PROSPECTUS
[LOGO]
PMS GREEN 554
RFS BANCORP, INC.
(Proposed Holding Company for Revere Federal Savings)
UP TO 466,181 SHARES OF COMMON STOCK
Revere Federal Savings and Loan Association ("Revere Federal Savings"), a
federal mutual savings association, is reorganizing into the mutual holding
company form of organization. As part of the reorganization, Revere Federal
Savings will convert to a stock savings bank and will become a wholly-owned
subsidiary of RFS Bancorp, Inc., a federal corporation. RFS Bancorp, Inc. will
become the majority-owned subsidiary of Revere, MHC, a federal mutual holding
company. RFS Bancorp, Inc. will issue a majority of its common stock to Revere,
MHC, and sell a minority of its common stock to the public. The shares of common
stock of RFS Bancorp, Inc. are being offered to the public under the terms of a
plan of reorganization that must be approved by members of Revere Federal
Savings and by the Office of Thrift Supervision. The reorganization will not go
forward if Revere Federal Savings does not receive these approvals, or if RFS
Bancorp, Inc. does not sell at least a minimum number of shares of its common
stock. Because the names of Revere Federal Savings, RFS Bancorp, Inc., and
Revere, MHC are so similar, we will refer to Revere Federal Savings as the
"Bank," we will refer to RFS Bancorp, Inc. as the "Stock Company," and we will
refer to Revere, MHC as the "Mutual Company."
TERMS OF OFFERING
An independent appraiser has estimated that the pro forma market value of
the Stock Company to be between $6.4 million to $9.9 million. Based on this
estimate, the Stock Company will issue between 637,500 and 991,874 shares of
common stock. We are selling 47% of these shares, or between 299,625 and 466,181
shares, to the Bank's depositors, borrowers and the public and 53% of these
shares, or between 337,875 and 525,693 shares, to the Mutual Company. Subject to
regulatory approvals, we may increase the shares we issue in the reorganization
and sell in the offering. After the reorganization is completed, stockholders
other than the Mutual Company will own 47% of the shares of the common stock
outstanding. Based in these estimates, we are making the following offering of
shares of common stock.
<TABLE>
<CAPTION>
MINIMUM MIDPOINT MAXIMUM ADJUSTED
------- -------- ------- --------
<S> <C> <C> <C> <C>
Price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of shares 299,425 352,500 405,375 466,181
Reorganization expenses (1) $ 425,952 $ 438,473 $ 450,994 $ 465,366
Net proceeds $2,570,298 $3,086,527 $3,602,756 $4,196,444
Net proceeds per share $ 8.58 $ 8.76 $ 8.89 $ 9.00
</TABLE>
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(1) Includes Underwriting Commissions.
PLEASE REFER TO THE RISK FACTORS SECTION BEGINNING ON PAGE 23 OF THIS
PROSPECTUS.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF
THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY STATE
SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Trident Securities, Inc. will use its best efforts to assist the Stock
Company in selling at least the minimum number of shares, but does not guarantee
that this number will be sold. All funds received from subscribers will be held
in an interest bearing savings account at the Bank until the completion or
termination of the Offering. We anticipate that the common stock (symbol "RFSB")
will be traded on the over-the-counter market with quotations available through
the OTC Bulletin Board.
For information on how to subscribe, call the Stock Information Center at
(781) 853-0613.
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Trident Securities, Inc.
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The date of this Prospectus is November 12, 1998.
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[TO COME FROM RFS]
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TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING............................. 4
SUMMARY AND OVERVIEW....................................................... 6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK................. 14
RECENT DEVELOPMENTS ....................................................... 16
RISK FACTORS............................................................... 23
REVERE, MHC................................................................ 28
RFS BANCORP, INC........................................................... 29
REVERE FEDERAL SAVINGS..................................................... 29
USE OF PROCEEDS............................................................ 30
DIVIDEND POLICY............................................................ 30
MARKET FOR THE COMMON STOCK................................................ 31
CAPITALIZATION............................................................. 32
SHARES TO BE PURCHASED BY MANAGEMENT ...................................... 33
REGULATORY CAPITAL COMPLIANCE ............................................. 34
PRO FORMA DATA............................................................. 35
CONSOLIDATED STATEMENTS OF INCOME.......................................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 41
BUSINESS................................................................... 55
FEDERAL AND STATE TAXATION................................................. 84
REGULATION................................................................. 86
MANAGEMENT................................................................. 97
THE REORGANIZATION.........................................................106
THE OFFERING...............................................................114
CERTAIN RESTRICTIONS ON ACQUISITION OF THE BANK............................125
DESCRIPTION OF CAPITAL STOCK...............................................127
TRANSFER AGENT AND REGISTRAR...............................................128
EXPERTS....................................................................128
LEGAL AND TAX MATTERS......................................................129
ADDITIONAL INFORMATION.....................................................129
This document contains forward-looking statements which involve risks and
uncertainties. The Stock Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in the
"Risk Factors" section of this Prospectus.
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QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE PURPOSE OF THE OFFERING?
A. We are selling shares of common stock so that we can raise capital to grow
and compete more effectively, and so that our depositors, customers,
employees, management and directors may obtain an equity ownership in the
Bank. As part of the reorganization, you will have the opportunity to
become a stockholder of the Stock Company, which will allow you to share
indirectly in the future earnings and growth of our Bank. The offering will
increase our capital for lending and investment activities. This will
better enable us to continue the expansion of our retail banking franchise
and to diversify operations. Further, as a stock bank operating through a
holding company structure, we will improve our future access to the capital
markets.
Q: HOW DO I ORDER THE STOCK?
A: You must complete and return the stock order form and certification to us
together with your payment, so that we receive it on or before 12:00 noon
on December 10, 1998.
Q: HOW MUCH STOCK MAY I ORDER?
A. The minimum order is 25 shares (or $250). The maximum order for any
individual person, persons on a single account, or persons acting together
is the lesser of 15,000 shares (or $150,000) or 5.0% of the shares of
Common Stock issued in the offering. We may decrease or increase the
maximum purchase limitation without notifying you. However, if we increase
the maximum purchase limitation, and you previously subscribed for the
maximum number of shares, you will be given the opportunity to subscribe
for additional shares.
Q: WHO WILL BE PERMITTED TO PURCHASE STOCK?
A: The stock will be offered on a priority basis to the following persons:
o Persons who had aggregate deposit accounts of at least $50 with the
Bank on December 31, 1996. Any remaining shares will be offered to:
o The Stock Company's employee stock ownership plan. Any remaining
shares will be offered to:
o Persons who had aggregate deposit accounts of at least $50 with the
Bank on September 30, 1998. Any remaining shares will be offered to:
o Persons who were depositors or borrowers with the Bank on November 2,
1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public, with
preference given to natural persons residing in Revere, Massachusetts.
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Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A. If the offering is oversubscribed, we will allocate shares based on the
purchase priorities that we have adopted in the plan of reorganization and
stock issuance plan. These purchase priorities are in accordance with
regulations of the Office of Thrift Supervision. If the offering is
oversubscribed in a particular category, then shares will be allocated
among all subscribers in that category based on a formula that is described
in detail in "The Reorganization and Offering."
Q: AS A DEPOSITOR OF THE BANK, WHAT WILL HAPPEN IF I DO NOT ORDER ANY COMMON
STOCK?
A: You are not required to purchase common stock. Your deposit accounts,
certificate accounts and any loans you may have with the Bank will not be
affected by the reorganization.
Q: HOW DO I DECIDE WHETHER TO BUY STOCK IN THE OFFERING?
A: In order to make an informed investment decision, you should read this
entire prospectus, particularly the section titled "Risk Factors."
Q: WHO CAN HELP ANSWER ANY QUESTIONS I MAY HAVE ABOUT THE OFFERING?
If you have questions about the offering, you may contact:
STOCK INFORMATION CENTER
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION
310 BROADWAY
REVERE, MASSACHUSETTS 02151
(781) 853-0613
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SUMMARY AND OVERVIEW
This is a summary of selected information from this document and does not
contain all the information that you need to know before making an informed
investment decision. To understand the offering fully, you should read carefully
this entire Prospectus, including the consolidated financial statements and the
notes to the consolidated financial statements of the Bank. References in this
document to the "Bank," "we," "us," or "our" refer to Revere Federal Savings. In
certain instances where appropriate, "us" or "our" refers collectively to RFS
Bancorp, Inc. and the Bank. References in this document to the "Stock Company"
refer to RFS Bancorp, Inc. References to the "Mutual Company" refer to Revere,
MHC.
THE REORGANIZATION AND OFFERING
The reorganization involves a number of steps, including the following:
o The Bank will establish the Stock Company and the Mutual
Company, neither of which will have any assets prior to the
completion of the reorganization.
o The Bank will convert from the mutual form of organization to
the capital stock form of organization and issue 100% of its
capital stock to the Stock Company.
o The Stock Company will issue between 637,500 and 991,874
shares of its common stock in the reorganization; 53% of these
shares (or between 337,875 shares and 466,181 shares) will be
issued to the Mutual Company, and 47% (or between 299,625
shares and 525,693 shares) will be sold to depositors, and
possibly the public.
o Membership interests that depositors had in the Bank will
become membership interests in the Mutual Company. As a
result, former members of the Bank who controlled 100% of the
votes eligible to be cast by the Bank's members prior to the
reorganization will, through the Mutual Company, control 53%
of the votes eligible to be cast by the Stock Company's
stockholders immediately following the reorganization.
DESCRIPTION OF THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects from
the savings and loan holding company structure that is used in a standard mutual
to stock conversion. In a standard conversion, a converting mutual institution
or its newly-formed holding company usually sells 100% of its common stock in a
stock offering. A savings institution that converts from the mutual to stock
form of organization using the mutual holding company structure sells less than
half of its shares at the time of the reorganization. By doing so, a converting
institution using the mutual holding company structure will raise less than half
the capital that it would have raised in a standard mutual to stock conversion.
Because of this, the Stock Company and the Bank will only raise an amount of
capital which it believes it can prudently deploy.
The shares that are issued to the Mutual Company may be subsequently sold
to the Bank's depositors if the Mutual Company fully converts from the mutual to
the stock form or organization. See "Conversion of the Mutual Company to the
Stock Form of Organization." In addition, because the Mutual Company controls a
majority of the Stock Company's common stock, we believe that the reorganization
and offering will permit the Bank to achieve the benefits of a stock company
without a loss of control that often follows a standard conversion from mutual
to stock form. Sales of locally based, independent savings institutions to
larger,
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regional financial institutions can result in closed branches, fewer choices for
consumers, employee layoffs and the loss of community support for and
involvement by financial institutions.
Because the Mutual Company is a mutual corporation, its actions may not
necessarily always be in the best interests of the Stock Company's stockholders.
In making business decisions, the Mutual Company's Board of Directors will
consider a variety of constituencies, including the depositors of the Bank, the
employees of the Bank, and the communities in which the Bank operates. As the
majority stockholder of the Stock Company, the Mutual Company is also interested
in the continued success and profitability of the Bank and the Stock Company.
Consequently, the Mutual Company will act in a manner that furthers the general
interest of all of its constituencies, including, but not limited to, the
interest of the stockholders of the Stock Company. The Mutual Company believes
that the interests of the stockholders of the Stock Company, and those of the
Mutual Company's other constituencies, are in many circumstances the same, such
as the increased profitability of the Stock Company and the Bank and continued
service to the communities in which the Bank operates.
BUSINESS PURPOSES OF THE REORGANIZATION
The Board of Directors of the Bank has determined that the Reorganization
is in the best interest of the Bank and its members. The Bank believes that the
Reorganization will enable the Bank to compete more effectively with local
community banks and thrift institutions and with statewide and regional banks.
In particular, formation of the Stock Company as a subsidiary of the Mutual
Company will permit the Stock Company to issue Common Stock, which is a source
of capital not available to mutual savings banks.
The sale of Common Stock will provide the Bank with new equity capital,
which will support future deposit growth and expanded operations. The additional
capital raised by the Bank in the Offering will raise the Bank's legal lending
limit by 47.2%, allowing the Bank to originate larger balance loans in its
market area. The proceeds of the Offering will also enable the Bank to grow its
asset and deposit base by funding the construction and/or acquisition of one or
more additional branch locations, modernize and expand our delivery systems and
support our diversification into other financial services. The holding company
form of organization is expected to provide additional flexibility to diversify
the Bank's business activities through existing or newly formed subsidiaries, or
through acquisitions of or mergers with other financial institutions, as well as
other companies.
Furthermore, since the Bank is competing with local and regional banks not
only for customers, but also for employees, the Bank believes that the ability
of the Stock Company to issue Common Stock also will better afford it the
opportunity to attract and retain management and employees through various stock
benefit plans, including incentive stock option plans, stock award plans and
employee stock ownership plans. At the midpoint of the current Offering Range,
approximately 28,200 shares of common stock are expected to be allocated to
management and employees under the employee stock ownership plan at a total cost
to the Stock Company of $282,000 (based on a price of $10.00 per share of Common
Stock issued.) In addition, the Bank expects to issue approximately 14,100
shares of Common Stock to directors and officers under a stock award plan
subject to approval of the Stock Company's minority shareholders at an estimated
cost of $141,000 (based on a price of $10.00 per share of common stock issued).
REVERE FEDERAL SAVINGS
The Bank is a federally chartered mutual savings association which conducts
business from its main office in Revere, Massachusetts, which is located five
miles northeast of Boston, Massachusetts. The Bank's deposits are insured by the
FDIC to the maximum extent permitted by law. At June 30, 1998, the Bank had
total assets of $88.8 million, total deposits of $63.0 million and equity of
$6.4 million.
Formed in 1901, the Bank is a community-oriented savings institution whose
business consists of accepting deposits from customers and investing those funds
together with borrowings primarily in loans secured by single family homes. The
Bank also serves the needs of small businesses and retail customers in its
market area by originating commercial, commercial real estate, construction and
development and consumer loans.
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The Bank invests in Treasury and Federal agency securities, asset-backed
securities, mortgage-backed securities and other short term interest-bearing
deposits. The Bank's principal sources of funds are deposits, borrowings and
principal and interest payments on loans and investments. The principal source
of income is interest and dividends on loans and investment securities. The
Bank's principal expenses are interest paid on deposits, Federal Home Loan Bank
("FHLB") advances and general and administrative expenses.
Business Strategy. Historically, the primary focus of the Bank has been to
provide financing for single family housing in its market area of Revere,
Massachusetts and surrounding communities. Indeed, at September 30, 1995, over
96% of the Bank's loan portfolio consisted of one- to four-family residential
loans, and the Bank had no commercial real estate or commercial loans in its
portfolio. Beginning in 1996, the Bank began to make significant investments in
the human and technological resources necessary to create a platform for the
future growth and profitability of the Bank. This strategy was designed to
enhance the Bank's franchise value and strengthen earnings by diversifying its
product lines, thereby increasing the size of the Bank's loan portfolio as well
as its composition. Although the Bank believes the adoption of this strategy
will increase profitability over the longer term, increases in operating
expenses associated with this strategy will continue to put pressure on earnings
in the short term.
o Retail Banking and Customer Service. The Bank continues to focus on
expanding its residential lending and retail banking franchise and
increasing the number of households served within the Bank's market area.
For nearly 100 years, the Bank has served the needs of Revere and its
surrounding communities and remains the only bank headquartered in Revere.
Given the increasing consolidation in the financial services sector, the
Bank believes that expanding its market share for traditional community
banking products will enhance its reputation as a service oriented
institution which meets the needs of the local community and provide
inroads to new segments of the banking market.
o Small Business Banking. The Bank views its entry into the small business
banking market as a natural outgrowth of its traditional community banking
services. Since 1996, the Bank has made a major commitment to small
business commercial lending (involving commercial and industrial loans and
commercial real estate loans) as a means to increase the yield on its loan
portfolio and attract lower cost transaction deposit accounts. The Bank has
worked to develop a niche of making commercial loans to the small and
medium sized companies in a wide variety of industries located in Revere
and elsewhere in the greater Boston area. In particular, the Bank has
expanded its lending to the business community surrounding the Logan
International Airport which comprises a growing sector of the Revere and
Chelsea markets. The Bank offers these businesses a variety of traditional
loan products and commercial services administered by the Bank's commercial
loan department which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the
refinancing of existing corporate debt. As a result of the Bank's efforts,
commercial business and commercial real estate loans have grown from zero
at September 30, 1995 to approximately $7.0 million at June 30, 1998.
o Branch Expansion. The Bank believes that a branch network is crucial to
increasing its market share in the traditional community banking and small
business banking arenas and that its lending and deposit gathering
activities are presently limited by the fact that it operates from only one
location. The Bank has recently purchased its first branch facility in
Chelsea, Massachusetts in a stable and growing small business market.
