<PAGE>
As filed with the Securities and Exchange Commission on September 24, 1998
Registration No. 333-60237
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MASSACHUSETTS FINCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6036 04-3431804
(State or Other Jurisdiction of Incorporation or (Primary Standard Industrial (IRS Employer Identification No.)
Organization) Classification Code Number)
</TABLE>
<TABLE>
<S> <C>
THE MASSACHUSETTS CO-OPERATIVE BANK
1442 DORCHESTER AVENUE 1442 DORCHESTER AVENUE
BOSTON, MASSACHUSETTS 02122 BOSTON, MASSACHUSETTS 02122
(617) 825-5555 (617) 825-5555
(Address and Telephone Number of Principal Executive (Address of Principal Place of Business or Intended Principal Place
Offices) of Business)
</TABLE>
PAUL C. GREEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE MASSACHUSETTS CO-OPERATIVE BANK
1442 DORCHESTER AVENUE
BOSTON, MASSACHUSETTS 02122
(617) 825-5555
(Name, Address and Telephone Number of Agent for Service)
Copies to:
LAWRENCE M.F. SPACCASI, ESQUIRE
KENT M. KRUDYS, ESQUIRE
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
(202) 362-0840
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. /______/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. /___/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /___/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Title of each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Offering Registration Fee
Per Unit Price (1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 1,073,408
$.01 par Value Shares(2) $10.00 $10,734,080 $3,167(3)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares to be issued to Massachusetts Co-operative Charitable
Foundation, a privately-formed charitable foundation.
(3) The registration fee of $3,167 was previously paid with the initial filing
of the Form SB-2 on July 30, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
[To be used in connection with the Syndicated Community Offering only]
SYNDICATED PROSPECTUS SUPPLEMENT
MASSACHUSETTS FINCORP, INC.
(PROPOSED HOLDING COMPANY FOR THE MASSACHUSETTS CO-OPERATIVE BANK)
__________ SHARES OF COMMON STOCK
Massachusetts Fincorp, Inc. (the "Company"), a Delaware corporation, is
offering for sale in a syndicated community offering (the "Syndicated Community
Offering") __________ shares, at a per share price of $10.00, of its common
stock, $0.01 par value (the "Common Stock"), to be issued upon the conversion of
The Massachusetts Co-operative Bank, Boston, Massachusetts (the "Bank") from a
Massachusetts chartered mutual co-operative bank to a Massachusetts chartered
stock co-operative bank and the issuance of the Bank's outstanding capital stock
to the Company pursuant to a plan of conversion (the "Plan of Conversion"). The
remaining __________ shares of the Common Stock have been subscribed for in
subscription and community offerings (the "Subscription and Direct Community
Offerings") by the Bank's holders of deposit accounts with the Bank with a
balance of $50 or more as of April 30, 1997 ("Eligible Account Holders"), by
holders of deposit accounts with a balance of $50 or more as of
________________, 1998 ("Supplemental Eligible Account Holders"), by The
Massachusetts Co-operative Bank Employee Stock Ownership Plan, a tax-qualified
employee benefit plan, and related trust (the "ESOP"), by Directors, Officers
and employees of the Bank who do not otherwise qualify as Eligible or
Supplemental Eligible Account Holders, and then by certain members of the
general public. See "The Conversion - General." Contained herein is the
Prospectus in the form used in the Subscription and Direct Community Offerings.
The purchase price for all shares purchased in the Syndicated Community Offering
will be the same as the price paid by subscribers in the Subscription and Direct
Community Offerings (the "Purchase Price"). The Purchase Price of $10.00 per
share is the amount to be paid for each share at the time a purchase order is
submitted. See the cover page of the Prospectus and the table below for
information as to the method by which the range within which the number of
shares offered may vary and the method of subscribing for shares of the Common
Stock. For a discussion of certain factors that should be considered by each
prospective investor, see "Risk Factors" on pages ___ through ___.
Funds submitted to the Bank with purchase orders will earn interest at the
Bank's passbook rate of interest from the date of receipt until completion or
termination of the Conversion. The Syndicated Community Offering will expire no
later than _______________, 1998, unless extended by the Bank and the Company
with the approval of the Commissioner of the Massachusetts Division of Banks and
the Federal Deposit Insurance Corporation, if necessary. Such extensions may
not go beyond May 6, 2000. If an extension of time has been granted, all
subscribers will be notified of such extension, and of their rights to confirm
their subscriptions, or to modify or rescind their subscriptions and have their
funds returned promptly with interest, and of the time period within which the
subscriber must notify the Bank of his intention to confirm, modify or rescind
his subscription. If an affirmative response to any resolicitation is not
received by the Bank and the
<PAGE>
Company from subscribers, such orders will be rescinded and all funds will be
returned promptly with interest. The minimum number of shares which may be
purchased is 25 shares. Except for the ESOP, which may purchase up to 8% of the
total number of shares of Common Stock issued in the Conversion, no person,
together with associates of and persons acting in concert with such person, may
purchase in the Direct Community Offering and the Syndicated Community Offering
more than $100,000 of the aggregate value of Common Stock offered in the
Conversion. See "Plan of Conversion - Limitations on Common Stock Purchases."
The Company reserves the right, in its absolute discretion, to accept or reject,
in whole or in part, any or all subscriptions in the Syndicated Community
Offering.
The Company and the Bank have engaged Trident Securities, Inc. ("Trident")
to assist them in the sale of the Common Stock in the Syndicated Community
Offering. It is anticipated that Trident will use the services of other
registered broker-dealers ("Selected Dealers") and that fees to Trident and such
Selected Dealers will be an amount not to exceed ___% of the aggregate Purchase
Price of the shares sold in the Syndicated Community Offering. Neither Trident
nor any Selected Dealer shall have any obligation to take or purchase any shares
of Common Stock in the Syndicated Community Offering.
The Bank has requested that Trident undertake to match offers to buy and
offers to sell the Common Stock, and Trident intends to list the Common Stock
over-the-counter through the National Daily Quotation Service "Pink Sheet"
published by the National Quotation Bureau, Inc. Prior to this Offering, there
has not been a public market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock will develop, or
that the Common Stock will trade at or above the Purchase Price. The absence or
discontinuance of a market may have an adverse impact on both the price and
liquidity of the stock.
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.
2
<PAGE>
<TABLE>
<CAPTION>
Estimated Estimated Net Pro-
Underwriting Estimated Net ceeds of Subscrip-
Commissions Proceeds of tion, Direct Community
Syndicated and Other Syndicated and Syndicated
Community Fees and Community Community
Offering Price Expenses(1) Offering Offerings(2)(3)
===========================================================================================================
<S> <C> <C> <C> <C>
Minimum Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------
Midpoint Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------
Maximum Per Share $10.00 $ $ $
- -----------------------------------------------------------------------------------------------------------
Total Minimum(4) $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Total Midpoint $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Total Maximum(4) $ $ $ $
- -----------------------------------------------------------------------------------------------------------
Total Maximum, As Adjusted(5) $ $ $ $
===========================================================================================================
</TABLE>
______________________________
(1) Consists of a pro rata allocation of estimated expenses of the Bank and the
Company in connection with the Conversion (other than estimated fees to be
paid to Trident for services in connection with the Subscription and Direct
Community Offerings) and estimated compensation of Trident and Selected
Dealers in connection with the sale of the remaining shares in the
Syndicated Community Offering which fees are estimated to be $__________ and
$__________ at the minimum and the maximum of the estimated price range and
may be deemed to be underwriting fees. The information under "Pro Forma
Data" in the Prospectus was based on the assumptions stated therein, which
may differ from the estimates used for this table. See "The Conversion -
Marketing and Underwriting Arrangements" for a more detailed discussion of
fee arrangements.
(2) The Company applied to retain up to 50% of the net proceeds. The balance of
the net proceeds will be transferred to the Bank in exchange for all of the
capital stock of the Bank to be issued in connection with the Conversion.
(3) The net proceeds of the Subscription and Direct Community Offerings (based
upon the sale of the __________ shares subscribed for at a price of $10.00
per share and after allocation of a pro rata portion of the estimated
expenses relating to the Conversion) are estimated to be $__________.
(4) Based on an estimated price range of $__________ to $__________ at $10.00
per share (the "Estimated Price Range). The Total Minimum reflects the sale
of __________ shares at a per share price of $10.00, leaving a total of
__________ shares to be sold in the Syndicated Community Offering.
(5) Gives effect to an increase in the number of shares which could occur due to
an increase in the Estimated Price Range of up to 15% to reflect changes in
market and financial conditions following commencement of the offerings.
See "The Conversion - Stock Pricing." For a discussion of the distribution
and allocation of the additional shares, see "The Conversion - Subscription
Rights and Limitations on Common Stock Purchases."
TRIDENT SECURITIES, INC.
_________________________________
The date of this Prospectus Supplement is _______________, 1998.
3
<PAGE>
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 ___.
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
PURCHASE PRICE(1) OTHER FEES ESTIMATED NET PROCEEDS(3)
AND EXPENSES(2)
- -------------------------------- ------------------- ------------------------------------ ---------------------------
<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 $566,040 $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 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 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 ______________, 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 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_________,
EASTERN TIME, ON NOVEMBER 12, 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 undertake to match
offers to buy and offers to sell the Common Stock, and Trident 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 on 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
______________, 1998. See "The Conversion--
General."
4
<PAGE>
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."
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 the Expiration Date at
___________, 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 MAY RESULT IN A
REDUCTION IN THE NUMBER OF SHARES ALLOCATED TO A
SUBSCRIBING DEPOSITOR.
5
<PAGE>
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.
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 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
6
<PAGE>
$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 (as defined herein) 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 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 shares issued
Value 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%
======== ====
- ---------------------------------
(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 Offering 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.
</TABLE>
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
7
<PAGE>
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
12.8%, 10.8%, 9.4% or 8.2% 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 34.8%, 32.8%, 31.4% or
30.2% of the Common Stock at the minimum,
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 "The
Conversion--Establishment of the Charitable
Foundation," "Management of the Bank--
Subscriptions of Executive Officers and
Directors," 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 __________, Eastern Time on November 12, 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 __________, Eastern Time on
November 12, 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 undertake to match
offers to buy and offers to sell the Common
Stock, and Trident 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) ________.
8
<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 MAY 31, AT DECEMBER 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
<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)
9
<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)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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," as
of October 31, 1993.
(4) Deposits include core deposit accounts (savings, 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, Real Estate Owned and Classified Assets."
(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.
10
<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.
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,
11
<PAGE>
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."
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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. 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 and Analysis of Financial Condition and Results of
Operations--Management of Interest Rate Risk and Market Risk Analysis."
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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
undertake to match offers to buy and offers to sell the Common Stock, and
Trident 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 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 25,225, 29,675, 34,125 and 39,245
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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. The aggregate price of the shares of Common
Stock being
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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, repectively.
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 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 14.5% 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
15.0% 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 Company's 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.
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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 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 12.8%, 10.8%, 9.4% or
8.2% 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 34.8%, 32.8%, 31.4% and 30.2% 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
"Restrictions on Acquisition of the Company and the Bank--Restrictions in the
Company's Certificate of Incorporation and Bylaws" and "The Conversion--
Establishment of the Charitable Foundation."
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 "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and Bylaws,"
"Management of the Bank--Employment Agreements," "--Change in Control
Agreements," "--Employee Severance Compensation Plan," "--Other Benefit Plans--
Stock-Based Incentive Plan."
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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 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.
NO FAIRNESS OPINION
The Bank has engaged Trident Securities as a financial and marketing advisor,
and Trident Securities has agreed 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."
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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 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
19
<PAGE>
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 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/negotiable order of withdrawal ("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
20
<PAGE>
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 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 $8.1 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
21
<PAGE>
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. See "Risk Factors--
Effects of the Establishment of the Charitable Foundation--Potential Anti-
Takeover Effect."
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 OF THE (MIDPOINT OF THE (MAXIMUM OF THE (15% ABOVE MAXIMUM
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED OF THE ESTIMATED
MAY 31, 1998 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)
-------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<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.
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,
23
<PAGE>
the Bank is actively pursuing establishing a de novo branch location. The Bank
expects to incur capital expenditures of approximately $1.5 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," "Risk Factors--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--Employment 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 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.
24
<PAGE>
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 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 undertake to match offers to buy and offers to sell the Common Stock,
and Trident 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.
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
--------------------------------------------------------------------
784,904
504,475 593,500 682,525 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)
<S> <C> <C> <C> <C> <C>
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 "- Other Benefit
Plans - 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, "The Conversion-- Liquidation
Rights" and "Management of the Bank-- Other Benefit Plans." 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 MAXIMUN 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............ 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
(See footnotes on next page)
</TABLE>
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. In that
event, the Company will recognize an after-tax expense for the amount of
the contribution to the Foundation which is expected to be $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 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, 71,655 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," "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,.......... 0.29 0.30 0.30 0.30
as adjusted
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........... 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..................... 8.75 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. In that event,
the Company will recognize an after-tax expense for the amount of the
contribution to the Foundation which is expected to be $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," "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 also be 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, 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, 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>
THE MASSACHUSETTS CO-OPERATIVE BANK
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).... 830,827 772,388 1,990,261 1,771,761 1,658,798
for possible loan losses ---------- ---------- ---------- ---------- ----------
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 Regulation--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.
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
34
<PAGE>
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.
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."
35
<PAGE>
<TABLE>
<CAPTION>
AT MAY 31, 1998
---------------------------------------------------------
MORE THAN MORE THAN MORE THAN
1 YEAR 1 YEAR TO 2 YEARS TO 3 YEARS TO
OR LESS 2 YEARS 3 YEARS 4 YEARS
--------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Federal funds sold and short term
investments................................. $ 4,032 $ - $ - $ -
Securities.................................... 3,560 250 499 538
Mortgage loans, net(2)(3)..................... 23,464 10,535 6,917 1,805
Other......................................... 818 41 23 7
------- ------- ------- -------
Total interest-earning assets................. $31,874 $10,826 $ 7,439 $ 2,350
======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts.............................. $ 957 $ 957 $ 957 $ 957
Money market accounts......................... 779 - - -
NOW accounts.................................. 1,761 1,761 1,761 1,761
Certificates of deposit....................... 21,828 5,237 522 33
FHLB advances................................. 1,498 - - -
------- ------- ------- -------
Total interest-bearing liabilities....... $26,823 $ 7,955 $ 3,240 $ 2,751
======= ======= ======= =======
Interest sensitivity gap(4)................... $ 5,051 $ 2,871 $ 4,199 $ (401)
======= ======= ======= =======
Cumulative interest sensitivity gap........... $ 5,051 $ 7,922 $12,121 $11,720
======= ======= ======= =======
Cumulative interest sensitivity gap as a
percentage of total assets................... 7.99% 12.53% 19.18% 18.54%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets.. 8.56% 13.43% 20.54% 19.86%
Cumulative net interest-earning assets
as a percentage of cumulative interest-
bearing liabilities.......................... 118.83% 122.78% 128.75% 128.75%
<CAPTION>
AT MAY 31, 1998
-----------------------------------------------------------
MORE THAN
4 YEARS TO MORE THAN FAIR
5 YEARS 5 YEARS TOTAL AMOUNT VALUE(5)
------------ ----------- -------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Federal funds sold and short term
investments................................. $ - $ - $ 4,032 $ 4,032
Securities.................................... - 1,953 6,800 6,801
Mortgage loans, net(2)(3)..................... 981 3,335 47,037 46,918
Other......................................... 2 243 1,134 1,134
------- ------- ------- -------
Total interest-earning assets................. $ 983 $ 5,531 $59,003 $58,885
======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings accounts.............................. $ 957 $ 5,056 $ 9,841 $ 9,841
Money market accounts......................... - - 779 779
NOW accounts.................................. 1,761 2,937 11,742 11,742
Certificates of deposit....................... 6 2 27,628 27,670
FHLB advances................................. - 1,596 3,094 3,300
------- ------- ------- -------
Total interest-bearing liabilities....... $ 2,724 $ 9,591 $53,084 $53,332
======= ======= ======= =======
Interest sensitivity gap(4)................... $(1,741) $(4,060) $ 5,919 $ 5,553
======= ======= ======= =======
Cumulative interest sensitivity gap........... $ 9,979 $ 5,919 $ 5,919 $ 5,553
======= ======= ======= =======
Cumulative interest sensitivity gap as a
percentage of total assets................... 15.79% 9.37% 9.37% 8.79%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets.. 16.91% 10.03% 10.03% 9.43%
Cumulative net interest-earning assets
as a percentage of cumulative interest-
bearing liabilities.......................... 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
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------------------------------------------------------------
<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
====== ====== ======
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>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1997 1996
--------------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ----------- ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and short-term investments $ 2,299 $ 126 5.48% $ 1,024 $ 41 4.00%
Securities....................................... 4,624 295 6.38 5,137 329 6.40
Mortgage loans, net.............................. 40,507 3,342 8.25 36,559 3,227 8.83
Other............................................ 925 66 7.14 761 55 7.23
------- ------ ------- ------
Total interest-earning assets................... 48,355 3,829 7.92 43,481 3,652 8.40
Noninterest-earning assets......................... 2,625 4,082
------- -------
Equity securities................................ 368 27 7.34 151 22 14.57
------- ------ ------- ------
Total assets.................................... $51,348 3,856 $47,714 3,674
======= ------ ======= ------
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Savings accounts............................... $10,328 $ 244 2.36% $ 9,854 $ 240 2.44%
Money market accounts.......................... 1,079 28 2.59 1,290 33 2.56
NOW accounts................................... 5,377 173 3.20 2,612 49 1.88
Certificates of deposit........................ 20,471 1,138 5.56 16,405 926 5.64
------- ------ ------- ------
Total deposits.................................. 37,255 1,583 4.25 30,161 1,248 4.14
FHLB advances.................................. 6,402 373 5.83 10,406 640 6.15
------- ------ ------- ------
Total interest-bearing liabilities.............. 43,657 1,956 4.48 40,567 1,888 4.65
------ ------
Noninterest-bearing demand checking accounts....... 2,255 2,043
Non interest-bearing liabilities................... 653 620
------- -------
Total liabilities............................... 46,565 43,230
Total surplus...................................... 4,783 4,484
------- -------
Total liabilities and surplus.................... $51,348 $47,714
======= =======
Net interest income................................ $1,900 $1,786
====== ======
Net interest income/interest rate spread........... 3.44% 3.75%
====== ======
Net interest margin as a percent of interest-earning
assets........................................... 3.93% 4.11%
Ratio of interest-earning assets to interest-bearing ====== ======
liabilities...................................... 110.76% 107.18%
====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995
---------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
---------- ----------- ------------
(DOLLARS IN THOUSANDS)
Assets:
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and short-term investments $ 1,162 $ 58 4.99%
Securities...................................... 5,739 354 6.17
Mortgage loans, net............................. 32,080 2,861 8.92
Other........................................... 493 42 8.52
------- -------
Total interest-earning assets................... 39,474 3,315 8.40
Noninterest-earning assets......................... 1,969
-------
Equity securities................................ 344 36 10.47
------- -------
Total assets.................................... $41,787 3,351
======= -------
LIABILITIES AND SURPLUS:
Interest-bearing liabilities:
Deposits:
Savings accounts............................... $ 9,967 $ 244 2.45%
Money market accounts.......................... 1,532 39 2.55
NOW accounts................................... 2,404 45 1.87
Certificates of deposit........................ 16,690 930 5.57
------- -------
Total deposits.................................. 30,593 1,258 4.11
FHLB advances.................................. 5,175 364 7.03
------- -------
Total interest-bearing liabilities.............. 35,768 1,622 4.53
------- -------
Noninterest-bearing demand checking accounts....... 1,342
Non interest-bearing liabilities................... 563
-------
Total liabilities............................... 37,673
Total surplus...................................... 4,114
-------
Total liabilities and surplus.................... $41,787
=======
Net interest income................................ $1,729
=======
Net interest income/interest rate spread.......... 3.87%
======
Net interest margin as a percent of interest-earning
assets........................................... 4.38%
======
Ratio of interest-earning assets to interest-bearing
liabilities...................................... 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 (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
----------------------- ----------------------- ---------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
----------------------- ------ ------------------------ ------ -------------------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold 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.
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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 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.
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<PAGE>
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 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
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<PAGE>
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 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
43
<PAGE>
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.
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
44
<PAGE>
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 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.
45
<PAGE>
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. 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
46
<PAGE>
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. 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 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 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.
47
<PAGE>
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 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" ("SFAS No. 129") 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"
("Statement No. 130"). 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" ("SFAS No. 132"), which standardizes
the disclosure requirements for pensions and other postretirement benefits.
This Statement supersedes FASB Statements No. 87, "Employers' Accounting for
Pensions,"
48
<PAGE>
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" ("SFAS No. 133"), 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 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
49
<PAGE>
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 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;
50
<PAGE>
$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.
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 FHA and 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
51
<PAGE>
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 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
ENDED MAY 31, FOR THE YEAR ENDED 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 MULTI- COMMERCIAL HOME AUTO LOANS ON OTHER TOTAL
FOUR- FAMILY REAL ESTATE EQUITY LOANS SAVINGS LOANS LOANS
FAMILY CONSTRUCTION LINES ACCOUNTS
------------------------------------------------------------------------------------------------------
(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 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.
54
<PAGE>
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 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.
55
<PAGE>
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 Low 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.
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.
56
<PAGE>
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.
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
57
<PAGE>
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.
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.
58
<PAGE>
<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 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.
59
<PAGE>
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 AT OR FOR THE
FIVE MONTHS YEAR ENDED
ENDED MAY 31, DECEMBER 31,
---------------------------- --------------------------------------
1998 1997 1997 1996 1995
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
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
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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%
===== ====== ===== ======
</TABLE>
60
<PAGE>
<TABLE>
<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>
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
61
<PAGE>
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 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.
62
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of May 31, 1998.
<TABLE>
<CAPTION>
AT MAY 31, 1998
------------------------------------------------------------------
MORE THAN ONE
ONE YEAR OR LESS YEAR TO FIVE YEARS
------------------------------------------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S Government and federal agency.......... $ 750 6.13% $ 250 5.60%
Corporate debt............................. 504 7.86 1,345 8.09
------ ------
Total held-to-maturity................... 1,254 6.82 1,595 7.70
------ ------
Available for sale:
Mortgage-backed securities................. -- -- -- --
U.S. Government and federal agency......... 500 5.50 1,498 5.98
Marketable equity securities............... -- -- -- --
------ ---- ------ ----
Total available-for-sale................. 500 5.50 1,498 5.98
------ ------
Total securities............................. $1,754 6.45% $3,093 6.87%
====== ==== ====== ====
<CAPTION>
AT MAY 31, 1998
-----------------------------------------------------------------------------------------
MORE THAN FIVE
YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
-----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
U.S Government and federal agency.... $ 65 6.59% $ -- --% $1,065 6.03%
Corporate debt....................... -- -- -- -- 1,849 8.03
---- ------ ------
Total held-to-maturity............ 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... 853 6.62 -- -- 2,851 6.08
Marketable equity securities......... -- -- -- -- 727 --
---- ---- ------ ---- ------ ----
Total available-for-sale.......... 853 6.62 1,035 4.94 4,613 5.79
---- ------ ------
Total securities....................... $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
------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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>
DECEMBER 31,
AT -------------------------------------------
MAY 31, 1998 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
======= ====== ======= ======
<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>
65
<PAGE>
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 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 AT OR FOR THE YEAR
ENDED ENDED
May 31, DECEMBER 31,
----------------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
LEASED OR ORIGINAL YEAR DATE OF LEASE IMPROVEMENTS
LOCATION OWNED LEASED OR ACQUIRED EXPIRATION AT MAY 31, 1998
- --------------------------------- ---------------- -------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
MAIN OFFICE: (IN THOUSANDS)
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.
67
<PAGE>
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.
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.
68
<PAGE>
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 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 Department of
Revenue as a "security corporation" under Massachusetts law, qualifying it to
take advantage of the 1.32% income tax rate on Massachusetts securities
corporations.
69
<PAGE>
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.
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.
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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.
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" 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
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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, 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:
<TABLE>
<CAPTION>
<S> <C>
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%
</TABLE>
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
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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.
REAL ESTATE LENDING POLICIES. Under FDIC regulations which became effective
March 19, 1993, state-chartered nonmember 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
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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.
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
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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 bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings 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 "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
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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. The Bank's assessment rate for the
years ended December 31, 1997, 1996 and 1995 were 0.01%, 0.01% and 0.11% of
assessable deposits.
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 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 Community Reinvestment Act, as amended ("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
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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
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
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<PAGE>
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
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
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<PAGE>
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 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.
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FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares of
the Common Stock purchased by persons who are not affiliates of the Company may
be resold without registration. Shares purchased by an affiliate of the Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
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."
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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 1991 1999
Executive 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.
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<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.
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.
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<PAGE>
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 $1,800.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1997, to the Chief Executive Officer ("Named Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
-------------------------------------------- --------------------------- ---------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($) (2) ($) (3) (#) (4) ($) (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
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<PAGE>
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 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 athree-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
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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
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.
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EMPLOYEE STOCK OWNERSHIP PLAN. The Bank intends to establish a tax-
qualified employee stock ownership plan (the "ESOP") in connection with the
Conversion. Generally, employees will become participants 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.
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
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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 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 Common Stock ("Stock Options"),
Common Stock ("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).
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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 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
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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 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, 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 8 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.
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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 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 MINIUMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE (1) 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................ -- -- -- -- --
-------- ------ ----- ------ ----
All directors and executive officers
as a group (14).................... $675,000 67,500 12.75% 67,500 9.40%
======== ====== ===== ====== ====
</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 shares to be contributed to the
Foundation equal to 5% of the Common Stock sold, 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.
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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
shareholders. A special meeting of the Bank's shareholders 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.
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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 request from 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.
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 of the Foundation from those nominated by the Nominating Committee.
Directors will be divided into three classes with
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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
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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 shareholders in the Company's common stock would
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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 14.5% 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, however, would be able to carry forward any unused
portion of the deduction for five years following the contribution. 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.
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
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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.
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 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
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"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 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.
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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 income taxation which indicate that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for Federal or Massachusetts income 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.
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
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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 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.
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.
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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 stockholders' 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,
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."
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 Shareholders 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 $50 or more as of April 30, 1997) and the denominator is the total
amount of Qualifying Deposits of all Eligible Account Holders ($_______), 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.
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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 Shareholders 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."
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.
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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.
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 (________, 1998) at 12:00 noon, Eastern time,
unless extended for up to 45 days by the Bank and Company or 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 canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Bank will notify subscribers of the extension of time and
of any rights of subscribers to modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order will
be rescinded and all subscription funds will be promptly returned with interest.
Such extensions may not go beyond 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
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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 and 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
$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.
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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 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 canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription 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
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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.
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
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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.
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
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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 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 members 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 1.0% of the shares offered, but
may make such purchase, together with associates of and persons acting in
concert with such person, by also purchasing in other available categories of
the Conversion, subject to availability of shares and the 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.
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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,"
"--Certain Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
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.
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
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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, to the effect that the Conversion will
not be a taxable transaction to the Company, the Bank, Eligible Account Holders
or Supplemental Eligible Account Holders, except as noted below. The federal and
Massachusetts tax consequences will remain unchanged in the event that a holding
company form of organization is not utilized.
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 to the effect that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the 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 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, Officers of the Bank or Company or their Associates 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, Officer or
Associate. 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
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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, Officers (or any person who was an Officer or Director of the Bank
after adoption of the Plan of Conversion) and their associates during the three-
year period following Conversion may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the
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.
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. 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 depositors in connection
with the meeting of depositors called to consider the Plan and at any time
thereafter with the concurrence of the Commissioner.
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 shareholders 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 management remuneration 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 management
remuneration 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
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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 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
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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 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 7.6% 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 25.6% 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:
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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 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
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<PAGE>
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
Interested Stockholder) may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, 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--Certain 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
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<PAGE>
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
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 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.
MASSACHUSETTS BANKING LAW. Massachusetts banking law also prohibits any
"company," defined to include banking institutions as well as corporations, from
directly or indirectly controlling the voting power of 25% or more of the voting
stock of two or more banking institutions without the prior approval of the
Board of Bank Incorporation. Additionally, an out-of-state company which
already directly or indirectly controls voting power of 25% or more of the
voting stock of two or more banking institutions may not also acquire direct or
indirect ownership or control of more than 5% of the voting stock of a
Massachusetts banking institution without the prior approval of the Board of
Bank Incorporation. Finally, for a period of three years following completion
of a conversion to stock form, no person may directly or indirectly offer to
acquire or acquire beneficial ownership of more than 10% of any class of equity
security of a converting mutual savings bank without prior written approval of
the Board of Bank Incorporation.
Prior approval of the Commissioner is also required before any action is
taken that causes any stock banking institution to acquire all of the capital
stock of any other stock banking institution. The Commissioner will approve
such a plan of acquisition, following approval by a majority vote of the boards
of directors of the acquiror and the acquiree and a two-thirds approval of the
stockholders of the acquiree, provided the Commissioner finds that competition
among banking institutions will not be unreasonably affected and that public
convenience and advantage will be promoted. Any such company shall engage
directly or indirectly only in such activities as are now or may hereafter be
proper activities for bank holding companies under the BHC Act.
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<PAGE>
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 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.
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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 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."
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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.
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 _________________.
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.
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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 and the FDIC. 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 and 15 Braintree Hill,
Office Park, Braintree, Massachusetts 02184.
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.
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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>
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.
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> <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.
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.
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 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.
<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
</TABLE>
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>
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>
<TABLE>
==================================================================================================================
<S> <C>
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. Up to 784,904 Shares
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 [LOGO]
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.
______________________________ Massachusetts Fincorp, Inc.
TABLE OF CONTENTS (Proposed Holding Company for
Page The Massachusetts Co-operative Bank)
----
Summary of the Conversion and the Offerings.................
Selected Financial and Other Data of the Bank...............
Risk Factors................................................
Massachusetts Fincorp, Inc.................................. COMMON STOCK
The Massachusetts Co-operative Bank......................... (par value $0.01 per share)
Massachusetts Co-operative Charitable Foundation............
Regulatory Capital Compliance...............................
Use of Proceeds.............................................
Dividend Policy.............................................
Market for the Common Stock.................................
Capitalization.............................................. __________
Pro Forma Data..............................................
Comparison of Valuation and Pro Forma Information........... PROSPECTUS
with No Foundation......................................... __________
The Massachusetts Co-operative Bank Statements of Income and
Comprehensive Income......................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.................................
Business of the Company.....................................
Business of the Bank........................................ TRIDENT SECURITIES, INC.
Federal and State Taxation..................................
Regulation and Supervision..................................
Management of the Company...................................
Management of the Bank...................................... __________, 1998
The Conversion..............................................
Restrictions on Acquisition of the
Company and the Bank.....................................
Description of Capital Stock of the Company.................
Description of Capital Stock of the Bank....................
Transfer Agent and Registrar................................
Changes in Accountants......................................
Experts.....................................................
Legal and Tax Opinions......................................
Additional Information......................................
The Massachusetts Co-operative Bank Index to
Financial Statements....................................
______________________________
UNTIL _________, 1998 OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
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.
