C> <C> <C>
Commitments to grant loans $2,138,550 $2,355,376 $2,515,150
Unadvanced funds on equity lines of credit 272,237 202,418 379,223
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for 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.
Funds disbursed under these financial instruments are collateralized by real
estate.
Commitments to sell loans require the Bank to make delivery at a specific
future date of a specified amount, at a specified price or yield. At May 31,
1998 and December 31, 1997 and 1996, the Bank had commitments to sell loans
of $2,580,675, $3,029,670 and $3,268,422, respectively. Failure to fulfill
delivery requirements of commitments may result in payment of certain fees to
the investors. Loans are sold without recourse and, accordingly, risks arise
principally from movements in interest rates.
Operating Lease Commitments
---------------------------
Pursuant to the terms of noncancelable lease agreements in effect at May 31,
1998 and December 31, 1997, pertaining to banking premises and equipment,
future minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Year ending Year ending
December 31, May 31,
- -------------- -----------
<S> <C> <C> <C>
1998 $34,557 1999 $37,339
1999 3,277 2000 17,500
-------
2001 17,500
$37,834 2002 17,500
=======
2003 17,500
--------
$107,339
========
</TABLE>
F-26
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONTINUED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE K - COMMITMENTS AND CONTINGENCIES - Concluded
Rent expense was $16,363 and $9,777 for the five months ended May 31, 1998
and 1997 and $23,590, $29,550 and $14,600 for the years ended December 31,
1997, 1996 and 1995, respectively.
Other Contingencies
-------------------
Various legal claims also arise from time to time in the normal course of
business which in the opinion of management, will have no material effect on
the Bank's financial position.
NOTE L - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates, generally at the same prevailing
terms as those of other borrowers. A summary of related party activity
follows:
<TABLE>
<CAPTION>
Five months
ended May 31, Year ended December 31,
-------------------- --------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $403,000 $446,000 $446,000 $484,000 $ 585,000
Loans made/advanced 66,200 - - 2,600 8,000
Repayments (47,200) (17,000) (43,000) (40,600) (109,000)
-------- -------- -------- --------
Balance at end of period $422,000 $429,000 $403,000 $446,000 $ 484,000
======== ======== ======== ======== =========
</TABLE>
F-27
<PAGE>
Massachusetts Co-operative Bank
NOTES TO FINANCIAL STATEMENTS - CONCLUDED
May 31, 1998 and 1997 (unaudited) and December 31, 1997, 1996 and 1995
NOTE M - CONVERSION TO STOCK FORM OF OWNERSHIP
On May 6, 1998, the Board of Directors of the Bank adopted a plan of conversion
(the "Plan"), which was subsequently amended, pursuant to which the Bank will
convert from a state chartered mutual co-operative bank to a state chartered
stock co-operative bank, all of the outstanding common stock of which will be
acquired by Massachusetts Fincorp, Inc., (the "Company"), a holding company
formed expressly for such purpose, in exchange for a portion of the net
conversion proceeds. All of the stock to be issued in the conversion is being
offered to eligible and supplemental eligible account holders, employee benefit
plans of the Bank and other certain eligible subscribers in a subscription
offering pursuant to subscription rights in order of priority as set forth in
the plan of conversion. The Bank plans to establish an Employee Stock
Ownership Plan ("ESOP") for the benefit of eligible employees, to become
effective upon the conversion. The ESOP may purchase up to 8% of the common
stock issued, including shares issued to the Foundation. The ESOP will borrow
the proceeds to fund the purchase of shares from either the Company or a
subsidiary thereof. The Bank expects to make annual contributions adequate to
fund the repayment of any indebtedness of the ESOP.
The Bank's plan of conversion provides for the establishment of a charitable
foundation in connection with the conversion. The Foundation will be funded
with a contribution by the Company equal to 5% of the common stock sold in the
conversion. The Foundation will be dedicated to charitable purposes within the
Bank's local community, including community development activities.
Effective upon the conversion, the Company intends to enter into employment
agreements with three senior executives. The agreements will include, among
other things, provisions for minimum annual compensation and certain lump-sum
severance payments in the event of a "change in control".
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs incurred
will be charged to expense.
The Plan provides for the establishment, upon the completion of the conversion,
of a special "liquidation account" for the benefit of account holders in an
amount equal to the surplus of the Bank as of the date of its latest balance
sheet contained in the final prospectus used in connection with the conversion.
Each account holder, if he were to continue to maintain his deposit account at
the Bank, would be entitled, on a complete liquidation of the Bank after the
conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Bank. Upon completion of the conversion, the Bank's
surplus will be substantially restricted with respect to payment of dividends
to stockholders due to the liquidation account.
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.
F-28
<PAGE>
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MASSACHUSETTS FINCORP, INC., THE MASSACHUSETTS CO-OPERATIVE BANK
OR TRIDENT SECURITIES, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF MASSACHUSETTS FINCORP, INC. OR THE
MASSACHUSETTS CO-OPERATIVE BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION
IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
Page
----
Summary of the Conversion and the Offerings............................. 4
Selected Financial and Other Data of the Bank........................... 10
Risk Factors............................................................ 12
Massachusetts Fincorp, Inc.............................................. 20
The Massachusetts Co-operative Bank..................................... 20
Massachusetts Co-operative Charitable Foundation........................ 21
Regulatory Capital Compliance........................................... 23
Use of Proceeds......................................................... 24
Dividend Policy......................................................... 25
Market for the Common Stock............................................. 25
Capitalization.......................................................... 26
Pro Forma Data.......................................................... 27
Comparison of Valuation and Pro Forma Information with No Foundation.... 32
The Massachusetts Co-operative Bank Statements of Income and
Comprehensive Income.................................................. 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 34
Business of the Company................................................. 49
Business of the Bank.................................................... 49
Federal and State Taxation.............................................. 68
Regulation and Supervision.............................................. 69
Management of the Company............................................... 80
Management of the Bank.................................................. 81
The Conversion.......................................................... 92
Restrictions on Acquisition of the Company and the Bank................. 111
Description of Capital Stock of the Company............................. 116
Description of Capital Stock of the Bank................................ 118
Transfer Agent and Registrar............................................ 119
Changes in Accountants.................................................. 119
Experts................................................................. 119
Legal and Tax Opinions.................................................. 119
Additional Information.................................................. 120
The Massachusetts Co-operative Bank Index to Financial Statements....... F-1
-----------------------------
UNTIL NOVEMBER 13, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, 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.
================================================================================
================================================================================
Up to 784,904 Shares
[LOGO]
Massachusetts Fincorp, Inc.
(Proposed Holding Company for
The Massachusetts Co-operative Bank)
COMMON STOCK
(par value $0.01 per share)
__________
PROSPECTUS
__________
TRIDENT SECURITIES, INC.
October 9, 1998
================================================================================