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In the future, the Bank expects to fund the construction and/or acquisition
of one or more additional branch locations either de novo, or by purchasing
an existing deposit base and/or location and to expand and renovate its
main office to allow the Bank's administrative functions to be performed in
a single facility. Expansion will facilitate greater services and increased
loan originations within the Bank's existing underwriting standards.
o Expanded Delivery Systems. The increased use of alternative delivery
channels has simplified and reduced the costs of financial transactions for
consumers, businesses and financial institutions. In addition to conducting
financial transactions at branch offices, customers are increasingly using
ATMs, online banking and online bill payment and electronic fund transfer
services. In response to these trends, the Bank offers 24 hour telebanking
product which provides its customers with around the clock access to their
accounts through the use of a touch tone telephone. The Bank also has
located an ATM at Logan Airport and is currently in negotiations to open
two additional ATMs in Revere and one ATM in downtown Boston in the fall of
1998. Finally, the Bank plans to introduce its home banking product which
will give its customers access to their accounts through the use of their
personal computers in the first quarter of 1999.
o Expansion of Product Lines. The Bank today has the opportunity to expand
its market share and compete for an increased share of customers' financial
services business by offering a diverse range of products and services that
formerly may have been offered only by insurance companies and securities
brokerage firms. The Bank intends to broaden its product line in order to
better serve its customers, expand customer relations and diversify its
income stream. In the near term, the Bank is contemplating offering various
uninsured investment products, including fixed-rate and variable annuities
and mutual funds, through relationships with third party broker-dealers
and/or money managers that would service both retail and small business
customers needs for investment products. The Bank also plans to investigate
opportunities presented by affiliations with insurance agencies over the
longer term. The Bank's strategy is to become a full service provider of
financial services, enhancing the Bank's ability to attract and retain both
retail and commercial customers.
The brief description of the Bank in this summary should be considered in
the context of the more detailed descriptions in this Prospectus, including
"Risk Factors."
THE OFFERING
We are offering a minimum of 299,625 shares and a maximum of 466,181 shares
of Common Stock in the Offering, which will expire at 12:00 noon, Eastern time,
on December 10, 1998 unless extended by us. Subject to the limitations set forth
herein and our right to reject certain orders in whole or in part (as described
under "The Offering -- Orders for Common Stock"), shares of Common Stock are
being offered in descending order of priority to (1) Eligible Account Holders;
(2) the ESOP; (3) Supplemental Eligible Account Holders; and (4) Other Members.
At any time during or after the subscription offering, the Bank may offer shares
to the general public, with a preference given to residents of Revere,
Massachusetts. Consummation of the Offering is subject to (i) consummation of
the Reorganization, which is conditioned on, among other things, approval by the
members and the OTS, (ii) the receipt of all required federal approvals for the
issuance of Common Stock in the Offering and (iii) the sale of a minimum of
299,625 shares of Common Stock. No
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assurance can be given that we will be able to obtain all regulatory approvals
required to consummate the Reorganization.
Trident will provide financial advice to us in connection with the Offering
and will assist on a best efforts basis in the distribution of the Common Stock
in the Offering. Trident may also manage a selling group of broker-dealers,
which may include Trident, in a Syndicated Community Offering.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Offering, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Stock Issuance Plan or the
shares of Common Stock to be issued upon their exercise. Each person exercising
subscription rights will be required to certify that any purchase of Common
Stock will be solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of any shares
purchased as a result of the exercise. We will pursue any and all legal and
equitable remedies in the event we become aware of the transfer of subscription
rights and will not honor orders believed by us to involve the transfer of such
rights.
Following the Offering, there generally will be no restrictions on the
transfer or sale of shares by purchasers other than affiliates of the Bank and
Stock Company or members of the National Association of Securities Dealers, Inc.
PURCHASE LIMITATIONS
The Stock Issuance Plan provides that, except for the ESOP, no person,
together with associates of and persons acting in concert with such person, may
purchase more than the lesser of $150,000 of the Common Stock or 5.0% of the
shares of Common Stock offered in the Offering; provided that we may in our sole
discretion, and without further notice to or solicitation of subscribers or
other prospective purchasers, increase such maximum purchase limitation to up to
5% of the number of shares offered in the Offering, or decrease it to as low as
0.5% of the number of shares offered in the Offering. If we increase such
limitation, subscribers for the maximum amount will be, and certain other large
purchasers in our sole discretion may be, given the opportunity to increase
their orders up to the then applicable limit. We would only adjust the maximum
purchase limitation if business circumstances or market conditions warrant such
adjustment. No person may purchase fewer than 25 shares. The Bank's directors,
officers and their "associates," may not purchase in the aggregate more than 34%
of the Common Stock sold in the Offering.
PURCHASE PRICE AND STOCK PRICING
We are offering the Common Stock at a fixed price of $10.00 per share. OTS
regulations require that the aggregate purchase price of all shares to be issued
in the Offering be consistent with an independent appraisal of the estimated pro
forma market value of the Bank immediately prior to the consummation of the
Offering. Based on the Independent Valuation, the estimated aggregate pro forma
market value of the Bank is $9.9 million. Such appraisal is not intended and
must not be construed as a recommendation of any kind as to the advisability of
purchasing shares of the Common Stock or as any form of assurance that, after
the Offering, such shares may be resold at or above the Purchase Price. The
Independent Valuation is based upon a number of factors and estimates derived
from those factors, all of which are subject to change from time to time. See
"The Reorganization" and "The Offering--Stock Pricing and Number of Shares to be
Issued."
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Based upon the Independent Valuation and in consultation with Trident, we
have established an offering range of between $3.0 million and $4.1 million,
subject to adjustment up to $4.7 million to reflect any increase in the
Independent Valuation (the "Offering Range"). We have established the Offering
Range to provide the maximum flexibility in raising capital. Based upon the
Independent Valuation, the shares that will be sold in the Offering as a
percentage of the number of shares that will be outstanding after the Offering
will be 47% at the minimum and maximum of the Offering Range.
The Independent Valuation and the Minority Ownership Interest may be
increased or decreased to reflect market and financial conditions immediately
prior to the time the Offering is consummated. A change in the Independent
Valuation will result in a corresponding increase or decrease in the Minority
Ownership Interest and may, at the discretion of the Bank, result in an increase
or decrease in the total number of shares being sold in the Offering. Regardless
of a change in the Independent Valuation, the maximum of the Offering Range will
not exceed 47% of the outstanding shares of Common Stock of the Stock Company.
We are not required to notify you of a change in the Independent Valuation
unless such change decreases the Independent Valuation by more than 15% below
the midpoint of the Offering Range or increases the Independent Valuation by
more than 15% above the maximum of the Offering Range.
The Minority Ownership Interest will be determined as follows: (i) the
numerator will be the product of (x) the number of shares of Common Stock sold
in the Offering and (y) the Purchase Price ($10.00 per share); and (ii) the
denominator will be the updated valuation of the estimated pro forma market
value of the Bank immediately prior to conclusion of the Offering as determined
by RP Financial, LC.("RP Financial"). Regardless of a change in the Independent
Valuation, the maximum shares sold in the Offering will not exceed 466,181
shares which, if the Independent Valuation increases by 15%, would result in a
Minority Ownership Interest of 47%. The Minority Ownership Interest may decrease
after the conclusion of the Offering if the Stock Company purchases additional
shares of Common Stock in the open market.
PROPOSED PURCHASES BY MANAGEMENT
Directors and executive officers of the Bank as a group (11 persons) are
expected to purchase $907,000 of Common Stock in the Offering which, assuming
the issuance of the anticipated midpoint 352,500 shares, would represent 90,700
shares or 25.9% of the Common Stock to be issued in the Offering. The ESOP
intends to purchase up to 8% of the shares of Common Stock to be issued in the
Offering which at the anticipated midpoint is 28,200 shares.
BENEFITS TO MANAGEMENT AND DIRECTORS
Stock Based Benefit Plans. As early as six months to one year following the
completion of the Offering, the Stock Company intends to adopt certain
stock-based benefit plans. These benefit plans include stock option plans
providing for the grant of options to purchase shares of common stock equal to
10% of the Common Stock issued in the Offering (29,962 shares and 40,537 shares
at the minimum and maximum of the Offering Range, or an aggregate dollar amount
of $299,620 and $405,370, respectively, assuming an exercise price equal to the
Purchase Price of $10.00 per share) and restricted stock programs providing for
the grant of restricted stock awards of, in the aggregate, up to 4% of the
shares of Common Stock issued in the Offering, or 11,985 shares and 16,215
shares at the minimum and maximum of the Offering Range or an aggregate dollar
amount of $119,850 and 162,150, respectively, assuming a purchase price of
$10.00 per share. Such stock based benefit plans would have to be approved by a
majority of the Minority Stockholders at an annual or special meeting of
stockholders, to be held no earlier than six months after the completion of the
Reorganization.
The following table presents the dollar value of the shares to be granted
pursuant to the proposed benefit plans and the percentage of the Stock Company's
outstanding common stock which will be represented by these shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
VALUE OF OUTSTANDING
SHARES GRANTED (1) COMMON STOCK
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BENEFIT PLAN:
<S> <C> <C>
Employee stock ownership plan .......... $ 270,250 3.76%
Stock award plan ....................... $ 135,125 1.88
Stock option plan ...................... ---(2) 4.70
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$ 405,375 10.34%
</TABLE>
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(1) Assumes shares are granted at $10 per share and that shares are sold in the
Offering at the maximum of the Offering Range.
(2) Recipients of stock options realize value only in the event of an increase
in the price of the common stock of the Stock Company following the date of
grant of the stock options.
11
<PAGE>
USE OF PROCEEDS
The Stock Company will use the net proceeds from the offering as follows.
The percentages we use are estimates:
o 85% will be added to the Bank's capital in exchange for all of the capital
stock of the Bank.
o 8% will be loaned to the ESOP to fund its purchase of common stock.
o 7% will be retained for general corporate purposes.
The proceeds to be received by the Bank will be available for continued
expansion of the retail banking franchise through the opening of new branches,
deposit or bank acquisitions, continued growth in the loan portfolio, and the
purchase of investment and mortgage related securities, in addition to general
corporate purposes.
Net proceeds from the sale of the Common Stock are estimated to be between
$2.6 million and $3.6 million (or $4.2 million if the Independent Valuation is
increased by 15%) depending on the number of shares sold and the expenses of the
Offering. See "Pro Forma Data." Net proceeds will be used to support the Bank's
expansion of its small business lending and other financial services and to
expand the Bank's operations through the establishment of additional branch
locations either de novo or through acquisitions and for expansion and
renovation of the Bank's main office. The Bank has recently purchased its first
branch facility in Chelsea, Massachusetts, a stable and growing, strong small
business market. The estimated acquisition and renovation costs for the building
are approximately $600,000. On an interim basis, it is anticipated that the net
proceeds will be invested in instruments that qualify as short-term liquidity
for regulatory purposes until such proceeds can be deployed in longer term
investments. The Stock Company may also use such funds for other corporate
purposes, including the funding of the ESOP loan and the funding of other
employee benefit plans.
DIVIDENDS
The Board of Directors does not anticipate paying a dividend in the near
term. The Bank believes that its capital would be better deployed by expanding
its small business lending and other corporate purposes. Declarations of
dividends by the Board of Directors in the future will depend upon a number of
factors, including the amount of the net proceeds, investment opportunities
available to the Bank, capital requirements, regulatory limitations, the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. There can be no assurance that dividends will be paid on
the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure that eligible members are properly identified as to their stock
purchase priorities, such parties must list all deposit accounts on the order
form, giving all names on each deposit account and the account numbers at the
applicable date. THE FAILURE TO PROVIDE ACCURATE AND COMPLETE ACCOUNT
INFORMATION ON THE ORDER FORM MAY RESULT IN A REDUCTION OR ELIMINATION OF YOUR
ORDER.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire will not be accepted) must accompany
an original order form. The Stock Company is not obligated to accept an order
submitted on photocopied or telecopied order forms. We will not accept order
forms if the certification appearing on the reverse side of the order form is
not executed. We are not required to deliver a prospectus and order form by any
means other than the U.S. postal service.
12
<PAGE>
MARKET FOR THE COMMON STOCK
We expect the Common Stock to be quoted on the OTC Bulletin Board under the
symbol "RFSB". Since the size of the offering is relatively small, it is
unlikely that an active and liquid trading market will develop and be
maintained. Investors should have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares when they desire or sell
them at a price equal to or above $10.00.
IMPORTANT RISKS IN PURCHASING AND OWNING RFS BANCORP'S COMMON STOCK
Before you decide to purchase stock in the offering, you should read the
Risk Factors section on pages 23 to 28 of this prospectus, in addition to the
other sections of this prospectus.
The shares of common stock offered hereby:
o Are not deposit accounts;
o Are not insured or guaranteed by the FDIC, or any other government
agency; and
o Are not guaranteed by the Stock Company, the Mutual Company, or the
Bank.
The common stock is subject to investment risk, including the possible loss
of principal invested.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
The selected consolidated financial and other data of the Bank set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Bank and Notes thereto presented
elsewhere in this Prospectus. The data presented for the nine months ended June
30, 1998 and 1997 was derived from unaudited consolidated financial statements
and reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the nine months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30,-----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets........................... $ 88,780 $ 86,920 77,898 67,732 59,910 50,953
Loans, net ............................ 46,825 41,175 33,046 21,273 20,579 22,158
Investments (1)........................ 34,146 40,790 41,120 42,054 35,747 19,341
Total deposits......................... 62,976 55,452 49,393 48,232 41,108 36,633
FHLB advances.......................... 19,284 25,104 22,712 13,818 13,482 10,000
Total equity........................... 6,374 6,039 5,447 5,277 4,819 4,093
Allowance for loan losses.............. 506 377 325 206 187 67
Non-performing loans................... 269 157 28 125 190 204
Non-performing assets.................. 269 157 28 125 298 332
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30 FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income................... $ 5,007 $ 4,567 $ 6,180 $ 5,110 $ 4,447 $ 3,733 $ 3,267
Interest expense............................... 2,751 2,655 3,585 3,018 2,454 1,653 1,311
------- ------- ------- ------- ------- -------- -------
Net interest and dividend income............... 2,256 1,912 2,595 2,092 1,993 2,080 1,956
Provision (benefit) for loan losses............ 175 45 60 148 (2) 144 155
------- ------- ------- ------- ------- -------- -------
Net interest and dividend income after
provision (benefit) for loan losses.......... 2,081 1,867 2,535 1,944 1,995 1,936 1,801
Total noninterest income....................... 117 81 116 67 348 42 44
Total noninterest expense...................... 1,865 1,373 1,888 1,891 1,531 1,261 1,190
------- ------- ------- ------- ------- -------- -------
Income before income taxes..................... 333 575 763 120 812 717 655
Income taxes................................... 125 208 287 26 271 241 276
------- ------- ------- ------- ------- -------- -------
Net income..................................... $ 208 $ 367 $ 476 $ 94 $ 541 $ 476 $ 379
======= ======= ======= ======= ======= ======== =======
</TABLE>
(footnotes on next page)
14
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ ------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL RATIOS AND OTHER DATA(2)
PERFORMANCE RATIOS:
<S> <C> <C> <C> <C> <C> <C> <C>
Return on average assets.................... 0.31% 0.59% 0.56% 0.13% 0.86% 0.88% 0.89%
Return on average equity.................... 4.74 9.04 8.66 1.84 11.17 10.98 9.59
Average equity to average assets............ 6.60 6.49 6.52 7.13 7.69 8.00 9.24
Equity to total assets at end of period..... 7.18 6.37 6.95 6.99 7.79 8.04 8.03
Average interest rate spread................ 3.16 2.88 2.89 2.72 2.99 3.71 4.50
Net interest margin......................... 3.48 3.13 3.16 3.00 3.26 3.94 4.74
Average interest-earning assets to average
interest-bearing liabilities ............. 107.52 106.01 106.16 106.60 106.66 107.06 107.57
Total noninterest expense to average assets. 2.81 2.20 2.24 2.63 2.43 2.33 2.78
Efficiency ratio(3)......................... 78.63 68.89 69.64 87.59 65.36 59.43 59.50
REGULATORY CAPITAL RATIOS:
Tangible capital............................ 6.63 6.66 6.54 6.69 7.56 7.68 8.03
Core capital................................ 6.63 6.66 6.54 6.69 7.56 7.68 8.03
Risk-based capital.......................... 17.89 20.21 21.33 24.03 33.42 33.12 28.12
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of loans.................................. 0.57 0.00 0.38 0.08 0.58 0.91 0.92
Non-performing assets as a percent
of total assets........................... 0.30 0.00 0.18 0.04 0.18 0.50 0.65
Allowance for loan losses as a percent
of loans ................................. 1.07 0.94 0.91 0.97 0.96 0.90 0.30
Allowance for loan losses as a percent
of non-performing loans .................. 188.12 N/A 240.03 1,159.67 164.86 98.33 32.76
NUMBER OF:
Loans outstanding........................... 834 717 775 569 440 436 487
Deposit accounts............................ 7,763 6,666 6,907 6,008 5,100 4,458 4,079
Full-service offices........................ 1 1 1 1 1 1 1
Full-time equivalent employees ............. 26 19 22 17 13 12 12
</TABLE>
- -------------
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115") as of September 30, 1994.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods and are annualized
where appropriate.