==================================================================================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), Articles 10 and 11 of the
Registrant's Certificate of Incorporation provide as follows:
TENTH:
A. Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent, or in any other capacity while serving as a Director,
Officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article TENTH
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, services to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an
<PAGE>
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this Article TENTH, or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of expenses conferred
in this Article TENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect itself
and any Director, Officer, employee or agent of the Corporation or subsidiary or
Affiliate or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
Director, except for liability: (i) for any breach of the Director's duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
Massachusetts filing fee.................................... $ 5,000
SEC filing fee(1)........................................... 3,167
OTS Holding Company filing fee.............................. 2,000
NASD filing fee(1).......................................... 1,574
Exchange listing fee(1)..................................... 10,000
Printing, postage and mailing............................... 50,000
Legal fees and expenses (including Issuer's counsel and
Underwriter's counsel).................................... 140,000
Accounting fees and expenses................................ 100,000
Appraiser's fees and expenses (including business plan)..... 21,500
Marketing fees and selling commissions...................... 131,000
Underwriter's expenses (excluding counsel fees)............. 15,000
Records management and conversion agent fees and expenses... 10,000
Transfer agent and registrar fees and expenses.............. 8,000
Certificate printing........................................ 2,000
Telephone, temporary help and other equipment............... 7,500
Blue Sky fees and expenses.................................. 7,000
Miscellaneous............................................... 42,259
--------
TOTAL....................................................... $556,000
========
</TABLE>
______________________
(1) Estimated expenses bases on the registration of 1,073,408 shares at $10.00
per share.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 27. EXHIBITS.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.1 Engagement Letter between The Massachusetts Co-operative Bank and
Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Stock Charter and Bylaws of
The Massachusetts Co-operative Bank)
3.1 Certificate of Incorporation of Massachusetts Fincorp, Inc.*
3.2 Bylaws of Massachusetts Fincorp, Inc.*
3.3 Stock Charter and Bylaws of The Massachusetts Co-operative Bank
(See Exhibit 2.1 hereto)
4.0 Stock Certificate of Massachusetts Fincorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Grant Thornton LLP re: State Tax Matters
10.1 Form of The Massachusetts Co-operative Bank Trust Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of The Massachusetts Co-operative Bank One-Year Employment
Agreement*
10.4 Form of The Massachusetts Co-operative Bank Three-Year Employment
Agreement*
10.5 Form of The Massachusetts Co-operative Bank Three-Year Change in
Control Agreement*
10.6 Form of Massachusetts Fincorp, Inc. One-Year Employment Agreement*
10.7 Form of Massachusetts Fincorp, Inc. Three-Year Employment Agreement*
10.8 Form of The Massachusetts Co-operative Bank Management Supplemental
Executive Retirement Plan*
10.9 Form of The Massachusetts Co-operative Bank Employee Severance
Compensation Plan*
16.1 Letter from Wolf & Company, P.C. regarding change in certifying
accountant*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc.(P)
99.2 Form of Massachusetts Co-operative Charitable Foundation Gift
Instrument*
</TABLE>
- -------------------
*Previously filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
ITEM 28. UNDERTAKINGS.
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
<PAGE>
CONFORMED
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Boston,
Commonwealth of Massachusetts, on September 24, 1998.
Massachusetts Fincorp, Inc.
By: /s/ Paul C. Green
------------------------------------------
Paul C. Green
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Paul C. Green President, Chief Executive September 24, 1998
- ------------------------ Officer and Director
Paul C. Green (principal executive
officer)
/s/ Ruth J. Rogers Chief Financial Officer September 24, 1998
- ------------------------ Treasurer and Corporate Secretary
Ruth J. Rogers (principal accounting and
financial officer)
* Director
- ------------------------
John B. Byrne
* Director
- ------------------------
John R. Byrne
* Director
- ------------------------
Richard F. Cahill
* Director
- ------------------------
W. Craig Dolan
* Director
- ------------------------
John E. Hurley, Jr.
* Director
- ------------------------
Robert E. McGovern
* Director
- ------------------------
John P. O'Hearn, Jr.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
* Director
- -----------------------
Robert H. Quinn
* Director
- -----------------------
Joseph W. Sullivan
* Director
- -----------------------
Diane Valle
</TABLE>
*Pursuant to the Power of Attorney find on July 30, 1998 as Exhibit 24.1
to the Registration Statement on Form SB-2 of Massachusetts
Fincorp, Inc.
<TABLE>
<S> <C> <C>
/s/ Paul C.Green President, Chief Executive September 24, 1998
- ----------------------- Officer and Director
Paul C. Green
</TABLE>
<PAGE>
$4/nofolio
TABLE OF CONTENTS
LIST OF EXHIBITS (FILED HEREWITH UNLESS OTHERWISE NOTED)
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits (filed herewith unless otherwise noted)
<TABLE>
<S> <C>
1.1 Engagement Letter between The Massachusetts Co-operative Bank and
Trident Securities, Inc.*
1.2 Draft Form of Agency Agreement
2.1 Amended Plan of Conversion (including the Stock Charter and Bylaws of
The Massachusetts Co-operative Bank)
3.1 Certificate of Incorporation of Massachusetts Fincorp, Inc.*
3.2 Bylaws of Massachusetts Fincorp, Inc.*
3.3 Stock Charter and Bylaws of The Massachusetts Co-operative Bank
(See Exhibit 2.1 hereto)
4.0 Draft Stock Certificate of Massachusetts Fincorp, Inc.*
5.0 Opinion of Muldoon, Murphy & Faucette re: legality
5.1 Opinion of Morris, Nichols, Arsht & Tunnell re: legality
8.0 Opinion of Muldoon, Murphy & Faucette re: Federal Tax Matters
8.1 Opinion of Grant Thornton LLP re: State Tax Matters
10.1 Form of The Massachusetts Co-operative Bank Trust Agreement*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan Documents*
10.3 Form of The Massachusetts Co-operative Bank One-Year Employment
Agreement*
10.4 Form of The Massachusetts Co-operative Bank Three-Year Employment
Agreement*
10.5 Form of The Massachusetts Co-operative Bank Three-Year Change in
Control Agreement*
10.6 Form of Massachusetts Fincorp, Inc. One-Year Employment Agreement*
10.7 Form of Massachusetts Fincorp, Inc. Three-Year Employment Agreement*
10.8 Form of The Massachusetts Co-operative Bank Management
Supplemental Executive Retirement Plan*
10.9 Form of The Massachusetts Co-operative Bank Employee Severance
Compensation Plan*
16.1 Letter from Wolf & Company, P.C. regarding change in certifying
accountant*
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Muldoon, Murphy & Faucette
23.3 Consent of Morris, Nichols, Arsht & Tunnell*
23.4 Consent and Subscription Rights Opinion of FinPro, Inc.*
24.1 Powers of Attorney*
27.0 Financial Data Schedule*
99.1 Appraisal Report of FinPro, Inc.(P)
99.2 Form of Massachusetts Co-operative Charitable Foundation Gift
Instrument*
</TABLE>
- --------------------------------------
*Previously Filed
(P) Filed pursuant to Rule 202 of Regulation S-T.
<PAGE>
EXHIBIT 1.2
MASSACHUSETTS FINCORP, INC.
504,475 to 784,904 SHARES
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
$10.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Massachusetts Fincorp, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), and The Massachusetts Co-operative Bank, a
Massachusetts-chartered mutual co-operative bank (the "Bank") hereby confirm, as
of ____________, 1998, their agreement with Trident Securities, Inc.
("Trident"), a broker-dealer registered with the Securities and Exchange
Commission (the "Commission") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"), as follows:
1. Introductory. The Company has been formed for the purpose of becoming the
holding company for the Bank, which intends to convert from mutual to stock
form (together with the Offerings (as hereinafter defined), and the issuance
of shares of stock of the Bank to the Company, the "Conversion") pursuant to
a plan of conversion, as amended, adopted by the Board of Directors of the
Bank on May 6, 1998 and amended on __________, 1998 (the "Plan"). In
accordance with the Plan, the Company is offering shares of its common
stock, par value $0.01 per share (the "Shares" or the "Common Stock")
pursuant to nontransferable subscription rights in a subscription offering
(the "Subscription Offering") to certain depositors of the Bank, to certain
tax-qualified employee benefit plans of the Company and the Bank
(collectively, the "Employee Plans"), including the Massachusetts Co-
operative Bank Employee Stock Ownership Plan (the "ESOP") and directors,
officers and employees of the Bank. Concurrently with the Subscription
Offering, shares of the Common Stock not sold in the Subscription Offering
are being offered in a community offering to certain members of the general
public with a preference being given to natural persons residing in Suffolk
and Norfolk Counties, Massachusetts (the "Direct Community Offering") (the
Subscription Offering and the Direct Community Offering are sometimes
referred to collectively as the "Subscription and Direct Community
Offering"), subject to the right of the Bank, in its absolute discretion, to
reject orders in the Direct Community Offering in whole or in part. It is
anticipated that shares of Common Stock not subscribed for in the
Subscription and
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 2
Direct Community Offering (if any) will be offered to certain members of
the general public on a best efforts basis by a selling group of broker-
dealers managed by Trident in a syndicated offering (the "Syndicated
Offering") (the Subscription Offering, the Direct Community Offering and
the Syndicated Offering are referred to collectively as the "Offerings").
In the Subscription and Direct Community Offering (and the Syndicated
Offering, if applicable), the Company is offering between 504,475 and
682,525 Shares (the "Current Valuation Range"), with the possibility of
offering up to 784,904 Shares without a resolicitation of subscribers
pursuant to (i) Massachusetts General Laws, Chapter 170, Section 26E, (ii)
209 C.M.R. 33.00 et. seq., (iii) 12 C.F.R. 333.4 or (iv) 12 C.F.R. 303.15
(collectively, the "Conversion Regulations"). With the exception of the
ESOP, no individual person or other entity, together with associates of and
persons acting in concert with such person or other entity, may subscribe
for more than 2% of the Common Stock offered in the Conversion.
The Company has filed with the Commission a registration statement on Form
SB-2 (No. 333-60237), including a prospectus for the registration of the Shares
under the Securities Act of 1933, as amended (the "Securities Act"), and such
amendments thereto, if any, and such amended prospectuses as may have been
required to the date hereof by the Commission in order to declare such
registration statement effective; and will file such additional amendments
thereto and such amended prospectuses and prospectus supplements as may
hereafter be required. Such registration statement (as amended to date, if
applicable, and as from time to time amended or supplemented hereafter) and the
prospectus constituting a part thereof (including in each case all documents
incorporated or deemed to be incorporated by reference therein, if any, and the
information, if any, deemed to be part thereof pursuant to the rules and
regulations of the Commission under the Securities Act, as from time to time
amended or supplemented pursuant to the Securities Act or otherwise (the
"Securities Act Regulations")) are hereinafter referred to as the "Registration
Statement" and the "Prospectus," respectively, except that if any revised
prospectus that shall be used by the Company in connection with the Subscription
and Direct Community Offering or the Syndicated Offering differs from the
Prospectus on file with the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to Trident for such use.
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus, immediately following the consummation of the
Conversion, subject to compliance with certain conditions as may be imposed by
regulatory authorities, the Company will contribute a number of Shares equal to
5% of the Common Stock sold in the Offerings (the "Foundation Shares") to the
Massachusetts Co-operative Charitable Foundation, a charitable foundation to be
established
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 3
by the Bank and the Company (the "Foundation").
The Company has been advised by Trident that Trident will use its best
efforts in assisting the Company with the sale of the Shares in the Offerings.
Prior to the execution of this Agreement, the Company has delivered to Trident
the Prospectus dated October ___, 1998 (hereinafter defined) and all supplements
thereto to be used in the Offerings. Such Prospectus contains information with
respect to the Company, the Bank, the Foundation and the Shares.
2. Representations and Warranties.
- --
The Company and the Bank jointly and severally represent and warrant to
Trident as follows:
a. The Registration Statement has been declared effective by the
Commission, no stop order has been issued with respect thereto and no
proceedings therefor have been initiated or, to the knowledge of the
Company and the Bank, threatened by the Commission. At the time the
Registration Statement became effective and at all times subsequent
thereto through and including the Closing Date referred to in Section
4 below, the Registration Statement (as amended or supplemented)
complied and will comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations
and did not and will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the date
of the Prospectus and at all times subsequent thereto through and
including the Closing Date (as hereinafter defined), the Prospectus
(as amended or supplemented) complied and will comply in all material
respects with the Conversion Regulations and the Prospectus did not
and will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. Representations or warranties in this subsection shall
not apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company relating
to Trident by or on behalf of Trident expressly for use in the
Prospectus or the Registration Statement.
b. As of the Closing Date, the Bank will have completed all conditions
precedent to its conversion from the mutual to stock form in
accordance with the Plan, the Conversion Regulations and all other
applicable laws, regulations, decisions and orders. The Plan has been
approved by the Commissioner of Banks of The Commonwealth of
Massachusetts (the "Commissioner") and has been reviewed
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 4
without objection by the Federal Deposit Insurance Corporation
("FDIC"), subject to conditions customarily imposed in such non-
objection letters, and no person has challenged or sought to obtain
judicial review of the action of the Commissioner in approving the
Plan and the Conversion.
c. The Bank has filed an Application for Conversion including (i) the
Prospectus; (ii) a Notice and Information Statement relating to the
Special Meeting of the Bank's depositors (as amended or supplemented,
the "Notice"); and (iii) certain exhibits (such Application for
Conversion, Prospectus, Notice and exhibits, as amended or
supplemented, shall sometimes be referred to collectively herein as
the "Conversion Application"). By letter dated ___________, 1998, the
Commissioner has approved the Conversion Application, such approval
remains in full force and effect and no order has been issued by the
Commissioner suspending or revoking such approval and no proceedings
therefor have been initiated or, to the knowledge of the Company or
the Bank, threatened by the Commissioner.
d. The Commissioner has not, by order or otherwise, prevented or
suspended the use of the Prospectus or any supplemental sales
literature authorized by the Company or the Bank for use in connection
with the Offerings.
e. As of the Closing Date, the Company will have completed all conditions
precedent to its registration as a savings and loan holding company.
The Company has filed an application on Form H-(e)1 (the "Holding
Company Application") with the Office of Thrift Supervision (the
"OTS") for approval to acquire the Bank and become a savings and loan
holding company and has received written notice from the OTS of its
approval of the Holding Company Application.
f. The Bank is now a Massachusetts-chartered co-operative bank of mutual
form of organization and upon the Conversion will be a Massachusetts-
chartered co-operative bank of capital stock form of organization, in
both instances duly licensed to conduct its business as described in
the Prospectus. Each of the Bank and the Bank Subsidiaries
(hereinafter defined) is in good standing under the laws of The
Commonwealth of Massachusetts and is not required to qualify as a
foreign corporation in any jurisdiction. The Bank is a member in good
standing of the Federal Home Loan Bank of Boston (the "FHLB of
Boston") and the Co-operative Central Bank (the "Central Bank"). The
deposit accounts of the Bank are insured by the Bank Insurance Fund of
the FDIC up to the applicable
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 5
limits, and deposits not insured by the FDIC are insured by the Share
Insurance Fund of the Central Bank. Upon the Conversion, the
liquidation account for the benefit of eligible account holders and
supplemental eligible account holders will be duly established in
accordance with the requirements of the Conversion Regulations. The
Bank does not own equity securities of, or an equity interest in, any
business enterprise, except as described in the Prospectus and except
for equity securities held in its investment portfolio representing
not more than 5% of the equity interest in any business entity.
g. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus
and to enter into and perform its obligations under this Agreement.
The Company is duly qualified as a foreign corporation to transact
business and is in good standing in The Commonwealth of Massachusetts
and in all other jurisdictions in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business.
h. As of the Closing Date, the Company will not directly own any
subsidiaries other than the Bank. The Bank's only subsidiaries (other
than, prior to the Closing Date, the Company) are Mass Securities
Corporation and Mass SEC Corp. II (the "Bank Subsidiaries").
i. Each of the Company, the Bank and the Bank Subsidiaries has obtained
all licenses, permits and other governmental authorizations currently
required for the conduct of its business or as required for the
conduct of its business as contemplated by the Conversion Application
and the Holding Company Application; all such licenses, permits and
other governmental authorizations are in full force and effect; and
each of the Company, the Bank and the Bank Subsidiaries is in all
material respects complying therewith.
j. Each of the Company, the Bank and the Bank Subsidiaries has good,
marketable and insurable title to all assets material to its business
and to those assets described in the Prospectus as owned by it, free
and clear of all material liens, charges, encumbrances or
restrictions, except for liens for taxes not yet due, except as
described in the Prospectus and except as could not in the aggregate
have a material adverse effect upon the operations or financial
condition of the Company, the Bank and the Bank Subsidiaries, taken as
a whole. All of the leases and subleases material to the operations or
financial condition of the Company,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 6
the Bank and the Bank Subsidiaries, taken as a whole, under which the
Company, the Bank or the Bank Subsidiaries holds properties, including
those described in the Prospectus, are in full force and effect as
described therein.
k. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and all actions in connection
with the contribution of Foundation Shares to the Foundation have been
duly and validly authorized by all necessary actions on the part of
each of the Company and the Bank, and this Agreement is a valid and
binding obligation of each of the Company and the Bank, enforceable in
accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of financial institutions,
the accounts of which are insured by the FDIC or by general equity
principles, regardless of whether such enforceability is considered in
a proceeding in equity or at law, and except to the extent that the
provisions of Section 7 hereof may be unenforceable as against public
policy).
l. There is no litigation or governmental proceeding pending or, to the
best knowledge of any of the Company, the Bank or the Bank
Subsidiaries, threatened against or involving the Company, the Bank or
the Bank Subsidiaries or their assets which individually or in the
aggregate would reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), results of
operations and business, including the assets and properties, of the
Company, the Bank or the Bank Subsidiaries.
m. The Bank has received the opinion of Muldoon, Murphy & Faucette with
respect to federal tax consequences of the Conversion to the effect
that the Conversion will constitute a tax-free reorganization under
the Internal Revenue Code of 1986, as amended. The Bank has also
received the opinion of Grant Thornton LLP that the Conversion will
not be a taxable transaction for the Bank under the laws of The
Commonwealth of Massachusetts. The Bank and the Company have received
the opinion of Grant Thornton LLP that the contribution of Foundation
Shares to the Foundation will not constitute an act of self-dealing,
and that the Company will be entitled to a deduction in the amount of
the fair market value of the Foundation Shares contributed at the time
of the contribution less the nominal par value that the Foundation is
required to pay the Company for such Foundation Shares, subject to a
limitation based on 10% of the Company's annual taxable income before
the charitable contribution deduction. The facts relied upon in
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 7
such opinions are accurate and complete.
n. Each of the Company and the Bank has all such corporate power,
authority, authorizations, approvals and orders as may be required to
enter into this Agreement and to carry out the provisions and
conditions hereof, subject to the limitations set forth herein and
subject to the satisfaction of certain conditions imposed by the
Commissioner in connection with his approval of the Conversion
Application, and except as may be required under the securities, or
"blue sky," laws of various jurisdictions. As of the Closing Date, the
Company will have such approvals and orders to issue and sell the
Shares to be sold by the Company as provided herein, and as provided
in the Plan, subject to the issuance of an amended charter of the Bank
in the form required for Massachusetts-chartered capital stock co-
operative banks (the "Stock Charter"), the form of which Stock Charter
has been approved by the Commissioner.
o. Each of the Company and the Bank has the corporate powers and
authority to establish the Foundation and contribute the Foundation
Shares.
p. To the best of its knowledge, the Bank is not in violation of any rule
or regulation of The Commonwealth of Massachusetts or the FDIC that
could reasonably be expected to result in any enforcement action
against the Bank or its officers or directors that might have a
material adverse effect on the condition (financial or otherwise),
operations, businesses, assets or properties of the Bank.
q. The financial statements and any related notes or schedules which are
included in the Prospectus and the Registration Statement fairly
present the balance sheets, income and comprehensive income, changes
in surplus and cash flows of the Bank at the respective dates thereof
and for the respective periods covered thereby and comply as to form
with the applicable accounting requirements of the Conversion
Regulations and the Securities Act Regulations. Such financial
statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied throughout the
periods involved, except as set forth therein, and such financial
statements are consistent with financial statements and other reports
filed by the Bank with supervisory and regulatory authorities. The
tables in the Prospectus and the Registration Statement accurately
present the information purported to be shown thereby at the
respective dates thereof and for the respective periods therein.
r. There has been no material change in the condition (financial or
otherwise),
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Trident Securities, Inc.
Sales Agency Agreement
Page 8
results of operations or business, including the assets and
properties, of the Company, the Bank or the Bank Subsidiaries, since
the latest date as of which such condition is set forth in the
Prospectus and the Registration Statement, except as set forth
therein. The capitalization, assets, properties and business of the
Company, the Bank and the Bank Subsidiaries conform to the
descriptions thereof contained in the Prospectus and the Registration
Statement. The Company, the Bank and the Bank Subsidiaries have no
material liabilities of any kind, contingent or otherwise, except as
set forth in the Prospectus and the Registration Statement.
s. There has been no breach or default (or the occurrence of any event
which, with notice or lapse of time or both, would constitute a
default) under, or creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company, the
Bank or the Bank Subsidiaries pursuant to any of the terms, provisions
or conditions of, any agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company, the Bank or the
Bank Subsidiaries is a party or by which it or any of its respective
assets or properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Company, the Bank or
the Bank Subsidiaries. All agreements which are material to the
condition (financial or other wise), results of operations or business
of the Company, the Bank and the Bank Subsidiaries are in full force
and effect, and no party to any such agreement has instituted or, to
the best knowledge of the Company, the Bank or the Bank Subsidiaries,
threatened, any action or proceeding wherein the Company, the Bank or
the Bank Subsidiaries would be alleged to be in default thereunder.
t. The Bank is not in violation of its mutual charter or bylaws. The
execution and delivery hereof and the consummation of the transactions
contemplated hereby by the Bank do not conflict with or result in a
breach of the charter or bylaws of the Bank (in either mutual or stock
form) or constitute a material breach of or default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of
any lien, charge or other encumbrance upon any of the properties or
assets of the Bank, pursuant to any of the terms, provisions or
conditions of, any material agreement, contract,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 9
indenture, bond, debenture, note, instrument or obligation to which the
Bank is a party or violate any governmental license or permit or any law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Bank.
u. The Company is not in violation of its certificate of incorporation or
bylaws. The execution and delivery hereof and the consummation of the
transactions contemplated hereby by the Company do not conflict with or
result in a breach of the certificate of incorporation or bylaws of the
Company or constitute a material breach of or default (or an event which,
with notice or lapse of time or both, would constitute a default) under,
give rise to any right of termination, cancellation or acceleration
contained in, or result in the creation or imposition of any lien, charge
or other encumbrance upon any of the properties or assets of the Company,
pursuant to any of the terms, provisions or conditions of, any material
agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Company is a party or violate any governmental
license or permit or any law, administrative regulation or order or court
order, writ, injunction or decree, which breach, default, encumbrance or
violation would have a material adverse effect on the condition (financial
or otherwise), operations business, assets or properties of the Company.
v. Subsequent to the respective dates as of which information is given in the
Prospectus and the Registration Statement and prior to the Closing Date,
except as otherwise may be indicated or contemplated therein, none of the
Company, the Bank or the Bank Subsidiaries will have issued any securities
which will remain issued at the Closing Date or incurred any liability or
obligation, direct or contingent, or borrowed money, except borrowings in
the ordinary course of business, or entered into any other transaction not
in the ordinary course of business and consistent with prior practices,
which is material in light of the business of the Company, the Bank and the
Bank Subsidiaries, taken as a whole.
w. Upon consummation of the Conversion, the authorized, issued and outstanding
equity capital of the Company shall be within the range as set forth in the
Prospectus under the caption "CAPITALIZATION," and no Common Stock of the
Company shall be outstanding immediately prior to the Closing Date, other
than shares issued to the Bank, which will be canceled upon the Closing (as
hereinafter defined). The issuance and the sale of the Shares of the
Company
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 10
have been duly authorized by all necessary action of the Company and,
when issued in accordance with the terms of the Plan and paid for,
shall be validly issued, fully paid and nonassessable and shall
conform to the description thereof contained in the Prospectus. The
issuance of the Shares is not subject to preemptive rights, except as
set forth in the Prospectus, and good title to the Shares will be
transferred by the Company upon issuance thereof against payment
therefor, free and clear of all claims, encumbrances, security
interests and liens against the Company whatsoever. The certificates
representing the Shares will conform in all material respects with the
requirements of applicable laws and regulations.
x. Upon consummation of the Conversion, the authorized equity capital of
the Bank shall be 3,000,000 shares of capital stock, of which
2,500,000 shares will be common stock, par value $0.01 per share (the
"Bank Common Stock"), and 500,000 shares will be serial preferred
stock, par value $0.01 per share, of which no shares will be issued
and outstanding. No shares of Bank Common Stock or Bank preferred
stock have been or will be issued prior to the Closing Date. At the
time of the Closing, the Bank Common Stock will have been duly
authorized for issuance by all necessary action of the Bank and
approved by the Commissioner and, when issued in accordance with the
terms of the Plan and paid for, shall be validly issued, fully paid
and nonassessable. The issuance of the Bank Common Stock is not
subject to preemptive rights, and good title to the Bank Common Stock
will be transferred by the Bank upon issuance thereof against payment
therefor, free and clear of all claims, encumbrances, security
interests and liens against the Bank whatsoever. The certificate(s)
representing the Bank Common Stock will conform in all material
respects with the requirements of applicable laws and regulations.
y. No approval of any regulatory or supervisory or other public authority
is required in connection with the execution and delivery of this
Agreement or the issuance of the Shares, except for compliance with
certain conditions imposed in the approval of the Conversion
Application and the Plan by the Commissioner, the declaration of
effectiveness of any required post-effective amendment by the
Commission, the issuance of the Stock Charter by the Commissioner,
compliance with any conditions imposed by the OTS in its approval of
the Holding Company Application, compliance with certain conditions
imposed in the review of the Plan without objection by the FDIC and as
may be required under the securities laws of various jurisdictions.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 11
z. All contracts and other documents required to be filed as exhibits to
the Conversion Application and the Holding Company Application or as
required by the Commissioner, the FDIC or the OTS have been filed with
the Commissioner, the FDIC and/or the OTS, as the case may be.
aa. All contracts and other documents required to be filed as exhibits to
the Registration Statement have been filed with the Commission.
bb. Wolf & Company, P.C. ("Wolf"), who have audited the financial
statements of the Bank as of December 31, 1997 and 1996, and for each
of the years in the three-year period ended December 31, 1997,
included in the Prospectus and the Registration Statement, are
independent public accountants within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public
Accountants and Title 12 of the Code of Federal Regulations, Section
335.604(a) of the FDIC's securities disclosure regulations.
cc. FinPro, Inc. (the "Appraiser") which prepared the appraisal of the pro
forma market value of the Shares, is independent with respect to the
Bank within the meaning of the Conversion Regulations, and has so
advised the Bank.
dd. The Bank and the Bank Subsidiaries have timely filed all required
federal, state and local franchise tax returns, and the Bank has no
knowledge of any tax deficiency which has been asserted with respect
to such returns by any taxing authorities. The Bank and the Bank
Subsidiaries have paid all taxes that have become due and, to the best
of their knowledge, have made adequate reserves for similar future tax
liabilities, except where any failure to make such filings, payments
and reserves, or the assertion of such a deficiency, would not have a
material adverse effect on the condition of the Bank and the Bank
Subsidiaries.
ee. All of the loans represented as assets of the Bank on the most recent
financial statements of the Bank included in the Prospectus and the
Registration Statement meet or are exempt from all requirements of
federal, state or local law pertaining to lending, including without
limitation truth in lending (including the requirements of Regulation
Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and
all disclosure laws applicable to such loans, except for violations
which, if asserted, would not have a material adverse effect on the
Bank.
ff. The records of account holders, depositors and other members of the
Bank
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 12
delivered to Trident by the Bank or its agent for use during the
Conversion have been prepared or reviewed by the Bank and, to the best
knowledge of the Bank, are reliable and accurate.
gg. None of the Company, the Bank or the Bank Subsidiaries, or the
employees of the Company, the Bank or the Bank Subsidiaries has made
any payment of funds of the Company, the Bank or the Bank Subsidiaries
prohibited by law, and no funds of the Company, the Bank or the Bank
Subsidiaries have been set aside to be used for any payment prohibited
by law.
hh. To the best knowledge of the Company, the Bank and the Bank
Subsidiaries, the Company, the Bank and the Bank Subsidiaries are in
compliance with all laws, rules and regulations relating to the
discharge, storage, handling and disposal of hazardous or toxic
substances, pollutants or contaminants and none of the Company, the
Bank or the Bank Subsidiaries believes that the Company, the Bank or
the Bank Subsidiaries are subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law, except for violations which, if asserted,
would not have a material adverse effect on the Company, the Bank and
the Bank Subsidiaries, taken as a whole. There are no actions, suits,
regulatory investigations or other proceedings pending or, to the best
knowledge of the Company, the Bank and the Bank Subsidiaries,
threatened against the Company, the Bank or the Bank Subsidiaries
relating to the discharge, storage, handling or disposal of hazardous
or toxic substances, pollutants or contaminants. To the best knowledge
of the Company, the Bank and the Bank Subsidiaries, no disposal,
release or discharge of hazardous or toxic substances, pollutants or
contaminants, including petroleum and gas products, as any of such
terms may be defined under federal, state or local law, has been
caused by the Company, the Bank or the Bank Subsidiaries or, to the
best knowledge of the Company, the Bank or the Bank Subsidiaries, has
occurred on, in or at any of the facilities or properties of the
Company, the Bank or the Bank Subsidiaries, except such disposal,
release or discharge which would not have a material adverse effect on
the Company, the Bank or the Bank Subsidiaries, taken as a whole.
ii. At the Closing Date, the Company and the Bank will have completed the
conditions precedent to, and shall have conducted the Conversion in
all material respects in accordance with, the Plan, the Conversion
Regulations, the Securities Act, the Securities Act Regulations and
all other applicable laws, regulations, published decisions and
orders, including all terms, conditions, requirements and
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 13
provisions precedent to the Conversion imposed by the Commissioner,
the FDIC and the OTS in their approval and review without objection of
the Plan, the Conversion Application and the Holding Company
Application, as applicable.
jj. Upon completion of the Conversion, the Foundation will be duly
incorporated and validly existing as a non-stock corporation in good
standing under the laws of the State of Delaware. All approvals
required to contribute the Foundation Shares to the Foundation shall
have been received, except as specifically disclosed in the
Prospectus. The Foundation Shares will have been duly authorized for
issuance and pursuant to the Plan, will be duly and validly issued and
fully-paid and non-assessable.
Any closing certificate signed by any officer of the Company, the Bank or
the Bank Subsidiaries and delivered to Trident or Trident's counsel that
contains a representation or warranty shall be deemed a representation and
warranty of the Company, the Bank or the Bank Subsidiaries, as applicable, to
Trident as to the matters covered thereby.
3. Agency. On the basis of the representations and warranties herein
- -
contained, but subject to the terms and conditions herein set forth, the
Company and the Bank hereby agree with Trident as follows:
a. Assistance with Conversion. The Company and the Bank hereby employ
---------------------------
Trident to assist the Company and the Bank on a best efforts basis in
the offer and sale of the Shares in the Conversion by assisting in:
i. training and educating the employees of the Bank regarding the
mechanics and regulatory requirements of the conversion process;
ii. conducting information meetings for the employees of the Bank,
depositors of the Bank and the general public, if desired by the
Bank;
iii. coordinating the selling efforts in the local communities of the
Bank, if desired by the Bank; and
iv. keeping records of all subscriptions for the Shares.
b. Assistance with the Direct Community Offering and the Syndicated
----------------------------------------------------------------
Offering. The Company and the Bank hereby employ Trident to act as
--------
their exclusive agent to utilize its best efforts in managing the sale
of the Shares in the Direct
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 14
Community Offering and the Syndicated Offering; provided, however,
that the Company and the Bank acknowledge and agree that Trident may
offer to other NASD-registered broker dealers ("Selected Dealers") the
opportunity to solicit subscriptions for the Shares to be sold in the
Syndicated Offering on a best efforts basis pursuant to the terms and
conditions of the Selected Dealers' agreements between Trident and
each of the Selected Dealers (the "Selected Dealers' Agreement").
c. Other Matters. Subscriptions shall be submitted in the Subscription
-------------
Offering only during the subscription period by means of order forms
as described in the Prospectus (the "Order Forms"), and may be
submitted in the Direct Community Offering and the Syndicated
Community Offering by means of Order Forms or by solicitation of
indications of interest from customers of Selected Dealers residing in
those states where the Common Stock is registered or is exempt from
registration. The Company shall notify Trident promptly after the
expiration of the Subscription Offering of the number of Shares sold
in the Subscription Offering and the aggregate number of Shares
remaining that are available to be sold in the Direct Community
Offering or the Syndicated Offering, if any. The Company shall advise
Trident as to the allocation of the Shares in the event of an
oversubscription and shall provide Trident with final instructions
(the "Allocation Instructions") as to the allocation of the Shares in
such event. Trident shall be entitled to rely on such Allocation
Instructions and shall have no liability in respect of its reliance
thereon, including without limitation, no liability for or related to
any denial or grant, full or partial, of a subscription unless
liability resulting from such denial or grant is due to Trident's
gross negligence or willful disregard of the Allocation Instructions.