(3) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
15
<PAGE>
RECENT DEVELOPMENTS
The selected consolidated financial and other data presented below as of
September 30, 1998 and 1997, at and for the twelve months ended September 30,
1998, are derived from unaudited financial data, but, in the opinion of
management, reflects all adjustments (consisting only of normal recurring
adjustments) which are necessary to present fairly the results for such period.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT JUNE 30, AT SEPTEMBER 30,
1998 1998 1997
----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets................................. $ 89,468 $ 88,780 $ 86,920
Loans, net................................... 46,852 46,825 41,175
Investments (1).............................. 31,005 34,146 40,790
Total deposits............................... 64,484 62,976 55,452
FHLB advances................................ 18,204 19,284 25,104
Total equity................................. 6,484 6,374 6,039
Allowance for loan losses.................... 528 506 377
Non-performing loans......................... 199 269 157
Non-performing assets........................ 199 269 157
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------
1998 1997 1998 1997
-------------------------- -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income.................. $ 1,636 $ 1,614 $ 6,643 $ 6,180
Interest expense.............................. 853 931 3,604 3,585
---------------------- ----------------------
Net interest and dividend income.............. 783 683 3,039 2,595
Provision for loan losses..................... 22 15 197 60
---------------------- ----------------------
Net interest and dividend income after
provision for loan losses.................. 761 668 2,842 2,535
Total noninterest income...................... 38 35 155 116
Total noninterest expense..................... 668 515 2,533 1,888
---------------------- ----------------------
Income before income taxes.................... 131 188 464 763
Income taxes.................................. 48 79 173 287
---------------------- ----------------------
Net income.................................... $ 83 $ 109 $ 291 $ 476
====================== ======================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE YEAR
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
------------------------------ -----------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2):
Performance Ratios:
Return on average assets.................................. 0.38% 0.50% 0.33% 0.56%
Return on average equity.................................. 5.49 7.60 4.94 8.66
Average equity to average assets.......................... 6.86 6.58 6.66 6.52
Equity to total assets at end of period................... 7.25 6.95 7.25 6.95
Average interest rate spread.............................. 3.29 2.89 3.20 2.89
Net interest margin....................................... 3.64 3.21 3.53 3.16
Average interest-earning assets to average
interest-bearing liabilities............................ 108.79 107.24 107.71 106.16
Total noninterest expense to average assets............... 3.03 2.36 2.86 2.24
Efficiency ratio(3)....................................... 81.36 71.73 79.30 69.64
REGULATORY CAPITAL RATIOS:
Tangible capital.......................................... 6.67 6.54 6.67 6.54
Core capital.............................................. 6.67 6.54 6.67 6.54
Risk-based capital........................................ 17.72 21.33 17.72 21.33
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans................ 0.42 0.38 0.42 0.38
Non-performing assets as a percent of total
assets.................................................. 0.22 0.18 0.22 0.18
Allowance for loan losses as a percent of loans........... 1.11 0.91 1.11 0.91
Allowance for loan losses as a percent of
non-performing loans.................................... 265.45 240.03 265.45 240.03
NUMBER OF:
Loans outstanding......................................... 857 775 857 775
Deposit accounts.......................................... 8,083 6,907 8,083 6,907
Full-service offices...................................... 1 1 1 1
Full-time equivalent employees............................ 27 22 27 22
</TABLE>
- ------------------------
(1) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115") as of September 30, 1994.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(3) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest and dividend income and noninterest income.
17
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998.
The Bank's total assets increased by $688,000 or .77% to $89.5 million at
September 30, 1998 from $88.8 million at June 30, 1998. The net increase in
total assets is primarily attributable to an increase in federal funds sold of
$3.8 million, offset by a $3.1 million decrease in investment securities.
Investment securities held by the Bank decreased by $3.1 million or 9.1% to
$31.0 million at September 30, 1998 from $34.1 million at June 30, 1998. This
decrease is primarily due to the call of $1.5 million of agency bonds.
Total deposits increased by $1.5 million or 2.4% to $64.5 million at
September 30, 1998 from $63.0 million at June 30, 1998. Total FHLB advances
decreased by $1.1 million or 5.7% to $18.2 million at September 30, 1998 from
$19.3 million at June 30, 1998. The Bank used proceeds from bonds called and
excess cash to pay down advances during this period. Total equity increased by
$110,000 or 1.7% to $6.5 million at September 30, 1998 from $6.4 million at June
30, 1998 principally as a result of net income of $83,000.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997.
The Bank's total assets increased by $2.6 million or 3.0% to $89.5 million
at September 30, 1998 from $86.9 million at September 30, 1997. The net increase
in total assets is primarily attributable to a $5.7 million increase in net
loans and an increase in federal funds sold of $5.5 million, offset by a $9.8
million decrease in investment securities. Total net loans increased by $5.7
million or 13.8% to $46.9 million or 52.4% of total assets at September 30, 1998
as compared to $41.2 million or 47.4% of total assets at September 30, 1997. The
Bank's loan growth reflected the continued emphasis on commercial and commercial
real estate lending. Investment securities held by the Bank decreased by $9.8
million or 24.0% to $31.0 million at September 30, 1998 from $40.8 million at
September 30, 1997. This decrease is primarily due to the call of $8.7 million
of agency bonds.
Total deposits increased by $9.0 million or 16.2% to $64.5 million at
September 30, 1998 from $55.5 million at September 30, 1997. Total FHLB advances
decreased by $6.9 million or 27.5% to $18.2 million at September 30, 1998 from
$25.1 million at September 30, 1997. The Bank used proceeds from bonds called
and excess cash to paydown advances during this period. Total equity increased
by $445,000 or 7.4% to $6.5 million at September 30, 1998 from $6.0 million at
September 30, 1997 principally as a result of net income $291,000.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997.
Net Income. The Bank's net income for the quarter ended September 30, 1998
was $83,000 as compared to $109,000 for the quarter ended September 30, 1997.
This $26,000 or 23.9% decrease in net income during the period was the result of
an increase of $22,000 in interest and dividend income, an increase of $3,000 in
other income, a decrease of $78,000 in interest expense and a decrease in
provision for income taxes of $31,000, offset by an increase of $153,000 in
operating expenses and an increase of $7,000 in provision for loan losses. The
Bank's continued expansion of its lending activities accounted for the increase
in interest income, while its operating expenses increased due to increased
staffing and advertising. The return on average assets for the quarter ended
September 30, 1998 was .38% compared to .50% for the quarter ended September 30,
1997.
Interest and Dividend Income. Total interest and dividend income increased
by $22,000 or 1.4% to $1.6 million for the quarter ended September 30, 1998 from
$1.6 million for the quarter ended September 30, 1997. The increase in interest
and dividend income was a result of a higher level of loans and a greater mix of
higher yielding commercial and commercial real estate loans funded by bonds
called. The average balance of net loans for the quarter ended September 30,
1998 was $46.7 million compared to $40.1 million for the quarter ended September
30, 1997. The average yield on net loans was 8.48% for the quarter ended
September 30, 1998 compared to 8.36% for the quarter ended September 30, 1997,
reflecting an increase in the amount of commercial and commercial real estate
loans. The average balance of investment securities for the quarter ended
September 30, 1998 was $33.2 million compared to $42.6 million for the quarter
ended September 30, 1997. The average yield on investment securities was 6.87%
for the quarter ended September 30, 1998 compared to 6.96% for the quarter ended
September 30, 1997.
Interest Expense. Interest expense decreased by $78,000 or 8.4% to $853,000
for the quarter ended September 30, 1998 from $931,000 for the quarter ended
September 30, 1997. Interest expense decreased as a result of a decrease in FHLB
advances. Average interest-bearing deposits increased by $6.9 million or 13.0%
to $59.9 million for the quarter ended September 30, 1998. Deposit balances have
increased as a result of offering free checking products and certificate of
deposit products with competitive rates. Accordingly, interest expense on
deposits increased $52,000 or 9.6% to $596,000 for the quarter ended September
30, 1998 compared to $544,000 for the quarter ended September 30, 1997. Interest
expense on FHLB advances decreased $129,000 or 33.4% to $257,000 for the quarter
ended September 30, 1998 from $386,000 for the quarter ended September 30, 1997.
18
<PAGE>
Net Interest and Dividend Income. The Bank's net interest and dividend
income for the quarter ended September 30, 1998 increased $100,000 or 14.6% to
$783,000 from $683,000 for the quarter ended September 30, 1997. The increase
can be attributed to a combination of the $22,000 increase in interest and
dividend income and a $78,000 decrease in interest expense on deposits and
borrowed funds.
The average yield on interest earning assets increased 4 basis points to
7.61% for the quarter ended September 30, 1998 from 7.57% for the quarter ended
September 30, 1997, while the average cost of interest-bearing liabilities
decreased by 36 basis points to 4.32% for the quarter ended September 30, 1998
from 4.68% for the quarter ended September 30, 1997. As a result of the Bank's
strategy to restructure the balance sheet, the interest rate spread increased to
3.29% for the quarter ended September 30, 1998 from 2.89% for the quarter ended
September 30, 1997 and the net interest margin improved from 3.21% during this
period.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of potential losses and is based on
the perceived higher risks inherent in small business and commercial real estate
lending as well as the growth of the loan portfolio. The Bank considers many
factors in determining the level of the provision for loan losses. Collateral
value on a loan by loan basis, trends of loan delinquencies, risk classification
identified in the Bank's regular review of individual loans, and economic
conditions are major factors in establishing the provision. The provision for
loan losses increased by $7,000 OR 46.7% to $22,000 for the quarter ended
September 30, 1998 from $15,000 for the quarter ended September 30, 1997. At
September 30, 1998, the balance of the allowance for loan losses was $528,000 or
1.11% of total loans versus $377,000 or .91% of total loans at September 30,
1997. As the Bank continues to expand its small business lending, additional
increases to the provision are likely.
Noninterest Income. Total noninterest income increased by $3,000 or 8.6% to
$38,000 for the quarter ended September 30, 1998 from $35,000 for the quarter
ended September 30, 1997. The increase was primarily the result of increased
fees on transactional deposit accounts. The Bank anticipates increases to
noninterest income as it continues to expand the volume of its deposit
relationships. It is also the Bank's goal to increase its level of noninterest
income by continually considering additional sources of revenue, including
offering various uninsured investment products, including fixed-rate and
variable annuities and mutual funds, through relationships with third party
broker-dealers and/or money managers and affiliations with insurance agencies.
Noninterest Expense. Noninterest expense increased by $153,000 or 29.7% to
$668,000 for the quarter ended September 30, 1998 from $515,000 for the quarter
ended September 30, 1997. The increase resulted primarily from a general
increase in operating expenses. Salaries and employee benefits, the largest
component of noninterest expense was $315,000 for the quarter ended September
30, 1998 as compared to $253,000 for the quarter ended September 30, 1997, an
increase of $62,000 or 24.5%. This increase was primarily associated with an
increase in compensation expenses due to the addition of five full time
equivalent employees, including two commercial lending department employees and
three operations department employees, necessary to provide support for the
Bank's expanded lending and deposit activities resulting from the establishment
of the Bank's commercial lending department. During the period, professional
fees increased from $29,000 to $63,000 or 117.2% due to the added cost of
outside loan review and certain legal and consulting costs associated with the
Bank's expansion. Occupancy expense increased by $10,000 or 35.7% to $38,000 for
the quarter ended September 30, 1998 as compared to $28,000 for the quarter
ended September 30, 1997, with the increase primarily related to additional
space utilized for certain administrative functions. Other increases were
incurred in the areas of equipment, data processing and advertising services,
primarily related to the expansion of the Bank's product lines and additional
services. Annual operating expenses are also expected to increase in future
periods due to the increased cost associated with an additional branch location
and the cost of operating as a stock institution.
Income Taxes. The net provision for income taxes amounted to $48,000 for
the quarter ended September 30, 1998 as compared to $79,000 for the quarter
ended September 30, 1997, resulting in effective tax rate of 36.6% and 42.0%.
The effective tax rate reflects the Bank's utilization of a securities
investment subsidiary to substantially reduce state income taxes.
19
<PAGE>
COMPARISON OF THE OPERATING RESULTS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997.
Net Income. The Bank's net income for the twelve months ended September 30,
1998 was $291,000 as compared to $476,000 for the twelve months ended September
30, 1997. This $185,000 or 38.9% decrease in net income during the period was
the result of an increase of $463,000 in interest and dividend income and an
increase of $39,000 in other income, offset by an increase of $645,000 in
operating expenses, an increase of $137,000 in provision for loan losses, an
increase of $19,000 in interest expense, and a decrease in provision for income
taxes of $114,000. The Bank's continued expansion of its lending activities
accounted for the increase in interest income, while its operating expenses
increased due to increased staffing and advertising. The return on average
assets for the twelve months ended September 30, 1998 was .33% compared to .56%
for the twelve months ended September 30, 1997.
Interest and Dividend Income. Total interest and dividend income increased
by $463,000 or 7.5% to $6.6 million for the twelve months ended September 30,
1998 from $6.2 million for the twelve months ended September 30, 1997. The
increase in interest and dividend income was a result of a higher level of loans
and a greater mix of higher yielding commercial and commercial real estate loans
funded by bonds called. The average balance of net loans for the twelve months
ended September 30, 1998 was $45.0 million compared to $36.3 million for the
twelve months ended September 30, 1997. The average yield on net loans was 8.60%
for the twelve months ended September 30, 1998 compared to 8.33% for the twelve
months ended September 30, 1997, reflecting an increase in the amount of
commercial and commercial real estate loans. The average balance of investment
securities for the twelve months ended September 30, 1998 was $35.4 million
compared to $44.1 million for the twelve months ended September 30, 1997. The
average yield on investment securities was 6.98% for the twelve months ended
September 30, 1998 compared to 6.96% for the twelve months ended September 30,
1997.
Interest Expense. Interest expense increased by $19,000 or .53 % to $3.6
million for the twelve months ended September 30, 1998 from $3.6 million for the
twelve months ended September 30, 1997. Interest expense increased as a result
of increases in overall deposit balances as well as a decrease in Federal Home
Loan Bank of Boston borrowings. Average interest-bearing deposits increased by
$5.7 million or 11.2% to $57.1 million for the twelve months ended September 30,
1998. Deposit balances have increased as a result of offering free checking
products and certificate of deposit products with competitive rates.
Accordingly, interest expense on deposits increased $233,000 or 11.3% to $2.3
million during this period from $2.1 million during fiscal year 1997. Interest
expense on advances from the Federal Home Loan Bank decreased $215,000 or 14.1%
to $1.3 million for the year ended September 30, 1998 from $1.5 million for the
year ended September 30, 1997.
20
<PAGE>
Net Interest and Dividend Income. The Bank's net interest and dividend
income for the twelve months ended September 30, 1998 increased $444,000 or
17.1% to $3.0 million from $2.6 million for the twelve months ended September
30, 1997. The increase is attributed to a combination of the $463,000 increase
in interest and dividend income and the $19,000 increase in interest expense on
deposits and borrowed funds.
The average yield on interest earning assets increased 19 basis points to
7.71% for the twelve months ended September 30, 1998 from 7.52 % for the twelve
months ended September 30, 1997, while the average cost on interest-bearing
liabilities increased by 12 basis points to 4.51% for the twelve months ended
September 30, 1998 from 4.63% for the twelve months ended September 30, 1997. As
a result of the Bank's strategy to restructure the balance sheet, the interest
rate spread increased to 3.20% for the twelve months ended September 30, 1998
from 2.89% for the twelve months ended September 30, 1997 and the net interest
margin improved to 3.53% from 3.16% during this period.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of potential losses and is based on
the perceived higher risks inherent in small business and commercial real
estate lending as well as the growth of the loan portfolio. The Bank considers
many factors in determining the level of the provision for loan losses.
Collateral value on a loan by loan basis, trends of loan delinquencies, risk
classification identified in the Bank's regular review of individual loans, and
economic conditions are major factors in establishing the provision. The
provision for loan losses increased by $137,000 or 228.3% to $197,000 for the
twelve months ended September 30, 1998 from $60,000 for the twelve months ended
September 30, 1997. At September 30, 1998, the balance of the allowance for loan
losses was $528,000 or 1.11% of total loans versus $377,000 or .91% of total
loans at September 30, 1997. The increase in the provision is due to the overall
increase in loan volume and the increased focus on the origination of commercial
real estate and commercial loans. As the Bank continues to expand its small
business lending, additional increases to the provision are likely.
Noninterest Income. Total noninterest income increased by $39,000 or 33.6%
to $155,000 for the twelve months ended September 30, 1998 from $116,000 for the
twelve months ended September 30, 1997. The increase was primarily the result of
increased fees on transactional deposit accounts. The Bank anticipates increases
to noninterest income as it continues to expand the volume of its deposit
relationships. It is also the Bank's goal to increase its level of noninterest
income by continually considering additional sources of revenue.
Noninterest Expense. Noninterest expense increased by $645,000 or 34.2% to
$ 2.5 million for the twelve months ended September 30, 1998 from $1.9 million
for the twelve months ended September 30, 1997. The increase resulted primarily
from a general increase in operating expenses. Salaries and employee benefits,
the largest component of noninterest expense, was $1.2 million for the twelve
months ended September 30, 1998 as compared to $919,000 for the twelve months
ended September 30, 1997, an increase of $298,000 or 32.4%. This increase was
primarily associated with approximately $223,000 in additional compensation
expenses due to the addition of five full time equivalent employees, including
two commercial lending department employees and three operations department
employees, necessary to provide support for the Bank's expanded lending and
deposit activities resulting from the establishment of the Bank's commercial
lending department. During the period, professional fees increased from $122,000
to $213,000 or 74.6% due to the added cost of outside loan review and certain
legal and consulting costs associated with the Bank's expansion. Occupancy
expense increased by $40,000 or 35.0% to $155,000 for the twelve months ended
September 30, 1998 as compared to $115,000 for the twelve months ended September
30, 1997, with the increase primarily related to additional space utilized for
certain administrative functions. Other increases were incurred in the areas of
equipment, data processing and advertising services, primarily related to the
expansion of the Bank's product lines and additional services. Annual operating
expenses are also expected to increase in future periods due to the increased
cost associated with an additional branch location and the cost of operating as
a stock institution.
Income Taxes. The net provision for income taxes amounted to $173,000 for
the year ended September 30, 1998 as compared to $287,000 for the year ended
September 30, 1997, resulting in effective tax rate of 37.3% for the period. The
effective tax rate reflects the Bank's utilization of a securities investment
subsidiary to substantially reduce state income taxes.
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RISK FACTORS
In addition to other information in this Prospectus, you should consider
carefully the following risk factors in evaluating an investment decision.
ANTICIPATED REDUCED EARNINGS LOW RETURN ON EQUITY AND INCREASED EXPENSES
FOLLOWING REORGANIZATION
Return on average equity (net income divided by average equity) is a ratio
used by many investors to compare the performance of a savings institution to
its peers. As a result of the reorganization, our equity will increase
substantially. Our expenses also will increase due to several factors. First,
over the next twelve to twenty-four months, we expect to incur approximately
$______ in non-recurring start-up expenses in establishing our new branch office
in Chelsea, Massachusetts. We estimate our annual compensation expense to
increase by approximately $_______ due to added personnel to staff our new
branch. We will also incur approximately $54,000 in additional annual expenses
associated with proposed stock compensation plans (assuming that these plans are
approved by our minority shareholders and that shares are acquired at $10.00 per
share at the maximum of the Offering Range), as well as the costs of being a
public company. For the years ended September 30, 1998 and 1997, the Bank's net
income was $291,000 and 476,000, respectively. On a pro forma basis, for the
year ended September 30, 1997, assuming the sale of the midpoint of ______
shares of common stock in the Reorganization at the beginning of the fiscal
year, the Company's net income would have been $__________. Although we believe
that the Reorganization and our business strategy will enhance the Bank's
franchise value and strengthen earnings in the long term, the estimated start-up
expenses for the new Chelsea branch and the projected $____ increase in annual
operating expenses is expected to have a material impact on earnings in the
short term. There can be no assurance that actual start-up expenses for the
Chelsea branch or actual increase in annual operating expenses will not be
greater than currently anticipated.
In addition, because of the increase in our equity and expenses, we expect
our return on equity to decrease as compared to our performance in previous
years. For the nine months ended June 30, 1998, the Bank's return on average
equity was 4.74%. On a pro forma basis, for the nine months ended June 30, 1998,
assuming the sale of the midpoint of 352,500 shares of Common Stock in the
Reorganization at the beginning of the fiscal year, the Company's return on
equity would have been 3.89%. A lower return on equity could reduce the trading
price of our shares. While increases in our operating expenses may be offset by
earnings on the offering proceeds, there can be no assurance that we will be
able to increase net income in future periods.
RISKS ASSOCIATED WITH GROWTH OF THE BANK'S COMMERCIAL LOAN AND COMMERCIAL REAL
ESTATE LOAN PORTFOLIO
Beginning in 1996, our lending activities have increasingly emphasized
commercial and commercial real estate loans to small businesses in our market
area. At June 30, 1998, our total loan portfolio included commercial loans of
$2.8 million, or 5.9% of total loans and commercial real estate loans of $4.2
million or 8.8% of total loans. Commercial loans accounted for 13.5% and 0% of
our total loan originations during the fiscal years 1997 and 1996, respectively,
and commercial real estate loans accounted for 15.6% and 2.3% of our total loan
originations during the fiscal years 1997 and 1996, respectively. Additionally,
because we have originated most of our commercial and commercial real estate
loans within the past two years, the commercial and commercial real estate loan
portfolio is relatively unseasoned, and there can be no guarantee as to the
long-term performance of such loans.
We attempt to collateralize all of our commercial loans with real estate or
tangible commercial assets. Loans secured by commercial real estate properties
generally involve a higher degree of risk than the single-family mortgages that
we have traditionally emphasized. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Commercial and commercial real estate loans may also involve
relatively large loan balances to single borrowers or groups of related
borrowers. The repayment of commercial loans is typically dependent on the
successful operation and income stream of the borrower. Such loans can be
significantly affected by economic conditions. In addition, commercial and
commercial real estate lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
GENERAL RISKS OF BRANCH EXPANSION AND GROWTH OPPORTUNITIES
Our future growth will depend on the success of increasing our loan
portfolio, expanding our product lines, opening de novo branches and/or the
success of any future branch acquisitions. The Bank's ability to
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increase the origination of small business loans and expand product lines will
depend on market conditions in the Bank's primary market area. The success of
the branching opportunities will, in turn, depend on a number of factors,
including, without limitation: our ability to integrate new branches into the
current operations of the Bank; our success in attracting customers and a
sufficient amount of deposits to make the new branches profitable; our ability
to control the incremental noninterest expenses from the new branches in a
manner that enables us to maintain a favorable overall efficiency ratio; our
ability to attract and retain the appropriate personnel to staff any new
branches; and our ability to earn acceptable levels of noninterest income from
any new branches.
STRONG COMPETITION WITHIN THE BANK'S MARKET AREA
We face competition for both the deposits we accept and the loans we make.
We face direct competition from a number of financial institutions, such as
other savings institutions, commercial banks, credit unions and other providers
of financial services, many of which are significantly larger than us and,
therefore, have greater financial and marketing resources than we do. In
relation to some of our competitors and due to our size, we offer a more limited
product line.
SENSITIVITY TO CHANGES IN INTEREST RATES ENVIRONMENT
Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are
substantially dependent on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Because, as a general
matter, our interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates generally would result in
a decrease in our average interest rate spread and net interest income.
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our investment securities portfolio. Generally, the
value of investment securities fluctuates inversely with changes in interest
rates. At June 30, 1998, our securities portfolio totaled $34.1 million,
including $849,000 of securities available for sale. Unrealized gains and losses
on securities available for sale are reported as a separate component of equity.
Decreases in the fair value of securities available for sale therefore could
have an adverse affect on stockholders' equity.
We are also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.
RECENT STOCK MARKET VOLATILITY
Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. In several cases, common stock issued by
recently converted financial institutions has traded at a price that is below
the price at which such shares were sold in the initial offerings of those
companies. The purchase price of our common stock in the offering is based on
the independent appraisal by RP Financial. After our shares begin trading, the
trading price of our common stock will be determined by the marketplace, and may
be influenced by many factors, including prevailing interest rates, investor
perceptions of the Company and general industry and economic conditions. Due to
possible continued market volatility and to other factors, including certain
Risk Factors discussed in this document, there can be no assurance that,
following the reorganization, the trading price of our common stock will be at
or above the $10.00 per share initial offering price.
DEPENDENCE ON KEY INDIVIDUALS
The Bank is dependent in large part on its ability to retain the services
of certain key personnel, including James J. McCarthy, President and Chief
Executive Officer and Anthony J. Patti, Executive Vice President and Chief
Financial Officer. The departure of either of them could have a material adverse
effect on the Bank's operations. The Bank intends to enter into employment
agreements with these officers. The Bank's continued success is also dependent
on its ability to retain and attract other qualified employees to meet the
Bank's needs.
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POTENTIAL DILUTION TO MINORITY STOCKHOLDERS RESULTING FROM ANY MUTUAL TO STOCK
CONVERSION
In the event of a full conversion to stock form, the Plan of Reorganization
provides that, subject to written OTS approval, (i) the stockholders of the
Stock Company will be entitled to exchange their shares of stock for shares of
the converted Mutual Company in a manner that is fair and reasonable to such
stockholders and subject to the stock purchase limitations of the OTS conversion
regulations (which may, as a condition to OTS approval of the Conversion
Transaction, in certain limited circumstances require certain insiders of the
Stock Company who have accumulated shares in excess of the stock purchase
limitations of the Conversion Transaction to divest such shares in connection
with such Conversion Transaction, and also potentially restrict or prohibit
additional purchases of Common Stock in the Conversion Transaction by other
stockholders that would be in excess of such stock purchase limitations), or
(ii) the Mutual Company may purchase all shares not owned by it simultaneously
with the consummation of the Conversion Transaction at the fair market value of
such shares. The OTS policy with respect to dividends waived by mutual companies
requires that, in the case of mutual to stock conversions of recently-formed
mutual companies such as the Mutual Company, the aggregate amount of cash
dividends waived by a mutual company must be considered when establishing a fair
and reasonable basis for exchanging subsidiary savings bank common stock for
converted mutual company common stock, and the OTS will not permit a pro rata
exchange if the Mutual Company has waived the receipt of cash dividends paid by
the subsidiary savings institution. Accordingly, any waiver of dividends by the
Mutual Company is likely to result in an adjustment to the ratio pursuant to
which shares of Common Stock are exchanged for shares of the converted Mutual
Company in a Conversion Transaction, which adjustment will have the effect of
diluting Minority Stockholders' percentage ownership interest in Mutual Company
shares.
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POSSIBLE DILUTIVE EFFECT OF STOCK OPTIONS AND RESTRICTED STOCK PROGRAMS
We intend to establish an ESOP for the benefit of our employees, and no
sooner than six months after the Reorganization, we intend to establish, if
approved by the Minority Stockholders, stock option and restricted stock award
programs for the benefit of directors, officers and employees (hereinafter
"Stock Option Plans" and "Restricted Stock Program"). Assuming the sale of
352,500 shares, if all of the options under the proposed Stock Option plan were
to be exercised using authorized but unissued Common Stock, the voting interests
of existing stockholders would be diluted by approximately 9.1%. The Restricted
Stock Program, if approved by the Minority Stockholders of the Company, will
acquire up to 4% of the shares of Common Stock issued in the Offering (assuming
OTS approval is obtained), either through open market purchases, if permitted,
or from the issuance of authorized but unissued shares. Assuming the Stock
Programs are funded by open market purchases, the voting interests of existing
shareholders will not be diluted and assuming that the shares were acquired at
the Purchase Price, the effect on pro forma net earnings per share and
stockholders' equity per share would be as set forth under "Pro Forma Data."
MUTUAL COMPANY CONTROL OF STOCK COMPANY AND OTHER ANTI-TAKEOVER PROVISIONS
Voting Control of the Mutual Holding Company. Under regulations of the OTS,
the Plan of Reorganization and our governing corporate instruments, a majority
of the Stock Company's voting shares must owned by the Mutual Company, and the
Mutual Company will own 53.0% of the Common Stock outstanding at the completion
of the Offering. The Mutual Company will be controlled by its executive officers
and directors, who initially will consist of persons who are executive officers
and directors of the Stock Company. Executive officers and directors of the
Stock Company will own 90,700 shares of Common Stock or 12.1% of the Common
Stock outstanding at the completion of the Offering (assuming shares are sold at
the midpoint of the Offering Range and that executive officers and directors
receive all of the shares for which they are expected to subscribe), and, based
on such assumptions, the Mutual Company and executive officers and directors as
a group would own 65.1% of the Common Stock outstanding at the conclusion of the
Offering. If all shares issuable under the ESOP, the Restricted Stock Plan and
the Stock Option Plan were issued to the management and directors of the
Company, management and directors would control 74.4% of the total voting stock
of the Company at the midpoint of the Offering Range. The Mutual Company will
elect all members of the Board of Directors of the Stock Company, and, with
certain exceptions, will control the outcome of matters presented to the
stockholders of the Stock Company for resolution by vote. The Mutual Company,
acting through its Board of Directors, will be able to control the business and
operations of the Stock Company and the Bank and will be able to prevent any
challenge to the ownership or control of the Stock Company by stockholders other
than the Mutual Company ("Minority Stockholders"). No assurance can be given
that the Mutual Company will not take actions that may be considered adverse to
the interests of minority stockholders. Although OTS regulations and the Plan of
Reorganization permit the Mutual Company to convert from the mutual to the
capital stock form of organization, there can be no assurance when, if ever, a
conversion of the Mutual Company will occur.
Anti-Takeover Provisions in the Stock Company's and the Bank's Governing
Instruments. In addition, certain provisions of the Stock Company's charter and
bylaws, particularly a provision limiting voting rights, as well as certain
federal regulations will assist the Stock Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, staggered Boards of Directors, no cumulative voting for directors,
limits on the calling of special meetings of shareholders, and limits on the
ability to vote Common Stock in excess of 10% of outstanding shares (except as
to shares held by the Mutual Holding Company and the ESOP). These provisions in
the Bank's and the Stock Company's governing instruments may discourage
potential proxy contests and other potential takeover attempts, particularly
those which have not been negotiated with the Board of Directors, and thus,
generally may serve to perpetuate current management.
ABSENCE OF ACTIVE AND LIQUID MARKET FOR COMMON STOCK
Due to the small size of the offering, it is highly unlikely that an active
trading market will develop and be maintained. If an active market does not
develop, you may not be able to sell your shares promptly or perhaps at all, or
sell your shares at a price equal to or above the price you paid for them. The
common stock may not be appropriate as a short-term investment.
TECHNOLOGY RISKS AND YEAR 2000 PROBLEM
Our future success will depend, in part, on our ability to address the
needs of customers by using technology to provide products and services that
will satisfy customer demands, as well as to create additional efficiencies in
the Bank's operations. Many of our competitors have substantially greater
resources than we do to invest in technological improvements. There can be no
assurance that we will be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services
to the public.
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The use of technology-related products, services, delivery channels, and
processes expose a bank to various risks, particularly transaction, strategic,
reputation and compliance risk. There can be no assurance we will be able to
successfully manage the risks associated with its increased dependence on
technology. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
The "Year 2000 Problem" centers on the inability of computer systems to
precisely recognize the year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. Software, hardware, and equipment both within and outside
the Bank's direct control and with whom the Bank electronically or operationally
interfaces (e.g., third party vendors providing data processing, information
system management, maintenance of computer systems, and credit bureau
information) are likely to be affected. The Bank has taken steps to ensure that
such systems will properly recognize information when the year changes to 2000
and that it is in compliance with federal bank regulatory directives in this
area. Management of the Bank believes that the costs of addressing the Year 2000
Problems will not have a material adverse impact on the Bank's financial
position, results of operations, or cash flows in the future periods.