The Company shall indemnify and hold harmless Trident against any
losses, claims, damages or liabilities resulting from Trident's
reliance on the Allocation Instructions or from the failure of the
Company or the Bank (or their agents) to properly record stock orders,
to properly credit subscription rights of Eligible Account Holders or
Supplemental Eligible Account Holders, to properly allocate Shares in
the event of an oversubscription or to otherwise properly deal with or
account for any records of qualifying deposit account holders of the
Bank during the Conversion.
d. Fees and Expenses.
-----------------
i. As compensation for Trident's services hereunder, the Company
agrees to pay to Trident a management fee of $10,000 and a
commission equal to 2.0% of the aggregate dollar amount of the
Shares sold in the Offerings
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 15
excluding any Shares sold to the Employee Plans, directors and
executive officers and "associates" of the Bank's directors and
executive officers. All fees and commissions shall be payable to
Trident on the Closing Date, in next day funds.
ii. In addition to the fees described in (i) above, the Company and the
Bank agree to reimburse Trident for all allocable out-of-pocket
expenses, including travel, communication, legal fees and postage (up
to an aggregate of $45,000) incurred by Trident in connection with the
Conversion. The expenses to be reimbursed hereunder shall be payable
by the Company or the Bank as they are incurred by Trident and billed
on a periodic basis to the Company or the Bank, and shall be payable
regardless of whether the Closing occurs or this Agreement is
terminated in accordance with paragraph (e) of this Section 3. To the
extent not previously paid, full payment of Trident's expenses shall
be made in same day funds at the Closing and any expenses and fees
incurred by Trident or its counsel but not billed as of the Closing
shall subsequently be payable in full upon receipt of such billings.
iii. Regardless of whether the Closing occurs or this Agreement is
terminated in accordance with paragraph (e) of this Section 3 and in
addition to the obligations under clauses (i) and (ii) hereof, each of
the Company and the Bank shall pay all expenses incident to the
performance of its obligations in connection with the Conversion
including, but not limited to, all fees and disbursements of its
counsel, the Appraiser and the conversion agent, all expenses incurred
in the preparation, printing, filing and distribution of all documents
relating to the Conversion (including all NASD filing fees), telephone
charges, air freight, rental equipment, supplies, marketing materials,
all fees and expenses of the transfer agent of the Company and all
transfer taxes that may be payable with respect to the sale of the
Common Stock, all fees of the accountants of the Bank, and all legal
and filing fees incurred in connection with the matters referred to in
Section 5(d) hereof. Any expenses to be reimbursed to Trident pursuant
to this clause (iii) shall be in addition to, and not subject to, the
limitations on, the expenses to be reimbursed to Trident pursuant to
clause (ii) above.
iv. Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in clause (ii) above, in the event that a
resolicitation or other event causes the Offerings to be extended
beyond their original
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 16
expiration date, Trident shall be reimbursed for its reasonable
allocable expenses incurred during such extended period, provided
that the allowance for allocable expenses provided for in clause
(ii) above has been exhausted and subject to the following: such
reimbursement shall be an amount equal to the lesser of (a)
$10,000, or (b) the product obtained by dividing $45,000 by the
total number of days of the unextended Subscription Offering
(calculated from the date of the Prospectus to the intended close
of the Subscription Offering as stated in the Prospectus) and
multiplying such product by the number of days of the extension
(that number of days from the date of the supplemental prospectus
used in the extended Subscription Offering to the closing of the
extension of the Subscription Offering described in such
supplemental prospectus).
v. In the event of a Syndicated Community Offering, Trident,
pursuant to a Selected Dealers' Agreement will assemble a
syndicate of brokers-dealers to assist with the placement of
Shares. Trident and other NASD members who are parties to the
Selected Dealers' Agreement will be paid a commission which shall
not exceed a fee to be agreed upon jointly by Trident and the
Bank to reflect market requirements at the time of the stock
allocation in the Syndicated Community Offering.
e. Termination. The employment of Trident hereunder shall terminate
-----------
upon the first to occur of the following: (i) the forty-fifth day
after the expiration of the Subscription Offering, as extended, unless
the Bank with the approval of the Commissioner, is permitted to extend
such date; (ii) the Closing; or (iii) the termination of this
Agreement pursuant to Section 9 hereof
4. Closing.
-------
a. Subject to the terms and conditions set forth herein, the closing of
the purchase and sale of the Common Stock (the "Closing") shall take
place at the offices of Muldoon, Murphy & Faucette, Washington, D.C.,
at 10:00 a.m., Washington, D.C. time, on a business day that shall be
agreed upon by the parties hereto (the "Closing Date"). At the
Closing, the Common Stock will be issued by the Company against
payment of the purchase price therefor. Certificates representing the
Common Stock shall be prepared in definitive form and in such
denominations and registered in such names as set forth on the Order
Forms or (in the case of Shares not subscribed for pursuant to Order
Forms) in such names as Trident may request, upon at least two
business days' prior notice to the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 17
Company, and will be (i) in the case of Shares subscribed for pursuant
to Order Forms, delivered by the Company or its agent directly to the
purchasers thereof as promptly as practicable following the Closing,
and (ii) in the case of Shares not subscribed for pursuant to Order
Forms, made available for checking and packaging at least one business
day prior to the Closing at a location to be designated by Trident.
b. Pursuant to the Conversion Regulations, prior to the commencement of
the Offerings, appropriate arrangements will be made for placing the
funds received in payment for the shares of Common Stock in special
interest-bearing segregated accounts (the "Segregated Accounts") with
the Bank until such shares are sold and paid for at the Closing. If
the Closing does not occur within the time specified in Section
3(e)(i) of this Agreement, the Bank will promptly refund all funds,
including interest, in the Segregated Accounts to the persons who have
the beneficial interests therein, unless alternative arrangements are
agreed to by the parties and approved by the Commissioner and the
FDIC.
5. Covenants of the Company and the Bank. Each of the Company and the Bank
- --
covenants and agrees with Trident as follows:
a. The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the
Conversion Application and the Notice as may hereafter be required by
the Securities Act Regulations or the Conversion Regulations or as may
hereafter be reasonably requested by Trident. Following completion of
the Subscription Offering and the Direct Community Offering, in the
event of a Syndicated Offering, the Company and the Bank will (i)
promptly prepare and file with the Commission a post-effective
amendment to the Registration Statement relating to the results of the
Subscription Offering and the Direct Community Offering, any
additional information with respect to the proposed plan of
distribution and any revised pricing information or (ii) if no such
post-effective amendment is required, file with, or mail for filing
to, the Commission a prospectus or prospectus supplement containing
information relating to the results of the Subscription Offering and
the Direct Community Offering and pricing information pursuant to Rule
424(c) of the Securities Act Regulations, in either case in a form
acceptable to Trident.
b. The Company and the Bank will notify Trident immediately, and confirm
the notice in writing of, (i) the effectiveness of any post-effective
amendment to the Registration Statement, the filing of any supplement
or amendment to the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 18
Prospectus, and the receipt of any approval relating to the Conversion
Application, (ii) the receipt of any comments from the Commissioner,
the FDIC or the Commission with respect to the Prospectus, the
Conversion Application or the transactions contemplated by this
Agreement or the Plan, (iii) any request by the Commission, the
Commissioner or the FDIC for any amendment to the Registration
Statement or the Conversion Application or any amendment or supplement
to the Prospectus or for additional information, (iv) the issuance by
the Commissioner of any order suspending the Offerings or the use of
the Prospectus or the initiation of any proceedings for that purpose,
(v) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, (vi) the receipt of any notice with
respect to the suspension of any qualification of the Common Stock for
offering or sale in any jurisdiction, and (vii) the receipt of any
comments from the OTS with respect to the Holding Company Application.
The Company and the Bank will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to
obtain the lifting thereof at the earliest possible moment.
c. The Company and the Bank will give Trident prompt notice of its
intention to file any amendment to the Holding Company Application,
the Conversion Application or the Registration Statement (including
any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus that the Company proposes
for use in connection with the Syndicated Offering that differs from
the prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the Securities Act
Regulations), will furnish Trident with copies of any such amendment
or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such
amendment or supplement or use any such prospectus to which Trident or
counsel for Trident may reasonably object.
d. The Company or the Bank has furnished or will furnish to Trident
copies of the Conversion Application, and each amendment thereto (one
of each of which will include all exhibits), the Prospectus and all
amendments and supplements thereto, the Registration Statement and all
amendments and supplements thereto, and the Holding Company
Application and all amendments and supplements thereto, in each case
as soon as available and in such quantities as Trident may from time
to time reasonably request.
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Trident Securities, Inc.
Sales Agency Agreement
Page 19
e. During the period when the Prospectus is required to be delivered, the
Company and the Bank will comply, at their own expense, with all
requirements imposed upon them by the Commissioner, the FDIC, the
Conversion Regulations, and the Securities Act, the Securities Act
Regulations, the Securities Exchange Act of 1934 (the "Exchange Act")
and the rules and regulations of the Commission promulgated
thereunder, including, without limitation, Rule l0b-6 under the
Exchange Act, so far as necessary to permit the continuance of sales
or dealing in shares of Common Stock during such period in accordance
with the provisions hereof and the Prospectus.
f. If during the Offerings any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include an untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statement
therein, in light of the circumstances then existing, not misleading,
or if during such period it is necessary to amend or supplement the
Conversion Application or the Prospectus to comply with the Conversion
Regulations or the Securities Act Regulations, the Company promptly
will notify Trident and will prepare and file with the Commissioner,
the FDIC and the Commission and any other authority with jurisdiction,
an amendment or supplement that will correct such statement or
omission or effect such compliance.
g. The Company and the Bank have taken or will take all necessary action
to qualify or obtain an exemption for the Common Stock for offer and
sale under the securities laws of such jurisdictions as Trident and
the Company may agree upon and to continue such qualifications or
exemptions in effect so long as required for the distribution of the
Common Stock pursuant to the Conversion; provided, however, that the
Company shall not be obligated in connection therewith to execute any
general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
The Company shall notify Trident immediately of the suspension of
qualification of the Common Stock or the threat of such action, in any
jurisdiction, of which the Company becomes aware. The Company shall
comply in all material respects with the undertakings, if any, given
by it in connection with the qualification of the Common Stock for
offer and sale under laws of such jurisdictions.
h. The Company authorizes Trident and any Selected Dealers to act as
agent of the Company in distributing the Prospectus to persons
entitled to subscription rights and other persons having record
addresses in the states or jurisdictions set forth in
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Trident Securities, Inc.
Sales Agency Agreement
Page 20
a survey of the securities or "blue sky" laws of the various
jurisdictions in which the Offerings will be made (the "Blue Sky
Survey").
i. The Company will make generally available to its security holders as
soon as practicable but no later than sixty (60) days from the close
of the period covered thereby an earnings statement (in compliance
with the provisions of Rule 158 of the Securities Act Regulations)
covering a twelve month period beginning not later than the first day
of the Company's fiscal quarter next following the "effective date"
(as defined in Rule 158) of the Registration Statement.
j. During the period ending on the third anniversary of the expiration of
the fiscal year during which the Closing occurs, the Company will
furnish to its stockholders as soon as practicable after the end of
each such fiscal year an annual report (including consolidated
statements of financial condition and consolidated statements of
income, stockholders' equity and cash flows of the Company, the Bank
and any subsidiaries, certified by independent public accountants)
and, as soon as practicable after the end of each of the first three
quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), consolidated
summary financial information of the Company, the Bank and any
subsidiaries for such quarter in reasonable detail. In addition, such
annual report and quarterly consolidated summary financial information
shall be made public through the issuance of appropriate press
releases at the same time or prior to the time of the furnishing
thereof to stockholders of the Company.
k. During the period ending on the third anniversary of the expiration of
the fiscal year during which the Closing occurs, the Company will
furnish to Trident (i) as soon as available, a copy of each report or
other document of the Company furnished generally to stockholders of
the Company or furnished to or filed with the Commission under the
1934 Act or any national securities exchange or system on which any
class of securities of the Company is listed, and (ii) from time to
time, such other public information concerning the Company as Trident
may reasonably request.
l. The Company and the Bank will conduct the Conversion in all material
respects in accordance with the Plan, the Conversion Regulations and
all other applicable regulations, decisions and orders thereunder,
including all applicable terms, requirements and conditions precedent
to the Conversion imposed upon the Company or the Bank by the
Commissioner, the FDIC or the OTS.
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Trident Securities, Inc.
Sales Agency Agreement
Page 21
m. Each of the Company and the Bank will use the net proceeds received by
it from the sale of the Common Stock in the manner specified in the
Prospectus under "USE OF PROCEEDS."
n. The Company will report the use of proceeds of the Offerings pursuant
to the requirements of Rule 463 of the Securities Act Regulations.
o. The Company will file a registration statement for the Common Stock
under Section 12(g) of the Exchange Act prior to completion of the
Offerings and will request that such registration statement be
effective upon completion of the Conversion. The Company will maintain
the effectiveness of such registration for not less than three years.
The Company will file with the National Quotation Bureau, Inc. all
documents and notices required by the National Quotation Bureau, Inc.
of companies that have issued securities that are traded in the over-
the-counter market and quotations for which are reported by the
National Daily Quotation Service "Pink Sheet."
p. The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for
Trident to ensure compliance with the NASD's "Interpretation Relating
to Free-Riding and Withholding."
q. The Company and the Bank will comply with, or cause to be complied
with, the conditions to Trident's obligations set forth in Section 6
hereof unless such conditions are waived in writing by Trident and
shall not deliver the Shares until each and every condition set forth
in Section 6 hereof has been satisfied, unless such condition is
waived in writing by Trident.
r. The Company will promptly prepare and file with the Commissioner, the
Commission, the FDIC, the OTS and any other appropriate regulatory
agency such reports or documents as may be required by the Conversion
Regulations, the Securities Act and rules and regulations promulgated
thereunder and other applicable laws and regulations to be filed with
such agencies, including, without limitation, reports with respect to
the sale of the Common Stock and the application of the proceeds
thereof.
s. The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 180 days after the Closing Date, without
Trident's prior written consent, any shares of Common Stock other than
in connection with the Offerings or in
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Trident Securities, Inc.
Sales Agency Agreement
Page 22
connection with any employee benefit plan or arrangement described in
the Prospectus.
t. The Company and the Bank agree that their counsel will undertake the
obligations customarily undertaken by underwriters and their counsel
with respect to preparation and delivery of the Blue Sky Survey
setting forth the registration and other filing requirements of (or
exemptions from) the securities laws of the states in which the
Offerings are being made.
6. Conditions to Trident's Obligations. Except as may be waived in writing by
Trident, the obligations of Trident as provided herein shall be subject to
the accuracy, as of the date hereof and at the Closing Date (as if made at
the Closing Date), of the representations and warranties of the Company and
the Bank herein, to the performance by the Company and the Bank of their
respective obligations hereunder and to the following additional
conditions:
a. The Prospectus and all supplemental sales literature shall have
received all required authorizations of the Commissioner for use in
final form. No order suspending the Offerings or authorization for
final use of the Prospectus shall have been issued or proceedings
therefor initiated or threatened by the Commissioner and no order
suspending the sale of the Common Stock in any jurisdiction shall have
been issued.
b. The Registration Statement shall have been declared effective by the
Commission. No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act
or proceedings therefor initiated or threatened by the Commission.
c. At the Closing Date, the Company and the Bank will have completed in
all material respects the conditions precedent to the Conversion in
accordance with the Plan, the applicable Conversion Regulations and
all other applicable laws, regulations, decisions and orders,
including all terms, conditions, requirements and provisions precedent
to the Conversion imposed upon the Company or the Bank by the
Commissioner, the FDIC, the OTS or any other regulatory authority
other than those that the Commissioner, the FDIC or the OTS permit to
be completed after the Conversion.
d. The Plan shall have been reviewed without objection by the FDIC. The
OTS shall have approved the Holding Company Application. Any filings
required by the
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Trident Securities, Inc.
Sales Agency Agreement
Page 23
Conversion Regulations or by the Home Owners Loan Act (and the
regulations promulgated thereunder) shall have been timely made. Any
request of the Commissioner, the FDIC, the Commission or the OTS for
additional information (to be included in the Conversion Application,
the Prospectus, the Notice, the Registration Statement or the Holding
Company Application or otherwise) shall have been complied with. The
NASD, upon review of the terms of this Agreement, shall not have
objected to Trident's performance of its obligations hereunder or the
terms herein set forth.
e. At the Closing Date, the Common Stock shall have been approved for
quotation on the National Daily Quotation Service "Pink Sheet" upon
notice of issuance.
f. Nothing shall have come to the attention of Trident that would cause
Trident to reasonably believe that the Conversion Application, the
Holding Company Application, the Prospectus or the Registration
Statement or any amendment or supplement thereto, contains an untrue
statement of fact that in the opinion of Vorys, Sater, Seymour and
Pease LLP, counsel for Trident, is material, or omits to state a fact
that in the opinion of such counsel is material and is required to be
stated therein or is necessary to make the statements therein not
misleading.
g. Except as contemplated in the Prospectus, subsequent to the respective
dates as of which information is given in the Prospectus, there shall
not have occurred any of the events specified in Section 9 hereof
which, in the reasonable judgment of Trident, makes it impractical or
inadvisable to proceed with the offering of the Shares.
h. Trident shall have received a certificate, dated the Closing Date,
signed by the chief executive officer and the chief financial officer
of each of the Company and the Bank, in form and substance
satisfactory to counsel for Trident, to the effect that at the
effective date thereof and at all times subsequent thereto through and
including the Closing Date, the Registration Statement did not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading and that at the date thereof and at
all times subsequent thereto through and including the Closing Date,
the Prospectus did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; that since
the effective date of the Registration Statement, no event has
occurred that should have been set forth in
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 24
an amendment or supplement to the Conversion Application, the
Prospectus, the Notice, the Registration Statement or the Holding
Company Application under applicable law that has not been so set
forth, and to the best of their knowledge, that no order has been
issued by the Commissioner, the FDIC, the Commission or the OTS to
suspend the offering of the Common Stock or the approval of the
Conversion Application or the Holding Company Application and, to the
best of their knowledge, no action for such purposes has been
instituted or threatened by the Commissioner, the FDIC, the Commission
or the OTS; that, to the best of their knowledge, no person has sought
to obtain review of the final actions of the Commissioner, the FDIC,
the Commission or the OTS in connection with the Conversion; and that
all of its representations and warranties contained herein are true
and correct as if made at and as of the Closing Date.
i. Trident shall have received the opinion of Muldoon, Murphy & Faucette,
special counsel for the Company and the Bank, which opinion shall
address those matters set forth below in subsections (i) through
(xvii), inclusive. Such opinion shall be dated the Closing Date, in
form and substance satisfactory to counsel for Trident, to the
following effect:
i. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of
Delaware. The Company has full corporate power and authority to
own, lease and operate its properties and to conduct its business
as described in the Registration Statement and Prospectus and to
enter into and perform its obligations under this Agreement. The
Company is duly qualified as a foreign corporation to transact
business and is in good standing in The Commonwealth of
Massachusetts and in all other jurisdictions in which the failure
to so qualify would have a material adverse effect upon the
financial condition, results of operations or business of the
Company, the Bank and the Bank Subsidiaries, taken as a whole.
ii. The Bank has been at all times since the date hereof and prior to
the Closing Time duly organized, and is validly existing, under
the laws of The Commonwealth of Massachusetts as a co-operative
bank of mutual form, and, at the Closing Time, has become duly
organized, validly existing and in good standing under the laws
of The Commonwealth of Massachusetts as a co-operative bank of
stock form, in both instances with full corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 25
the Prospectus and to enter into and perform its obligations
under this Agreement. The Bank is duly qualified as a foreign
corporation in each jurisdiction in which the failure to so
qualify would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Bank and the Bank Subsidiaries, taken as a whole. The Bank is a
member in good standing of the FHLB of Boston and the Central
Bank. The deposit accounts of the Bank are insured by the FDIC in
the BIF up to the applicable limits, and deposits not insured by
the FDIC are insured by the Share Insurance Fund of the Central
Bank. The liquidation account for the benefit of account holders
as of April 30, 1997 and ___________ has been duly established in
accordance with the requirements of the Conversion Regulations,
and such account holders who continue to maintain their deposit
accounts in the Bank have a contingent creditors' interest in
their pro rata portion of the liquidation account which will have
a priority superior to that of the holders of shares of Common
Stock in the event of a complete liquidation of the Bank.
iii. The Company does not directly own any subsidiaries other than the
Bank, and the Bank's only subsidiaries are the Bank Subsidiaries.
The Bank Subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of The
Commonwealth of Massachusetts, have full corporate power and
authority to own, lease and operate their properties and to
conduct their business as described in the Prospectus and are
duly qualified as foreign corporations to transact business and
are in good standing in each jurisdiction in which the failure to
so qualify would have a material adverse effect upon the
financial condition, results of operations or business of the
Company, the Bank and the Bank Subsidiaries, taken as a whole.
The activities of the Bank Subsidiaries as described in the
Prospectus are permitted to subsidiaries of a savings and loan
holding company and of a Massachusetts-chartered co-operative
bank by the rules, regulations, resolutions and practices of the
OTS and the Commissioner. All of the issued and outstanding
capital stock of each of the Bank Subsidiaries has been duly
authorized and validly issued, is fully paid and non-assessable
and is owned of record by the Bank free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim.
iv. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 26
(1) have been duly and validly authorized by all necessary
action on the part of each of the Company and the Bank, and
this Agreement constitutes the legal, valid and binding
agreement of each of the Company and the Bank, enforceable
in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited under applicable
law (it being understood that such counsel may avail itself
of customary exceptions concerning the effect of bankruptcy,
insolvency or similar laws and the availability of equitable
remedies),
(2) to the best of such counsel's knowledge, will not conflict
with or constitute a breach of or default under, and no
event has occurred which, with notice or lapse of time or
both, would constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company, the Bank or the
Bank Subsidiaries pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company, the Bank or the Bank Subsidiaries are a
party or by which any of them may be bound, or to which any
of the property or assets of the Company, the Bank or the
Bank Subsidiaries is subject, other than conflicts,
breaches, defaults, liens, charges or encumbrances that,
individually or in the aggregate, would not have a material
adverse effect on the financial condition, results of
operations or business of the Company, the Bank and the Bank
Subsidiaries, taken as a whole,
(3) will not result in any violation of the provisions of the
Certificate of Incorporation, charter or bylaws of the
Company, the Bank or the Bank Subsidiaries, and
(4) will not result in any violation of any law or
administrative regulation or any administrative or court
decree that, individually or in the aggregate, would have a
material adverse effect on the financial condition, results
of operations or business of the Company, the Bank and the
Bank Subsidiaries, taken as a whole.
v. Upon consummation of the Conversion, the authorized, issued and
outstanding capital stock of the Company will be within the range
as set
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 27
forth in the Prospectus under "CAPITALIZATION," and no shares of
Common Stock have been issued and outstanding prior to the
Closing Time except for shares issued to the Bank to be canceled
at the Closing. The Shares and the Foundation Shares have been
duly and validly authorized for issuance and sale and, when the
Shares are issued and delivered by the Company pursuant to the
Plan against payment of the consideration therefor, the Shares
will be duly and validly issued and fully paid and non-
assessable. The issuance of the Shares is not subject to
preemptive or other similar rights. The terms and conditions of
the Common Stock conform to the description thereof contained in
the Prospectus under the caption "DESCRIPTION OF CAPITAL STOCK OF
THE COMPANY," and, to the extent that it constitutes matters of
law or legal conclusions, that section of the Prospectus has been
reviewed by such counsel and is correct in all material respects.
The certificates representing shares of Common Stock are in
compliance in all material respects with all applicable legal
requirements.
vi. Upon consummation of the Conversion, all of the issued and
outstanding capital stock of the Bank will be duly authorized and
validly issued and fully paid and non-assessable, and all such
capital stock will be owned of record by the Company free and
clear of any security interest, mortgage, pledge, lien,
encumbrance or legal or equitable claim.
vii. The Commissioner has approved the Conversion Application and the
OTS has approved the Holding Company Application and no action is
pending or, to the best of such counsel's knowledge, threatened
regarding the Conversion Application or the Holding Company
Application or the acquisition by the Company of all of the
Bank's issued and outstanding capital stock. The Conversion
Application and the Holding Company Application comply as to form
in all material respects with the Conversion Regulations, the
regulations of the OTS and all other applicable requirements of
the Commissioner, the FDIC and the OTS (other than the financial
statements, appraisal and statistical data included therein, as
to which no opinion need be rendered), and, to the best of such
counsel's knowledge, include all documents required to be filed
as exhibits thereto, and is complete in all material respects.
The Company is duly authorized to become a savings and loan
holding company and is duly authorized to own all of the issued
and outstanding capital stock of the Bank to be issued pursuant
to the Plan.
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Trident Securities, Inc.
Sales Agency Agreement
Page 28
viii. The FDIC has reviewed the Plan without objection and no action is
pending or, to the best of such counsel's knowledge, threatened
respecting the FDIC's review thereof, the notice of the
Conversion filed with the FDIC complied as to form in all
material respects with the FDIC's regulations and all other
applicable requirements of the FDIC, and, to the best of such
counsel's knowledge, included all documents required to be filed
as exhibits thereto, and is complete in all material respects.
ix. The Plan has been duly authorized by the Boards of Directors of
the Company and the Bank and by the mutual shareholders of the
Bank. The Commissioner's approval of the Plan (and the FDIC's
non-objection thereto) remains in full force and effect. The
Bank's charter has been amended, effective upon consummation of
the Conversion and the filing of such amended charter with the
Secretary of State of The Commonwealth of Massachusetts, to
authorize the issuance of permanent capital stock. To the best of
such counsel's knowledge, the Company and the Bank have conducted
the Conversion in all material respects in accordance with
applicable requirements of the Plan, the Conversion Regulations
and all other applicable regulations, decisions and orders
thereunder, including all material applicable terms, conditions,
requirements and conditions precedent to the Conversion imposed
upon the Company or the Bank by the Commissioner or the FDIC. No
order, to the best of such counsel's knowledge, has been issued
by the Commissioner or the FDIC to suspend the Offerings and, no
action for such purpose has been instituted or, to the best of
such counsel's knowledge threatened by the Commissioner or the
FDIC and, to the best of such counsel's knowledge, no person has
sought to obtain review of the final action of the Commissioner
in approving, or of the FDIC in issuing a notice of non-objection
to, the Plan.
x. The Prospectus and the Notice have been duly authorized by the
Commissioner for final use pursuant to the Conversion Regulations
and no action has been taken, or is pending or, to the best of
such counsel's knowledge, threatened, by the Commissioner to
revoke such authorization. The Prospectus and the Notice (other
than the financial statements, appraisal and statistical data
included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the Conversion Regulations.
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Trident Securities, Inc.
Sales Agency Agreement
Page 29
xi. The Registration Statement is effective under the Securities Act
and no stop order suspending the effectiveness of the
Registration Statement has been issued under the Securities Act
or proceedings therefor initiated or, to the best of such
counsel's knowledge, threatened by the Commission. At the time
the Registration Statement became effective, the Registration
Statement (other than the financial statements, appraisal and
statistical data included therein, as to which no opinion need be
rendered) and the Prospectus complied as to form in all material
respects with the requirements of the Securities Act and the
Securities Act Regulations.
xii. No further approval, authorization, consent or other order of any
public board or body is required in connection with the execution
and delivery of this Agreement, the issuance of the Shares, the
contribution of Foundation Shares to the Foundation and the
consummation of the Conversion, except as may be required under
the securities or "blue sky" laws of various jurisdictions as to
which no opinion need be rendered.
xiii. The information in the Prospectus under the caption "THE
CONVERSION," to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is
correct in all material respects. The information in the
Prospectus under the caption "FEDERAL AND STATE TAXATION," to the
extent that it constitutes matters of law or legal conclusions
concerning federal tax matters, has been reviewed by such counsel
and is correct in all material respects. The information under
the caption "The Conversion -- Tax Aspects" correctly summarizes
the opinion of such counsel regarding the federal tax effects of
the Conversion to the Bank and the mutual shareholders of the
Bank
xiv. To the best of such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against or
affecting the Company, the Bank or the Bank Subsidiaries that are
required, individually or in the aggregate, to be disclosed in
the Registration Statement and the Prospectus, other than those
disclosed therein, and all pending legal or governmental
proceedings to which the Company, the Bank or the Bank
Subsidiaries are a party or to which any of their property is
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business,
are, considered in the aggregate, not material.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 30
xv. To the best of such counsel's knowledge and information, there
are no contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred
to in the Registration Statement or to be filed as exhibits
thereto other than those described or referred to therein or
filed as exhibits thereto.
xvi. To the best of such counsel's knowledge and information, the
Company, the Bank and the Bank Subsidiaries have obtained all
licenses, permits and other governmental approvals and
authorizations currently required for the conduct of their
respective businesses as described in the Registration Statement
and Prospectus, except for such licenses, permits, approvals or
authorizations the failure of which to have would not result in a
material adverse change in the financial condition, results of
operations or the business of the Company, the Bank and the Bank
Subsidiaries, taken as a whole. All such licenses, permits and
other governmental authorizations are in full force and effect,
and each of the Company, the Bank and the Bank Subsidiaries is in
all material respects complying therewith.
xvii. Upon completion of the Conversion, the Foundation will be duly
incorporated and validly existing as a non-stock corporation in
good standing under the laws of the State of Delaware. All
approvals required to contribute the Foundation Shares to the
Foundation have been received, except as specifically disclosed
in the Prospectus. The Foundation Shares will have been duly
authorized for issuance and pursuant to the Plan, will be duly
and validly issued and fully-paid and non-assessable.
xviii. Neither the Company, the Bank nor the Bank Subsidiaries is in
violation of its charter or certificate of incorporation upon
consummation of the Conversion nor, to the best of such counsel's
knowledge, in default (nor has any event occurred which, with
notice or lapse of time or both, would constitute a default) in
the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to
which the Company, the Bank or the Bank Subsidiaries is a party
or by which the Company, the Bank or the Bank Subsidiaries or any
of their respective property may be bound in any respect that
would have a material adverse effect upon the financial
condition, results of operations or business of the Company, the
Bank and the Bank Subsidiaries, taken as a whole.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 31
xix. The Foundation has been effected in all material respects in
accordance with the requirements of the FDIC and the State of
Delaware. All terms, conditions, requirements and provisions
regarding the organization and purpose of the Foundation imposed
by the FDIC, except with respect to the filing and submission of
any required reports after the Foundation is formed and the
Conversion completed, have been completed. To the best of such
counsel's knowledge, no person has sought to obtain regulatory or
judicial review of the final action of the FDIC or the
Commissioner in approving or issuing a non-objection letter
regarding the formation of the Foundation and the contribution of
the Foundation Shares.
In rendering such opinion, such counsel may rely as to matters of fact on
certificates of responsible officers of the Company and the Bank and
certificates of public officials, and as to matters of law other than federal
law, on opinions of other counsel admitted to practice the applicable law
reasonably acceptable to counsel for Trident; provided, however, that such
counsel shall provide a letter addressed to Trident which states that with
respect to the opinion of such other counsel, nothing has come to such counsel's
attention that would lead it to believe that it and Trident are not reasonably
justified in relying upon such opinion. In addition, such other counsel shall
address its opinion letter to Trident or expressly state in its opinion letter
or in a separate letter addressed to Trident that Trident and Trident's counsel
are entitled to rely upon such opinion. Such counsel may assume that any
agreement is the valid and binding obligation of any party to such agreement
other than the Company or the Bank. Copies of any certificates of officers of
the Company or the Bank on which counsel relies shall be furnished to counsel
for Trident at the time the opinion is delivered.
Such counsel's opinion may be limited to present statutes, regulations and
judicial interpretations and to facts as they exist as of the date of the
opinions. In rendering such opinion, counsel need assume no obligation to
revise or supplement it should present laws be changed by legislative or
regulatory action, judicial decision or otherwise. Such counsel need express no
view, opinion or belief with respect to whether any proposed or pending
legislation, if enacted, or any regulations or any policy statements issued by
any regulatory agency, whether or not promulgated pursuant to any such
legislation, would affect the validity of the execution and delivery by the
Company or the Bank of this Agreement or the issuance of the Shares.