Nonetheless, the Bank's ability to predict the costs associated with Year 2000
compliance is subject to some uncertainties, and the Bank may incur additional
unexpected expenditures in connection with Year 2000 compliance.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The Bank is subject to extensive regulation and supervision as a federal
savings association. The regulatory authorities have extensive discretion in
connection with their supervision and enforcement activities and their
examination policies, including the imposition of restrictions on the operation
of a savings institution, the classification of assets by an institution and the
imposition of an increase in a savings institution's allowance for loan losses.
In addition, the Mutual Company, as a savings and loan holding company, will be
subject to extensive regulation and supervision. Any change in the regulatory
structure or the applicable statutes or regulations, whether by the OTS, the
FDIC or Congress, could have a material impact on the Mutual Company, the Stock
Company, the Bank, their operations or the Plan of Reorganization and Stock
Issuance Plan.
IRREVOCABILITY OF ORDERS; RISK OF DELAYED OR CANCELLED OFFERING
We expect to complete the Reorganization and Offering within the time
periods indicated in this Prospectus. However, consummation of the
Reorganization and Offering is conditioned on OTS approval of the Plan of
Reorganization which is expected, but has not yet been received. If OTS approval
is not received, all funds received from subscribers will be returned promptly
with interest and all withdrawal authorizations will be terminated. In addition,
it is possible, although not anticipated, that adverse market, economic or other
factors could significantly delay the completion of the Reorganization and
Offering and result in a delay in subscribers receiving their stock
certificates, increased Offering costs or changes in the Offering Range. The
Subscription Offering could be extended to January 3, 1999, 1998 and the
Community Offering extended to as late as February 17, 1999, before subscribers
would have the right to modify or rescind their subscriptions. If the
Subscription and Community Offerings are extended beyond such dates, all
subscribers will have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly, with interest, or to have their
withdrawal authorization terminated.
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REVERE, MHC
The Bank has submitted a Notice of Mutual Company Reorganization and
Application for Approval of a Minority Stock Issuance by a Savings Association
Subsidiary of a Mutual Holding Company ("Notice") to the OTS pursuant to which
the Bank has requested approval to reorganize into the mutual holding company
structure. It is anticipated that the Bank will receive approval of the Notice;
however, it is unknown prior to actual receipt of OTS approval what conditions,
if any, the OTS may impose on the Reorganization. In the event the OTS approval
contains conditions which, in the opinion of the Board of Directors of the Bank,
are unacceptable, the Bank may determine to terminate the Reorganization and/or
the Offering and return all subscription funds collected in connection with the
Offering. As part of the Reorganization, the Bank will establish a federal
mutual holding company under the laws of the United States with the powers set
forth in its proposed charter and bylaws. Members of the Mutual Company
(consisting of depositors of the Bank) shall have sole authority to elect the
Board of Directors of the Mutual Company for so long as the Mutual Company
remains mutually owned. Initially, the Mutual Company's principal assets will be
the shares of Common Stock received in the Reorganization and up to $100,000 in
cash.
Immediately after consummation of the Reorganization, it is expected that
the Mutual Company's operations will consist of activities relating to its
investment in a majority of the Common Stock of the Stock Company and
maintenance of books and records relating to members of the Mutual Company. The
Mutual Company may accept dividends paid by the Stock Company in an amount
necessary to pay expenses. In addition, the Mutual Company may accept dividends
paid by the Stock Company to be used for other purposes, including purchasing
Common Stock from time to time in the open market or from the Stock Company. The
Mutual Company may participate in any such plan. There can be no assurances that
the Mutual Company will accept dividends paid by the Stock Company, or if such
dividends are accepted, that the Mutual Company will purchase shares of Common
Stock in the open market. Any Mutual Company purchases of Common Stock will
increase the percentage of the Stock Company's outstanding shares of Common
Stock held by the Mutual Company and increase the number of shares eligible to
be sold in any subsequent secondary offering or Conversion Transaction by the
Mutual Company.
The Mutual Company will be a mutual corporation chartered and regulated by
the OTS. The Mutual Company will be subject to the limitations and restrictions
imposed on savings institution mutual holding companies by Section 10(o)(5) of
HOLA. See "Regulation -- Regulation of the Mutual Company."
The Mutual Company's principal executive office will be located at 310
Broadway, Revere, Massachusetts 02151 and its telephone number will be (781)
284-7777.
RFS BANCORP, INC.
The Stock Company will be formed as a federal corporation and will own 100%
of the Bank's common stock. The Stock Company has not yet been formed, and
accordingly, its financial statements are not included in this Prospectus. The
OTS has approved an application for the Stock Company to become a savings and
loan holding company through the acquisition of all of the capital stock of the
Bank to be issued and outstanding upon completion of the Reorganization. The
Stock Company will have all of the powers set forth in its federal charter and
federal law and OTS regulations.
The Stock Company will retain up to 15% of the net proceeds of the
Offering. Part of the net proceeds will be used to fund a loan to the Bank's
ESOP, which is expected to purchase up to 8% of the Common Stock
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sold in the Offering. The remainder of the net proceeds will be used for general
corporate purposes. The holding company structure will provide the Stock Company
with greater flexibility than is currently available to the Bank to diversify
its business activities, either through newly-formed subsidiaries or through
acquisitions. The business activities of the Stock Company will be subject to
the same restrictions under federal law as the Mutual Company. The Stock Company
initially will not conduct any active business and does not intend to employ any
person other than its officers, although it may utilize the Bank's support staff
from time to time.
The Stock Company's executive office will be located at the administrative
offices of the Bank, at 310 Broadway, Revere, Massachusetts 02151. Its telephone
number will be (781) 284-7777.
REVERE FEDERAL SAVINGS
The Bank is a federally chartered mutual savings association which conducts
business from its main office located in Revere, Massachusetts, which is located
five miles northeast of Boston, Massachusetts. The Bank's deposits are insured
by the FDIC to the maximum extent permitted by law. At June 30, 1998, the Bank
had total assets of $88.8 million, total deposits of $63.0 million and equity of
$6.4 million.
The primary focus of the Bank is to provide financing for single family
housing and small businesses in its market area of Revere, Massachusetts. The
Bank originates one- to four-family residential mortgages and non-residential
commercial real estate, commercial, consumer and construction loans. The Bank
also invests its excess funds in Treasury and Federal agency securities,
mortgage-backed securities, asset-backed securities and other short term
interest-bearing deposits. The Bank's principal sources of funds are deposits,
borrowings and principal and interest payments on loans. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits and employee compensation and benefits.
See "Business" on page 55.
The Bank's executive office will be located at the administrative offices
of the Bank, at 310 Broadway, Revere, Massachusetts 02151. Its telephone number
is (781) 284-7777.
USE OF PROCEEDS
An amount equal to 85% of the net proceeds from the sale of the Common
Stock ($2.6 million at the midpoint of the Offering Range) will be added to the
general funds of the Bank and used for general corporate purposes, including the
origination of loans, funding the construction and/or acquisition costs of
establishing new branch locations and renovating existing facilities, and
enhancing future access to capital markets. The Bank has recently purchased a
second location. The estimated acquisition and renovation costs for the building
are approximately $600,000. The Stock Company will retain the balance of the
funds for its initial capitalization, with a portion of those funds ($282,000 at
the midpoint of the Offering Range) being loaned to the ESOP to fund its
purchase of Common Stock in the Offerings following completion of the Offering.
Subject to applicable limitations, the Stock Company may also use available
funds to repurchase shares of Common Stock and for the payment of dividends. We
expect that, in the interim, we will invest all or part of the net proceeds in
U.S. Government and Agency securities and other short-term investments.
The total number of shares of the Common Stock to be issued in the
Reorganization cannot be stated with certainty at this time, because it will
depend upon the estimated pro forma market value of the Common Stock at the time
of sale. See "The Offering -- Stock Pricing and Number of Shares to be Issued."
However,
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the net proceeds to the Company would be approximately $3.1 million based upon
the assumptions that (i) 352,500 shares of Common Stock are sold at a purchase
price per share of $10.00 for an aggregate of $3.5 million (the midpoint of the
Offering Range) and (ii) the Offering expenses are $418,937 in the aggregate.
THE ACTUAL NET PROCEEDS MAY BE MORE OR LESS THAN THE ESTIMATED AMOUNT
BECAUSE THE TOTAL PROCEEDS FROM THE SALE OF THE COMMON STOCK MAY BE
SIGNIFICANTLY MORE OR LESS THAN THE MIDPOINT OF THE CURRENT VALUATION RANGE AND
BECAUSE ACTUAL REORGANIZATION EXPENSES MAY BE MORE OR LESS THAN THOSE CURRENTLY
EXPECTED.
DIVIDEND POLICY
The Board of Directors does not anticipate paying a dividend in the near
term. The Bank believes that its capital would be better deployed by expanding
its small business lending and other general corporate purposes. Declarations of
dividends by the Board of Directors in the future will depend upon a number of
factors, including the amount of the net proceeds, investment opportunities
available to the Bank, capital requirements, regulatory limitations, the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. There can be no assurance that dividends will be paid on
the Common Stock or that, if paid, such dividends will not be reduced or
eliminated in future periods. If the Mutual Company elects not to waive receipt
of dividends from the Stock Company, the Stock Company will have reduced
flexibility as to the amount of dividends that can be paid. There can be no
assurance that dividends will in fact be paid on the Common Stock or that, if
paid, such dividends will not be reduced or eliminated in future periods. No
dividends will be paid as long as there is any impairment of capital.
The Stock Company will not be subject to OTS regulatory restrictions on the
payment of dividends although the source of such dividends depends in part upon
the receipt of dividends from the Bank. The Bank must provide the OTS with 30
days prior notice of its intention to make a capital distribution to the Stock
Company. OTS regulations in certain circumstances limit the amount of any
capital distribution by federal savings associations. In addition, the portion
of the Bank's earnings which has been appropriated for bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Stock Company without the payment of federal income taxes by
the Bank at the then current income tax rate on the amount deemed distributed,
which would include the amount of any federal income taxes attributable to the
distribution. The Stock Company does not contemplate any distribution by the
Bank that would result in a recapture of the Bank's bad debt reserve or
otherwise create federal tax liabilities. See "Federal and State
Taxation-Federal Taxation" and Note 8 to the Consolidated Financial Statements,
and "Regulation-Federal Regulation of Savings Institutions-Limitations on
Capital Distribution."
Additionally, in connection with the Reorganization, the Stock Company and
Bank have committed to the OTS that during the one-year period following the
consummation of the Reorganization, the Stock Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the OTS.
MARKET FOR THE COMMON STOCK
As a newly organized company, the Stock Company has never issued capital
stock, and consequently there is no established market for the common stock.
Following the completion of the offering, it is anticipated that the common
stock (symbol "RFSB") will be traded on the over-the-counter market with
quotations available through the OTC Bulletin Board. Trident is expected to make
a market in the common stock by developing and maintaining historical stock
trading records, soliciting potential buyers and sellers and attempting to match
buy
29
<PAGE>
and sell orders. In connection with its market making activities, Trident may
buy or sell shares from time to time for its own account. However, Trident will
not be subject to any obligation with respect to such efforts. If the common
stock cannot be quoted and traded on the OTC Bulletin Board, it is expected that
the transactions in the common stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
The development of an active trading market depends on the existence of
willing buyers and sellers. Due to the small size of the offering, it is highly
unlikely that an active trading market will develop and be maintained. You could
have difficulty disposing of your shares and you should not view the shares as a
short-term investment. You may not be able to sell your shares at a price equal
to or above the price you paid for the shares.
30
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
June 30, 1998, and the pro forma capitalization of the stock Company after
giving effect to the Offering based upon the sale of the number of shares
indicated in the table and the other assumptions set forth under "Pro Forma
Data." A change in the number of shares to be sold in the Offering may
materially affect such pro forma capitalization.
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER SHARE
BANK -----------------------------------------------------------
HISTORICAL MAXIMUM AS
CAPITALIZATION MINIMUM MIDPOINT MAXIMUM ADJUSTED
AS OF 299,625 352,500 405,175 466,181
JUNE 30, 1998 SHARES SHARES SHARES SHARES(1)
------------- ------ ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deposits(2)........................... $ 62,976 $ 62,976 $ 62,976 $ 62,976 $ 62,976
Borrowed funds........................ 19,284 19,284 19,284 19,284 19,284
-------- -------- -------- -------- --------
Total deposits and borrowed funds..... $ 82,260 $ 82,260 $ 82,260 $ 82,260 $ 82,260
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock, no par value,
1,000,000 shares authorized;
no shares to be issued $ --- $ --- $ --- $ --- $ ---
Common stock, $.01 par value,
5,000,000 shares authorized;
shares to be issued as reflected --- 6 8 9 10
Additional paid-in capital(3)..... --- 2,564 3,079 3,594 4,187
Equity(4) ........................ 6,374 6,374 6,374 6,374 6,374
Less:
Common Stock acquired by ESOP(5). --- (240) (282) (324) (373)
Common Stock acquired by
Restricted Stock Program(6).... --- (120) (141) (102) (186)
-------- -------- ------- -------- --------
Total stockholders' equity............ $ 6,374 $ 8,584 $ 9,038 $ 9,491 $ 10,012
======== ======== ======= ======== ========
</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 Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Company's Stock Option Plan intended to be
adopted by the Stock Company. An amount equal to 10% of the shares of
Common Stock issued in the Offering will be reserved for issuance upon the
exercise of options to be granted under the Stock Option Plan. See "Risk
Factors--Possible Dilutive Effect of Stock Option and Restricted Stock
Programs" and "Management--Benefits--Stock Option Plan."
(4) The retained earnings of the Bank will be substantially restricted after
the Reorganization. See "The Reorganization--Effects of the
Reorganization--Liquidation Rights" and "Regulation--Regulation of Federal
Savings Associations--Limitations on Capital Distributions."
(5) Assumes that 8% of the shares issued in connection with the Offering will
be purchased by the ESOP and that the funds used to acquire such shares
will be borrowed from the Stock Company. See "Use of Proceeds." The Common
Stock acquired by the ESOP is reflected as a reduction of stockholders'
equity. See "Management of the Bank--Benefits--Employee Stock Ownership
Plan and Trust" and Footnote 3 to the tables under "Pro Forma Data."
(6) Assumes that subsequent to the Reorganization, an amount equal to 4% of the
shares of Common Stock issued in the Offering, is purchased by the
Restricted Stock Program. Before the Restricted Stock Program is
implemented, it must be approved by the minority stockholders of the stock
Company. The Common Stock purchased by the Stock Program is reflected as a
reduction of stockholders' equity. See "Risk Factors--Possible Dilutive
Effect of Stock Options and Restricted Stock Programs," Footnote 4 to the
tables under "Pro Forma Data" and "Management--Benefits--Restricted Stock
Program."
31
<PAGE>
SHARES TO BE PURCHASED BY MANAGEMENT
The following table sets forth, for each director of the Bank, for the
executive officers of the Bank as a group and for all directors and executive
officers as a group (including their associates) certain information as to the
number of shares of Common Stock which they have advised the Bank that they
intend to purchase. For purposes of the following table, it has been assumed
that 352,500 shares of Common Stock will be offered at $10.00 per share, the
midpoint of the Offering Range (see "The Offering--Stock Pricing and Number of
Shares to be Issued") and that sufficient shares will be available to satisfy
subscriptions in all categories.
<TABLE>
<CAPTION>
AGGREGATE PURCHASE
TOTAL SHARES TOTAL PRICE OF
NAME OF COMMON STOCK PERCENTAGE PROPOSED PURCHASES
- --------------------------------------------- ------------------ ------------------ ----------------------------
<S> <C> <C> <C>
Arno P. Bommer............................. 9,200 2.7 $92,000
Ernest F. Becker........................... 1,000 0.3 10,000
Theodore E. Charles........................ 15,000 4.4 150,000
Anthony R. Conte........................... 3,500 1 35,000
Carmen R. Mattuchio........................ 15,000 4.4 150,000
James J. McCarthy.......................... 15,000 4.4 150,000
J. Michael O'Brien......................... 5,000 1.5 50,000
Angelo A. Todisco.......................... 2,000 0.6 20,000
John J. Verrengia.......................... 10,000 3 100,000
All other executive officers (2 persons)
as a group............................. 15,000 4.3 150,000
------ --- --------
Total shares to be purchased by
directors and executive officers....... 90,700 25.9% 907,000
====== ==== ========
</TABLE>
32
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Bank exdeed each of its regulatory capital
requirements Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of June 30, 1998, on an hisotircal and pro forma basis
assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 85% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of its shares
expected to acquired by the Restricted Stock Program are deducted from pro forma
regulatory capita. See "Management."
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1998, BASED UPON THE
SALE OF
-----------------------------------------
299,625 SHARES
HISTORICAL AT AT MINIMUM OF
JUNE 30, 1998 OFFERING RANGE
-------------------- --------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
GAAP capital ................ $6,374 7.18% $8,199 9.05%
====== ===== ====== =====
Tangible capital:
Tangible capital (3) ........ $5,889 6.63% $7,714 8.51%
Requirement ................. 1,333 1.50 1,360 1.50
------ ----- ------ -----
Excess ...................... $4,556 5.13% $6,354 7.01%
====== ===== ====== =====
Core capital:
Core capital(3) ............. $5,889 6.63% $7,714 8.51%
Requirement(4) .............. 3,555 4.00 3,628 4.00
------ ----- ------ -----
Excess ...................... $2,334 2.63% $4,086 4.51%
Risk-based capital:
Risk-based capital(3)(5) $6,332 17.89% $8,166 22.60%
Requirement ................. 2,831 8.00 2,891 8.00
------ ----- ------ -----
Excess ...................... $3,501 9.89% $5,275 14.60%
====== ===== ====== =====
<CAPTION>
PRO FORMA AT JUNE 30, 1998, BASED UPON THE SALE OF
----------------------------------------------------------------
466,181 SHARES(1)
352,500 SHARES 405,375 SHARES AT ADJUSTED
AT MIDPOINT OF AND MAXIMUM OF MAXIMUM OF
OFFERING RANGE OFFERING RANGE OFFERING RANGE
----------------------- -------------------- -------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
----------- ----------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital ................ $ 8.575 9.42% 8,951 9.80% $9,382 10.22%
======= ===== ===== ===== ====== =====
Tangible capital:
Tangible capital (3) ........ $ 8,090 8.88% $8,466 9.26% $8,897 9.68%
Requirement ................. 1,366 1.50 1,372 1.50 1,378 1.50
------- ----- ------ ----- ------ -----
Excess ...................... $ 6,724 7.38% $7,094 7.76% $7,519 8.18%
======= ===== ====== ===== ====== =====
Core capital:
Core capital(3) ............. $ 8,090 8.88% $8,466 9.26% $8,897 9.68%
Requirement(4) .............. 3,643 4.00 3,658 4.00 3,675 4.00
------- ----- ------ ----- ------ -----
Excess ...................... $ 4,447 4.88% $4,808 5.26% $5,222 5.68%
Risk-based capital:
Risk-based capital(3)(5) $ 8,544 23.55% $8,922 24.49% $9,356 25.55%
Requirement ................. 2,903 8.00 2,915 8.00 2,929 8.00
------- ----- ------ ----- ------ -----
Excess ...................... $ 5,641 15.55% 6,007 16.49% $6,427 17.55%
======= ===== ====== ===== ====== =====
</TABLE>
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the Offering.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shwon as a percentage of risk-weighted
assets.
(3) Pro forma capital levels assume that the Bank funds the Restricted Stock
Program purchases of a number of shares equal to 4% of the Common Stock
sold in the Offering, the ESOP purchases 8% of the sahres sold in the
Offering, and the Mutual Company is capitalised with $100,000. See
"Management" for a discussion of the Restricted Stock Program and ESOP.
(4) The current core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements that
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulation--Federal Regulation of Savings
Institutions--Capital Requiremets."
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk-weighting of the Banks risk-weighted assets as
of June 30, 1998.
33
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $2.6 million and $3.6 million (or $4.2 million in the
event the Independent Valuation is increased by 15%) based upon the following
assumptions: (i) the shares of Common Stock will be sold in the Subscription and
Community Offerings, as follows: (a) 8% will be sold to the ESOP; (b) an amount
equal to 4% will be awarded pursuant to the Restricted Stock Program (which may
be adopted no sooner than six months following the Offering) through authorized
but unissued shares; and (c) depositors, officers and directors of the Bank and
members of the general public will purchase all remaining shares; (ii) Trident
will receive a marketing fee equal to 2% of the aggregate dollar amount of the
shares sold in the Offering, Trident's total fees, consisting of advisory,
management and marketing fees will be at least $51,700, excluding shares
purchased by the ESOP, directors, officers, and immediate family of
directors and officers, for which there is no fee; (iii) no shares are sold in
the Syndicated Community Offering; and (iv) fixed expenses incurred in
connection with the Offering are estimated to be $374,252.
Pro forma consolidated net income for the Stock Company for the nine months
ended June 30, 1998 and the year ended September 30, 1997 has been calculated
assuming the Common Stock had been sold at the beginning of the periods and the
net proceeds had been invested at an average yield of 5.38% for the period ended
September 30, 1997 and 5.37% for the period ended June 30, 1998, which
approximates the yield on short-term U.S. government securities. The yield on
short-term U.S. government securities, rather than an arithmetic average of the
average yield on interest-earning assets and average rate paid on deposits, has
been used to estimate income on net proceeds because it is believed that the
one-year U.S. Treasury bill rate is a more accurate estimate of the rate that
would be obtained on an investment of net proceeds from the Offering. The pro
forma after-tax yield or cost is assumed to be 3.30% for both the nine months
ended June 30, 1998 and the year ended September 30, 1997, based on an effective
tax rate of 39%. The effect of withdrawals from deposit accounts for the
purchase of Common Stock has not been reflected. 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 (in the case of
pro forma net earnings per share) to give effect to the purchase of shares by
the ESOP. Pro forma stockholders' equity amounts have been calculated as if the
Common Stock had been sold on June 30, 1998 and September 30, 1997,
respectively, and, accordingly, no effect has been given to the assumed earnings
effect of the transactions.
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 Bank
computed in accordance with GAAP. 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 table summarizes historical data of the Bank and pro forma
data of the Bank at or for the nine month period ended June 30, 1998 and the
fiscal year ended September 30, 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 Reorganization. The table below gives
effect to the restricted stock program (the "RRP"), which is expected to be
adopted by the Stock Company following the Reorganization and presented to
stockholders for approval at a meeting of stockholders to be held no earlier
than six months after completion of the Reorganization. No effect has been given
in the table to the possible issuance of additional shares reserved for future
issuance pursuant to the Stock Option Plans to be adopted by the Board of
Directors of the Bank, 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 the bad debt reserve in liquidation.
34
<PAGE>
See "The Reorganization--Effects of Reorganization--Liquidation Rights" and
"Management--Benefits--Stock Option Plan."
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------
MAXIMUM AS
MINIMUM MIDPOINT MAXIMUM ADJUSTED
299,625 SHARES 352,500 SHARES 405,375 SHARES 466,181 SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(1)
----------------- ---------------- --------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross Proceeds(2).............................. $ 2,996 $ 3,525 $ 4,054 $ 4,662
Less: Expenses............................... (426) (438) (451) (465)
-------- -------- -------- --------
Estimated net proceeds...................... 2,570 3,087 3,603 4,197
Less: Common stock purchased by ESOP(3)..... (240) (282) (324) (373)
Less: Common stock purchased by RRP(4)...... (120) (141) (162) (186)
-------- -------- -------- --------
Estimated net proceeds, adjusted............... $ 2,210 $ 2,664 $ 3,117 $ 3,638
======== ======== ======== ========
For the 9 months ended June 30, 1998
- ------------------------------------
Consolidated net income:
Historical income........................... $ 208 $ 208 $ 208 $ 208
Pro forma income on net proceeds............ 55 66 77 90
Pro forma ESOP adjustment(3)................ (11) (13) (15) (18)
Pro forma RRP adjustment(4)................. (11) (13) (15) (18)
-------- -------- -------- --------
Pro forma net income...................... $ 241 $ 248 $ 255 $ 262
======== ======== ======== ========
Per share net income:
Historical income........................... $ 0.34 $ 0.29 $ 0.25 $ 0.22
Pro forma income on net proceeds............ 0.09 0.09 0.09 0.09
Pro forma ESOP adjustment(3)(5)............. (0.02) (0.02) (0.02) (0.02)
Pro forma RRP adjustment(4)................. (0.02) (0.02) (0.02) (0.02)
======== ======== ======== ========
Pro forma net income per share............ $ 0.39 $ 0.74 $ 0.30 $ 0.27
======== ======== ======== ========
At June 30, 1998
- --------------------------------------
Stockholders' equity:
Historical.................................. $ 6,374 $ 6,374 $ 6,374 $ 6,374
Estimated net proceeds...................... 2,570 3,087 3,603 4,197
Less: Common Stock acquired by ESOP(3)...... (240) (282) (324) (373)
Less: Common Stock acquired by RRP(4)....... (120) (141) (162) (186)
-------- -------- -------- --------
Pro forma stockholders' equity............ $ 8,584 $ 9,038 $ 9,491 $ 9,677
======== ======== ======== ========
Stockholders' equity per share(6):
Historical.................................. 10.00 $ 8.50 $ 7.39 $ 6.09
Estimated net proceeds...................... 4.03 4.12 4.18 4.23
Less: Common Stock acquired by ESOP(3)...... (0.38) (0.38) (0.38) (0.38)
Less: Common Stock acquired by RRP(4)....... (0.19) (0.19) (0.19) (0.19)
-------- -------- -------- --------
Pro forma stockholders' equity per share.. $ 13.46 $ 12.05 $ 11.00 $ 9.75
======== ======== ======== ========
Ratio of offering price to pro forma
net income per share (annualized)........... 19.18x 22.00x 24.93x 17.24x
-------- -------- -------- --------
Offering price as a percentage of pro forma
stockholders' equity per share.............. 74.29% 82.99% 90.91% 99.11%
-------- -------- -------- --------
</TABLE>
(footnotes on following page)
35
<PAGE>
(1) The Company reserves the right to issue up to a total of 466,181 shares at
$10.00 per share, or 15% above the maximum of the Offering Range. Unless
otherwise required by the OTS, subscribers will not be given the right to
modify their subscriptions unless the aggregate purchase price of the
Common Stock is increased to exceed $4.7 million (i.e., 15% above the
maximum of the Offering Range.)
(2) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. Management estimates that approximately 20%
of all subscription orders may utilize funds currently on deposit at the
Bank.
(3) Assumes 8% of the shares to be sold in the Offering are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Stock Company. The approximate amount expected
to be borrowed by the ESOP is reflected in this table as a reduction of
capital. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Bank expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a ten-year term. Since the Stock Company will be providing the ESOP
loan, only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. The provision of SOP 93-6 have been
applied for shares to be acquired by the ESOP and for purposes of computing
earnings per share. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Employee Stock Ownership Plan and Trust."
(4) Assumes a number of issued and outstanding shares of Common Stock equal to
4% of the Common Stock to be sold in the Offering will be purchased by the
Restricted Stock Program. Before the Restricted Stock Program is
implemented by management, it must be approved by the minority stockholders
of the Stock Company. The dollar amount of the Common Stock possibly to be
purchased by the Restricted Stock Program is based on the price per share
in the Offering and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the price per share of the
Offering. As the Bank accrues compensation expenses to reflect the vesting
of such shares pursuant to the Restricted Stock Program, the charge against
capital will be reduced accordingly. In the event the shares issued under
the restricted stock plan consist of shares of Common Stock newly issued
and the price per share in the Offering, the per share financial condition
and result of operations of the Company would be proportionately reduced
and to the extent the interest of existing stockholders would be diluted by
approximately 4.0%.
(5) The Bank intends to record compensation expense related to the ESOP in
accordance with SOP 93-6. As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares that
have been committed to be released to participants. For purposes of the
preceding table, it was assumed that the number of ESOP shares were
committed to be released at June 30, 1998.
(6) Stockholders' equity per share data is based upon 637,500, 750,000, 862,500
and 991,874 shares outstanding representing shares sold in the offering,
and shares purchased by the ESOP and Restricted Stock Program.
36
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------------
MAXIMUM AS
MINIMUM MIDPOINT MAXIMUM ADJUSTED
299,625 SHARES 352,500 SHARES 405,375 SHARES 466,181 SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE(1)
----------------- ---------------- ---------------- ----------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross Proceeds(2).............................. $ 2,996 $ 3,525 $ 4,054 $ 4,662
Less: Expenses ................................ (426) (438) (451) (465)
-------- -------- -------- --------
Estimated net proceeds...................... 2,570 3,087 3,603 4,197
Less: Common stock purchased by ESOP(3)..... (240) (282) (324) (373)
Less: Common stock purchased by RRP(4)...... (120) (141) (162) (186)
-------- -------- -------- --------
Estimated net proceeds, adjusted............... $ 2,210 $ 2,664 $ 3,117 $ 3,638
======== ======== ======== ========
For the 12 months ended September 30, 1997
- ------------------------------------------
Consolidated net income:
Historical income........................... $ 476 $ 476 $ 476 $ 476
Pro forma income on net proceeds............ 73 88 103 120
Pro forma ESOP adjustment(3)................ (15) (17) (20) (23)
Pro forma RRP adjustment(4)................. (15) (17) (20) (23)
-------- -------- -------- --------
Pro forma net income...................... $ 519 $ 530 $ 539 $ 550
======== ======== ======== ========
Per share net income:
Historical income........................... $ 0.77 $ 0.66 $ 0.57 $ 0.50
Pro forma income on net proceeds............ 0.12 0.12 0.12 0.13
Pro forma ESOP adjustment(3)(5)............. (0.02) (0.02) (0.02) (0.02)
Pro forma RRP adjustment(4)................. (0.02) (0.02) (0.02) (0.02)
======== ======== ======== ========
Pro forma net income per share............ $ 0.85 $ 0.74 $ 0.65 $ 0.59
======== ======== ======== ========
At September 30, 1997
- ---------------------
Stockholders' equity:
Historical.................................. $ 6,039 $ 6,039 $ 6,039 $ 6,039
Estimated net proceeds...................... 2,570 3,087 3,503 4,197
Less: Common Stock acquired by ESOP(3)...... (240) (282) (324) (373)
Less: Common Stock acquired by RRP(4)....... (120) (141) (162) (186)
-------- -------- -------- --------
Pro forma stockholders' equity............ $ 8,249 $ 8,703 $ 9,156 $ 9,677
======== ======== ======== ========
Stockholders' equity per share(6):
Historical.................................. 9.47 $ 8.05 $ 7.00 $ 6.09
Estimated net proceeds...................... 4.03 4.12 4.18 4.23
Less: Common Stock acquired by ESOP(3)...... (0.38) (0.38) (0.38) (0.38)
Less: Common Stock acquired by RRP(4)....... (0.19) (0.19) (0.19) (0.19)
-------- -------- -------- --------
Pro forma stockholders' equity per share.. $ 12.93 $ 11.60 $ 10.61 $ 9.75
======== ======== ======== ========
Ratio of offering price to pro forma
net income per share........................ 11.76 x 13.51 x 15.38 x 16.95 x
-------- -------- -------- --------
Offering price as a percentage of pro forma
stockholders' equity per share.............. 77.34% 86.21% 94.25% 102.56%
-------- -------- -------- --------
</TABLE>
(footnotes on following page)
37
<PAGE>
(1) The Company reserves the right to issue up to a total of 466,181 shares
at $10.00 per share, or 15% above the maximum of the Independent Valuation.
Unless otherwise required by the OTS, subscribers will not be given the
right to modify their subscriptions unless the aggregate purchase price of
the Common Stock is increased to exceed $4.7 million (i.e., 15% above the
maximum of the Independent Valuation.)
(2) Withdrawals from deposit accounts for the purchase of stock have not been
reflected in these adjustments. Management estimates that approximately 20%
of all subscription orders may utilize funds currently on deposit at the
Bank.
(3) Assumes 8% of the shares to be sold in the Offering are purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from the Stock Company. The approximate amount expected
to be borrowed by the ESOP is reflected in this table as a reduction of
capital. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Bank expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a ten-year term. Since the Stock Company will be providing the ESOP
loan, only principal payments on the ESOP loan are reflected as employee
compensation and benefits expense. The provision of SOP 93-6 have been
applied for shares to be acquired by the ESOP and for purposes of computing
earnings per share. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Employee Stock Ownership Plan and Trust."