(j) At the Closing Date, Trident shall receive the letter of Muldoon,
Murphy & Faucette, special counsel for the Company and the Bank, dated
the Closing Date, addressed to Trident, in form and substance
reasonably satisfactory to counsel for Trident and to the effect that:
in connection with the preparation of the
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Page 32
Conversion Application (including the Prospectus and the Notice) and
the Registration Statement, such counsel participated in conferences
with directors, officers, employees and other representatives of the
Bank and representatives of the independent public accountants for the
Bank as well as reviewed various documents and other information
deemed relevant and, based on such conferences and review, nothing has
come to such counsel's attention that would lead such counsel to
believe (i) that the Registration Statement, at the time it became
effective (including any post-effective amendments), or that the
Conversion Application, at the time it was approved, contained an
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading (except as to information with respect to
Trident, as to the appraisal and as to financial statements, notes to
financial statements, financial tables and other financial and
statistical data contained therein with respect to which such counsel
need express no comment), or (ii) that the Prospectus or the Notice,
at the date thereof or at Closing Time, included an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading
(except as to information with respect to Trident, as to the appraisal
and as to financial statements, notes to financial statements,
financial tables and other financial and statistical data contained
therein with respect to which such counsel need express no comment).
In rendering this letter, counsel may state that they have not
undertaken to verify independently the information in the Conversion
Application, the Prospectus and the Notice or the Registration
Statement and therefore, do not assume any responsibility for the
accuracy or completeness thereof
(k) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to
review or pass upon the matters required by Trident, and for the
purposes of evidencing the accuracy, completeness or satisfaction
of any of the representations, warranties or conditions herein
contained, including but not limited to, resolutions of the Board
of Directors of the Company and the Bank regarding the
authorization of this Agreement and the transactions contemplated
hereby.
(l) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material adverse change in the
condition, financial or otherwise, of the Bank since the last date as
of which such condition is set forth in
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 33
the Prospectus, except as referred to therein; (ii) there shall have
been no transaction entered into by the Bank after the latest date as
of which the financial condition of the Bank is set forth in the
Prospectus other than transactions referred to or contemplated
therein, transactions in the ordinary course of business, and
transactions which are not material to the Bank; (iii) the Bank shall
not have received from the Commissioner, the FDIC, or any other
governmental authority any direction (oral or written) to make any
material change in the method of conducting their respective
businesses with which it has not complied or which is material to the
business of the Bank; (iv) no action, suit or proceeding, at law or in
equity or before or by any federal or state commission, board or other
administrative agency, shall be pending or threatened against the
Company, the Bank or the Bank Subsidiaries or affecting any of their
respective assets, wherein an unfavorable decision, ruling or finding
materially and adversely would affect the business, operations,
financial condition or income of the Company, the Bank and the Bank
Subsidiaries, taken as a whole; and (v) the Shares shall have been
qualified or registered for offering and sale by the Company or are
exempt from such qualification or registration under the securities or
"blue sky" laws of such jurisdictions as Trident and the Company shall
have agreed upon.
(m) At the Closing Date, Trident shall receive, among other documents, (i)
a copy of the letter of the Commissioner approving the Conversion
Application and authorizing the use of the Prospectus, (ii) a copy of
the letter from The Commonwealth of Massachusetts or the Commissioner
evidencing the good standing of the Bank, (iii) a copy of the letter
from the FDIC raising no objection to the Plan and the Conversion;
(iv) a copy of the letter from The Commonwealth of Massachusetts or
the Commissioner approving the Bank's Stock Charter; (v) a copy of the
letter from the OTS approving the Holding Company Application; and
(vi) a copy of a statement from the Commission declaring the
Registration Statement effective.
(n) Trident shall have received such opinion of Vorys, Sater, Seymour and
Pease, LLP, counsel for Trident, dated the Closing Date, with respect
to certain matters as Trident may reasonably request, and such counsel
shall have received such documents, papers and records as they request
for the purpose of enabling them to pass upon such matters.
(o) Concurrently with the execution of this Agreement, Trident shall
receive a letter from Wolf, dated the date hereof and addressed to
Trident: (i) confirming that Wolf is a firm of independent public
accountants within the meaning of the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 34
Securities Act and the FDIC's securities disclosure regulations and 12
C.F.R. (S) 335.604(a) and no information concerning its relationship
with or interests in the Bank is required by the Conversion
Application, and stating in effect that in Wolf's opinion the
financial statements of the Bank as are included in the Prospectus
comply as to form in all material respects with the applicable
accounting requirements of the Conversion Regulations, the Securities
Act, the Securities Act Regulations and GAAP; (ii) stating in effect
that, on the basis of certain agreed upon procedures (but not an audit
examination in accordance with GAAP) consisting of a reading of the
latest available unaudited interim financial statements of the Bank
prepared by the Bank, a reading of the minutes of the meetings of the
Board of Directors and shareholders of the Bank and consultations with
officers of the Bank responsible for financial and accounting matters,
nothing came to their attention which caused them to believe that: (A)
such unaudited financial statements, including Recent Developments,
are not in conformity with GAAP applied on a basis substantially
consistent with that of the audited financial statements included in
the Prospectus; or (B) during the period from the date of the latest
unaudited financial statements included in the Prospectus to a
specified date not more than three business days prior to the date
hereof, there was any material increase in borrowings, and any other
form of debt other than deposits of the Bank (increases in borrowings
will not be deemed to be material if such increase in total borrowings
outstanding does not exceed $1,000,000); (C) there was any decrease in
changes in surplus of the Bank at the date of such letter as compared
with amounts shown in the latest unaudited statement of condition
included in the Prospectus, including Recent Developments; or (D)
there was any decrease in net income or net interest income of the
Bank for the number of full months commencing immediately after the
period covered by the latest unaudited income statement included in
the Prospectus, including Recent Developments, and ended on the latest
month end prior to the date of the Prospectus or such letter as
compared to the corresponding period in the preceding year; and (iii)
stating that, in addition to the audit examination referred to in its
opinion included in the Prospectus and the performance of the
procedures referred to in clause (ii) of this subsection (o), they
have compared with the general accounting records of the Bank, which
are subject to the internal controls of the Bank, accounting system
and other data prepared by the Bank, directly from such accounting
records, to the extent specified in such letter, such amounts and/or
percentages set forth in the Prospectus as Trident may reasonably
request; and they have found such amounts and percentages to be in
agreement therewith (subject to rounding).
(p) At the Closing Date, Trident shall receive a letter from Wolf, dated
the Closing
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 35
Date, addressed to Trident, confirming the statements made by its
letter delivered by it pursuant to subsection (o) of this Section 6,
the "specified date" referred to in clause (ii)(B) thereof to be a
date specified in such letter, which shall not be more than three
business days prior to the Closing Date.
(q) Trident shall have received a confirming letter from the Appraiser,
dated the Closing Date, with respect to its estimated pro forma fair
market value appraisal. Such letter shall be of the type described in
the Prospectus to be submitted promptly after completion of the
offering of the Shares.
(r) All necessary approvals and consents to the consummation of the
Conversion shall have been obtained, and the Shares shall have been
qualified or be exempt from qualification under the state securities
laws of the states as shall have been agreed upon by Trident and the
Company.
(s) The representations and warranties of each of the Company and the Bank
contained herein shall be true and correct on the date of this
Agreement and on and as of the Closing Date, and each of the Company
and the Bank shall have performed all covenants and agreements
contained herein, to be performed on their part at or prior to the
Closing Date.
(t) At any time prior to the Closing Date, (i) there shall not have
occurred any material adverse change in the financial markets in the
United States or elsewhere or any outbreak of hostilities or
escalation thereof or other calamity or crisis the effects of which,
in the judgment of Trident, are so material and adverse as to make it
impracticable to market the Common Stock or to enforce contracts,
including subscriptions or orders, for the sale of the Common Stock,
and (ii) trading generally on either the Nasdaq National Market or the
New York Stock Exchange shall not have been suspended, or minimum or
maximum prices for trading shall not have been fixed, or maximum
ranges for prices for securities shall not have been required, by
either of such Exchange or Market or by order of the Commission or any
other governmental authority, and a banking moratorium shall not have
been declared by either federal or Massachusetts authorities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel. Any
certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident pursuant to this Agreement shall be deemed a representation and warranty
by the Company or the Bank, as the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 36
case may be, to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing Date
is not so fulfilled, Trident may terminate this Agreement or, if Trident so
elects, may waive in writing such conditions which have not been fulfilled, or
may extend the time of their fulfillment. If Trident terminates this Agreement
as aforesaid, the Company or the Bank shall reimburse Trident for its
accountable expenses as provided in Section 3 hereof.
7. Indemnification and Contribution.
- --
(a) Each of the Company and the Bank hereby agrees to indemnify and hold
harmless Trident and each person, if any, who controls Trident within
the meaning of Section 15 or Section 20(a) of the Exchange Act,
against any losses, damages or liabilities, joint or several, to which
Trident or each such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Prospectus or the
Registration Statement or any amendment or supplement thereto, or in
any application filed under any state securities law, or in any other
document executed by the Company or the Bank in connection with, or in
contemplation of the transactions contemplated by this Agreement or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the
Company and the Bank agrees to reimburse Trident and each such
controlling person in connection with investigating, preparing or
defending against any such loss, claim, damage, liability or action;
provided, however, that neither the Company nor the Bank will be
liable in any such case to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission
made in the Prospectus or the Registration Statement or any amendment
or supplement thereto, or in any state securities law application, or
in any other document executed by the Company or the Bank in
connection with or in contemplation of the transactions contemplated
by this Agreement in reliance upon and in conformity with written
information furnished to the Company or the Bank by or on behalf of
Trident specifically for use therein. In the event the Company or the
Bank advances any amounts alleged to be due under this Section 7(a) to
the indemnified party, and it is determined by a court of competent
jurisdiction that the indemnified party is not entitled to
indemnification hereunder,
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 37
then the indemnified party shall repay, without interest, any amounts
so advanced to the Company or the Bank. The indemnification
obligations of the Company and the Bank as provided above are in
addition to any liabilities the Company or the Bank may have under
other agreements, under common law or otherwise.
(b) Trident agrees to indemnify and hold harmless the Company and the
Bank, their directors, officers and employees, and each person, if
any, who controls the Company or the Bank within the meaning of the
Securities Act, against any losses, claims, damages or liability to
which the Company or the Bank, or any such director, officer, or
controlling person may be subject, under the Securities Act, the
Exchange Act, or other federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue or alleged untrue statement of any material fact
contained in the Prospectus or the Registration Statement or any
amendment or supplement thereto, or in any other document executed by
the Company or the Bank in connection with or in contemplation of the
transactions contemplated by this Agreement or in any state
securities law application, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Prospectus or the Registration
Statement, or any amendment or supplement thereto, in any state
securities law application, or in any other document executed by the
Company or the Bank in connection with or in contemplation of the
transactions contemplated by this Agreement in reliance upon and in
conformity with any written information furnished to the Company or
the Bank by Trident specifically for use in the preparation thereof.
Trident will reimburse any legal or other expenses reasonably incurred
by the Company or the Bank or any such director, officer, or
controlling person in connection with investigating, preparing or
defending against any such loss, claim, damage, liability or action.
In the event Trident advances any amounts alleged to be due under this
Section 7(b) to an indemnified party and it is determined by a court
of competent jurisdiction that the indemnified party is not entitled
to indemnification hereunder, then the indemnified party shall repay,
without interest, any amounts so advanced to Trident. The
indemnification obligations of Trident as provided above are in
addition to any liabilities Trident may have under other agreements,
under common law or otherwise.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 38
(c) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an
indemnifying party under this Section 7, notify the indemnifying party
in writing of the commencement thereof; provided, however, that the
omission to so notify the indemnifying party will not relieve an
indemnifying party from any liability which it or he may have to any
indemnified party otherwise than under this Section 7, except to the
extent, and only to the extent, that the indemnifying party
establishes that such failure to so notify prejudiced it or his rights
in the defense against such claim. In case any such action is brought
against any indemnified party, and such indemnified party notifies an
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate in, and, to the extent that it or he
may wish, jointly with all other indemnifying parties, similarly
notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have reasonably
concluded, based upon advice of its counsel, that there may be legal
defenses available to it or him and/or other indemnified parties which
are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof unless:
i. the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel);
ii. the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice or
commencement of the action; or
iii. the indemnifying party has authorized the employment of counsel
at the
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 39
expense of the indemnifying party.
d. If the indemnification provided for in this Section 7 is unavailable
to an indemnified party in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall, subject to the
limitations hereinafter set forth, contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities:
i. in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Bank and Trident from
the Offerings; or
ii. if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Bank and
Trident in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations.
The respective relative benefits received by the Company and the Bank and
Trident shall be deemed to be represented by the percentage that the fees to be
paid to Trident hereunder bears to the total gross proceeds of the Conversion.
The relative fault of the Company and the Bank and Trident shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Company and the Bank, or by Trident, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages and liabilities referred to
above shall be deemed to include, subject to the limitations set forth in
paragraph (d) of this Section 7, any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
or per capita allocation or by any other method or allocation which does not
take into account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 7, no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 40
8. Survival of Certain Representations and Obligations. All representations,
- --
warranties and agreements of the Company and the Bank herein and of
Trident, if any, or certificates delivered pursuant hereto, and the
agreement of the parties contained in Section 7 hereof, will remain in full
force and effect and will survive the issuance of and payment for the
Shares and/or any termination or consummation of this Agreement, and any
legal representative of Trident, the Company and the Bank and any such
controlling persons shall be entitled to the benefit of the respective
agreements, indemnities, warranties and representations.
9. Termination. Trident shall have the right by giving notice as hereinafter
- --
specified at any time at or prior to the Closing Date, to terminate this
Agreement if any of the following events shall occur:
a. there shall have occurred (i) any general suspension of, or limitation
on prices for, trading in securities on the New York Stock Exchange or
in the over-the-counter market, (ii) a declaration of a banking
moratorium or any suspension of payments in respect of banks or
savings associations in the United States, (iii) a commencement of a
war, armed hostilities or other substantial international or national
calamity directly or indirectly involving the United States, (iv) any
limitation (whether or not mandatory) by any governmental authority
on, or any other event which might materially affect, the extension of
credit by banks or other lending institutions, or (v) a material
change in United States or any other currency exchange rates or a
suspension of, or limitation on, the markets therefor;
b. there shall be threatened, instituted or pending any action, suit,
proceeding or other application before or by any court, regulatory
authority or governmental agency or body or by any other person that,
in the reasonable judgment of Trident might materially and adversely
affect the financial condition, business, or results of operations of
the Company or the Bank or the value of the Shares;
c. the Company or the Bank shall have sustained a material loss by fire,
flood, accident or other calamity which is material to the property,
financial condition, business, or results of operations of the Company
or the Bank, whether or not such loss shall have been insured; or
d. there otherwise shall have been, since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the financial condition, business, or results of operations
of the Bank, whether or not arising in the ordinary course of
business, that in the reasonable judgment of Trident makes it
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 41
impractical or inadvisable to proceed with the offering of the Shares.
A termination pursuant to this Section 9 shall be without liability on the
part of Trident to the Company or the Bank or on the part of the Company or the
Bank to Trident (except that the Company and the Bank shall remain responsible
for the expenses to be paid or reimbursed by them pursuant to Sections 3(d) (ii)
and (iii) and the respective obligations of the parties pursuant to Section 7
hereof shall remain in full force and effect).
10. Notices. All notices or communications hereunder shall be in writing and
- ---
if sent to Trident shall be mailed, delivered, telecopied or telegraphed
and confirmed to Trident at its address set forth on the first page hereof
to the attention of Timothy E. Lavelle (with a copy to Vorys, Sater,
Seymour and Pease LLP, 221 East Fourth Street, Cincinnati, Ohio 45202,
Attention: Terri Reyering Abare); or if sent to the Company or the Bank
shall be mailed, delivered, telecopied or telegraphed and confirmed to the
Company or the Bank at 1442 Dorchester Avenue, Boston, Massachusetts 02122,
Attention: Paul C. Green (with a copy to Muldoon, Murphy & Faucette, 5101
Wisconsin Avenue, N.W., Washington, D.C. 20016, Attention: Lawrence M.F.
Spacassi).
11. Parties. This Agreement shall inure to the benefit of, and shall be
- ---
binding upon, Trident, the Company and the Bank, and the controlling
persons, officers and directors referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other
person shall have any legal or equitable right, remedy or claim under or by
virtue of this Agreement.
12. Applicable Law. This Agreement shall be governed by, and construed in
- ---
accordance with, the laws of The Commonwealth of Massachusetts, except to
the extent that federal law applies.
13. Counterparts. This Agreement may be executed in separate counterparts,
- ---
each of which when so executed and delivered shall be an original, but all
of which together shall constitute but one and the same instrument.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement between the Company and the Bank and Trident in
accordance with its terms.
MASSACHUSETTS FINCORP, INC.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 42
By:
Paul C. Green
President, Chief Executive Officer and
Chairman of the Board
THE MASSACHUSETTS CO-OPERATIVE BANK
By:
Paul C. Green
President and Chief Executive Officer
The foregoing Sales Agency
Agreement is hereby confirmed
and accepted as of the date
first above written.
TRIDENT SECURITIES, INC.
By:
Timothy E. Lavelle
President
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 43
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
listed below:
<TABLE>
<S> <C>
Alabama Missouri
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no agents)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
</TABLE>
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 44
<TABLE>
<S> <C>
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
</TABLE>
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
listed below:
Alaska
Hawaii
Montana
South Dakota
Utah
- -------------------------------
Tuesday, September 22, 1998
- -------------------------------
<PAGE>
EXHIBIT 2.1
AMENDED
PLAN OF CONVERSION
FOR
THE MASSACHUSETTS CO-OPERATIVE BANK
(as adopted May 6, 1998 and amended July 15, 1998 and September 8, 1998)
1. INTRODUCTION.
This Amended Plan of Conversion (the "Plan") provides for the conversion of
The Massachusetts Co-operative Bank (the "Bank") from a state-chartered mutual
to a state-chartered capital stock institution. The Board of Directors has
carefully considered the alternatives available to the Bank with respect to its
corporate structure and has determined that a mutual to stock conversion as
described in this Plan is in the best interests of the Bank, its Shareholders
(as defined herein) and the communities served by the Bank. The Board of
Directors believes that the decline in mutuality is placing mutual savings
associations, such as the Bank, at a disadvantage to the increasing base of
stock thrift and commercial Bank institutions. The restructuring of the Bank
into the capital stock form of organization will enable the Bank to expand the
Bank's franchise, compete more effectively with commercial Banks and other
financial institutions for new business opportunities, and as a stock
institution, to increase its equity capital base and access the capital markets
when needed. The business purposes of the Conversion are to provide the Bank
with equity capital which will enable it to increase its reserves and net worth
to support future lending and operational growth and branching activities and to
increase its ability to render services to the communities it serves.
The Board of Directors of the Bank currently contemplates that all of the
stock of the Bank shall be held by a business corporation (the "Holding
Company") organized under the laws of the State of Delaware and that the Holding
Company will issue and sell its capital stock pursuant to this Plan. The use of
the Holding Company, if so utilized, would provide greater organizational and
operating flexibility. Shares of capital stock of the Bank will be sold to the
Holding Company and the Holding Company will offer the Conversion Stock upon the
terms and conditions set forth herein in a Subscription Offering to the Eligible
Account Holders, Supplemental Eligible Account Holders and any Tax-Qualified
Employee Stock Benefit Plan established by the Bank or Holding Company, in the
respective priorities set forth in this Plan. Any shares of Conversion Stock not
subscribed for by the foregoing classes of persons will be offered for sale to
certain members of the public either directly by the Bank or the Holding Company
through a Direct Community Offering or a Syndicated Community Offering or
through an underwritten firm commitment public offering or through a combination
thereof. In the event that the Bank decides not to utilize the Holding Company
in conversion, Conversion Stock of the Bank, in lieu of the Holding Company,
will be sold as set forth above and in the respective priorities set forth in
this Plan. In addition to the foregoing, the Bank and the Holding Company
intend to provide employment or severance agreements to certain management
employees and certain other benefits to the Directors, officers and employees of
the Bank as described in the Prospectus for the Conversion Stock.
<PAGE>
In furtherance of the Bank's commitment to its community, this Plan
provides for the establishment of a charitable foundation as part of the
Conversion. The charitable foundation is intended to complement the Bank's
existing community reinvestment activities in a manner that will allow the
Bank's local community to share in the growth and profitability of the Holding
Company and the Bank over the long term. Consistent with the Bank's goal, the
Holding Company intends to donate to the charitable foundation immediately
following the Conversion a number of shares of its authorized but unissued
Common Stock in an amount up to 8% of the common stock issued in the Conversion.
For these reasons, the Board of Directors, on May 6, 1998, unanimously
adopted this Plan to convert the Bank from a mutual form of organization to a
stock form of organization.
The deposit accounts of the Bank's Shareholders will not be affected by the
Conversion provided for in this Plan. Each deposit account holder in the
converted Bank, prior to conversion, shall receive, without payment, a
withdrawable account or accounts in the converted Bank equal in withdrawable
amount to the withdrawable value of such account holder's account or accounts in
the Bank prior to conversion. All deposit accounts in the Bank following the
Conversion will continue to be insured by the Federal Deposit Insurance
Corporation (the "FDIC") and the Share Insurance Fund of the Co-operative
Central Bank to the maximum amount permitted by law. The stock to be issued in
the Conversion, however, will not be insured by the FDIC or any other insurer.
The Bank, as chartered in the stock form following the Conversion, will succeed
to all of the presently existing rights, interests, duties and obligations of
the Bank to the extent provided by law, including, but not limited to, all of
its rights to and interests in its assets and properties, both real and
personal.
This Plan, which has been adopted by the Bank's Board of Directors by a
unanimous vote, must also be approved by (1) the affirmative vote of two-thirds
of the Voting Shareholders present and voting at a special meeting of the Voting
Shareholders called to consider the Plan, and (2) if required by the FDIC, by
the affirmative vote of at least a majority of the amount of votes eligible to
be cast by Voting Shareholders at the Special Meeting (as defined herein).
Prior to the submission of this Plan to the Voting Shareholders for their
consideration, the Plan must be approved by the Commissioner of Banks of the
Commonwealth of Massachusetts (the "Commissioner") and reviewed without
objection by the FDIC.
2. DEFINITIONS.
As used in this Plan, the following terms have the meanings indicated
below:
Acting in Concert. The term "Acting in Concert" means: (a) knowing
-----------------
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; (b) 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
(c) a person or
2
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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.
Actual Purchase Price. The term "Actual Purchase Price" means the per
---------------------
share price at which the Conversion Stock is ultimately sold in accordance with
the terms hereof.
Affiliate. An Affiliate of, or a person "affiliated" with, a specified
---------
person, is a person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
Aggregate Purchase Price. The term "Aggregate Purchase Price" means the
------------------------
total sum paid for all Shares of Conversion Stock.
Associate. The term "Associate," when used to indicate a relationship with
---------
any person, means (a) any corporation or organization (other than the Holding
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; (b) 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) for the purposes of Sections 5 and 6 hereof, the term "Associate" does not
include any Non-Tax-Qualified Employee Stock Benefit Plan or any Tax-Qualified
Employee Stock Benefit Plan in which a person has a substantial beneficial
interest or serves as a 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 (c) 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.
Bank. The term "Bank" means The Massachusetts Co-operative Bank.
----
Bank Personnel. The term "Bank Personnel" means directors, officers and
--------------
employees of the Bank.
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Broker-Dealer. The term "Broker-Dealer" means any person who engages
-------------
either for all or part of such person's time, directly or indirectly, as agent,
broker or principal, in the business of offering, buying, selling or otherwise
dealing or trading in securities issued by another person.
Commissioner. The term "Commissioner" means Commissioner of the
------------
Massachusetts Division of Banks.
Conversion. The term "Conversion" means the change in the form of the Bank
----------
from the mutual form to the capital stock form by the adoption of an amendment
to the Certificate of Incorporation of the Bank to authorize the issuance of
capital stock in accordance with the regulations of the Commissioner and to
otherwise conform to the requirements of a Massachusetts stock Co-operative Bank
and the issuance of the capital stock of the Bank in accordance with this Plan.
Conversion Regulations. The term "Conversion Regulations" means Title 209,
----------------------
Chapter 33.00, Subpart A of the Code of Massachusetts Regulations and the
applicable regulations of the Federal Deposit Insurance Corporation, but only to
the extent such regulations do not conflict with Title 209, Chapter 33.00,
Subpart A of the Code of Massachusetts Regulations.
Conversion Stock or Shares. The terms "Conversion Stock" or "Shares" mean
--------------------------
the common stock initially issued by the Bank or Holding Company in connection
with the Conversion.
Direct Community Offering. The term "Direct Community Offering" means the
-------------------------
offering of Conversion Stock to the Local Community with preference given to
natural persons residing in the Local Community.
Director. The term "Director" refers to the directors of the Bank.
--------
Division. The term "Division" means the Division of Banks of the
--------
Commonwealth of Massachusetts.
Eligible Account Holder. The term "Eligible Account Holder" means any
-----------------------
person holding a Qualifying Deposit in the Bank as of the Eligibility Record
Date.
Eligibility Record Date. The term "Eligibility Record Date" means April
-----------------------
30, 1997, the record date set by the Bank for determining Eligible Account
Holders.
Estimated Price Range. The term "Estimated Price Range" means the range of
---------------------
minimum and maximum aggregate values determined by the Board of Directors of the
Bank within which the aggregate amount of Common Stock sold in the Conversion
will fall. The Estimated Price Range will be within the estimated pro forma
market value of the Conversion Stock as
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determined by the Independent Appraiser prior to the Subscription Offering and
as it may be amended from time to time thereafter.
Foundation. The term "Foundation" means a charitable foundation that will
----------
qualify as an exempt organization under Section 501(c)(3) of the Internal
Revenue Code, the establishment and funding of which is contemplated by Section
3A herein.
FDIC. The term "FDIC" means the Federal Deposit Insurance Corporation.
----
Holding Company. The term "Holding Company" means the Delaware corporation
---------------
formed for the purpose of acquiring all of the shares of capital stock of the
Bank to be issued upon its conversion to stock form unless the Holding Company
form of organization is not utilized. Shares of common stock of the Holding
Company will be issued in the Conversion to Participants and others in a
Subscription, Direct Community, Syndicated Community, or underwritten firm
commitment public offering, or through a combination thereof.
Independent Appraiser. The term "Independent Appraiser" means the firm
---------------------
employed by the Bank to prepare an appraisal of the pro forma market value of
the Bank which will be used as the basis for determining the price of the
Conversion Stock.
Local Community. The term "Local Community" means all counties in which
---------------
the Bank has its home office or a branch office.
Officer. The term "Officer" means the chairman of the board, chief
-------
executive officer, president, any officer of the level of vice president or
above, clerk, and the treasurer of the Bank.
Order Form. The term "Order Form" means any form together with attached
----------
cover letter, sent by the Bank to any Participant or Person containing among
other things a description of the alternatives available to such Person under
the Plan and by which any such Person may make elections regarding subscriptions
for Conversion Stock in the Subscription and Community Offerings.
Person. The term "Person" means an individual, a corporation, a
------
partnership, an association, a joint-stock company, a trust (including
Individual Retirement Accounts ("IRA") and KEOGH Accounts), any unincorporated
organization or similar association, a government or political subdivision or a
group acting in concert, and the Tax-Qualified Employee Stock Benefit Plan.
5
<PAGE>
Plan. The term "Plan" means this Plan of Conversion as adopted by the
----
Board of Directors of the Bank and approved by the Commissioner.
Prospectus. The term "Prospectus" means the offering circular or
----------
prospectus by which the Common Stock of the Holding Company is being offered.
Purchase Price. The term "Purchase Price" means the price of the
--------------
Conversion Stock, as offered in the Conversion.
Qualifying Deposit. The term "Qualifying Deposit" means the balance of a
------------------
deposit account of any type offered by the Bank (including, but not limited to,
savings accounts, NOW account deposits, certificates of deposit, demand
deposits, money market deposits and deposits made pursuant to IRA/Keogh Plans)
of $50 or more in the Bank at the close of business as of the Eligibility Record
Date or the Supplemental Eligibility Record Date, whichever may be the case.
Deposit accounts with total deposit balances of less than $50 shall not
constitute a Qualifying Deposit.
SEC. The term "SEC" means the Securities and Exchange Commission.
---
Shareholders. The term "Shareholders" means the shareholders of the Bank
------------
as determined by the Bylaws of the Bank.
Special Meeting. The term "Special Meeting" means the meeting of the
---------------
Shareholders, and any adjournments thereof, called for the specific purpose of
submitting the Plan to such Shareholders for vote and approval.
Subscription Offering. The term "Subscription Offering" means the offering
---------------------
of shares of capital stock, through nontransferable Subscription Rights issued
to Eligible Account Holders, Supplemental Eligible Account Holders, the Tax-
Qualified Employee Stock Benefit Plan and Directors, Officers and Employees.
Supplemental Eligible Account Holder. The term "Supplemental Eligible
------------------------------------
Account Holder" means any person (other than an Eligible Account Holder) holding
a Qualifying Deposit in the Bank as of the Supplemental Eligibility Record Date
except officers, directors and their associates.
Supplemental Eligibility Record Date. The term "Supplemental Eligibility
------------------------------------
Record Date" means March 31, 1998, the record date set by the Bank for
determining Supplemental Eligible Account Holders of the Bank.
6
<PAGE>
Syndicated Community Offering. The term "Syndicated Offering" means the
-----------------------------
offering of Conversion Stock not subscribed for in the Subscription Offering, if
any, to certain members of the general public and/or through a syndicate of
registered broker-dealers.
Tax-Qualified Employee Stock Benefit Plan. The term "Tax-Qualified
-----------------------------------------
Employee Stock Benefit Plan" means any defined benefit plan or defined
contribution plan of the Bank, such as an employee stock ownership plan, stock
bonus plan, profit-sharing plan or other plan, which, with any related trust,
meets the requirements to be "qualified" under section 401 of the Internal
Revenue Code of 1986, as amended.
Voting Shareholders. The term "Voting Shareholders" means those
-------------------
Shareholders who at the close of business on the Voting Record Date are entitled
to vote as Shareholders of the Bank in accordance with its mutual articles of
incorporation and bylaws and the laws of the Commonwealth of Massachusetts.
Voting Record Date. The term "Voting Record Date" means the date fixed by
------------------
the Directors in accordance with the Conversion Regulations and consistent with
the Bylaws of the Bank for determining the eligibility to vote at the Special
Meeting.
3. PROCEDURE FOR CONVERSION.
After adoption of the Plan by the Board of Directors of the Bank, the Plan
will be submitted, together with all other requisite material in an application
for conversion (the "Application"), to the Commissioner for approval and to the
FDIC with all other requisite material for non-objection. The Bank must also
apply to the Internal Revenue Service for a tax ruling or receive an opinion
from counsel which provides that the Conversion would not result in a taxable
reorganization of the Bank under the Internal Revenue Code of 1986, as amended,
and with respect to the federal tax consequences of the conversion.
Following a determination by the Commissioner that the Application is
complete, the Bank will publish a public announcement of its application to
convert in newspapers having general circulation in each community in which an
office of the Bank is located, or in such other locations as may be satisfactory
to the Commissioner. Three such announcements shall be published, the first
being as close to the date of the determination of the completion of the
application as may be practical, the second during the next week, and the final
notice during the third week. Such notice shall also be posted in each office
of the Bank for at least 21 days.
The Commissioner will review the Bank's Application. If the Commissioner
finds the Conversion is fair to Shareholders, the Bank's deposits will be
adequately insured, that other Banks will not be adversely affected and the
public's access to credit within the Bank's community will not be adversely
affected, he shall approve the Plan.
7
<PAGE>
Notice to all Voting Shareholders of the Special Meeting must be in a form
previously approved by the Commissioner and include other requisite material and
must be given not less than seven days prior to the date of the meeting. After
approval of the Conversion by the Commissioner, the adoption of the Plan and the
establishment of the Foundation will be submitted to the Voting Shareholders at
the Special Meeting called to consider each such matter. The Plan must be
approved by two-thirds of the Voting Shareholders present and voting at the
meeting and, if required by the FDIC, the affirmative vote of at least a
majority of the amount of votes entitled to be cast at such Special Meeting.