(4) Assumes a number of issued and outstanding shares of Common Stock equal to
4% of the Common Stock to be sold in the Offering will be purchased by a
Restricted Stock Program. Before the Restricted Stock Program is
implemented, it must be approved by the minority stockholders of the stock
Company. The dollar amount of the Common Stock possibly to be purchased by
the Restricted Stock Program is based on the price per share in the
Offering and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the price per share of the
Offering. As the Bank accrues compensation expenses to reflect the vesting
of such shares pursuant to the Restricted Stock Program, the charge against
capital will be reduced accordingly. In the event the shares issued under
the restricted stock plan consist of shares of Common Stock newly issued
and the price per share in the Offering, the per share financial condition
and result of operations of the Company would be proportionately reduced
and to the extent the interest of existing stockholders would be diluted by
approximately 4.0%.
(5) The Bank intends to record compensation expense related to the ESOP in
accordance with SOP 93-6. As a result, to the extent the value of the
Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares that
have been committed to be released to participants. For purposes of the
preceding table, it was assumed that the number of ESOP shares were
committed to be released at September 30, 1997.
(6) Stockholders' equity per share data is based upon 637,500, 750,000,
862,500 and 991,874 shares outstanding representing shares sold in the
offering, and shares purchased by the ESOP and Restricted Stock Program.
38
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended September 30, 1997 have been audited by
Shatswell, MacLeod & Company, P.C., independent certified public accountants,
whose report thereon appears elsewhere herein. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Prospectus. The Consolidated Statements of Income for
the nine month periods ended June 30, 1998 and 1997 are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair presentation
of the results for such periods. All such adjustments are of a normal recurring
nature. The results for the nine month period ended June 30, 1998 are not
necessarily indicative of the results of the Bank that may be expected for the
entire year.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED JUNE 30, SEPTEMBER 30,
------------------------------------------------------------------
1998 1997 1997 1996 1995
------------------------------------------------------------------
(UNAUDITED)
Interest income:
<S> <C> <C> <C> <C> <C>
Interest and fees on loans...................... $ 2,874,611 $ 2,182,236 $ 3,026,756 $ 2,362,623 $ 1,793,215
Interest and dividends on securities:
Taxable interest and dividends................ 1,898,421 2,320,407 3,067,872 2,690,400 2,529,291
Other interest.................................. 234,399 63,977 85,681 57,446 124,236
----------- ----------- ----------- ----------- ------------
Total interest and dividend income............ 5,007,431 4,566,620 6,180,309 5,110,469 4,446,742
----------- ----------- ----------- ----------- -----------
Interest expense:
Interest on deposits
SAVINGS DEPOSITS.............................. 124,603 106,583 142,775 146,342 28,565
NOW ACCOUNTS AND MMDA DEPOSITS 68,574 40,446 57,583 28,965 219,414
Time deposits................................... 1,503,436 1,367,034 1,858,330 1,794,423 1,438,025
interest on advances from Federal Home Loan Bank 1,054,804 1,140,841 1,526,633 1,048,212 767,982
----------- ----------- ----------- ----------- -----------
Total interest expense........................ 2,751,417 2,654,904 3,585,321 3,017,942 2,453,986
----------- ----------- ----------- ----------- -----------
Net interest and dividend income.............. 2,256,014 1,911,716 2,594,988 2,092,527 1,992,756
Provision (benefit) for loan losses................ 174,500 45,000 60,000 148,500 (2,000)
----------- ----------- ----------- ----------- -----------
Net interest and dividend income after
provision (benefit) for loan losses......... 2,081,514 1,866,716 2,534,988 1,944,027 1,994,756
----------- ----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts............. 102,884 68,264 93,483 51,512 40,633
Security gain................................... --- --- --- --- 294,531
Other income.................................... 14,124 12,716 22,982 15,131 12,827
----------- ----------- ----------- ----------- -----------
Total noninterest income...................... 117,008 80,980 116,465 66,643 347,991
----------- ----------- ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits.................. 902,584 666,169 919,443 752,042 628,619
Occupancy expense............................... 116,670 86,942 114,788 111,220 111,341
Equipment expense............................... 104,548 86,887 117,626 114,763 103,035
FDIC insurance.................................. 27,936 38,245 46,558 400,235 94,967
Advertising expense............................. 95,356 30,000 45,000 125,618 111,754
Office supplies expense......................... 72,093 47,023 59,188 49,304 32,320
Data processing expense......................... 111,736 77,615 107,801 78,011 64,042
Professional fees............................... 149,818 92,608 122,084 90,511 80,792
Other expense................................... 284,823 247,060 355,318 168,980 303,435
----------- ----------- ----------- ----------- -----------
Total noninterest expense..................... 1,865,564 1,372,549 1,887,806 1,890,684 1,530,305
----------- ----------- ----------- ----------- -----------
Income before income taxes.................... 332,958 575,147 763,647 119,986 812,442
Income taxes....................................... 124,979 208,234 287,245 25,579 271,097
----------- ----------- ----------- ----------- -----------
Net income.................................... $ 207,979 $ 366,913 $ 476,402 $ 94,407 $ 541,345
=========== =========== =========== =========== ===========
</TABLE>
See accompanying "Notes to Consolidated Financial Statements" presented
elsewhere in this Prospectus.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the consolidated financial condition and results of operations of the
Bank. This review should be read in conjunction with the Bank's financial
statements and accompanying notes included elsewhere in this Prospectus. This
analysis provides an overview of the significant changes that occurred during
the periods presented.
GENERAL
Our operating results are primarily dependent upon net interest and
dividend income. Net interest income is the difference between income earned on
our loan and investment portfolio and our cost of funds which consists of
interest paid on deposits and borrowings. Operating results are also affected by
the provision for loan losses, securities sales activities and service charges
on deposit accounts as well as other fees. Our operating expenses consist of
salaries and employee benefits, occupancy and equipment expenses, professional
fees as well as marketing and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates and government and regulatory policies.
MARKET RISK ANALYSIS
Qualitative Disclosures About Market Risk.
Like other institutions, our most significant form of market risk is
interest rate risk. We are subject to interest rate risk to the degree that our
interest-bearing liabilities, primarily deposits with short and medium-term
maturities, mature or reprice at different rates than our interest-earning
assets. We believe it is critical to manage the relationship between interest
rates and the effect on our net portfolio value ("NPV"). This approach
calculates the difference between the present vlaue of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. We manage assets and liabilities
within the context of the marketplace, regulatory limitations and within limits
established by our Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
stategies designed to decrease the vulnerability of our earnings to material and
prolonged changes in interest rates. In this regard, we attempt to minimize
interest rate risk by, amoung other things, emphasizing the origination and
retention of adjustable-rate loans and loans with shorter maturities and the
sale of long-term one-to-four family fixed-rate loans in the secondary market.
Quantitative Disclosures About Market Risk.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As we do not meet
either of these requirements, we are not required to file Schedule CMR, although
we do so voluntarily. Under the regulation, associations which must file are
required to take a deduction (the interest rate risk capital component) from
their total capital available to calculate their risk based capital requirement
if their interest rate exposure is greater than "normal." The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
40
<PAGE>
Presented below, as of June 30, 1998, is an analysis performed by the OTS of
our interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments, up
and down 400 basis points. Our exposure to interest rate risk results from the
concentration of fixed rate mortgage loans in our portfolio.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of Present Value of Assets
Change --------------------------- ----------------------------------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $ 6,520 $ (3,143) (33)% 7.79% (274) bp
+300 bp 7,531 (2,132) (22)% 8.78% (176) bp
+200 bp 8,466 (1,197) (12)% 9.63% (91) bp
+100 bp 9,243 (420) (4)% 10.28% (26) bp
0 bp 9,663 --- ---% 10.53% --- bp
-100 bp 9,795 132 1% 10.50% (4) bp
-200 bp 9,489 (174) (2)% 10.03% (50) bp
-300 bp 9,295 (368) (4)% 9.68% (86) bp
-400 bp 9,257 (406) (4)% 9.46% (107) bp
</TABLE>
- ---------------
* Basis points
As with any method of measuring interest rate risk, the methods of analysis
presented above have certain short comings. 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 on
a short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could likely deviate significantly from those
assumed in calculating the table.
41
<PAGE>
AVERAGE BALANCES, INTEREST, YIELDS AND RATES
The following tables set forth certain information relating to the Bank at
and for the nine months ended June 30, 1998 and 1997 and for the years ended
September 30, 1997, 1996 and 1995, and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown. Average balances are derived
from average daily balances. The yields include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30,
AT JUNE 30, --------------------------------------------------------------------
1998 1998 1997
---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE AVERAGE
AVERAGE AVERAGE YIELD/ AVERAGE YIELD/
BALANCE YIELD (1) BALANCE INTEREST COST BALANCE INTEREST COST
------------ -------- --------- -------- ----- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Interest-bearing deposits .......... $ 799 4.77% $ 478 $ 12 3.36% $ 427 $ 13 4.07%
Federal funds sold ................. 2,909 5.88 5,395 222 5.50 1,481 51 4.60
Investment securities(1) ........... 35,663 6.90 36,206 1,898 7.01 44,608 2,321 6.96
Loans(2) ........................... 46,825 8.02 44,483 2,875 8.64 35,050 2,182 8.32
------- ------ ------ ------- ---- ------- -------
Total interest-earning assets .... 86,196 7.45 86,562 5,007 7.73 81,566 4,567 7.49
Noninterest-earning assets ........... 2,584 2,307 ------- 2,038 -------
------- ------- -------
Total assets ..................... $88,780 $88,869 $83,604
======= ======= =======
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW accounts ....................... $ 4,526 1.07% $ 4,191 $ 33 1.05% $ 3,361 $ 25 0.99%
Regular savings accounts ........... 16,352 1.41 15,018 142 1.26 14,520 119 1.10
Money market accounts .............. 1,991 3.13 1,555 36 3.10 660 15 3.04
Time deposits ...................... 36,306 5.48 35,397 1,485 5.61 32,266 1,355 5.61
------- ------- ------- ---- ------- -------
Total interest-bearing deposits .. 59,175 3.94 56,161 1,696 4.04 50,807 1,514 3.98
Advances from FHLB ................. 19,284 5.45 24,344 1,055 5.79 26,137 1,141 5.84
------- ------- ------- ------- -------
Total interest-bearing liabilities 78,459 4.31 80,505 2,751 4.57 76,944 2,655 4.61
------- -------
Demand deposits ...................... 3,801 2,441 1,047
Other liabilities .................... 146 61 184
------- ------- -------
Total liabilities ................ 82,406 83,007 78,175
Equity ............................... 6,374 5,862 5,429
------- ------- -------
Total liabilities and equity ..... $88,780 $88,869 $83,604
======= ======= =======
Net interest income .................. $ 2,256 $1,912
======= ======
Net interest rate spread(3) .......... 3.16% 2.88%
==== ====
Net interest margin(4) ............... 3.14% 3.48% 3.13%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities....... 109.86% 107.52% 106.01%
====== ====== ======
</TABLE>
- -----------------
(1) Includes investment securities available-for-sale, held-to-maturity and
stock in FHLB-Boston.
(2) Amount is net of deferred loan origination fees, allowance for loan losses
and includes non-accrual loans.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
42
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST ALANCE INTEREST COST BALANCE INTEREST COST
------------ -------- ------- -------- ----------- -------- ------- ------------ --------
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits......... $ 453 $ 16 3.53% $ 237 $ 14 5.91% $ 460 $ 25 5.43%
Federal funds sold................ 1,308 69 5.28 730 43 5.89 1,700 99 5.82
Investment securities(1).......... 44,092 3,068 6.96 40,908 2,690 6.58 38,341 2,529 6.60
Loans(2).......................... 36,324 3,027 8.33 27,849 2,363 8.49 20,568 1,794 8.72
-------- ------- -------- ------- -------- -------
Total interest-earning assets... 82,177 6,180 7.52 69,724 5,110 7.33 61,069 4,447 7.28
------- ------- -------
Noninterest-earning assets........ 2,144 2,078 1,936
-------- -------- --------
Total assets.................... $ 84,321 $ 71,802 $ 63,005
======== ======== ========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW accounts...................... $ 3,443 35 1.02% $ 2,041 $ 23 1.13% $ 1,707 28 1.64%
Regular savings accounts.......... 14,548 161 1.11 14,743 157 1.06 15,436 230 1.49
Money market accounts............. 739 23 3.11 212 6 2.83 6 3.30
Time deposits..................... 32,634 1,839 5.64 30,763 1,784 5.79 26,660 1,428 5.35
-------- ------- -------- ------- -------- ------
Total interest-bearing deposits. 51,364 2,058 4.02 47,759 1,970 4.11 43,809 1,686 3.84
Advances from FHLB................ 26,044 1,527 5.86 17,648 1,048 5.94 13,445 768 5.71
-------- ------- -------- ------- -------- ------
Total interest-bearing liabilities 77,408 3,585 4.63 65,407 3,018 4.61 57,254 2,454 4.29
------- ------- ------
Demand deposits........................ 1,219 914 586
Other liabilities...................... 199 362 323
-------- -------- --------
Total liabilities............... 78,826 66,683 58,163
Equity................................. 5,495 5,119 4,842
-------- -------- --------
Total liabilities and equity.... $ 84,321 $ 71,802 $ 63,005
======== ======== ========
Net interest income.................... $ 2,595 $ 2,092 $ 1,993
======= ======= =======
Net interest rate spread(3)............ 2.89% 2.72% 2.99%
==== ==== ====
Net interest margin(4)................. 3.16% 3.00% 3.26%
==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities...... 106.16% 106.60% 106.66%
====== ====== ======
</TABLE>
- ------------------
(1) Includes investment securities available-for-sale, held-to-maturity and
stock in FHLB-Boston.
(2) Amount is net of deferred loan origination fees, allowance for loan losses
and includes non-accrual loans.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
43
<PAGE>
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's rate)
(ii) changes attributable to rate (changes in rate multiplied by the prior
period's volume) and (iii) mixed changes (changes in volume multiplied by
changes in rate).
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 YEAR ENDED SEPTEMBER 30, 1996
JUNE 30, 1998 COMPARED TO COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
NINE MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 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:
Interest-bearing deposits............ $ 2 $ (3) $ (1) $ 4 $ (2) $ 2 $ (13) $ 2 $ (11)
Federal funds sold................... 159 12 171 30 (4) 26 (57) 1 (56)
Investment securities................ (440) 18 (422) 216 162 378 169 (8) 161
Loans, net........................... 607 86 693 705 (41) 664 616 (47) 569
------------------------------------------------------------------------------------------
Total interest-earning assets.... 328 113 441 955 115 1070 715 (52) 663
------------------------------------------------------------------------------------------
Interest-bearing liabilities:
NOW accounts......................... 6 2 8 14 (2) 12 8 (13) (5)
Regular savings accounts............. 4 19 23 (2) 6 4 (10) (63) (73)
Money market accounts................ 21 --- 21 16 1 17 --- 6 6
Time deposits........................ 131 (1) 130 98 (43) 55 231 125 356
------------------------------------------------------------------------------------------
Total deposits................... 162 20 182 126 (38) 88 229 55 284
FHLB advances........................ (78) (8) (86) 492 (13) 479 249 31 280
------------------------------------------------------------------------------------------
Total interest-bearing liabilities 84 12 96 618 (51) 567 478 86 564
------------------------------------------------------------------------------------------
Net change in net interest income...... $ 24 $ 101 $ 345 $ 337 $ 166 $ 503 $ 237 $ (138) $ 99
==========================================================================================
</TABLE>
44
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1997.
The Bank's total assets increased by $1.9 million or 2.2% to $88.8 million
at June 30, 1998 from $86.9 million at September 30, 1997. The Bank's asset
growth was comprised of an increase in the net loan portfolio of $5.7 million or
13.7%. Net loans totaled $46.8 million or 52.7% of total assets at June 30, 1998
as compared with $41.2 million at September 30, 1997. The increase in the loan
portfolio was funded by a decrease in investment securities, as $7.2 million of
agency bonds were called, as well as by an increase in deposits. The Bank, as a
part of its growth strategy, has begun to replace investment securities with
residential and commercial loans and FHLB advances with core deposits.
Total deposits increased by $7.5 million or 13.5% to $63.0 million at June
30, 1998 from $55.5 million at September 30, 1997. Total advances from the FHLB
decreased by $5.8 million or 23.1% to $19.3 million at June 30, 1998 from $25.1
million at September 30, 1997. Total equity increased by $335,000 or 5.6% to
$6.4 million at June 30, 1998 from $6.0 million at September 30, 1997 as a
result of net income of $208,000 and an increase in the net unrealized gain on
securities available for sale of $127,000.
COMPARISON OF THE OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND
1997.