The establishment of the Foundation must be approved by two-thirds of the Voting
Shareholders unless a lesser amount is permitted by the Commissioner and the
FDIC. If the establishment of the Foundation is not approved as provided
herein, the Bank may proceed with the consummation of the Conversion without the
Foundation subject to applicable regulatory approval.
If the Voting Shareholders approve the Plan, and the Commissioner
authorizes the sale of Conversion Stock pursuant to this Plan, Conversion Stock
will be sold as provided herein. The Conversion Stock to be issued pursuant to
this Plan will be offered in a Subscription Offering to Eligible Account
Holders, Supplemental Eligible Account Holders and any Tax-Qualified Employee
Stock Benefit Plan and as set forth in Section 5 of this Plan after such Voting
Shareholder approval or, if permitted by the Commissioner, after approval of the
Application for Conversion provided that any such offer and sale shall be
conducted upon approval of the Plan by Voting Shareholders at the Special
Meeting. If feasible, any Conversion Stock remaining after such purchases will
then be offered to the general public through a Direct Community Offering as
provided in Section 6 of this Plan. The sale of all Conversion Stock ordered in
the Subscription Offering may be consummated simultaneously on the date the
Direct Community Offering is completed, or, if there is no Direct Community
Offering, as soon as practicable following expiration of the Subscription
Offering.
The Board of Directors of the Bank intends to take all necessary steps to
form the Holding Company, including the filing of any necessary applications to
the appropriate regulatory authorities which will govern the activities of the
Holding Company. The Bank will be a wholly-owned subsidiary of the Holding
Company unless the Holding Company is not utilized in the Conversion.
If the Holding Company is utilized, upon Conversion the Bank will issue its
capital stock to the Holding Company, and the Holding Company will issue and
sell the Conversion Stock in accordance with this Plan. The Holding Company
will make timely applications for any requisite regulatory approvals, including
an application to register as a Bank or Savings and Loan holding company, and
the filing of a Registration Statement to register the sale of the Conversion
Stock with the SEC.
The Board of Directors of the Bank also intends to take all necessary steps
to establish the charitable foundation and to fund such charitable foundation in
the manner set forth in Section 3A hereof, subject to the approval of Voting
Shareholders.
8
<PAGE>
Upon the issuance of the Conversion Stock, the Holding Company will
purchase from the Bank all of the capital stock of the Bank to be issued by the
Bank in the Conversion in exchange for the Conversion proceeds that are not
permitted to be retained by the Holding Company. The Bank believes that the
Conversion proceeds will greatly enhance the Bank's ability, among other things,
(i) to expand its franchise through increased lending, (ii) to diversify
products offered to customers and (iii) to establish new branch locations.
The Board of Directors of the Bank may determine for any reason at any time
prior to the issuance of the Conversion Stock not to utilize a holding company
form of organization in the Conversion. If the Board of Directors of the Bank
determines not to complete the Conversion utilizing a holding company form of
organization, the capital stock of the Bank will be issued and sold in
accordance with the Plan. In such case, the Holding Company's Registration
Statement will be withdrawn from the SEC, the Bank will take steps necessary to
complete the conversion from the mutual to the stock form of organization,
including filing any necessary documents with the Commissioner, FDIC and the
Division, and will issue and sell the Conversion Stock in accordance with this
Plan. In such event, any subscriptions or orders received for Conversion Stock
of the Holding Company shall be deemed to be subscriptions or orders for
Conversion Stock of the Bank, and the Bank shall take such steps as permitted or
required by the FDIC, the Division and the SEC.
The Conversion Stock will not be insured by the FDIC or any other federal
or state government agency or authority. The Bank shall not loan funds or
otherwise extend credit to any Person to purchase shares of the Conversion
Stock.
3A. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION
As part of the Conversion, the Holding Company and the Bank intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Internal Revenue Code ( the "Foundation") and to
donate to the Foundation from authorized, but unissued, shares of Common Stock
of the Holding Company in an amount up to 8% of the number of shares of Common
Stock sold in the Conversion. The Foundation is being formed in connection with
the Conversion in order to complement the Bank's existing community reinvestment
activities and to share with the Bank's local community a part of the Bank's
financial success as a locally headquartered, community minded, financial
services institution. The funding of the Foundation with Common Stock of the
Holding Company accomplishes this goal as it enables the community to share in
the growth and profitability of the Holding Company and the Bank over the long-
term.
The Foundation will be dedicated to the promotion of charitable purposes
including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations or
civic minded projects. The Foundation will annually distribute total grants to
assist charitable organizations or to fund projects within its local community
of not less than 5% of the average fair value of Foundation assets each year.
In
9
<PAGE>
order to serve the purposes for which it was formed and maintain its Section
501(c)(3) qualification, the Foundation may sell, on an annual basis, a limited
portion of the Common Stock contributed to it by the Holding Company.
The board of directors of the Foundation will be comprised of individuals
who are officers and/or directors of the Bank. The board of directors of the
Foundation will be responsible for establishing the polices of the Foundation
with respect to grants or donations, consistent with the stated purposes of the
Foundation.
The establishment and funding of the Foundation as part of the Conversion
is subject to the approval of the Commissioner and, if applicable, the FDIC.
The establishment and funding of the Foundation as part of the Conversion is
also subject to the approval of the Voting Shareholders by the affirmative vote
of two-thirds of the Voting Shareholders present and voting at the Special
Meeting unless a lesser amount is permitted by the Commissioner and the FDIC. In
the event that the Bank's Voting Shareholders approve this Plan, but not the
Foundation, the Bank may determine to complete the Conversion without the
establishment of the Foundation and may do so without amending this Plan or
obtaining any further vote of the Bank's Voting Shareholders. Failure of the
Voting Shareholders to approve the Foundation may materially affect the pro
forma market value of the Bank. In such an event, the Bank may establish a new
Estimated Price Range and commence a resolicitation of subscribers.
4. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK.
The total number of shares of Conversion Stock which will be issued in
connection with the Conversion will be determined by the Board of Directors of
the Bank or Holding Company immediately prior to the commencement of the
Subscription Offering; provided, that the Board of Directors may elect to
increase or decrease the number of shares of Conversion Stock to be offered in
the Subscription and Direct Community Offering depending upon market and
financial conditions, with the approval of the Commissioner and FDIC, if
necessary. In particular, the total number of shares may be increased by up to
15% of the number of shares offered in the Subscription and Direct Community
Offering if the Estimated Price Range is increased subsequent to the
commencement of the Subscription and Direct Community Offering to reflect
changes in market and financial conditions and the Actual Purchase Price in the
aggregate is not more than 15% above the maximum of the Estimated Price Range.
An Independent Appraiser shall be employed by the Bank to provide it with
an independent valuation of the estimated pro forma market value of the
Conversion Stock to be issued in the Conversion as required by the Conversion
Regulations. The Directors of the Bank shall thoroughly review and analyze the
methodology and fairness of the independent appraisal. The valuation will be
made by a written report to the Bank, contain the factors upon which the
valuation was made and conform to procedures adopted by the Commissioner and the
FDIC. The valuation shall contain an estimated range of aggregate prices for the
Conversion Stock, which range shall reflect the anticipated pro forma market
value of the Conversion Stock to be
10
<PAGE>
issued in the Conversion. The maximum price shall be no more than 15% above the
estimated pro forma market value, and the minimum price shall be no more than
15% below the estimated pro forma market value. The number of shares of
Conversion Stock to be issued and the purchase price per share may be increased
or decreased by the Bank. In the event that the aggregate purchase price of the
Conversion Stock is below the minimum of the Estimated Price Range, or
materially above the maximum of the Estimated Price Range, resolicitation of
purchasers may be required, provided that up to a 15% increase above the maximum
of the Estimated Price Range will not be deemed material so as to require a
resolicitation. Any such resolicitation shall be effected in such manner and
within such time as the Bank shall establish, with the approval of the
Commissioner and FDIC, if required. Up to a 15% increase in the number of shares
to be issued which is supported by an appropriate change in the estimated pro
forma market value of the Holding Company will not be deemed to be material so
as to require a solicitation of subscriptions.
All Shares to be sold in the Conversion shall be sold at a uniform price
per share. The Independent Appraiser shall evaluate the pro forma market value
of the Conversion Stock to be issued in the Conversion, which value shall be
included in the Prospectus (as described in Section 8 of this Plan) filed with
the Commissioner. The Independent Appraiser shall also present at the close of
the Subscription Offering a valuation of the pro forma market value of the
Conversion Stock to be issued in the Conversion. The Aggregate Purchase Price of
the Conversion Stock to be sold by the Bank shall be adjusted to reflect any
required changes in the pro forma market value of the Bank. If, as a result of
such adjustment, the aggregate Purchase Price is not within the Estimated Price
Range, the Bank shall obtain an amendment to the Commissioner's approval. If
appropriate, the Commissioner will condition his approval by requiring a
resolicitation of subscribers.
The price per share for each share of Conversion Stock when multiplied by
the number of shares of Conversion Stock, shall be equivalent to the pro forma
market value of the Conversion Stock to be issued in the Conversion in
accordance with the valuation furnished by the Independent Appraiser.
5. SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS,
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AND TAX-QUALIFIED EMPLOYEE STOCK
BENEFIT PLAN
A. CATEGORY NO. 1: ELIGIBLE ACCOUNT HOLDERS
(a) Each Eligible Account Holder shall receive, as first priority and
without payment, non-transferable Subscription Rights to purchase shares of
Conversion Stock in the amount equal to the greater of: $100,000 worth of
Conversion Stock offered in the Conversion, but which may be increased to 5.0%
of the Conversion Stock offered or decreased to 0.10% of the Conversion Stock
offered without the further approval of Voting Shareholders or resolicitation of
subscribers; one-tenth of one percent of the total offering of shares; or
fifteen times the product
11
<PAGE>
(rounded down to the next whole number) obtained by multiplying the total number
of shares of capital stock to be issued by a fraction of which the numerator is
the amount of the Qualifying Deposit of the Eligible Account Holder, and the
denominator is the total amount of Qualifying Deposits of all Eligible Account
Holders.
(b) In the event that subscriptions for Conversion Stock are received from
Eligible Account Holders upon exercise of Subscription Rights pursuant to
paragraph (a) in excess of the number of Shares available for subscription, the
Conversion Stock available for purchase will be allocated among the subscribing
Eligible Account Holders so as to permit each subscribing Eligible Account
Holder, to the extent possible, to purchase a number of Shares sufficient to
make his total allocation of Conversion Stock equal to the lesser of 100 Shares
or the number of Shares subscribed for by such Eligible Account Holder. Any
Shares remaining after such allocation will be allocated among the subscribing
Eligible Account Holders whose subscriptions remain unsatisfied in the
proportion which the amount of each Eligible Account Holder's Qualifying Deposit
bears to the total amount of the Qualifying Deposits of all Eligible Account
Holders whose subscriptions remain unsatisfied. If the amount so allocated
exceeds the amount subscribed for by any one or more Eligible Account Holders,
the excess shall be reallocated on the same principle (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied until all available Shares have been allocated or all
subscriptions are satisfied.
(c) Nontransferable subscription rights held by Eligible Account Holders
who are also Directors or Officers of the Bank, will be subordinated to those of
other Eligible Account Holders to the extent they are attributable to increased
deposits during the one-year period preceding the Eligibility Record Date.
B. CATEGORY NO. 2: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS
(a) Each Supplemental Eligible Account Holder shall receive, as second
priority and without payment, nontransferable Subscription Rights to purchase
shares of Conversion Stock equal to the amount equal to the greater of $100,000
worth of Conversion Stock offered in the Conversion, but which may be increased
to 5.0% of the Conversion Stock offered or decreased to 0.10% of the Conversion
Stock offered without the further approval of Voting Shareholders or
resolicitation of subscribers; one-tenth of one percent of the total offering of
shares; or fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of capital stock to be issued
by a fraction of which the numerator is the amount of the Qualifying Deposit of
the Eligible Account Holder, and the denominator is the total amount of
Qualifying Deposits of all Eligible Account Holders.
(b) In the event that subscriptions for Conversion Stock are received from
Supplemental Eligible Account Holders upon exercise of Subscription Rights
pursuant to paragraph (a) in excess of the number of Shares available for
subscription, the Conversion Stock available for purchase will be allocated
among the subscribing Supplemental Eligible Account
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<PAGE>
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of Shares sufficient to make his
total allocation of Conversion Stock equal to the lesser of 100 Shares or the
number of Shares subscribed for by such Supplemental Eligible Account Holder.
Any Shares remaining after such allocation will be allocated among the
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proposition which the amount of each Supplemental Eligible
Account Holder's Qualified Deposit bears to the total of the Qualifying Deposits
of all Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by any
one or more Supplemental Eligible Account Holders, the excess shall be
reallocated (one or more times as necessary) among those Supplemental Eligible
Account Holders whose subscriptions are still not fully satisfied on the same
principle until all available Shares have been allocated or all subscriptions
satisfied.
(c) Subscription rights received pursuant to Section 5B shall be
subordinated to all rights received by Eligible Account Holders to purchase
Conversion Stock.
(d) Subscription rights received by an Eligible Account Holder pursuant to
Section 5A shall be applied in partial satisfaction of the subscription rights
to be received as a Supplemental Eligible Account Holder pursuant to this
Section 5B.
C. CATEGORY NO. 3: TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN
The Tax-Qualified Employee Stock Benefit Plan shall receive, without
payment, as a third priority, after the satisfaction of the subscriptions of
Eligible Account Holders and Supplemental Eligible Account Holders, non-
transferable Subscription Rights to purchase up to 8% of the shares of
Conversion Stock issued in the Conversion. If, after the satisfaction of
subscriptions of Eligible Account Holders and Supplemental Eligible Account
Holders, a sufficient number of shares are not available to fill the
subscriptions by such plan, the subscription by such plan shall be filled to the
maximum extent possible. If all the Conversion Stock offered in the
Subscription Offering are purchased by Eligible Account Holders and Supplemental
Eligible Account Holders, then the Tax-Qualified Employee Stock Benefit Plan may
purchase shares in the open market following consummation of the Conversion or
directly from the Holding Company through authorized but unissued shares. A
Tax-Qualified Employee Stock Benefit Plan shall not be deemed to be an Associate
or Affiliate of, or a Person Acting in Concert with, any Director of Officer of
the Holding Company or the Bank. Notwithstanding any provision contained herein
to the contrary, the Bank may make scheduled discretionary contributions to a
Tax-Qualified Employee Stock Benefit Plan; provided, that such contributions do
not cause the Bank to fail to meet its regulatory capital requirements.
D. CATEGORY NO. 4: DIRECTORS, OFFICERS AND EMPLOYEES
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
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<PAGE>
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
together with any Associate or group of persons Acting in Concert. However,
Directors and Officers of the Bank and the Holding Company shall not be deemed
to be Associates or Persons Acting in Concert solely as a result of their board
membership or employment.
6. DIRECT COMMUNITY OFFERING.
Conversion Stock which remains unsubscribed after the exercise of
Subscription Rights pursuant to the Subscription Offering pursuant to Section 5
shall be offered for sale to the general public through a Direct Community
Offering, with a preference given to natural persons residing in the Bank's
Local Community. The Direct Community Offering, if any, may commence
simultaneously with the Subscription Offering, subject to approval of the
Commissioner, or may commence during or after the commencement of the
Subscription Offering, as the Board so determines. The right to subscribe for
shares of Conversion Stock in the Direct Community Offering is subject to the
right of the Bank and Holding Company to accept or reject such subscriptions in
whole or in part. Stock being sold in the Direct Community Offering will be
offered and sold in a manner that will achieve the widest distribution of the
Conversion Stock. Purchases by Persons and their Associates in this phase of the
offering are limited to $100,000 of Conversion Stock issued in the Conversion,
or a percentage of the total offering not to exceed 5% of the total offering of
shares. In making the Direct Community Offering, the Bank will give preference
to natural persons residing in the Local Community. 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.
If any Conversion Stock remains unsold after the close of the Subscription
and Direct Community Offerings, the Bank may use the services of broker-dealers
to sell such unsold shares in a Syndicated Community Offering.
7. LIMITATIONS ON PURCHASES.
In addition to the maximum amount of Conversion Stock that may be
subscribed for as set forth in Sections 5A and 5B, the following limitations
shall apply to all purchases of shares of Conversion Stock:
(a) The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the Conversion by any Person
together with any Associate or group or persons Acting in Concert,
shall not exceed 2.0% of the Conversion Stock sold (the "Maximum Overall
Purchase Limitation"), except for Tax-Qualified Employee Stock Benefit Plans
which may subscribe for up to 8% of the Conversion Stock issued and
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except for certain Eligible Account Holders and Supplemental Eligible Account
Holders which may subscribe for or purchase shares in accordance with Sections
5A and 5B herein, respectively; provide, however, that Directors and Officers of
the Bank and the Holding Company shall not be deemed to be Associates or Persons
Acting In Concert solely as a result of their board membership or employment.
THIS MAXIMUM OVERALL PURCHASE LIMITATION MAY BE INCREASED CONSISTENT WITH THE
CONVERSION REGULATIONS IN THE SOLE DISCRETION OF THE HOLDING COMPANY AND THE
BANK SUBJECT TO ANY REQUIRED REGULATORY APPROVAL.
(b) A minimum of 25 Shares must be purchased by each person purchasing
Conversion Stock to the extent Shares are available, provided, however, that
such minimum number of Shares will be reduced if the price per Share times such
minimum number of Shares exceeds $500.
(c) The maximum number of Shares which may be purchased, in their
individual capacity, in the Subscription and Direct Community Offering in the
Conversion by Directors and Officers of the Bank, in the aggregate shall not
exceed thirty percent (30%) of the total number of Shares. Each Director and
Officer will be subject to the same purchase limitations as other Eligible
Account Holders and Supplemental Eligible Account Holders.
8. MANNER OF EXERCISING RIGHTS; ORDER FORMS.
(a) Promptly after the Commissioner has declared the Prospectus referred to
in paragraph (b) of this Section 8 effective, Order Forms approved by the
Commissioner for the exercise of the Subscription Rights provided for in this
Plan will be sent to all Eligible Account Holders, Supplemental Eligible Account
Holders and the Tax-Qualified Employee Benefit Plan at their last known address
appearing in the records of the Bank.
(b) Each Order Form will be preceded or accompanied by a Prospectus which
must be approved by the Commissioner. Such Prospectus shall describe the Bank,
the Holding Company and the Conversion Stock being offered and will contain all
the information required by the Commissioner and all applicable laws and
regulations as necessary to enable the recipients of the Order Forms to make
informed investment decisions regarding the purchase of Conversion Stock. The
Bank may, in lieu of mailing a Prospectus to each Eligible Account Holder and
Supplemental Eligible Account Holder, mail a notice and information statement to
each such person with a request form to be returned to the Bank by a reasonable
date certain to request Subscription or Direct Community Offering materials.
(c) The Order Forms will contain or will be accompanied by, among other
things, the following:
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(i) An explanation of the rights and privileges granted under this Plan
to each class of persons granted Subscription Rights pursuant to Section 5 of
this Plan with respect to the purchase of Conversion Stock;
(ii) A specified time by which Order Forms must be received by the Bank
for purposes of exercising the Subscription Rights of Eligible Account Holders
and Supplemental Eligible Account Holders under this Plan, as provided in
Section 10 of this Plan;
(iii) A statement that the Aggregate Purchase Price at which the
Conversion Stock will ultimately be purchased in the Conversion has not been
determined as of the date of mailing of the Order Form, but that such price will
be within the range of prices which will be stated in the Order Form;
(iv) The amount which must be returned with the Order Form to subscribe
for Conversion Stock. Such amount will be equal to the Purchase Price multiplied
by the number of Shares subscribed for in accordance with the terms of this
Plan;
(v) Instructions concerning how to indicate on such Order Form the extent
to which the recipient elects to exercise Subscription Rights under this Plan,
the name or names in which the Shares subscribed for are to be registered, the
address to which certificates representing such Shares are to be sent and the
alternative methods of payment for Conversion Stock which will be permitted;
(vi) Specifically designated blank spaces for dating and signing the Order
Form;
(vii) An acknowledgment that the recipient of the Order Form has received,
prior to signing the Order Form, the Prospectus referred to in paragraph (b) of
this Section 8;
(viii) A statement that the Subscription Rights provided for in this
Plan are nontransferable, will be void after the specified time referred to in
paragraph (c)(ii) above and can be exercised only by delivery of the Order Form,
properly completed and executed, to the Bank, together with the full required
payment (in the manner specified in Section 9 of this Plan) for the number of
Shares subscribed for prior to such specified time; and
(ix) Provision for certification to be executed by the recipient of the
Order Form to the effect that, as to any Shares which the recipient elects to
purchase, such recipient is purchasing such Shares for his own account only and
has no present agreement or understanding regarding any subsequent sale or
transfer of such Shares.
(x) A statement to the effect that the executed Order Form, once received
by the Bank, may not be modified or amended by the subscriber without the
consent of the Bank.
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Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimilied order forms.
9. PAYMENT FOR CONVERSION STOCK.
(a) Full payment for all Shares subscribed for must be received by the
Bank, together with properly completed and executed order forms therefor, prior
to the expiration time, which will be specified on the Order Forms, unless such
date is extended by the Bank; provided, however, that if the Tax-Qualified
Employee Stock Benefit Plan subscribes for Conversion Stock during the
Subscription Offering, such plan will not be required to pay for shares at the
time they subscribe but may pay for such shares of Conversion Stock subscribed
for by such plan at the Actual Purchase Price upon consummation of the
Conversion, provided that there is in force from time of its subscription until
the consummation of the Conversion, a loan commitment to lend to the Tax-
Qualified Employee Stock Benefit Plan, at such time, the aggregated Maximum
Subscription Price of the shares for which it subscribed.
(b) If it is determined that the Aggregate Purchase Price should be greater
than the amount stated in the Order Forms, upon compliance with such
requirements as may be imposed by the Commissioner (which may include
resolicitation of votes for approval of this Plan by Shareholders) each Person
who subscribed for Shares will be permitted to withdraw their Subscription and
have their payment for Shares returned to them in whole or in part, with
interest, or to make payment to the Bank of the additional amount necessary to
pay for the Shares subscribed for by him at the Actual Purchase Price in the
manner and within the time prescribed by the Bank.
(c) If the Aggregate Purchase Price is outside the range of prices
established by the Independent Appraiser referred to in Section 4 of this Plan
and set forth in the Prospectus referred to in Section 8 of this Plan, the Bank
will apply for an amendment to the Commissioner's approval of this Plan and
comply with such requirements as the Commissioner may then establish.
(d) Payment for Shares ordered for purchase by Eligible Account Holders and
Supplemental Eligible Account Holders will be permitted to be made in any of the
following manners:
(i) In cash, if delivered in person;
(ii) By check, bank draft or money order, provided that checks will only be
accepted subject to collection;
(iii) By appropriate authorization of withdrawal the subscriber's deposit
account at the Bank. The Order Forms will contain appropriate means by which
authorization of such withdrawals may be made. For purposes of determining the
withdrawable balance of such
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accounts, such withdrawals will be deemed to have been made upon receipt of
appropriate authorization therefor, but interest at the rates applicable to the
accounts from which the withdrawals have been deemed to have been made will be
paid by the Bank on the amounts deemed to have been withdrawn until the date on
which the Conversion is consummated, at which date the authorized withdrawal
will actually be made. Such withdrawals may be made upon receipt of Order Forms
authorizing such withdrawals, but interest will be paid by the Bank on the
amounts withdrawn as if such amounts had remained in the accounts from which
they were withdrawn until the date upon which the sales of Conversion Stock
pursuant to exercise of Subscription Rights are actually consummated. Interest
will be paid by the Bank at not less than the rate per annum being paid by the
Bank on its passbook accounts at the time the Subscription Offering commences,
on payments for Conversion Stock received in the Subscription Offering in cash
or by check or negotiable order of withdrawal from the date payment is received
until consummation or termination of the Conversion. The Bank shall be entitled
to invest all amounts paid for subscriptions in the Subscription Offering for
its own account until completion or termination of the Conversion.
(iv) Wire transfers as payment for Shares ordered for purchase will not be
permitted or accepted as proper payment.
(e) Orders for Common Stock submitted by subscribers which aggregate
$50,000 or more must be paid by official bank or certified check, a check issued
by a NASD-registered broker-dealer or by withdrawal authorization from a deposit
account of the Bank.
(f) Payments for the purchase of Conversion Stock in the Subscription
Offering will be permitted through authorization of withdrawals from certificate
accounts at the Bank without early withdrawal penalties. If the remaining
balances of the certificate accounts after such withdrawals are less than the
minimum qualifying balances under applicable regulations, the certificates
evidencing the accounts will be canceled upon consummation of the Conversion,
and the remaining balances will thereafter earn interest at the rate provided
for in the certificates in the event of cancellation.
10. EXPIRATION OF PURCHASE RIGHTS; UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS;
INSUFFICIENT PAYMENT.
(a) All Subscription Rights provided for in this Plan, including, without
limitation the Subscription Rights of all persons whose Order Forms are returned
by the United States Post Office as undeliverable, will expire on a specified
date as described in the Prospectus which shall be not less than twenty (20)
days following the date on which Order Forms are first mailed to Eligible
Account Holders, provided that the Bank shall have the power to extend such
expiration time in its discretion.
(b) In those cases in which the Bank is unable to locate particular persons
granted Subscription Rights under this Plan, and cases in which Order Forms (1)
are returned as
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undeliverable by the United States Post Office, (2) are not received back by the
Bank or are received by the Bank after the expiration date specified thereon,
(3) are defectively filled out or executed or (4) are not accompanied by the
full required payment for the Conversion Stock subscribed for (including cases
in which deposit accounts from which withdrawals are authorized are insufficient
to cover the amount of the required payment), the Subscription Rights of the
person to whom such rights have been granted will lapse as though such person
failed to return the completed Order Form within the time period specified
thereon.
(c) The Bank may, but will not be obligated to, waive any irregularity on
any Order Form or require the submission of corrected Order Forms or the
remittance of full payment for Shares subscribed for by such date as it may
specify, and all interpretations by the Bank of terms and conditions of this
Plan and of the Order Forms will be final.
11. PERSONS IN NONQUALIFIED STATES OR IN FOREIGN COUNTRIES.
Subject to the following sentence, the Holding Company will make reasonable
efforts to comply with the securities laws of all states of the United States in
which Eligible Account Holders and Supplemental Eligible Account Holders
entitled to subscribe for Conversion Stock pursuant to this Plan reside.
However, no such person will be offered any Subscription Rights or sold any
Conversion Stock under this 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.
12. VOTING RIGHTS AFTER CONVERSION.
Following Conversion, voting rights with respect to the Bank will be held
and exercised exclusively by the holders of the capital stock of the Bank; the
Holding Company shall own all of the issued and outstanding stock of the Bank.
13. ESTABLISHMENT OF A LIQUIDATION ACCOUNT.
(a) The Liquidation Account shall be maintained by the Bank for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain deposit accounts at the Bank. The Bank will, at the time
of Conversion, establish a "Liquidation Account" in an amount equal to the net
worth of the Bank set forth in its latest statement of financial condition
contained in its final Prospectus. The function of the Liquidation Account is
to establish a priority on liquidation and, except as provided for in this
Section 13, shall not operate to restrict the use or application of any of the
net worth accounts of the Bank.
(b) The Liquidation Account shall be maintained by the Bank for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain deposit accounts at the Bank. Each Eligible Account Holder
and Supplemental Eligible Account
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Holder will have a separate inchoate interest in the Liquidation Account in
relation to each deposit account making up a Qualifying Deposit. Such inchoate
interests are referred to herein as "Subaccount Balances." For deposit accounts
in existence on the Eligibility Record Date and the Supplemental Eligibility
Record Date, separate Subaccount Balances shall be determined on the basis of
the Qualifying Deposits in such deposit accounts on each such date.
(c) Each initial Subaccount Balance in the Liquidation Account held by an
Eligible Account Holder and/or Supplemental Eligible Account Holder shall be an
amount determined by multiplying the amount in the Liquidation Account by a
fraction the numerator of which is the amount of Qualifying Deposits in such
deposit account on the Eligibility Record Date and/or Supplemental Eligibility
Record Date and the denominator of which is the total amount of all Qualifying
Deposits of Eligible Account Holders and Supplemental Account Holders on the
corresponding record date. For deposit accounts in existence at both dates,
separate Subaccounts shall be determined on the basis of the Qualifying Deposits
in such deposit accounts on such record dates.
(d) Each initial Subaccount Balance in the Liquidation Account shall never
be increased, but will be subject to downward adjustment as follows. If the
balance in the deposit account to which a Subaccount Balance relates, at the
close of business on any annual fiscal year closing date of the Bank subsequent
to the corresponding record date, is less than either (a) the lesser of the
deposit balance in such account at the close of business on any other annual
fiscal year closing date subsequent to the Eligibility Record Date or
Supplemental Eligibility Record Date, or (b) the amount of the Qualifying
Deposit as of the Eligibility Record Date or Supplemental Eligible Record Date,
then the Subaccount Balance for such deposit account shall be adjusted by
reducing such Subaccount Balance in an amount proportionate to the reduction in
such account balance. In the event of such downward adjustment, the Subaccount
Balance shall not be subsequently increased, notwithstanding any increase in the
deposit balance of the related deposit account. If any account is closed, its
related Subaccount Balance shall be reduced to zero upon such closing.
(e) In event of a complete liquidation of the converted Bank (and only in
such event), each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive from the Liquidation Account a liquidation distribution in
the amount of the then current adjusted Subaccount Balances for deposit accounts
then held, before any liquidation distribution may be made to any holders of the
conversion stock of the converted Bank. No merger, consolidation, purchase of
bulk assets with assumption of deposit accounts and other liabilities, or
similar transactions, in deposit accounts and other liabilities, which the
converted Bank is not the surviving institution, will be deemed to be a complete
liquidation for this purpose, and, in any such transaction, the Liquidation
Account shall be assumed by the surviving institution.
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14. TRANSFER OF DEPOSIT ACCOUNT.
Each deposit account in the Bank at the time of the Conversion will
constitute, without payment or further action by the account holder, a
withdrawable deposit account in the converted Bank equivalent in withdrawable
amount to the withdrawable value, and subject to the same terms and conditions
(except as to voting and liquidation rights) as such deposit account in the Bank
at the time of the Conversion.
15. RESTRICTION ON TRANSFER OF CONVERSION STOCK OF OFFICERS AND DIRECTORS.
(a) All Conversion Stock purchased by Officers or Directors either
directly from the Bank (by subscription or otherwise) or from an underwriter of
such Shares will be subject to the restriction that no such Shares shall be sold
for a period of one year following the date of purchase of such Shares, except
in the event of the death or substantial disability (as determined by the
Commissioner) of the Officer or Director to whom such Shares were initially sold
under the terms of this Plan or upon the written approval of the Commissioner.
(b) With respect to all Conversion Stock subject to restriction on
subsequent disposition pursuant to the above paragraph, each of the following
provisions shall apply:
(i) Each certificate representing such Shares shall bear the following
legend prominently stamped on its face giving notice of such restriction on
transfer:
The shares represented by this certificate may not be sold by the
registered holder hereof for a period of not less than one year from the date of
issuance hereof, except in the event of the death of the registered holder or
substantial disability (as determined by the Commissioner) of the Officer or
Director to whom such Shares were initially sold under the terms of this Plan or
upon the written approval of the Commissioner.
(ii) Instructions will be given to the transfer agent for the converted
Bank or the Holding Company not to recognize or effect any transfer of any
certificates representing such Shares, or any change of record ownership thereof
in violation of such restriction on transfer;
(iii) Any capital stock of the Holding Company issued in respect of a
stock dividend, stock split or otherwise in respect of ownership of outstanding
Shares subject to restrictions on transfer hereunder will be subject to the same
restrictions as are applicable to the Conversion Stock in respect of which such
Shares are issued.
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16. RESTRICTION ON STOCK PURCHASES BY OFFICERS AND DIRECTORS OF THE CONVERTED
BANK.
For a period of three years following the Conversion, no Officer or
Director of the converted Bank or any of their Associates shall, without the
prior written approval of the Commissioner, purchase capital stock of the Bank
or the Holding Company directly from the Bank or the Holding Company.
17. AMENDMENT AND TERMINATION OF THE PLAN.
This Plan may be substantively amended by the Board of Directors of the
Bank in its sole discretion as a result of comments from regulatory authorities
or otherwise, at any time prior to the date material is sent to the Shareholders
in connection with the meeting called to consider this Plan, and at any time
thereafter with the concurrence of the Commissioner and if necessary, the FDIC.
This Conversion may be terminated by the Directors of the Bank at any time prior
to the Special Meeting called to consider this Plan and at any time thereafter
with the concurrence of the Commissioner.
By adoption of the Plan, the Shareholders of the Bank authorize the Board
of Directors to amend or terminate the Plan under the circumstances set forth in
this Section.
18. TIME PERIOD FOR COMPLETION OF CONVERSION.
The Conversion shall be completed within 24 months from the date this Plan
is approved by the Board of Directors of the Bank.
19. EXPENSES OF CONVERSION.
The Bank and Holding Company shall use its best efforts to assure that the
expenses incurred in connection with the Conversion shall be reasonable.
20. REGISTRATION UNDER SECURITIES EXCHANGE ACT OF 1934.
The Holding Company shall register its Conversion Stock under the
Massachusetts General Laws and the Securities Exchange Act of 1934, as amended,
concurrently with or promptly following the Conversion, provided that either or
both such registrations are required under applicable law.
21. MARKET FOR CONVERSION STOCK.
The Bank and Holding Company shall use its best efforts to (i) encourage
and assist a market maker to establish and maintain a market for the Conversion
Stock and/or (ii) list or quote the shares on a national or regional securities
exchange or on the Nasdaq Stock Market.
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22. CONVERSION STOCK NOT INSURED.
The Conversion Stock will not be covered by deposit insurance.
23. NO LOANS TO PURCHASE CAPITAL STOCK.
The Bank shall not loan funds or otherwise extend credit to any Person to
purchase Conversion Stock in connection with the Conversion.
24. RESTRICTIONS ON ACQUISITION OF THE BANK OR BANK STOCK.
Current Massachusetts regulations provide that for a period of three years
following completion of the Conversion, no Person, or group of Persons Acting In
Concert, shall directly, or indirectly, offer to acquire or actually acquire the
beneficial ownership of more than 10% of any class of equity security of the
Bank without prior written notice to the Bank and the prior approval of the
Commissioner. However, approval is not required for purchases directly from the
Bank or the underwriters or selling group acting on its behalf with a view
towards public resale, or for purchases not exceeding one percent per annum of
the shares outstanding, or for the acquisition of securities by one or more Tax-
Qualified Employee Stock Benefit Plan of the Bank, provided that the plan or
plans do not have beneficial ownership in the aggregate of more than 25% of any
class of equity security of the Bank. Civil penalties may be imposed by the
Commissioner for willful violation or assistance of any violation. Where any
person directly or indirectly, acquires beneficial ownership of more than ten
percent of any class of equity security of the Bank within such three-year
period without the prior approval of the Commissioner, stock of the Bank
beneficially owned by such person in excess of 10% shall not be counted as
shares entitled to vote and shall not be voted by any person or counted as
voting shares in connection with any matter submitted to the stockholders for a
vote.
25. STOCK CHARTER AND BYLAWS.
As part of the Conversion, an amended Stock Charter and Bylaws will be
adopted to authorize the Bank to operate as a Massachusetts-chartered stock co-
operative bank. By approving the Plan, the Shareholders of the Bank will
thereby approve the amended Stock Charter and Bylaws of the Bank. Prior to
completion of the Conversion, the proposed Stock Charter and Bylaws of the Bank
may be amended in accordance with the provisions and limitations for amending
the Plan under Section 17 herein. The effective date of the adoption of the
Stock Charter and Bylaws of the Bank shall be the date of the issuance of the
Conversion Stock, which shall be the date of consummation of the Conversion.
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<PAGE>
26. COPY OF APPLICATION.
The Bank shall maintain a copy of its Application for Conversion filed with
the Commissioner in its main Banking office for public inspection until
consummation of the conversion.
27. CONDITIONS TO CONVERSION
The conversion of the Bank pursuant to this Plan is expressly conditioned
upon the following:
(a) Prior receipt by the Bank of either rulings of the United States
Internal Revenue Service and the Massachusetts taxing authorities, or opinions
of counsel or independent auditors, substantially to the effect that the
conversion will not result in any adverse federal or state tax consequences to
Eligible Account Holders or to the Bank and the Holding Company before or after
the Conversion;
(b) The sale of all of the Conversion Stock offered in the Conversion
pursuant to this Plan; and
(c) The completion of the Conversion within the time period specified in
Section 3 of this Plan.
28. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Bank
shall be final, subject to the authority of the Commissioner and FDIC.
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EXHIBIT I
CHARTER
FOR
THE MASSACHUSETTS CO-OPERATIVE BANK
SECTION 1. CORPORATE TITLE. The full corporate title of the Bank is "The
Massachusetts Cooperative Bank."
SECTION 2. OFFICE. The main office of the Bank shall be located in the
City of Boston, County of Suffolk, Commonwealth of Massachusetts, or such other
location as the Board of Directors may lawfully designate, subject to the
requirements of Chapter 167C, Section 2 of the Massachusetts General Laws.
SECTION 3. POWERS. The Bank is a capital stock co-operative chartered
under Chapter 170 of the Massachusetts General Laws and has and may exercise all
the express, implied and incidental powers conferred thereby and by all acts
amendatory thereof and supplemental thereto.
SECTION 4. DURATION. The duration of the Bank is perpetual.
SECTION 5. CAPITAL STOCK. The total number of shares of all classes of
the capital stock which the Bank has authority to issue is ____ million
(__,000,000), of which _____ million (__,000,000) shall be common stock, par
value $____ per share, and _____ million (__,000,000) shall be serial preferred
stock, par value $____ per share. The shares may be issued by the Bank from
time to time as approved by its Board of Directors without the approval of its
stockholders except as otherwise provided in this Section 5, or subject to
applicable law. The consideration for the issuance of the shares shall be paid
in full before their issuance and shall not be less than the stated value per
share and otherwise shall comply with all requirements set forth in Chapter 172,
Section 24 Subsection C of the Massachusetts General Laws. Neither promissory
notes nor future services shall constitute payment or part payment for the
issuance of shares of the Bank. The consideration for the shares shall be cash,
tangible or intangible property, labor or services actually performed for the
Bank or any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor or services, as determined by the
Board of Directors of the Bank, shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable. In
the case of a stock dividend, that part of the surplus of the Bank which is
transferred to stated capital upon the issuance of the shares as a stock
dividend shall be deemed to be the consideration for their issuance.
A description of the different classes and series of the Bank's capital
stock and a statement of the designations, and the relative rights, preferences
and limitations of the shares of each class of and series of capital stock are
as follows:
<PAGE>
A. COMMON STOCK. Except as provided in this Section 5 (or in any
supplementary sections hereto) the holders of the common stock shall exclusively
possess all voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for payment,
to the holders of the outstanding shares of any class of stock having preference
over the common stock as to the payment of dividends, the full amount of
dividends and of sinking fund or retirement fund or other retirement payments,
if any, to which such holders are respectively entitled in preference to the
common stock, then dividends may be paid on the common stock and on any class or
series of stock entitled to participate therewith as to dividends, out of any
assets legally available for the payment of dividends; but only when and as
declared by the Board of Directors.
Subject to Section 6 of this Charter in the event of any liquidation,
dissolution or winding up of the Bank, after there shall have been paid to or
set aside for the holders of any class having preference over the common stock
in the event of liquidation, dissolution or winding up the full preferential
amounts which they are respectively entitled, the holders of the common stock,
and of any class or series of stock entitled to participate therewith in whole
or in part, as to distribution of assets, shall be entitled after payment or
provision for payment of all debts and liabilities of the Bank, to receive the
remaining assets of the Bank available for distribution, in cash or in kind, in
proportion to their holdings.
Each share of common stock shall have the same relative rights as and be
identical in all respects with all the other shares of common stock.
B. SERIAL PREFERRED STOCK. Subject to the approval of the provisions of
any series of preferred stock by the Commissioner of Banks of the Commonwealth
of Massachusetts (the "Commissioner"), if required by law, the Board of
Directors of the Bank is authorized by resolution or resolutions from time to
time adopted, to provide for the issuance of serial preferred stock in series
and to fix and state the voting powers, designations, preferences and relative
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof, including,
but not limited to, determination of any of the following:
(1) The distinctive serial designation and the number of shares
constituting such series;
(2) The dividend rates or the amount of dividends to be paid on the shares
of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to
dividends;
(3) The voting powers, full or limited, if any, of shares of such series;
(4) Whether the shares of such series shall be redeemable and, if so, the
price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
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(5) The amount or amounts payable upon the shares of such series in the
event of voluntary or involuntary liquidation, dissolution or winding
up of the Bank;
(6) Whether the shares of such series shall be entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption
of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such
fund;
(7) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Bank
and, if so convertible or exchangeable, the conversion price or prices,
or the rate or rates of exchange, and the adjustments thereof, if any,
at which such conversion or exchange may be made, and any other terms
and conditions of such conversion or exchange;
(8) The price or other consideration for which the shares of such series
shall be issued; and
(9) Whether the shares of such series which are converted shall have the
status of authorized but unissued shares of serial preferred stock and
whether such shares may be reissued as shares of the same or any other
series of serial preferred stock.
Any such resolution shall become effective when the Bank files with the
Secretary of State of the Commonwealth of Massachusetts a certificate of
establishment of preferred stock, signed under the penalties of perjury of the
president or any vice president and by the clerk, assistant clerk, secretary or
assistant secretary of the Bank, setting forth a copy of the resolution of the
Board of Directors.
Each share of each series of serial preferred stock shall have the same
relative rights as and be identical in all respects with all the other shares of
the same series.
SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the Bank
shall not be entitled to preemptive rights with respect to shares of the Bank
which may be issued.
SECTION 7. REPURCHASE OF SHARES. The Bank may from time to time, pursuant
to authorization by the Board of Directors of the Bank and without action by the
stockholders, purchase or otherwise acquire shares of any class, bonds,
debentures, notes, scrip, warrants, obligations, evidences of indebtedness, or
other securities of the Bank in such a manner, upon such terms, and in such
amounts as the board of directors shall determine; subject, however, to such
limitations or restrictions, if any, as are contained in the express terms of
any class of shares of the Bank outstanding at the time of the purchase or
acquisition in question or as are imposed by law or by regulation or order of
the Commissioner.
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SECTION 8. LIQUIDATION ACCOUNT. The Bank shall establish and maintain a
liquidation account for the benefit of its deposit account holders as of April
30, 1997 ("Eligible Account Holders") and its deposit account holders as of
_______, 1998 ("Supplemental Eligible Account Holders"). In the event of a
complete liquidation of the Bank it shall comply with such rules and regulations
of the Commissioner with respect to the amount and the priorities on liquidation
of each of the Bank's Eligible Account Holder's and Supplemental Eligible
Account Holder's inchoate interests in the liquidation account to the extent it
is still existence; provided, however, that an Eligible Account Holder's and
Supplemental Eligible Account Holder's inchoate interest in the liquidation
account shall not entitle such Eligible Account Holder or Supplemental Eligible
Account Holder to any voting rights at meetings of the Bank's stockholders.
SECTION 9. CERTAIN PROVISIONS APPLICABLE FOR THREE YEARS. Notwithstanding
anything contained in the Bank's charter or bylaws to the contrary, for a period
of three years from the date of consummation of the conversion of the Bank from
mutual to stock form, the following provisions shall apply.
A. BENEFICIAL OWNERSHIP LIMITATION. No person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than ten
percent (10%) of any class of any equity security of the Bank without prior
written notice to the Bank and the prior written approval of the Commissioner.
This limitation shall not apply to a 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 and appraisal rights, the purchase of shares by underwriters in
connection with a public offering, or the purchase of shares by an employee
stock benefit plan.
In the event shares are acquired in violation of this Section 9, all shares
beneficially owned by any person in excess of ten percent (10%) shall be
considered "excess shares" and shall not be counted as shares entitled to vote,
shall not be voted by any person or counted as voting shares in connection with
any matters 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.
For purposes of this Section 8, the following definitions apply:
(1) The term "person" includes an individual, a group acting in concert, a
corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate
or any other group formed for the purpose of acquiring, holding or
disposing of the equity securities of the Bank.
(2) The term "offer" includes every offer to buy or otherwise acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for
value.
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(3) The term "acquire" includes every type of acquisition, whether effected
by purchase, exchange, operation of law or otherwise.
(4) The term "acting in concert" means (a) knowing participation in a joint
activity or conscious parallel action towards a common goal whether or
not pursuant to an express agreement, or (b) a combination or pooling
of voting or other interests in the securities of an issuer for a
common purpose pursuant to any contract, understanding, relationship,
agreement or other arrangements, whether written or otherwise.
SECTION 10. CERTAIN REQUIREMENTS FOR BUSINESS COMBINATIONS. In addition
to any affirmative vote required by law or this Charter, the vote of
stockholders of the Bank required to approve any Business Combination (as
defined below) shall be as set forth in this Section 10.
A. None of the following Business Combinations shall be consummated
without the affirmative vote of the holders of at least eighty percent (80%) of
the shares entitled to vote thereon ("Voting Stock"):
1. any merger or consolidation of the Bank with or into (a) any
Interested Shareholder or (b) any other corporation or entity (whether or not
itself an Interested Shareholder) which is, or after each merger or
consolidation would be, an Affiliate of an Interested Shareholder;
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate of any Interested Shareholder of assets
of the Bank having an aggregate Fair Market Value of $100,000 or more;
3. the issuance or transfer by the Bank (in one transaction or a
series of transactions) of any securities of the Bank to any Interested
Shareholder or any Affiliate of any Interested Shareholder in exchange for cash,
securities or other property (or a combination thereof) having an aggregate Fair
Market Value of $ 100,000 or more, other than the issuance of securities upon
the conversion of any class or series of stock or securities convertible into
stock of the Bank which were not acquired by such Interested Shareholder or such
Affiliate from the Bank;
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Bank proposed by or on behalf of an Interested Shareholder or
any Affiliate of any Interested Shareholder; or
5. any reclassification of securities (including any reverse stock
split), or any recapitalization of the Bank, or any merger or consolidation of
the Bank or any other transaction (whether or not with or into or otherwise
involving an Interested Shareholder) which in any such case (a) has the effect,
directly or indirectly of increasing the proportionate share of the outstanding
shares of any class or series of stock of the Bank which is directly or
indirectly beneficially owned
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by any Interested Shareholder or any Affiliate of any Interested Shareholder or
(b) would have the effect of increasing such proportionate share upon conversion
of any class or series of stock or securities convertible into stock of the
Bank.
B. The provisions of paragraph A hereof shall not be applicable to any
Business Combination in respect of which the conditions specified in either of
the following subparagraphs 1 and 2 are met. Any such Business Combination shall
require the affirmative vote of only the holders of a majority of the Voting
Stock.
1. Such Business Combination shall have been approved by a majority
of the Disinterested Directors, or
2. All of the following conditions relating to minimum price and
consideration for stock shall have been met:
(a) Common Stock. The aggregate amount of the cash and the Fair Market
------------
Value as of the "Consummation Date" of any consideration other than cash to be
received by holders of the common stock of the Bank in such Business Combination
shall be at least equal to the higher of the following:
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such common stock beneficially owned by the Interested
Shareholder which were acquired beneficially by such Interested Shareholder
within the two-year period immediately prior to the Announcement Date or in the
transaction in which it became an Interested Shareholder, whichever is higher;
or
(ii) the Fair Market Value per share of such common stock on the
Announcement Date or the Determination Date, whichever is higher; or
(b) Other Stock. The aggregate amount of the cash and the Fair Market
-----------
Value as of the Consummation Date of any consideration other than cash to be
received per share by holders of shares of any class or series of outstanding
Voting Stock other than common stock shall be at least equal to the highest of
the following (it being intended that the requirements of this subparagraph (b)
shall be required to be met with respect to every class and series of such
Voting Stock, whether or not the Interested Shareholder beneficially owns any
shares of a particular class or series of such Voting Stock):
(i) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid in order to
acquire any shares of such class or series of Voting Stock beneficially owned by
the Interested Shareholder which were acquired beneficially by such Interested
Shareholder within the two-year period immediately prior to the Announcement
Date or in the transaction in which it became an Interested Shareholder,
whichever is higher;
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(ii) the highest preferential amount per share to which the
holders of shares of such class or series of Voting Stock are entitled in the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Bank; or
(iii) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement date or the determination Date, whichever is
higher; and
(c) Form of Consideration. The consideration to be received by holders
---------------------
of a particular class or series of outstanding Voting Stock shall be in cash or
in the same form as was previously paid in order to acquire beneficially shares
of such class or series of Voting Stock that are beneficially owned by the
Interested Shareholder and, if the Interested Shareholder beneficially owns
shares of any class or series of Voting Stock that were acquired with varying
forms of consideration, the form of consideration to be received by the holders
of such class or series of Voting Stock shall be either cash or the form used to
acquire beneficially the largest number of shares of such class or series of
Voting Stock beneficially acquired by it prior to the Announcement Date; and
(d) Prohibited Conduct. After the Determination Date, and prior to
------------------
the Consummation Date:
(i) except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at regular dates
therefor the full amount of any dividends (whether or not cumulative), payable
on any class or series having a preference over the common stock of the Bank as
to dividends, or upon liquidation;
(ii) there shall have been no reduction in the annual rate of
dividends paid on the common stock of the Bank (except as necessary to reflect
any division of the common stock) except as approved by a majority of the
Disinterested Directors; and there shall have been an increase in such annual
rate of dividends as necessary to prevent any such reduction in the event of any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the common stock, unless the failure so to
increase such annual rate was approved by a majority of the Disinterested
Directors;
(iii) an Interested Shareholder shall not have become the
beneficial owner of any additional shares of Voting Stock except as part of the
transaction in which it became an Interested Shareholder; and
(iv) after an Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial assistance or tax credits or
other tax advantages provided by the Bank, whether in anticipation of or in
connection with such Business Combination or otherwise; and
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(e) Informational Requirements. A proxy or information statement
---------------------------
describing the proposed Business Combination and complying with the then current
regulatory requirements shall be mailed to holders of Voting Stock at least 30
days prior to the shareholder vote on such Business Combination (whether or not
such proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions).
C. For the purpose of this Section 10:
1. The term "Business Combination" shall mean any transaction that
is referred to in any one or more subsections I through 5 of paragraph A hereof.
2. A "person" shall mean any individual, firm, corporation or other
entity.
3. "Interested Shareholder" shall mean any person (other than the
Bank) who or which:
a. is the beneficial owner, directly or indirectly, of more
than ten percent (10%) of the combined voting power of the then outstanding
shares of Voting Stock;
b. is an Affiliate of the Bank and at any time within the two-
year period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of ten percent (10%) or more of the combined voting
power of the then outstanding shares of Voting Stock; or
c. is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of Voting Stock that were at any time within
the two-year period immediately prior to the date in question beneficially owned
by any Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not involving
a public offering within the meaning of the Securities Act of 1933.
4. A person shall be a "Beneficial Owner" of any Voting Stock:
a. which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly;
b. which such person or any of its Affiliates or Associates
has (i) the right to acquire (whether such right is exercisable immediately or
only after the passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or-options, or otherwise, or (ii) the right to vote or direct the vote
pursuant to any agreement, arrangement or understanding; or
c. which is beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or Associates has
any agreement, arrangement or
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understanding for the purpose of acquiring, holding, voting or disposing of any
shares of Voting Stock.
5. For the purposes of determining whether a person is an Interested
Shareholder pursuant subparagraph 3 of this paragraph C, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of subparagraph 4 of this paragraph C.
6. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934.
7. "Subsidiary" means any corporation more than fifty percent (50%)
of whose outstanding stock having ordinary voting power in the election of
directors is owned, directly or indirectly, by the Bank or by a Subsidiary
thereof or by the Bank and one or more Subsidiaries thereof; provided, however,
that for the purposes of the definition of Interested Shareholder set forth in
subparagraph 3 of this paragraph C, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Bank.
8. "Disinterested Director" means any member of the Board of
Directors of the Bank who is unaffiliated with, and not a nominee of, the
Interested Shareholder and was a member of the Board prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor of a
Disinterested Director who is unaffiliated with, and not a nominee of, the
Interested Shareholder and who is recommended to succeed a Disinterested
Director by a majority of Disinterested Directors then on the Board of
Directors.
9. "Fair Market Value" means:
a. in the case of stock, the highest closing sale price during
the 30-day period immediately preceding the date in question of a share of such
stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if
such stock is not quoted on the Composite Tape on the New York Stock Exchange,
or, if such stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934 on
which such stock is listed, or, if such stock is not listed on any such
exchange, on the principal United States securities exchange registered under
the Securities Exchange Act of 1934 on which such stock is listed, or, if such
stock is not listed on any such exchange, of a share of such stock. Such price
shall be the higher of (1) the closing sales price or bid quotation with respect
to a share of such stock during the 30-day period preceding the date in question
on the National Association of Securities Dealers, Inc. Automated Quotations
System or any system then in use, or if no such quotations are available, the
fair market value on the date in question of a share of such stock as determined
by a majority of the Disinterested Directors in good faith; and (2) in the case
of stock of any class or series which is not traded on any United States
registered securities exchange nor in the over-the-counter market or in the case
of property other than cash or stock, the fair market value of such
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property on the date in question as determined by a majority of the
Disinterested Directors in good faith.
10. In the event of any Business Combination in which the Bank
survives, the phrase "any consideration other than cash" as used in subparagraph
2.a. of paragraph B hereof shall include the shares of common stock and/or the
shares of any class or series of outstanding Voting Stock other than common
stock of the Bank retained by the holders of such shares.
11. "Announcement Date" means the date of first public announcement
of the proposed Business Combination.
12. "Consummation Date" means the date of consummation of a Business
Combination.
13. "Determination Date" means the date on which the Interested
Shareholder became an Interested Shareholder.
D. A majority of the Disinterested Directors of the Bank shall have the
power and duty to determine, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine compliance with this
Section10, including, without limitation, (i) whether a person is an Interested
Shareholder, (ii) the number of shares of Voting Stock beneficially owned by a
person, (iii) whether a person is an Affiliate or Associate of another person,
(iv) whether the requirements of paragraph B hereof have been met with respect
to any Business Combination, and (v) whether the assets which are the subject of
any Business Combination have, or the consideration to be received for the
issuance or transfer of securities by the Bank or any subsidiary in any
Business Combination has, an aggregate Fair Market Value of $100,000 or more.
The good faith determination of a majority of the Disinterested Directors on
such matters shall be conclusive and binding for all purposes of this Section
10.
E. Nothing contained in this Section 10 shall be construed to relieve any
Interested Shareholder from any fiduciary obligation imposed by law.
F. This Section 10 may be amended only by the vote of holders of two-
thirds of the Voting Stock, unless the amendment is approved by a majority of
the Disinterested Directors, in which event it may be amended by the vote of
holders of a majority of the Voting Stock.
SECTION 11. STANDARDS FOR BOARD OF DIRECTORS EVALUATION OF OFFERS. The
Board of Directors of the Bank, when evaluating any offer of another person (as
defined in Section 10 hereof) to (i) make a tender or exchange offer for any
equity security of the Bank, (ii) merge or consolidate the Bank with another
institution, or (iii) purchase or otherwise acquire all or substantially all of
the properties and assets of the Bank, shall, in connection with the exercise of
its judgment in determining what is in the best interests of the Bank and its
stockholders, give due consideration to all relevant factors, including without
limitation the social and economic
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effects of acceptance of such offer on (a) its depositors, borrowers and
employees and on the communities in which the Bank operates or is located and
(b) the ability of the bank to fulfill the objectives of a Massachusetts-
chartered co-operative bank under applicable statues and regulations.
SECTION 12. DIRECTORS. The Bank shall be under the direction of a Board
of Directors. The number of directors, as stated in the Bank's Bylaws, shall not
be less than seven or more than twenty-five.
The Board of Directors or the stockholders may adopt, alter, amend or
repeal the Bylaws of the Bank. Such action by the Board of Directors shall
require the affirmative vote of at least two-thirds of the directors then in
office at a duly constituted meeting of the Board of Directors called expressly
for such purpose. Such action by the stockholders shall require the affirmative
vote of at least two-thirds of the total votes eligible to be cast by
stockholders at a duly constituted meeting of stockholders called expressly for
such purpose.
SECTION 13. AMENDMENT OF CHARTER. No amendment, addition, alteration,
change or repeal of this Charter shall be made, unless such is first proposed by
the Board of Directors of the Bank and thereafter approved by the stockholders
by the affirmative vote of at least two-thirds of the total votes eligible to be
cast at a legal meeting. Any amendment, addition, alteration, change or repeal
so acted upon shall be effective on the date it is filed with the Secretary of
State of the Commonwealth of Massachusetts or on such other date as the
Secretary of State may specify.
SECTION 14. CUMULATIVE VOTING LIMITATION. Stockholders shall not be
permitted to cumulate their votes for the election of directors.
SECTION 15. CALL FOR SPECIAL MEETINGS. Special meeting of stockholders
relating to changes in control of the Bank or amendments to its charter shall be
called only by the Chairperson of the Board upon direction of a majority of the
Board of Directors.
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EXHIBIT II
BYLAWS
OF
THE MASSACHUSETTS CO-OPERATIVE BANK
ARTICLE I
ORGANIZATION
The name of this Bank shall be "The Massachusetts Co-operative Bank." Its
main office shall be in the City of Boston, Massachusetts, or such other
location as the Board of Directors may designate subject to applicable law.
The Bank shall conduct the business of a co-operative bank and shall have and
may exercise all the powers, privileges and authority now or hereafter conferred
by applicable law.
ARTICLE II
STOCKHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the stockholders for
election of directors and other purposes shall be held on the third Wednesday in
January at 5:30 p.m., commencing with January 20, 1999, at the main office of
the Bank, unless a different hour or place within Massachusetts (or if permitted
by applicable law, elsewhere in the United States) is fixed by the Board of
Directors. The purposes for which the annual meeting is to be held, in addition
to those prescribed by law, by the Charter or by these Bylaws, may be specified
by the Board of Directors. If no annual meeting has been held on the date fixed
above, a special meeting in lieu thereof may be held, or there may be action by
unanimous written consent of the stockholders on matters to be voted on at the
annual meeting, and such special meeting or written consent shall have for the
purposes of these Bylaws or otherwise all the force and effect of an annual
meeting.
SECTION 2. SPECIAL MEETINGS. Special meeting of the stockholders for any
purpose or purposes may be called at any time only by the chairperson of the
board or the president at the direction of a majority of the directors then in
office unless otherwise provided by law.
SECTION 3. NOTICE OF MEETINGS. A written notice of all regular and
special meetings of stockholders shall state the place, date, hour and purposes
of such meetings and a brief statement of the nature of the business to be acted
upon at such meeting, and shall be given by the clerk or an assistant clerk (or
other person authorized by these Bylaws or by law) by mailing notice thereof, at
least seven days before the meeting, to each stockholder as of the record date
for the meeting. Such notice shall be published in one or more newspapers in the
city or town wherein the main office of the Bank is located. When any
stockholders' meeting, either annual or special, is adjourned for thirty (30)
days or more, notice of the adjourned meeting shall
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be given as in the case of an original meeting. It shall not be necessary to
give any notice of the time and place of any meeting adjourned for less than
thirty days or of the business to be transacted thereat, other than an
announcement at the meeting at which such adjournment is taken.
SECTION 4. QUORUM. The holders of a majority of all stock issued,
outstanding, and entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If a quorum is not present, a
majority of the shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. The stockholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to constitute less than a
quorum.
SECTION 5. VOTING AND PROXIES. Stockholders shall have one vote for each
share of stock entitled to vote owned by them of record according to the books
of the Bank, and no vote for a fractional share. Stockholders may vote either in
person or by written proxy dated not more than six months before the meeting
named therein. No proxy shall be valid after the final adjournment of such
meeting. Proxies shall be filed with the clerk of the meeting, or of any
adjournment thereof, before being voted. Except as otherwise limited therein,
proxies shall entitle the persons authorized thereby to vote at any adjournment
of such meeting, but they shall not be valid after final adjournment of such
meeting. A proxy with respect to stock held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to exercise of
the proxy the Bank receives a specific written notice to the contrary from any
one of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid unless challenged at or prior to its exercise, and the
burden or proving invalidity shall rest on the challenger.
SECTION 6. ACTION OF MEETING. When a quorum is present, any matter before
the meeting shall be decided by vote of the holders of a majority of the shares
of stock voting on such matter, except where a larger vote is required by law,
by the Charter or by these Bylaws. Any election by stockholders shall be
determined by a plurality of the votes cast, except where a larger vote is
required by law, by the Charter or by these Bylaws. No ballot shall be required
for any election unless requested by a stockholder entitled to vote in the
election. The Bank shall not directly or indirectly vote any share of its own
stock, provided however, that no provision of these Bylaws shall be construed to
limit the voting rights and powers relating to shares of stock held pursuant to
a plan which is intended to be an "employee stock ownership plan" as defined in
section 409A of the Internal Revenue Code, as now or hereafter in effect.
SECTION 7. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting or any adjournment.
The number of inspectors shall be either one or three. Any such appointment
shall not be altered at the meeting. If inspectors of
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election are not so appointed, the chairman of the board or the president may,
or on the request of not fewer than ten percent of the votes represented at the
meeting shall, make such appointment at the meeting. If appointed at the
meeting, the majority of the votes present shall determine whether one or three
inspectors are to be appointed. In case any person appointed as inspector fails
to appear or fails or refuses to act, the vacancy may be filled by appointment
by the board of directors in advance of the meeting, or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by the Act or regulations of the Commissioner,
the duties of such inspectors shall include: determining the number of shares
and the voting power of each share, the shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
receiving votes, ballots, or consents; hearing and determining all challenges
and questions in any way arising in connection with the rights to vote; counting
and tabulating all votes or consents; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. The business and affairs of the Bank shall be
managed by a Board of Directors who may exercise all the powers of the Bank
except as otherwise provided by law, by the Charter or by these Bylaws.
SECTION 2. COMPOSITION AND TERM. The Board of Directors shall be
composed of: those persons serving as directors of the Bank immediately prior to
the effective date of these Bylaws until the respective expiration dates of
their terms and until their successors are elected and qualified; and (ii) as
such terms expire, those persons who are elected as directors from time to time
as provided herein. At least a majority of the directors shall be citizens of
the Commonwealth of Massachusetts and resident therein. The directors shall be
elected, in such manner as is provided herein, by their stockholders at their
annual meeting or at a special meeting called for the purpose. The Board of
Directors shall consist of not less than seven (7) nor more than twenty-five
(25) individuals, the exact number to be fixed from time to time by a two-thirds
vote of the stockholders at an annual meeting or special meeting in lieu
thereof, and until determined by the stockholders at the first annual meeting of
the converted Bank shall consist of eleven (11) individuals. The Board of
Directors shall be divided into three classes as nearly equal in number as
possible. The appropriate class of directors shall be elected annually by the
holders of the Bank's common and voting preferred stock, if any. Except as
otherwise provided in these Bylaws, the members of each class shall be elected
for a term of three years and until their successors are elected and qualified.
A Director shall be eligible for reelection.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw at the same place
as the annual meeting of stockholders, or the special meeting held in lieu
thereof, following such meeting of stockholders.
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The Board of Directors may provide, by resolution, the time and place for the
holding of regular meetings without other notice than such resolution. The Board
of Directors shall meet at least once in each calendar month at a place or
places fixed from time to time by the Board of Directors.
SECTION 4. QUALIFICATION. Each director shall have such qualifications as
are required by applicable law. Each director shall own, in his own right and
free of any lien or encumbrance, common stock of the Bank or of a company owning
seventy-five percent of the stock of the Bank, having a par value or a fair
market value on the date the person became a director of not less than one
thousand dollars. Any director who ceases to be the owner of the required number
of shares of stock, or who becomes in any other manner disqualified, shall
vacate his office forthwith. Each director, when appointed or elected, shall
take an oath that he or she will faithfully perform the duties of his or her
office and that he or she is the owner, in his or her own right and free from
any lien or encumbrance, of the amount of stock required by this section. The
oath shall be taken before a Notary Public or Justice of the Peace, who is not
an officer of such Bank, and a record of the oath shall be made a part of the
records of such Bank.
SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the chairperson of the board,
the president, or a majority of the directors. The persons authorized to call
special meetings of the Board of Directors may fix the place for holding any
special meeting of the Board of Directors elected by such persons.
SECTION 6. NOTICE. Notice of any special meeting shall be given to each
director in person or by telephone or sent to his business or home address by
telegram at least 24 hours in advance of the meeting or by written notice mailed
to his business or home address at least 48 hours in advance of such meeting.
Such notice shall be deemed to be delivered when deposited in the mail so
addressed, with postage thereon prepaid if mailed, or when delivered to the
telegraph company if sent by telegram. Any director may waive notice of any
meeting by a writing filed with the clerk of the meeting. The attendance of a
director at a meeting shall constitute a waiver of notice of such meeting except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 7. QUORUM. A majority of the number of directors then in office
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time.
When any Board of Directors' meeting either regular or special is adjourned for
30 days or more, notice of the adjourned meeting shall be given as in the case
of an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for less than 30 days or of the business to
be transacted thereat, other than an announcement at the meeting at which such
adjournment is taken.
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SECTION 8. MANNER OF ACTING. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless a greater number is prescribed by governing law, by the
Charter or by these Bylaws.
SECTION 9. ACTION BY CONSENT. Any action required or permitted to be
taken by the Board of Directors at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors.
SECTION 10. RESIGNATION. Any director may resign at any time by sending a
written notice of such resignation to the main office of the Bank addressed to
the chairperson of the board or the president. Unless otherwise specified
therein such resignation shall take effect upon receipt thereof by the
chairperson of the board or the president.
SECTION 11. REMOVAL. Any director may be removed, but only for cause, at
the special meeting of stockholders by the affirmative vote of at least two-
thirds (2/3) in number of shares of the stockholders present in person or
represented by proxy at such meeting and entitled to vote or the election of
such director; provided, however, that notice of intention to act upon such
matter shall have been given in the notice calling such meeting.
SECTION 12. VACANCIES. Any vacancy occurring on the Board of Directors as
a result of resignation, removal or death may be filled by the affirmative vote
of a majority of the remaining directors. A director elected to fill such a
vacancy shall be elected to serve until the next election of directors by the
stockholders. Any directorship to be filled by reason of an increase in the
number of directors may be filled by election by the Board of Directors for a
term of office continuing until the next election of directors by the
stockholders.
SECTION 13. COMPENSATION. The members of the Board of Directors and the
members of either standing or special committees may be allowed such
compensation as the Board of Directors may determine.
SECTION 14. PRESUMPTION OF ASSENT. A director of the Bank who is present at
a meeting of the Board of Directors at which action on any Bank matter is taken
shall be presumed to have assented to the action taken unless his or her dissent
or abstention shall be entered in the minutes of the meeting or unless he or she
shall file a written dissent to such action with the person acting as the clerk
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the clerk of the Bank within five days after the date of the
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
SECTION 15. COMMITTEES. The Board of Directors, by vote of a majority of
the directors then in office, may elect from its number, not less than three
members in each case to serve as an Executive Committee. The Board of Directors
may also elect a Security Committee, an Audit Committee, Finance Committee or
other committees and may delegate thereto some or all of its powers except those
which by law, by the Charter, or by these Bylaws may not be
5
<PAGE>
delegated. Except as the Board of Directors may otherwise determine, any such
committee may make rules for the conduct of its business, but unless otherwise
provided by the Board of Directors or in such rules, its business shall be
conducted so far as possible in the same manner as is provided by these Bylaws
for the Board of Directors. All members of such committees shall hold such
offices at the pleasure of the Board of Directors. The Board of Directors may
abolish any such committee at any time, subject to any applicable requirements
of law. Any committee to which the Board of Directors delegates any of its
powers or duties shall keep records of its meetings and shall report its action
to the Board of Directors. The Board of Directors shall have power to rescind
any action of any committee, but no such rescission shall have retroactive
effect.
SECTION 16. NOMINATING COMMITTEE. The chairperson of the board shall
appoint a nominating committee for selecting nominees for election as directors.
Except in the case of a management nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the President at least 20 days prior to the date
of the annual meeting. Upon delivery, such nominations shall be posted in a
conspicuous place in each office of the Bank. No nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by shareholders are made in writing and
delivered to the president of the Bank at least five days prior to the date of
the annual meeting. Upon delivery such nominations shall be posted in a
conspicuous place in each office of the Bank. Ballots bearing the names of all
persons nominated by the nominating committee and by shareholders shall be
provided for use at the annual meeting. However, if the nominating committee
shall fail or refuse to act at least twenty days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any shareholder
entitled to vote and shall be voted upon.
SECTION 17. REPORT ON TRANSACTIONS. At intervals of not more than two
months each, the treasurer or any other officer designated by the Board of
Directors shall submit to a meeting of the Board of Directors a written report,
over his signature, for the period running from the closing date of the last
report to a date not more than eighteen days prior to the date of the meeting at
which the report is submitted. Such report shall be filed with the records of
the meeting and shall be retained for a period of six years from the date of the
meeting; such report shall cover the transactions required by Chapter 172,
Section 16 of the Massachusetts General Laws.
ARTICLE IV
OFFICERS
SECTION 1. ENUMERATION. The officers of the Bank shall consist of a
president, a treasurer, a clerk or secretary, and such other officers, including
a chairperson of the board, one or more vice presidents and such other officers
as the Board of Directors may determine as necessary for the management of the
Bank.
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SECTION 2. ELECTION. The clerk or secretary shall be elected by the
stockholders at their annual meeting or at a special meeting of the stockholders
duly called for the purpose. The president shall be elected by and from the
Board of Directors and shall be the chairperson thereof unless the board
delegates a director in lieu of the president to be chairperson. The Board of
Directors shall elect the treasurer and such other officers as may be required
or permitted by law or these Bylaws. Other officers may be chosen by the Board
of Directors at such first meeting of the Board of Directors or at any other
meeting.
SECTION 3. QUALIFICATION. No officer need be a stockholder. Any two
offices may be held by any person. The clerk shall be a resident of the
Commonwealth of Massachusetts unless the Bank has a resident agent appointed for
the purpose of service of process. Any officer shall be required by the Board of
Directors to give bond for the faithful performance of his or her duties in such
amount as determined by the Board of Directors.
SECTION 4. TENURE. Except as otherwise provided by law, by the Charter or
by these Bylaws, the president and treasurer shall hold office until the first
meeting of the Board of Directors following the next annual meeting of
stockholders and until their respective successors are chosen and qualified. The
clerk shall hold office until the next annual meeting of stockholders and until
his or her successor is chosen and qualified. All other officers shall hold
office until the first meeting of the Board of Directors following the next
annual meeting of stockholders and until their successors are chosen and
qualified, or for such shorter term as the Board of Directors may fix at the
time such officers are chosen. Any officer may resign by delivering his written
resignation to the Bank at its main office addressed to the president, clerk and
such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The Board of Directors may authorize the Bank to enter into an
employment contract with any officer in accordance with governing law or
regulation, but no such contract right shall impair the right of the Board of
Directors to remove any officer at any time in accordance with section 5 of this
Article IV.
SECTION 5. REMOVAL. The Board of Directors may remove any officer with or
without cause by a vote of two-thirds of the entire number of directors then in
office; provided, however, that such removal, other than for cause, shall be
without prejudice to the contract rights, if any, of the persons involved.
SECTION 6. VACANCIES. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 7. CHIEF EXECUTIVE OFFICER. The chief executive officer shall,
subject to the direction of the Board of Directors, have general supervision and
control of the Bank's business.
7
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SECTION 8. PRESIDENT AND VICE PRESIDENTS. The president shall have such
powers and shall perform such duties as the Board of Directors may from time to
time designate and shall serve as the chief executive officer of the Bank. Any
vice president shall have such powers and shall perform such duties as the Board
of Directors may from time to time designate.
SECTION 9. TREASURER AND ASSISTANT TREASURERS. The treasurer shall,
subject to the direction of the Board of Directors and the Executive Committee,
have general charge of the financial affairs of the Bank and shall cause to be
kept accurate books of account. He or she shall have custody of all funds,
services and valuable documents of the Bank, except as the Board of Directors
may otherwise provide. Any assistant treasurer shall have such powers and
perform such duties as the Board of Directors may from time to time designate.
SECTION 10. CLERK AND ASSISTANT CLERKS. The clerk shall keep a record of
the meetings of stockholders and meetings of the Board of Directors. In the
absence of the clerk from any meeting of stockholders, an assistant clerk if one
be elected, otherwise a temporary clerk designated by the person presiding at
the meeting, shall perform the duties of the clerk.
SECTION 11. OTHER POWERS AND DUTIES. Subject to these Bylaws, each officer
of the Bank shall have in addition to the duties and powers specifically set
forth in these Bylaws, such duties and powers as are customarily incident to,
his office, and such duties and powers as may be designated from time to time by
the Board of Directors.
ARTICLE V
CAPITAL STOCK
SECTION 1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a
certificate of the capital stock of the Bank in such form as may from time to
time be prescribed by the Board of Directors. Such certificate shall be signed
by the president or a vice president and by the treasurer or an assistant
treasurer. Such signatures may be facsimile if the certificate is signed by a
transfer agent, or by a registrar, other than a director, officer or employee of
the Bank. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Bank with the same effect as if
he were such officer at the time of its issue.
SECTION 2. TRANSFERS. Subject to any restrictions on transfer, shares of
stock may be transferred on the books of the Bank by the surrender to the Bank's
transfer agent of the certificate therefor properly endorsed or accompanied by a
written assignment and power of attorney properly executed with transfer stamps
(if necessary) affixed, and with such proof of the authenticity of signature as
the transfer agent may reasonably require.
SECTION 3. RECORD HOLDERS. Except as may be otherwise required by law, by
the Charter or by these Bylaws, the Bank shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, include the payment of dividends
8
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and the right to vote with respect thereto, regardless of any transfer, pledge
or other disposition of such stock, until the shares have been transferred on
the books of the Bank in accordance with the requirements of these Bylaws. It
shall be the duty of each stockholder to notify the Bank of his post office
address.
SECTION 4. RECORD DATE. The Board of Directors may fix in advance a
time of not more than sixty days preceding the date of any meeting of
stockholders, or the date for the payment of any dividend or the making of any
distribution to stockholders, or the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders having the right to notice of and to vote at
such meeting, and any adjournment thereof, or the right to receive such dividend
or distribution or the right to give such consent or dissent. In such case only
stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the Bank after the record
date. Without fixing such record date the Board of Directors may for any of such
purposes close the transfer books for all or any part of such period. If no
record date is fixed and the transfer books are not closed, (a) the record date
for determining stockholders having the right to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, and (b) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors-acts with respect thereto.
SECTION 5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
SECTION 6. ISSUANCE OF CAPITAL STOCK. The Board of Directors shall
have the authority, subject to applicable law, to issue or reserve for issue
from time to time the whole or any part of the capital stock of the Bank which
may be authorized from time to time, to such persons or organizations, for such
consideration whether cash, property, services or expenses, and on such terms as
the Board of Directors may determine, including without limitation the granting
of options, warrants, or conversion or other rights to subscribe to said capital
stock.
SECTION 7. DIVIDENDS. Subject to applicable law, the Charter and
these Bylaws, the Board of Directors may from time to time declare, and the Bank
may pay, dividends on the outstanding shares of its capital stock.
ARTICLE VI
CERTAIN OPERATING PROVISIONS
SECTION 1. WITHDRAWALS. Any notice by a depositor of his intention
to withdraw the whole or any part of his deposit or accounts filed with the Bank
pursuant to a requirement of notice under applicable provisions of law, shall be
null and void if the depositor does not, within twenty-one days after notice
from the Bank that funds are available for such withdrawal,
9
<PAGE>
withdraw the funds made available for such purpose. Withdrawals may be made by
presentation by the depositor, his or her legally appointed representative, or
another person, of such instruments, in writing or otherwise, as may be from
time to time approved by the Board of Directors.
SECTION 2. TRANSFER. Deposits or accounts may be transferred by the owner
to one or more other persons, subject to applicable provisions of law, and a
charge therefor may be imposed as the Board of Directors from time to time may
prescribe, provided at such charge shall not exceed the maximum amount permitted
by law. No transfer shall be valid as against the Bank until recorded on the
books of the Bank.
SECTION 3. LOANS AND INVESTMENTS. Funds of the Bank shall be loaned or
invested in such manner, upon such terms and conditions, in such amounts and at
such rates of interest, as from time to time may be authorized or approved by
the Board of Directors or appropriate officers of the Bank in accordance with
applicable provisions of law.
SECTION 4. ATTORNEYS. The president may appoint one or more attorneys to
examine titles to property offered as security for loans and to prepare papers
of a legal nature required in connection therewith. The Board of Directors or
the president may approve the appointment of the same or such other attorneys in
general or special matters, as from time-to time the board or such officer may
deem necessary or advisable.
SECTION 5. EXECUTION OF INSTRUMENTS. All conveyances of real estates and
all assignments, extensions, discharges and releases in whole or in part of
mortgages, and all other instruments to which the Bank may be a party, shall be
executed by the president, the treasurer or by such other officer or officers as
from time to time may be authorized by the Board of Directors.
SECTION 6. CHARGES ON OVERDUE PAYMENT. The Board of Directors shall fix
the rate of charges to be imposed upon delinquent payments due the Bank within
the limits prescribed by law and shall determine the circumstances under which
and the periods in which such charges may be waived by the president, a vice
president, the treasurer or other officer authorized by the Board of Directors.
SECTION 7. BANK DAY. The regular monthly bank day of the Bank shall be
the last business day of each month. Monies due the Bank may be collected by
the Treasurer, or other persons duly empowered by the Board of Directors, upon
any other business day of the month.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 1. FISCAL YEAR. Except as otherwise determined by the Board of
Directors, the fiscal year of the Bank shall be the twelve months ending
December 31 of each
10
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year. The Bank shall be subject to an annual audit as of the end of its fiscal
year by independent public accountants appointed by the Board of Directors.
SECTION 2. SEAL. The Board of Directors shall have power to adopt and
alter the seal of the Bank.
SECTION 3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the Bank in
the ordinary course of its business without Board of Directors action may be
executed on behalf of the Bank by the president, any vice president, the
treasurer or any other officer, employee, or agent of the Bank as the Board of
Directors may authorize.
SECTION 4. INDEMNIFICATION. The Bank shall indemnify each director or
officer of the Bank to the fullest extent now or hereafter permitted by law
against all expenses (including attorneys' fees and disbursements), judgments,
fees and amounts paid in settlement actually and reasonably incurred by him or
her in connection with any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative in which he
or she is or is threatened to be made a party by reason of the fact that he or
she is or was a director, officer, employee or agent of the Bank or of a
subsidiary of the Bank, or is or was a director, custodian, administrator,
committeeman or fiduciary of any employee benefit plan established and
maintained by the Bank or by a subsidiary of the Bank, or is or was serving
another enterprise in any such capacity at the written request of the Bank. To
the extent authorized at any time by the Board of Directors of the Bank, the
Bank may similarly indemnify other persons against liability incurred in any
capacity, or arising out of any status, of the character described in the
immediately preceding sentence. At the discretion of the Board of Directors, any
Indemnification hereunder may include payment by the Bank of expenses incurred
in defending a civil or criminal action or proceeding in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by the
person indemnified to repay such payment if he shall be adjudicated to be not
entitled to indemnification under this section or applicable laws. In no event,
however, shall the Bank indemnify any director, officer, or other person
hereunder with respect to any matter as to which he or she shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Bank. The Bank may
purchase and maintain insurance to protect itself and any present or former
director, officer or other person against any liability of any character
asserted against and incurred by the Bank or any such director, officer or other
person in any capacity, or arising out of any status, whether or not the Bank
would have the power to indemnify such person against such liability by law or
under the provisions of this Section 4. The provisions of this Section 4 shall
be applicable to persons who shall have ceased to be directors or officers of
the Bank, and shall inure to the benefit of the heirs, executors and
administrators of persons entitled to indemnify hereunder. Nothing herein shall
be deemed to limit the Bank's authority to indemnify any person pursuant to any
contract or otherwise.
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SECTION 5. VOTING OF SECURITIES. Unless otherwise provided by the Board
of Directors, the president, any vice president or the treasurer may waive
notice of and act on behalf of the Bank, or appoint another person or persons to
act as proxy or attorney in fact for the Bank with or without discretionary
power and/or power of substitution, at any meeting of stockholders or
shareholders of any other organization, any of whose securities are held by the
Bank.
SECTION 6. RESIDENT AGENT. The Board of Directors may appoint a resident
agent upon whom legal process may be served in any action or proceeding against
the Bank. Said resident agent shall be either an individual who is a resident of
and has a business address in Massachusetts or a corporation organized under the
laws of any other state of the United States, which has qualified to do business
in, and has an office in, Massachusetts.
SECTION 7. BANK RECORDS. The original, or attested copies, of the Charter,
Bylaws and records of all meetings of the directors or stockholders and the
stock and transfer records, which shall contain the names of all stockholders
and the record address and the amount of stock held by each, shall be kept in
Massachusetts at the main office of the Bank, or at an office of its transfer
agent, clerk or resident agent.
SECTION 8. CHARTER. All references in these Bylaws to the Charter shall
be deemed to refer to the Charter of the Bank, as amended and in effect from
time to time.
SECTION 9. AMENDMENTS. These Bylaws may be altered, amended or repealed
as provided in the Charter.
SECTION 10. EFFECTIVE DATE. These Bylaws shall become effective on the
date of the conversion of the Bank to a Massachusetts-chartered stock form co-
operative bank.
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[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE APPEARS HERE]
Exhibit 5.0
September 24, 1998
Board of Directors
Massachusetts Fincorp, Inc.
1442 Dorchester Avenue
Boston, Massachusetts 02122
Re: The issuance of up to 824,149 shares of
Massachusetts Fincorp, Inc. Common Stock
Lady and Gentlemen:
You have requested our opinion concerning certain matters of Delaware law
in connection with the conversion of The Massachusetts Co-operative Bank (the
"Bank"), a Massachusetts co-operative bank, from the mutual to the stock form of
ownership (the "Conversion"), and the related subscription offering, direct
community offering and syndicated community offering (the "Offerings") by
Massachusetts Fincorp, Inc., (the "Company"), a Delaware corporation and the
proposed holding company for the Bank, of up to 682,525 shares of its common
stock, par value $.01 per share ("Common Stock") (784,904 shares if the
estimated valuation range is increased up to 15% to reflect changes in market
and financial conditions following commencement of the Offerings) and the
issuance of 34,125 shares to Massachusetts Co-operative Charitable Foundation,
(the "Foundation") a privately-owned charitable foundation formed by the
Company, (39,245 shares if the estimated valuation range is increased up to 15%
to reflect changes in market and financial conditions following commencement of
the Offerings).
We understand that the Company will contribute funds to a wholly-owned
subsidiary of the Company (the "Subsidiary") which Subsidiary will loan to the
trust for the Bank's Employee Stock Ownership Plan (the "ESOP") the funds the
ESOP trust will use to purchase shares of Common Stock for which the ESOP trust
subscribes pursuant to the Offerings and for purposes of rendering the opinion
set forth in paragraph 2 below, we assume that: (a) the Board of Directors of
the Company (the "Board") has duly authorized the capital contribution to the
Subsidiary for purposes of making a loan to the ESOP trust (the "Loan"); (b) the
Board of Directors of the Subsidiary has duly authorized the Loan to the ESOP
trust; (c) the ESOP serves
<PAGE>
Board of Directors
Massachusetts Fincorp, Inc.
September 24, 1998
Page 2
a valid corporate purpose for the Company; (d) the Loan will be made at an
interest rate and on other terms that are fair to the Subsidiary; (e) the terms
of the Loan will be set forth in customary and appropriate documents including,
without limitation, a promissory note representing the indebtedness of the ESOP
trust to the Subsidiary as a result of the Loan; and (f) the closing for the
Loan and for the sale of Common Stock to the ESOP trust will be held after the
closing for the sale of the other shares of Common Stock sold in the Offerings
and the receipt by the Company of the proceeds thereof and the contribution by
the Company to the Subsidiary of the funds sufficient to make the Loan.
In connection with your request for our opinion, you have provided to us
and we have reviewed the Company's certificate of incorporation filed with the
Delaware Secretary of State on July 10, 1998 (the "Certificate of
Incorporation"); the Company's Bylaws; the Company's Registration Statement on
Form SB-2, as initially filed with the Securities and Exchange Commission on
July 30, 1998 and as amended on September 24, 1998 (the "Registration
Statement"); a consent of the sole incorporator of the Company; the plan of
Conversion; the gift instrument whereby shares will be granted to the
Foundation; the ESOP trust agreement and the ESOP Loan agreement; resolutions of
the Board concerning the organization of the Company, the Offerings and
designation of a pricing committee of the Board (the "Pricing Committee"), and
the form of stock certificate approved by the Board to represent shares of
Common Stock. We have also been furnished a certificate of the Delaware
Secretary of State certifying the Company's good standing as a Delaware
corporation. Capitalized terms used but not defined herein shall have the
meaning given them in the Certificate of Incorporation.
In rendering this opinion, we have relied upon the opinion of Morris,
Nichols, Arsht & Tunnell as to matters of Delaware law upon which opinion we
believe we are justified in relying. We have examined the opinion of Morris,
Nichols, Arsht & Tunnell which opinion is in form satisfactory to us.
Based upon and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Company has been duly organized and is validly existing in good
standing as a corporation under the laws of the State of Delaware.
2. Upon the due adoption by the Pricing Committee of a resolution fixing
the number of shares of Common Stock to be sold in the Offerings, the Common
Stock to be issued in the Offerings (including the shares to be issued to the
ESOP trust) and the shares to be granted to a charitable foundation to be
established by the Company in connection with the Conversion will be duly
authorized and, when such shares are sold and paid for or granted (in the case
of the
<PAGE>
Board of Directors
Massachusetts Fincorp, Inc.
September 24, 1998
Page 3
Foundation) in accordance with the terms set forth in the prospectus which is
included in the Registration Statement and such resolution of the Pricing
Committee or, in the case of the Foundation, and certificates representing such
shares in the form provided to us are duly and properly issued, will be validly
issued, fully paid and nonassessable.
The following provisions of the Certificate of Incorporation may not be
given effect by a court applying Delaware law, but in our opinion the failure to
give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and nonassessable status of the Common Stock:
1. (a) Subsections C.3 and C.6 of Article FOURTH and Section D of
Article EIGHTH, which grant the Board the authority to construe
and apply the provisions of those Articles, subsection C.4 of
Article FOURTH, to the extent that subsection obligates any
person to provide to the Board the information such subsection
authorizes the Board to demand, and the provision of Subsection
C.7 of Article EIGHTH empowering the Board to determine the Fair
Market Value of property offered or paid for the Company's stock
by an Interested Stockholder, in each case to the extent, if any,
that a court applying Delaware law were to impose equitable
limitations upon such authority; and
(b) Article NINTH, which authorizes the Board to consider the effect
of any offer to acquire the Company on constituencies other than
stockholders in evaluating any such offer.
We assume no obligation to advise you of any events that occur subsequent
to the date of this opinion.
Very truly yours,
MULDOON, MURPHY & FAUCETTE
/s/ Muldoon, Murphy & Faucette
<PAGE>
EXHIBIT 5.1
[Morris, Nichols, Arsht & Tunnell Letterhead]
September 18, 1998
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue, N.W.
Washington, DC 20016
Ladies and Gentlemen:
You have requested our opinion concerning certain matters of Delaware
law in connection with the conversion of The Massachusetts Co-operative
Bank, a Massachusetts chartered co-operative bank (the "Bank"), from the mutual
form of ownership to stock form of ownership (the "Conversion") and the
subscription and direct community offering (the "Offering"), in connection with
the Conversion, by Massachusetts Fincorp, Inc., a Delaware corporation (the
"Company"), of up to 784,904 shares of its common stock, par value $.01 per
share (the "Common Stock").
In connection with your request for our opinion, you have provided to
us, and we have reviewed, the Company's certificate of incorporation (the
"Certificate of Incorporation"), its bylaws, the Registration Statement filed
with the Securities and Exchange Commission in connection with the Offering (the
"Registration Statement"), including the prospectus constituting a part thereof
(the "Prospectus"), a consent of the sole incorporator of the Company,
resolutions of the Board of Directors of the Company (the "Board") concerning,
inter alia, the organization of the Company, the Offering and the designation
- ----- ----
of a Pricing Committee of the Board (the "Pricing Committee")and the form of
stock certificate approved by the Board to represent shares of Common Stock. We
have also obtained a certificate of the Delaware Secretary of State as to the
<PAGE>
Muldoon, Murphy & Faucette
September 18, 1998
Page 2
Company's good standing as Delaware corporation. Capitalized terms used but not
defined herein shall have the meanings given them in the Certificate of
Incorporation.
We understand that a wholly-owned subsidiary of the Company (the
"Subsidiary") will loan to the Bank's Employee Stock Ownership Plan (the "ESOP")
the funds the ESOP will use to purchase the shares of Common Stock for which the
ESOP has subscribed as part of the Offering. The Subsidiary will receive funds
necessary to make such loan by way of a capital contribution by the Company to
the Subsidiary (the "Capital Contribution"). In this regard, we have assumed,
for purposes of rendering the opinion set forth in paragraph 2 below, that: (a)
the board of directors of the Subsidiary has duly authorized the loan to the
ESOP (the "Loan"); (b) the Loan serves a valid corporate purpose of the
Subsidiary and the Capital Contribution serves a valid corporate purpose of the
Company; (c) the Loan will be made at an interest rate and on other terms that
are fair to the Subsidiary; (d) the terms of the Loan will be set forth in
customary and appropriate documents including, without limitation, a promissory
note representing the indebtedness of the ESOP to the Subsidiary as a result of
the Loan; and (e) the Capital Contribution, the closing for the Loan and for the
sale of Common Stock to the ESOP will be held after the closing for the sale of
the other shares of Common Stock sold in the Offering and the receipt by the
Company of the proceeds thereof.
We call your attention to the fact that the opinions expressed herein
are limited in all respects to matters of Delaware corporate law. We express no
opinion concerning the requirements of any other law, rule or regulation, state
or federal, applicable to the Bank, the Company, the Offering or the Conversion,
including, without limitation, those applicable to federally insured co-
operative banks or their holding companies.
<PAGE>
Muldoon, Murphy & Faucette
September 18, 1998
Page 3
Based upon and subject to the foregoing, it is our opinion that:
1. The Company has been duly organized and is validly existing in
good standing as a corporation under the laws of the State of Delaware, with the
corporate power and authority to own its property and conduct its business as
now conducted as described in the Prospectus.
2. Upon the due adoption by the Pricing Committee of a resolution
fixing the number of shares of Common Stock to be sold in the Offering, the
Common Stock to be issued in the Offering (including the shares to be issued to
the ESOP) will be duly authorized and, when such shares are sold and paid for in
accordance with the terms set forth in the Prospectus and such resolution of the
Pricing Committee, and certificates representing such shares in the form
provided to us are duly and properly issued, will be validly issued, fully paid
and non-assessable, with no personal liability for the payment of the Company's
debts arising solely by virtue of the ownership thereof; such issuance and sale
will not be in violation of or subject to any preemptive rights provided for by
Delaware law or by the Certificate of Incorporation.
The following provisions of the Certificate of Incorporation may not
be given effect by a court applying Delaware law, but in our opinion the failure
to give effect to such provisions will not affect the duly authorized, validly
issued, fully paid and non-assessable status of the Common Stock:
(a) Subsections C.3 and C.6 of Article FOURTH and Section D of Article
EIGHTH, which grant the Board the authority to construe and apply the provisions
of those Articles, subsection C.4 of Article FOURTH, to the extent that
provision obligates any person to provide to the Board the information such
subsection authorizes the Board to demand, and the provision of Section C.7 of
Article EIGHTH empowering the Board to determine the Fair Market Value of
property offered or paid for the Company's stock by an Interested Stockholder,
to the extent, if any,
<PAGE>
Muldoon, Murphy & Faucette
September 18, 1998
Page 4
that a court applying Delaware law were to impose equitable limitations upon the
authority of the Board under such provisions.
(b) Article NINTH of the Certificate of Incorporation, which purports
to permit the Board to consider the effect of any offer to acquire the Company
on constituencies other than stockholders in evaluating any such offer.
Very truly yours,
/s/ Morris, Nichols, Arsht & Tunnell
<PAGE>
EXHIBIT 8.0
[LETTERHEAD OF MULDOON, MURPHY & FAUCETTE APPEARS HERE]
September 22, 1998
Board of Directors
The Massachusetts Co-operative Bank
1442 Dorchester Avenue
Boston, Massachusetts 02122
Board of Directors
Massachusetts Fincorp, Inc.
1442 Dorchester Avenue
Boston, Massachusetts 02122
Re: Certain Federal Tax Consequences of the Conversion of The
Massachusetts Co-operative Bank from a State-chartered Mutual Co-
operative Bank to a State-chartered Capital Stock Co-operative Bank
and the Offer and Sale of Common Stock of Massachusetts Fincorp, Inc.
(the "Conversion")
Ladies and Gentlemen:
You have requested an opinion on certain federal income tax consequences of
the proposed conversion of The Massachusetts Co-operative Bank (the "Bank") from
a state-chartered mutual co-operative bank to a state-chartered capital stock
co-operative bank and the acquisition of the Bank's capital stock by
Massachusetts Fincorp, Inc., a Delaware corporation (the "Holding Company"),
pursuant to the plan of conversion adopted by the Board of Directors on May 6,
1998 and amended on July 15, 1998 and September 8, 1998 (the "Plan of
Conversion").
The proposed transaction is described in the Prospectus and the Plan of
Conversion, and the tax consequences of the proposed transaction will be as set
forth in the section of this letter entitled "FEDERAL TAX OPINION."
<PAGE>
Board of Directors
September 22, 1998
Page 2
We have made such inquiries and have examined such documents and records as
we have deemed appropriate for the purpose of this opinion. In rendering this
opinion, we have received certain standard representations of the Holding
Company and the Bank concerning the Holding Company and the Bank as well as the
transaction ("Representations"). These Representations are required to be
furnished prior to the execution of this letter and again prior to the closing
of the Conversion. We will rely upon the accuracy of the Representations of the
Holding Company and the Bank and the statements of facts contained in the
examined documents, particularly the Plan of Conversion. We have also assumed
the authenticity of all signatures, the legal capacity of all natural persons
and the conformity to the originals of all documents submitted to us as copies.
Each capitalized term used herein, unless otherwise defined, has the meaning set
forth in the Plan of Conversion. We have assumed that the Conversion will be
consummated strictly in accordance with the terms of the Plan of Conversion.
The Plan of Conversion and the Prospectus contain a detailed description of
the Conversion. These documents as well as the Representations to be provided
by the Holding Company and the Bank are incorporated in this letter as part of
the statement of the facts.
The Massachusetts Co-operative Bank, with its headquarters in Boston,
Massachusetts, is a state-chartered mutual co-operative bank. As a co-operative
bank, the Bank has never been authorized to issue stock. Instead, the
proprietary interest in the reserves and undivided profits of the Bank belong to
the deposit account holders of the Bank, hereinafter sometimes referred to as
"shareholders." A shareholder of the Bank has a right to share, pro rata, with
respect to the withdrawal value of his respective deposit account in any
liquidation proceeds distributed in the event the Bank is ever liquidated. In
addition, a shareholder of the Bank is entitled to interest on his account
balance as fixed and paid by the Bank.
In order to provide organizational and economic strength to the Bank, the
Board of Directors has adopted the Plan of Conversion whereby the Bank will
convert itself into a Massachusetts-chartered capital stock co-operative bank
(the "Converted Bank"), the stock of which will be held entirely by the Holding
Company. Assuming that the Holding Company form of organization is utilized,
the Holding Company will acquire the stock of the Bank by purchase, in exchange
for the Conversion proceeds that are not permitted to be retained by the Holding
Company. The Holding Company will apply to the Office of Thrift Supervision
("OTS") to retain up to 50% of the proceeds received from the Conversion. The
aggregate sales price of the Common Stock issued in the Conversion will be based
on an independent appraiser's valuation of the estimated pro forma market value
of the Common Stock of the Converted Bank. The Conversion and sale of the
Common Stock will be subject to applicable regulatory approval and the approval
of the Voting Shareholders.
<PAGE>
Board of Directors
September 22, 1998
Page 3
ESTABLISHMENT OF LIQUIDATION ACCOUNT. The Bank shall establish at the time
of Conversion a liquidation account in an amount equal to its net worth as of
the latest practicable date prior to Conversion. The liquidation account will
be maintained by the Bank for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders who continue to maintain their deposit
accounts at the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder shall, with respect to his Savings Account, hold a related
inchoate interest in a portion of the liquidation account balance, in relation
to his deposit account balance on the Eligibility Record Date and/or
Supplemental Eligibility Record Date or to such balance as it may be
subsequently reduced, as provided in the Plan of Conversion.
In the unlikely event of a complete liquidation of the Bank (and only in
such event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their deposit accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the liquidation account, in the amount of the then
adjusted subaccount balance for his deposit accounts then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of Savings
Accounts and other liabilities, or similar transaction with a Federal Deposit
Insurance Corporation (FDIC) institution, in which the Bank is not the surviving
institution, shall be deemed to be a complete liquidation for this purpose. In
such transactions, the liquidation account shall be assumed by the surviving
institution.
ESTABLISHMENT OF FOUNDATION. As part of the Conversion, the Company and
the Bank intend to establish a charitable foundation (the "Foundation") that
will qualify as an exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and to donate to the Foundation up
to 5.0% of the number of shares of Common Stock sold in the Conversion. The
establishment and funding of the Foundation as part of the Conversion is subject
to the approval of the Voting Shareholders of the Bank at the Special Meeting of
Shareholders. In the event that the Foundation does not receive the
prerequisite approval, the Bank may determine to complete the Conversion without
the Foundation.
The Plan of Conversion provides that the Foundation is being formed to
further the Converted Bank's long term commitment to its community. The Plan of
Conversion states that the Foundation is intended to complement the Bank's
existing community reinvestment activities so as to allow the local community to
share in the growth and profitability of the Holding Company and the Converted
Bank over the long term.
The Foundation will be dedicated to the promotion of charitable and
educational purposes within the Bank's Local Community, including, but not
limited to, grants or donations to support
<PAGE>
Board of Directors
September 22, 1998
Page 4
housing assistance, scholarships, local education, not-for-profit medical
facilities, not-for-profit community groups and other types of organizations or
civic minded projects. The Foundation will annually distribute total grants and
donations to assist charitable organizations or to fund projects within its
local community of not less than 5% of the average fair value of the Foundation
assets each year.
* * *
You have provided the following Representations concerning this
transaction:
(a) The fair market value of the withdrawable deposit accounts plus
interests in the liquidation account of the Converted Bank to be
constructively received under the Plan of Conversion will, in each
instance, be equal to the fair market value of the withdrawable
deposit accounts (plus the related interest in the residual equity of
the Bank) deemed to be surrendered in exchange therefor.
(b) If an individual's total deposits in the Bank equal or exceed $50 as
of the Eligibility Record Date or the Supplemental Eligibility Record
Date, then no amount of that individual's total deposits will be
excluded from participating in the liquidation account. The fair
market value of the deposit accounts of the Bank which have a balance
of less than $50 on the Eligibility Record Date or the Supplemental
Eligibility Record Date will be less than 1% of the total fair market
value of all deposit accounts of the Bank.
(c) Immediately following the Conversion, the Eligible Account Holders and
the Supplemental Eligible Account Holders of the Bank will own all of
the outstanding interests in the liquidation account and will own such
interest solely by reason of their ownership of deposits in the Bank
immediately before the Conversion.
(d) After the Conversion, the Converted Bank will continue the business of
the Bank in the same manner as prior to the Conversion. The Converted
Bank has no plan or intention and the Holding Company has no plan or
intention to cause the Converted Bank to sell its assets other than in
the ordinary course of business.
(e) The Holding Company has no plan or intention to sell, liquidate or
otherwise dispose of the stock of the Converted Bank other than in the
ordinary course of business.
<PAGE>
Board of Directors
September 22, 1998
Page 5
(f) The Holding Company and the Converted Bank have no current plan or
intention to redeem or otherwise acquire any of the Common Stock
issued in the Conversion transaction.
(g) Immediately after the Conversion, the assets and liabilities of the
Converted Bank will be identical to the assets and liabilities of the
Bank immediately prior to the Conversion, plus the net proceeds from
the sale of the Converted Bank's common stock to the Holding Company
and any liability associated with indebtedness incurred by the
Employee Plans in the acquisition of Common Stock by the Employee
Plans.
(h) The Bank is a corporation chartered by Massachusetts as a mutual Co-
operative bank.
(i) None of the shares of the Common Stock to be purchased by the
depositor-employees of the Bank in the Conversion will be issued or
acquired at a discount. However, shares may be given to certain
employees as compensation by means of the Tax-Qualified Employee Stock
Benefit Plans. Compensation to be paid to such Directors and
depositor-employees will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
(j) The fair market value of the assets of the Bank, which will be
transferred to the Converted Bank in the Conversion, will equal or
exceed the sum of the liabilities of the Bank which will be assumed by
the Converted Bank and any liabilities to which the transferred assets
are subject.
(k) The Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of section
368(a)(3)(A) (the "Code").
(l) Upon the completion of the Conversion, the Holding Company will own
and hold 100% of the issued and outstanding capital stock of the
Converted Bank and no other shares of capital stock of the Converted
Bank will be issued and/or outstanding. At the time of the
Conversion, the Converted Bank does not have any plan or intention to
issue additional shares of its stock following the transaction.
Further, no shares of preferred stock of the Converted Bank will be
issued and/or outstanding.
(m) Upon the completion of the Conversion, there will be no rights,
warrants, contracts, agreements, commitments or understandings with
respect to the capital
<PAGE>
Board of Directors
September 22, 1998
Page 6
stock of the Converted Bank, nor will there be any securities
outstanding which are convertible into the capital stock of the
Converted Bank.
(n) No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders, or others in lieu of (a)
nontransferable subscription rights, or (b) an interest in the
liquidation account of the Converted Bank.
(o) The Bank has utilized a reserve for bad debts in accordance with
section 593 and, following the Conversion, to the extent allowed under
the Code, the Converted Bank shall maintain a reserve for bad debts in
accordance with the applicable provisions of the Code.
(p) The Bank currently satisfies the 60% "qualified assets" test of
section 7701(a)(19) of the Code. Management expects the Converted
Bank to be able to continue to satisfy the test in the future.
Currently, the Bank is not required to satisfy the "qualified thrift
lender" tests set out in sections 301 and 303 of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("the QTL
test in FIRREA"). After conversion, the Converted Bank will satisfy
the QTL test in FIRREA.
(q) Depositors will pay the expenses of the Conversion solely applicable
to them, if any. The Holding Company and the Bank will each pay
expenses of the transaction attributable to them and will not pay any
expenses solely attributable to the depositors or to the Holding
Company shareholders.
(r) The exercise price of the subscription rights received by the Bank's
Eligible Account Holders, Supplemental Eligible Account Holders, and
other holders of subscription rights to purchase Holding Company
Common Stock will be equal to the fair market value of the stock of
the Holding Company at the time of the completion of the Conversion as
determined by an independent appraisal.
(s) The liquidation account will be maintained by the Bank for the benefit
of the Eligible Account Holders and the Supplemental Eligible Account
Holders who continue to maintain their Deposit Accounts at the Bank.
(t) There is no plan or intention for the Converted Bank to be liquidated
or merged with another corporation following this proposed
transaction.
<PAGE>
Board of Directors
September 22, 1998
Page 7
(u) The liabilities of the Bank assumed by the Converted Bank plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Bank in the ordinary course of its business and are
associated with the assets transferred.
(v) The Bank currently has no net operating losses for federal tax
purposes, and has no such losses available for carryover to future tax
years.
LIMITATIONS ON OPINION
----------------------
Our opinions expressed herein are based solely upon current provisions of
the Code, including applicable regulations thereunder and current judicial and
administrative authority. Any future amendments to the Code or applicable
regulations, or new judicial decisions or administrative interpretations, any of
which could be retroactive in effect, could cause us to modify our opinion. No
opinion is expressed herein with regard to the federal, state, or city tax
consequences of the Conversion under any section of the Code except if and to
the extent specifically addressed.
FEDERAL TAX OPINION
-------------------
Based solely upon the foregoing Representations and information and
assuming the transaction occurs in accordance with the Plan of Conversion, and
taking into consideration the limitations noted throughout this opinion, it is
our opinion that under current federal income tax law:
(1) Pursuant to the Conversion, the changes at the corporate level other
than changes in the form of organization will be insubstantial. Based
upon that fact and the fact that the equity interest of a shareholder
in a mutual co-operative bank is more nominal than real, unlike that
of a shareholder of a corporation, the Conversion of the Bank from a
mutual co-operative bank to a stock co-operative bank is a tax-free
reorganization since it is a mere change in identity, form or place of
organization within the meaning of section 368(a)(1)(F) of the Code
(see Rev. Rul. 80-105, 1980-1 C.B. 78). Neither the Bank nor the
Converted Bank shall recognize gain or loss as a result of the
Conversion. The Bank and the Converted Bank shall each be "a party to
a reorganization" within the meaning of section 368(b) of the Code.
(2) No gain or loss shall be recognized by the Converted Bank or the
Holding Company on the receipt by the Converted Bank of money from the
Holding
<PAGE>
Board of Directors
September 22, 1998
Page 8
Company in exchange for shares of the Converted Bank's capital stock
or by the Holding Company upon the receipt of money from the sale of
its Common Stock (Section 1032(a) of the Code).
(3) The basis of the assets of the Bank in the hands of the Converted Bank
shall be the same as the basis of such assets in the hands of the Bank
immediately prior to the Conversion (Section 362(b) of the Code).
(4) The holding period of the assets of the Bank in the hands of the
Converted Bank shall include the period during which the Bank held the
assets (Section 1223(2) of the Code).
(5) No gain or loss shall be recognized by the Eligible Account Holders
and the Supplemental Eligible Account Holders of the Bank on the
issuance to them of withdrawable deposit accounts in the Converted
Bank plus interests in the liquidation account of the Converted Bank
in exchange for their deposit accounts in the Bank or to the other
depositors on the issuance to them of withdrawable deposit accounts
(Section 354(a) of the Code).
(6) Provided that the amount to be paid for such stock pursuant to the
subscription rights is equal to the fair market value of the stock, no
gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon the distribution to them of
the nontransferable subscription rights to purchase shares of stock in
the Holding Company (Section 356(a)). Gain realized, if any, by the
Eligible Account Holders and Supplemental Eligible Account Holders on
the distribution to them of nontransferable subscription rights to
purchase shares of Common Stock will be recognized but only in an
amount not in excess of the fair market value of such subscription
rights (Section 356(a)). Eligible Account Holders and Supplemental
Eligible Account Holders will not realize any taxable income as a
result of the exercise by them of the nontransferable subscription
rights (Rev. Rul. 56-572, 1956-2 C.B. 182).
(7) The basis of the deposit accounts in the Converted Bank to be received
by the Eligible Account Holders, Supplemental Eligible Account Holders
and other shareholders of the Bank will be the same as the basis of
their deposit accounts in the Bank surrendered in exchange therefor
(Section 358(a)(1) of the Code). The basis of the interests in the
liquidation account of the Converted Bank to be received by the
Eligible Account Holders of the Bank shall be zero (Rev. Rul. 71-233,
1971-1 C.B. 113). The basis of the Holding Company Common Stock to
<PAGE>
Board of Directors
September 22, 1998
Page 9
its stockholders will be the purchase price thereof plus the basis, if
any, of nontransferable subscription rights (Section 1012 of the
Code). Accordingly, assuming the nontransferable subscription rights
have no value, the basis of the Common Stock to the Eligible Account
Holders and Supplemental Eligible Account Holders will be the amount
paid therefor. The holding period of the Common Stock purchased
pursuant to the exercise of subscription rights shall commence on the
date on which the right to acquire such stock was exercised (Section
1223(6) of the Code).
Our opinion under paragraph (6) above is predicated on the Representation
that no person shall receive any payment, whether in money or property, in lieu
of the issuance of subscription rights. Our opinion under paragraphs (6) and
(7) above assumes that the subscription rights to purchase shares of Common
Stock received by Eligible Account Holders, Supplemental Eligible Account
Holders and Directors, Officers and Employees have a fair market value of zero.
We understand that you have received a letter from FinPro, Inc. that the
subscription rights do not have any value. We express no view regarding the
valuation of the subscription rights.
If the subscription rights are subsequently found to have a fair market
value, income may be recognized by various recipients of the subscription rights
(in certain cases, whether or not the rights are exercised) and the Holding
Company and/or the Converted Bank may be taxable on the distribution of the
subscription rights.
<PAGE>
* * *
Since this letter is rendered in advance of the closing of this
transaction, we have assumed that the transaction will be consummated in
accordance with the Plan of Conversion as well as all the information and
Representations referred to herein. Any change in the transaction could cause
us to modify our opinion.
We consent to the inclusion of this opinion as an exhibit to the
Application for Conversion and Form SB-2 Registration Statement of Massachusetts
Fincorp, Inc. and the references to and summary of this opinion in such
Application for Conversion and Form SB-2 Registration Statement.
Sincerely,
/s/ Muldoon, Murphy & Faucette
------------------------------
MULDOON, MURPHY & FAUCETTE
<PAGE>
EXHIBIT 8.1
[Grant Thornton LLP letterhead]
July 29, 1998
Board of Directors
The Massachusetts Co-operative Bank
1442 Dorcester Avenue
Boston, Massachusetts 02122
Board of Directors
Massachusetts Fincorp., Inc.
1442 Dorcester Avenue
Boston, Massachusetts 02111
Ladies and Gentlemen:
This letter constitutes our opinion regarding certain Massachusetts state tax
consequences of the transactions described in The Massachusetts Co-operative
Bank Plan of Conversion, as amended (the "Plan"). Capitalized terms used but
not defined herein shall have the respective meanings ascribed to them in the
Plan.
We have examined the law and such papers, including the Plan, as deemed
necessary to render this opinion. As to questions of fact material to our
opinions, we have relied upon representations set forth in the Plan (including
the Exhibits), and such other documents pertaining to the transactions
contemplated by the Plan as we have deemed appropriate and necessary. In
rendering our opinion, we have relied upon the opinions of Muldoon, Murphy &
Faucette related to the federal tax consequences of the transactions
contemplated by the Plan (the "Federal Tax Opinions"), without undertaking to
verify the same by independent investigation.
In issuing our opinions, we have assumed that the Plan has been duly adopted and
validly authorized and has been approved and adopted by the Board of Directors
of The Massachusetts Co-operative Bank (the "Mutual Bank") at a meeting duly
called and held pursuant to Massachusetts law; that the Mutual Bank will comply
with the terms and conditions of the Plan; and that the various representations
and warranties which are provided to us are accurate, complete, true and
correct. Accordingly, we express no opinion concerning the effect, if any, of
variations from the foregoing.
In our examination we have assumed that (i) each entity that is a party to any
of the documents (the "Documents") described herein has been duly organized
under the laws of its state or country of organization, is validly existing and
in good standing under such laws, and is duly qualified and in good standing
under such laws, and is duly qualified and in good standing in each jurisdiction
in which it is required to be qualified to engage
<PAGE>
in the transactions contemplated by the Documents; (ii) each such entity has
full power, authority, capacity and legal right to enter into and perform the
terms of the Documents and the transactions contemplated thereby; (iii) the
copies or originals of the Documents furnished to us are authentic (if
originals) or accurate (if copies), those that are contracts or instruments are
enforceable and effective in accordance with their terms against all parties
thereto, and all signatures are genuine; (iv) any representations made in the
Documents are, and will continue to be, true and complete, and no default exists
under any of the Documents; (v) the business and affairs of each of the entities
that is a party to any of the Documents will be conducted in accordance with the
Documents and all relevant laws; (vi) no actions will be taken, no change in any
of the Documents will occur, and no other events will occur, after the date
hereof, that would have the effect of altering the facts, Documents or
assumptions upon which this opinion is based; and (vii) the Federal Tax Opinions
have been delivered and have not been withdrawn.
The opinions rendered herein are based upon the provisions of the Massachusetts
General Laws, proposed, temporary and final regulations of the Massachusetts
Department of Revenue (the "DOR"), judicial decisions, and rulings and
administrative interpretations of the Massachusetts General Laws, as each of the
foregoing exists on the date hereof. The opinions rendered herein are not
binding on the DOR or a court of law, and no assurance can be given that
legislative or administrative action or judicial decisions that differ from the
opinions rendered below will not be forthcoming. Any such differences could be
retroactive to transactions or business operations prior to such action or
decisions.
We express no opinion as to the Massachusetts state tax consequences other than
those described below, if any, or as to any federal, local or foreign income or
other tax consequences with respect to the transactions contemplated by the
Plan.
STATEMENT OF FACTS
------------------
The Massachusetts Co-operative Bank is a Massachusetts-chartered mutual co-
operative bank. The Mutual Bank is regulated by the Commissioner of Banks of
the Commonwealth of Massachusetts (the "Commissioner"). The Mutual Bank is also
regulated by the Federal Deposit Insurance Corporation (the "FDIC"). The Mutual
Bank's principal executive office is located at 1442 Dorcester Avenue, Boston,
Massachusetts.
As a Massachusetts-chartered mutual co-operative bank, the Mutual Bank has no
capital stock. Instead, depositors of the Mutual Bank possess the right: (i) to
share in the Mutual Bank's current earnings (which is in the nature of the right
to receive interest on deposits); and (ii) upon liquidation of the Mutual Bank,
to share in any surplus remaining after all of the Mutual Bank's liabilities
have been satisfied ("Liquidation Rights"). Depositors of the Mutual Bank also
have voting rights as to all matters requiring membership action. A depositor's
rights terminate when the depositor's account is closed.
<PAGE>
Massachusetts Fincorp., Inc. (the "Holding Company"), is a Delaware corporation
recently organized by the Mutual Bank. The Holding Company has received
approval from the Office of Thrift Supervision 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.
PROPOSED TRANSACTION
--------------------
In order to provide access to capital sources not available to mutual co-
operative banks, and to provide enhanced ability to diversify into other
financial services related activities, among other business purposes, the Board
of Directors of Mutual Bank adopted the Plan. Pursuant to the Plan, the Mutual
Bank will be converted into a Massachusetts-chartered stock co-operative bank
(the "Stock Bank"), by the adoption of an amendment to the Certificate of
Incorporation of the Mutual Bank to authorize the issuance of capital stock.
Under the Plan, each depositor in the Mutual 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 the 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.
Borrowers of the Mutual Bank will become borrowers of the Stock Bank, with the
same status they had with the Mutual Bank. The amount, interest rate, maturity
and security for each loan will remain as it was contractually fixed prior to
the Conversion.
Following the Conversion, all voting rights in the Stock Bank will be vested in
the Holding Company as the sole stockholder of the Stock Bank. Exclusive voting
rights in the Holding Company will be vested in the holders of its Common Stock.
Upon completion of the Conversion, the Stock Bank will establish a special
liquidation account ("Liquidation Account") for the benefit of the Eligible
Account Holders and Supplemental Eligible Account Holders, in an amount equal to
the surplus or reserves of the Mutual Bank as of its latest balance sheet
contained in the final Prospectus used in connection with the Conversion.
Eligible Account Holders and Supplemental Eligible Account Holders would, upon
complete liquidation of the Stock Bank, have a claim to an interest in the
Liquidation Account after payment of all creditors prior to any payment of
the stockholders of the Stock Bank. 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 upon the
proportion that the balance of each such deposit account on the Eligibility
Record Date or the Supplemental Eligibility Record Date bore to the balance of
all qualifying deposits of all Eligible Account Holders and Supplemental Account
Holders on such date.
<PAGE>
The Bank intends to establish a tax-qualified employer stock ownership plan (the
"ESOP") in connection with the Conversion.
In connection with the Conversion, the Holding Company will sell shares of its
common stock, par value $0.01 per share, in the Subscription Offering, and, if
applicable, the Syndicated Public Offering. The Holding Company plans to retain
50% of the net proceeds from the sale of its common stock and to use the
remaining 50% to purchase all of the common stock of the Stock Bank to be issued
in the Conversion.
Net proceeds retained by the Holding Company will be used for general business
activities, including the formation and capitalization of a wholly-owned
subsidiary, 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 common stock issued in connection with the
Conversion, including shares issued to the Foundation.
REPRESENTATIONS
---------------
In connection with the proposed Conversion, the following representations have
been made to us by you and we have relied upon them as integral assumptions in
reaching our conclusion:
1. The value of the withdrawable deposit accounts plus interest in the
Liquidation Account of the Stock Bank to be received under the Plan
will, in each instance, be equal to the value of the withdrawable
deposit accounts plus liquidation rights deemed to be surrendered in
exchange therefor.
2. If an individual's total deposits in the Bank equal or exceed $50 as of
the Eligibility Record Date and/or Supplemental Eligibility Record
Date, then no amount of that individual's total deposits will be
excluded from participation in the Liquidation Account. The value of
the deposit accounts of the Mutual Bank which have a balance of less
than $50 on the Eligibility Record Date or the Supplemental Eligibility
Record Date is less than 1% of the total value of all deposit accounts
of the Mutual Bank.
3. Immediately following the Conversion, the Eligible Account Holders and
Supplemental Eligible Account Holders of the Stock Bank will own all of
the outstanding interests in the Liquidation Account and will own such
interest solely by reason of their ownership of deposits in the Mutual
Bank immediately before the Conversion.
4. After the Conversion, the Stock Bank will continue the business of the
Mutual Bank in the same manner as prior to the Conversion. The Stock
Bank has no plan or intention and the Holding Company has no plan or
intention to cause the Stock Bank to sell its assets other than in the
ordinary course of business.
<PAGE>
5. The Holding Company has no plan or intention to sell, liquidate or otherwise
dispose of the stock of the Stock Bank other than in the ordinary course of
business.
6. The Holding Company and the Stock Bank have no current plan or intention to
redeem or otherwise acquire any of the common stock issued in the
Conversion.
7. Immediately after the Conversion, the assets and liabilities of the Stock
Bank will be identical to the assets and liabilities of the Mutual Bank
prior to the Conversion, plus the net proceeds from the sale of the capital
stock of the Stock Bank to the Holding Company and any liability associated
with indebtedness incurred by the Employee Stock Ownership Plan in the
acquisition of Common Stock.
8. The Mutual Bank, Stock Bank and the Holding Company are corporations within
the meaning of Section 7701(a)(3) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. None of the shares of the Common Stock to be purchased by the depositor-
employees of the Mutual Bank in the Conversion will be issued or acquired at
a discount. However, shares may be given to certain directors and employees
as compensation by means of the Employee and/or Stock Plans that may be
approved at the Conversion or subsequently thereto. Compensation to be paid
to such directors and depositor-employees will be commensurate with amounts
paid to third parties bargaining at arm's length for similar services.
10. The value of the assets of the Bank, which will be transferred to the Stock
Bank in the Conversion, will equal or exceed the sum of the liabilities of
the Mutual Bank which will be assumed by the Stock Bank and any liabilities
to which the transferred assets are subject.
11. The Mutual Bank is not under the jurisdiction of a bankruptcy or similar
court in any Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
12. Upon completion of the Conversion, the Holding Company will own and hold
100% of the issued and outstanding capital stock of the Stock Bank and no
other shares of capital stock of the Stock Bank will be issued and/or
outstanding. The Stock Bank does not have any plan or intention to issue
additional shares of its stock following the transaction. No shares of
preferred stock of the Stock Bank will be issued and/or outstanding.
13. Upon completion of the Conversion, there will be no rights, warrants,
contracts, agreements, commitments or undertakings with respect to the
<PAGE>
capital stock of the Stock Bank, nor will there be any securities which are
convertible into the capital stock of the Stock Bank.
14. No cash or property will be given to Eligible Account Holders, Supplemental
Eligible Account Holders, or others in lieu of (a) nontransferable
subscription rights, or (b) an interest in the liquidation account of the
Stock Bank.
15. Depositors will pay the expenses of the Conversion solely applicable to
them, if any. The Holding Company, Mutual Bank and Stock Bank will each pay
expenses of the transaction attributable to each respective entity and will
not pay any expenses solely attributable to the depositors of the Mutual
Bank or Stock Bank or to the shareholders of the Holding Company.
16. The exercise price of the subscription rights received by the Eligible
Account Holders, Supplemental Eligible Account Holders, and other holders
of subscription rights to purchase Holding Company common stock will be
equal to the value of the Holding Company common stock at the time of the
completion of the Conversion as determined by an independent appraisal.
17. The proprietary interest of the Eligible Account Holders and the
Supplemental Eligible Account Holders in the Mutual Bank arise solely by
virtue of the fact that they are account holders in the Mutual Bank.
18. There is no plan or intention for the Stock Bank to be liquidated or merged
with another corporation following the Conversion.
19. The liabilities of the Mutual Bank assumed by the Stock Bank, plus the
liabilities, if any, to which the transferred assets are subject, were
incurred by the Mutual Bank in the ordinary course of its business and are
associated with the assets transferred.
20. The Mutual Bank has no net operating losses for federal tax purposes, and
has no such losses available for carryover to future tax years. The Mutual
Bank has neither generated nor carried forward a net operating loss for
federal tax purposes in the past ten years.
OPINION
-------
Based upon the foregoing, we are of opinion, as of the date hereof and
under existing law, as follows:
1. Provided that the Conversion qualifies as a tax-free reorganization within
the meaning of section 368(a)(1)(F) of the Code, no gross income, gain or
loss will be recognized by the Mutual Bank or the Stock Bank for purposes
of Massachusetts General Laws chapter 63, sections 1 and 2 as a result of
the transactions contemplated by the Plan.
<PAGE>
2. For purposes of Massachusetts General Laws chapter 63, sections 1, 2, 30,
and 39, no gain or loss shall be recognized by the Stock Bank or the
Holding Company on the receipt by the Stock Bank of money from the Holding
Company in exchange for shares of the Stock Bank's capital stock, or by the
Holding Company upon receipt of money from the sale of its common stock.
3. The Stock Bank's basis in the property received from the Mutual Bank will
be the same as the basis of such property in the hands of the Mutual Bank
immediately prior to the Conversion. Code Section 362(b); M.G.L. c. 63,
Sections 1, 2.
4. The Stock Bank's holding period for property received from the Mutual Bank
will include the period during which such property was held by the Mutual
Bank. Code Section 1223(1); M.G.L. c. 63, Sections 1, 2.
5. No gross income, gain or loss will be recognized by the Eligible Account
Holders and the Supplemental Eligible Account Holders on their receipt of
deposit accounts and interests in the Liquidation Account in the Stock Bank
in exchange for their deposit accounts and liquidation rights in the Mutual
Bank. Code Section 354(a); M.G.L. c. 62, Sections 1, 2; M.G.L. c. 63,
Sections 1, 2, 30, 32, 39.
6. Provided that the amount to be paid for the Holding Company's common stock
pursuant to the subscription rights is equal to the fair market value of
the common stock, no gross income, gain or loss will be recognized by the
Eligible Account Holders and the Supplemental Eligible Account Holders upon
the distribution to them of the non-transferable subscription rights to
purchase the Holding Company's common stock. Code Section 356(a);
M.G.L. c. 62, Sections 1, 2; M.G.L. c. 63, Sections 1, 2, 30, 32, 39. Gain
realized, if any, by Eligible Account Holders and Supplemental Eligible
Account Holders on the distribution to them of non-transferable
subscription rights to purchase shares of common stock will be recognized
but only in an amount not in excess of the fair market value of such
subscription rights. Code Section 356(a); M.G.L. c. 62, Sections 1, 2;
M.G.L. c. 63, Sections 1, 2, 30, 32, 39. Eligible Account Holders and
Supplemental Eligible Account Holders will not realize any taxable income
as a result of the exercise by them of the non-transferable subscription
rights.
7. The basis of the deposit accounts in the Stock Bank to be received by the
Eligible Account Holders, Supplemental Eligible Account Holders and other
depositors of the Mutual Bank will be the same as the basis of their
deposit accounts in the Mutual Bank surrendered in exchange therefor. Code
Section 358(a)(1); M.G.L. c. 62, Sections 1, 2; M.G.L. c. 63, Sections 1,
2, 30, 32, 39. The basis of the interests in the Liquidation Account of the
Stock Bank to be received by the Eligible Account Holders and Supplemental
Eligible Account
<PAGE>
Holders of the Mutual Bank will be zero. The basis of the Holding
Company common stock to its stockholders will be the purchase price therefor
plus the fair market value, if any, of the non-transferable subscription
rights. Code Section 1012; M.G.L. c. 62, Sections 1, 2; M.G.L. c. 63,
Sections 1, 2, 30, 32, 39. Therefore, assuming the non-transferable
subscription rights have no value, the basis of the Common Stock purchased
pursuant to the Eligible Account Holders and Supplemental Eligible Account
Holders will be the amount paid therefor. The holding period of the Common
Stock purchased pursuant to the exercise of subscription rights shall
commence on the date on which the right to acquire such stock was exercised.
Code Section 1223(6); M.G.L. c. 62, Sections 1, 2; M.G.L. c. 63, Sections
1, 2, 30, 32, 39.
8. Under Massachusetts General Laws chapter 63, Sections 1, 2 and 7, the Mutual
Bank and the Stock Bank will be treated as the same bank and as if the
Conversion had not occurred. Therefore,
a. the part of the current taxable year of the Mutual Bank before the
Conversion and the part of the current taxable year of the Stock Bank
after the Conversion will constitute a single taxable year of the Stock
Bank;
b. the Stock Bank will succeed to and take into account the net operating
income of the Mutual Bank as of the date of the Conversion; and,
c. for the current taxable year, the Stock Bank may claim as a credit any
estimated tax payments made by the Mutual Bank prior to the Conversion.
9. The lending of money from the ESOP Loan Subsidiary to the ESOP will not
prevent the Holding Company from qualifying as a Massachusetts Security
Corporation, provided that the Holding Company does not conduct any
activities deemed impermissible under M.G.L. c. 63 Section 38B, and the
various regulations, directives, letter rulings and administrative
announcements issued by the Massachusetts Department of Revenue.
Our opinion under paragraph 6 above is predicated on the representation that no
person shall receive any payment, whether in money or property, in lieu of the
issuance of subscription rights. Our opinion under paragraphs 6 and 7 above
assumes that the subscription rights to purchase shares of Common Stock received
by Eligible Account Holders and Supplemental Eligible Account Holders and
Directors, officers and Employees have a fair market value of zero. We
understand that you have received an opinion from FinPro that the
subscription rights have no value. We express no opinion regarding the
valuation of the subscription rights.
<PAGE>
If the subscription rights are subsequently found to have a fair market value,
income may be recognized by various recipients of the subscription rights ( in
certain cases, whether or not the rights are exercised) and the Holding Company
and/or the Stock Bank may be taxable on the distribution of the subscription
rights.
Very Truly Yours,
/s/ Grant Thornton LLP
GRANT THORNTON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 and Prospectus
of Massachusetts Fincorp, Inc. (proposed holding company for Massachusetts
Co-operative Bank) of our report dated March 6, 1998, except note M which is as
of May 6, 1998, on the 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 and to the use of our name and the
statements with respect to us, as appearing under the heading "Experts" in the
Prospectus.
/s/ Wolf & Company, P.C.
Wolf & Company, P.C.
Boston, Massachusetts
September 23, 1998
<PAGE>
EXHIBIT 23.2
CONSENT
We hereby consent to the references to this firm and our opinions in: the
Registration Statement on Form SB-2 filed by Massachusetts Fincorp, Inc.,
Boston, Massachusetts, and all amendments thereto; and in the Form H-(e)1-S for
Massachusetts Fincorp, Inc., and all amendments thereto, relating to the
conversion of The Massachusetts Co-operative Bank, Boston, Massachusetts, from a
Massachusetts-chartered mutual co-operative bank to a Massachusetts-chartered
stock co-operative bank, the concurrent issuance of the Bank's outstanding
capital stock to Massachusetts Fincorp, Inc., a holding company formed for such
purpose, and the offering of Massachusetts Fincorp, Inc.'s common stock. In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended.
MULDOON, MURPHY & FAUCETTE
/s/ Muldoon, Murphy & Faucette
Dated this 24th day of
September, 1998