Net Income. The Bank's net income for the nine months ended June 30, 1998
was $208,000 as compared to $367,000 for the nine months ended June 30, 1997.
During the period, the net interest rate spread and net interest margin
increased 28 and 35 basis points, respectively. These improved ratios were
offset during the period by an increase in general and administrative expenses
to support the Bank's growth in retail and commercial lending. The return on
average assets for the nine months ended June 30, 1998 was 0.31% compared to
0.59% for the nine months ended June 30, 1997.
Interest and Dividend Income. Total interest and dividend income increased
by $441,000 or 9.6% to $5.0 million for the nine months ended June 30, 1998 from
$4.6 million for the nine months ended June 30, 1997. This increase was due to
an increase in average interest-earning assets of $5.0 million or 6.1% to $86.6
million at June 30, 1998 from $81.6 million at June 30, 1997. During this
period, the average balance of the loan portfolio increased $9.4 million or
26.8% and the average balance of the investment portfolio decreased $8.4 million
or 18.8%, as investment securities were redeployed to fund loan originations.
Accordingly, interest and dividend income on investment securities decreased by
$422,000 or 18.3% to $1.9 million for the nine months ended June 30, 1998 as
compared to $2.3 million for the nine months ended June 30, 1997. Interest
income on loans increased by $693,000 or 31.5% to $2.9 million for the nine
months ended June 30, 1998 as compared to $2.2 million for the nine months ended
June 30, 1997. The average yield on the loan portfolio increased to 8.64% for
the nine months ended June 30, 1998, as compared to 8.32% for the nine months
ended June 30, 1997, reflecting an increase in the amount of commercial and
commercial real estate loans.
Interest Expense. Total interest expense increased by $96,000 or 3.6% to
$2.8 million for the nine months ended June 30, 1998 from $2.7 million for the
nine months ended June 30, 1997. Average interest-bearing liabilities increased
by $3.6 million or 4.7% to $80.5 million at June 30, 1998 from $76.9 million at
June 30, 1997. During this period, the average balance of interest bearing
deposits increased $5.4 million or 10.6% and the average balance of FHLB
advances decreased $1.8 million or 6.9% as deposit growth replaced FHLB advances
as a source of funds. Deposit balances have increased as a result of offering
free checking products and certificate of deposit products with competitive
rates. Accordingly, interest expense on deposits increased $182,000 or 12.1% to
$1.7 million for the nine months ended June 30, 1998 from $1.5 million for the
nine months ended June 30, 1997. Interest expense on advances from the FHLB
decreased $86,000 or 7.8% to $1.1 million for the nine months ended June 30,
1998 from $1.1 million for the nine months ended June 30, 1997.
45
<PAGE>
Net Interest and Dividend Income. The Bank's net interest and dividend
income increased by $344,000 or 18.1% to $2.3 million for the nine months ended
June 30, 1998 from $1.9 million for the nine months ended June 30, 1997. The
increase in net interest income and dividend income was due to an increase in
interest-earning assets along with an increase in interest-bearing liabilities.
The average yield on interest-earning assets for the nine months ended June
30, 1998 was 7.73% which was an increase of 24 basis points from 7.49% for the
nine months ended June 30, 1997. The average rate paid on interest-bearing
liabilities for the nine months ended June 30, 1998 was 4.57% which was an
decrease of 4 basis points from 4.61% for the nine months ended June 30, 1997.
As a result of the Bank's strategy to restructure the balance sheet, the net
interest rate spread increased from 2.88% to 3.16% during the period and the net
interest margin improved from 3.13% to 3.48%.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of estimated losses and is based on
the perceived higher risks inherent in small business and commercial real estate
lending, as well as the growth of the loan portfolio. The Bank considers many
factors in determining the level of the provision for loan losses. Collateral
value on a loan by loan basis, trends of loan delinquencies, risk classification
identified in the Bank's regular review of individual loans, and economic
conditions are major factors in establishing the provision. The provision for
loan losses increased by $130,000 or 288.9% to $175,000 for the nine months
ended June 30, 1998 from $45,000 for the nine months ended June 30, 1997. The
allowance for loan losses was $506,000 or 1.07% of total loans at June 30, 1998
versus $370,000 or 0.94% of total loans at June 30, 1997. The increase in the
provision is due to the overall increase in loan volume and the increased focus
on the origination of commercial real estate and commercial loans. As the Bank
continues to expand its small business lending, additional increases to the
provision are likely.
Noninterest Income. Noninterest income increased by $36,000 or 44.4% to
$117,000 for the nine months ended June 30, 1998 as compared to $81,000 for the
nine months ended June 30, 1997. The increase was primarily due to higher fee
income on $1.6 million and $1.4 million increases in the volume of retail
checking and commercial demand deposit accounts, respectively. The Bank
anticipates increases to noninterest income as it continues to expand the volume
of its deposit relationships. It is also the Bank's goal to increase its level
of noninterest income by continually considering additional sources of revenue
including offering various uninsured investment products, including fixed-rate
and variable annuities and mutual funds, through relationships with third party
broker-dealers and/or money managers and affiliations with insurance agencies.
Noninterest Expense. Noninterest expense increased by $493,000 or 35.2% to
$1.9 million for the nine months ended June 30, 1998 as compared to $1.4 million
for the nine months ended June 30, 1997. Salaries and employee benefits, the
largest component of noninterest expense, was $903,000 for the nine months ended
June 30, 1998 as compared to $666,000 for the nine months ended June 30, 1997,
an increase of $237,000 or 35.6%. This increase was primarily associated with
approximately $167,000 in additional compensation expenses due to the addition
of five full time equivalent employees including two commercial lending
department employees and three operations departments employees, necessary to
provide support for the Bank's expanded lending and deposit activities resulting
from the establishment of the Bank's commercial lending department.
During the period, professional fees increased from $93,000 to $150,000 or
61.3% due to the added cost of outside loan review and certain legal and
consulting costs associated with the Bank's expansion. Occupancy expense
increased by $30,000 or 34.5% to $117,000 for the nine months ended June 30,
1998 as compared to $87,000 for the nine months ended June 30, 1997, with the
increase primarily related to additional space utilized for certain
administrative functions. Other increases were incurred in the areas of
equipment, data processing and advertising services, primarily related to the
expansion of the Bank's product lines and additional services. Annual operating
expenses are also expected to increase in future periods due to future branching
and product expansion and the increased cost of operating as a stock
institution.
Income Taxes. The net provision for income taxes amounted to $125,000 for
the nine months ended June 30, 1998 as compared to $208,000 for the nine months
ended June 30, 1997, resulting in effective tax rates of 37.5% and 36.2% for the
respective periods. The effective tax rate reflects the Bank's utilization of a
securities investment subsidiary to substantially reduce state income taxes.
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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND 1996.
The Bank's total assets increased by $9.0 million or 11.6% to $86.9 million
at September 30, 1997 from $77.9 million at September 30, 1996. The Bank's asset
growth reflected commencement of the Bank's emphasis on commercial and
commercial real estate lending and increased origination of commercial loans
during 1997. Net loans were $41.2 million or 47.4% of total assets at September
30, 1997 as compared to $33.0 million or 42.4% of total assets at September 30,
1996, representing an increase of $8.2 million or 24.8%. The increase in loans
was funded through FHLB borrowings and an increase in deposits. Investment
securities held by the Bank decreased by $330,000 or 0.8% to $40.8 million in
1997 from $41.1 million in 1996. Total deposits increased by $6.1 million or
12.3% to $55.5 million at September 30, 1997 from $49.4 million at September 30,
1996. Deposits increased due to the increased profile of the Bank resulting from
marketing efforts and the development of new deposit products which resulted in
new deposit relationships. Total advances from the FHLB of Boston were $25.1
million at September 30, 1997 compared $22.7 million at September 30, 1996.
Total equity increased by $592,000 or 11.0% to $6.0 million at September 30,
1997 from $5.4 million at September 30, 1996 as a result of net income of
$476,000 and an increase in the net unrealized gain on securities available for
sale of $116,000. In addition, land increased by $104,000 due to the purchase of
an adjacent property to be used to provide additional parking for the Bank's
customers. The Bank does not believe that the acquisition or use of this
property will materially affect the Bank's operations.
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
1996.
Net Income. The Bank's net income for the year ended September 30, 1997 was
$476,000 as compared to $94,000 for the year ended September 30, 1996. This
$382,000 or 406.4% increase in net income during the period was the result of an
increase of $591,000 in net interest and dividend income after provision for
loan losses, partially offset by an increase of $261,000 in income taxes. The
increase in net interest and dividend income was due to the expansion of the
Bank's lending activities and investment in higher yielding callable agency
securities. During the same period, the Bank's salaries and employee benefits
increased due to the higher compensation costs associated with the addition of
employees to meet the staffing needs of the commercial lending department and
the establishment of an operations department to handle increased customer
service. The return on average assets for the year ended September 30, 1997 was
0.56% compared to 0.13% for the year ended September 30, 1996.
Interest and Dividend Income. Total interest and dividend income increased
by $1.1 million or 21.6% to $6.2 million for the year ended September 30, 1997
from $5.1 million for the year ended September 30, 1996. The increase in
interest and dividend income was a result of a higher level of loan originations
and increased investment in higher yielding callable agency securities, offset
by the decrease in the average rate of one- to four-family loans.
Interest Expense. Total interest expense increased by $567,000 or 18.9% to
$3.6 million for the year ended September 30, 1997 from $3.0 million for the
year ended September 30, 1996. Interest expense on deposits increased $89,000,
or 4.5%, from $2.0 million at September 30, 1996 to $2.1 million at September
30, 1997. Interest expense on advances from the FHLB increased $478,000, or
47.8%, from $1.0 million at September 30, 1996 to $1.5 million at September 30,
1997. Such advances were used in order to finance the acquisition of higher
yielding callable agency securities. Interest expense increased due to an
increase in overall deposit balances as well as the increase in FHLB advances.
Net Interest and Dividend Income. Net interest and dividend income for the
year ended September 30, 1997 was $2.6 million as compared to $2.1 million for
the year ended September 30, 1996. The $502,000 or 23.9% increase can be
attributed to an increased volume of loan originations and investment in higher
yielding callable agency securities and higher yielding commercial loans, offset
by additional borrowing expenses. The average yield on interest-earning assets
increased 19 basis points to 7.52% for the year ended September 30, 1997 from
7.33% for the year ended September 30, 1996, while the average cost of
interest-bearing liabilities increased by 2 basis points to 4.63% for the year
ended September 30, 1997 from 4.61% for the year ended September 30, 1996.
During this period, the Bank began originating commercial loans. As a result,
the net
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interest rate spread increased to 2.89% for the year ended September 30, 1997
from 2.72% for the year ended September 30, 1996 and the net interest margin
increased to 3.16% from 3.00% for the same periods.
Provision for Loan Losses. The provision for loan losses was $60,000 for
the year ended September 30, 1997 as compared to $148,000 for the year ended
September 30, 1996. The provision in 1996 was in response to the Bank's
commencement of small business lending and the perceived higher risk, inherent
in small business and commercial lending. At September 30, 1997, the balance of
the allowance for loan losses was $377,000 or 0.91% of total loans. During the
year ended September 30, 1997, $8,000 was charged against the allowance for loan
losses. At September 30, 1996, the balance of the allowance for loan losses was
$325,000 or 0.97% of total loans. During the year ended September 30, 1996,
$29,000 was charged against the allowance for loan losses.
Noninterest Income. Noninterest income was $116,000 for the year ended
September 30, 1997 compared to $67,000 for the year ended September 30, 1996.
The $49,000 or 73.1% increase was primarily the result of a $42,000 increase in
service charges on deposit accounts and an $8,000 increase in other income.
These increases were due to the increase in transactional accounts.
Noninterest Expense. Noninterest expense for the year ended September 30,
1997 remained relatively stable when compared to the year ended September 30,
1996. While the amounts of noninterest expense were comparable, the 1996 period
includes a one-time charge in FDIC Insurance to recapitalize the SAIF deposit
insurance fund. During 1997, the decrease in deposit insurance expense was
offset by an increase of $167,000 in salaries and employee benefits resulting
from the addition of five employees in the commercial loan department and an
increase of $183,000 in other expenses. Annual operating expenses are also
expected to increase in future periods due to future branching and product
expansion and the increased cost of operating as a stock institution.
Income Taxes. Income tax expense was $287,000 for the year ended September
30, 1997 as compared to $26,000 for the year ended September 31, 1996, resulting
in an effective tax rate at September 30, 1997 of 37.6% compared to 21.3% for
the prior period.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In March 1995, the FASB issued SFAS No.
121, "Accounting for Impairment of Long-Lived Assets and for Long Lived Assets
to be Disposed of" ("SFAS No. 121"). This Statement established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
Statement required that long-lived assets and certain identifiable intangibles
to be held and used by an institution be reviewed for impairment whenever events
change and circumstances indicate the carrying amount of the asset may not be
recoverable. This Statement became effective for the Bank on October 1, 1996.
Adoption of this Statement did not have a material impact on the earnings or
financial position of the Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB issued
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). This
statement established financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permitted the Bank to choose either a new fair
value based method or the current Accounting Principles Board ("APB") Opinion 25
intrinsic value based method of accounting for its stock-based compensation
arrangements. SFAS No. 123 required pro forma disclosures of net earnings and
earnings per share computed as if the fair value based method had been applied
in financial statements of companies that continue to follow current practice in
accounting for such arrangements under APB Opinion 25. SFAS No. 123 applied 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 applied 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 Plan, stock purchase plans, restricted
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stock plans and stock appreciation rights). The statement also specified 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 will apply to all
transactions entered into in fiscal years that begin after December 15, 1995.
Any effect that this statement will have on the Stock Company will be applicable
upon the consummation of the Reorganization. The Stock Company intends to follow
the APB Opinion 25 method upon adoption, but will provide pro forma disclosure
as if the fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities "("SFAS No. 125"). This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and does not
recognize financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that exited prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with a pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, applied prospectively. Earlier or retroactive
application of this Statement is not permitted. The adoption of the non-deferred
provisions of this Statement as of January 1, 1997 did not have a material
impact on the Bank's consolidated financial statements. The Bank believes that
the impact of the adoption as of January 1, 1998 of the deferred provisions of
this Statement will not be material to its future consolidated financial
statements.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general- purpose
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. It does not address issues of recognition or
measurement for comprehensive income and its components. SFAS No. 130 is
effective for fiscal years beginning after December 31, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. The Bank does not expect that upon adoption, this statement will have
a material effect on its consolidated financial statements.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This Statement
establishes standards for the way public business enterprises report information
about operating segments in financial statements. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. The Bank
does not expect that under this statement it will be required to report
additional information because its present organization consists of only one
operating segment as defined by the Statement.
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Other New Accounting Standards. SFAS No. 128 "Earnings per Share" ("SFAS
No. 128") is effective for periods ending after December 15, 1997. SFAS No. 129,
"Disclosure of Information about Capital Structure " ("SFAS No. 129") is
effective for periods ending after December 15, 1997. The Stock Company expects
that the adoption of these standards will not have a material impact on the
Stock Company's consolidated financial statements.
Disclosures about Pensions and Other Postretirement Benefits. In February
1998, the FASB issued SFAS No. 132, "Employers' Disclousres about Pensions and
Other Postretirement Benefits- an amendment of FASB Statements No. 87, 88 and
106" ("SFAS No. 132") which revises employers' disclosures about pension and
other postretirement benefit plans, though it does not change the measurement or
recognition of those plans. The Bank will adopt SFAS No. 132 for the fiscal year
beginning on October 1, 1998. Adoption of this Statement will not have a
material impact on the Stock Company's or the Bank's financial position or
results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June 1998
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." ("SFAS No.133") This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives.) It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. It is not expected that the adoption of
this statement will have a material impact on the Stock Company's financial
statements. The Bank at this time does not plan to adopt SFAS No. 133 early.
Also, the Bank has no plan, on adoption of SFAS No. 133, to use the window of
opportunity to reclassify held-to-maturity securities to available-for-sale.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, proceeds from the principal and
interest payments on loans, debt and equity securities, and to a lesser extent,
borrowings and proceeds from the sale of fixed rate mortgage loans to the
secondary market. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit outflows, mortgage
prepayments, mortgage loan sales, and borrowings are greatly influenced by
general interest rates, economic conditions and competition.
Our primary investing activities are the origination of various types of
loans and the purchase of debt and equity securities. During the nine months
ended June 30, 1998 and the years ended September 30, 1997, 1996 and 1995, our
loan originations totaled $18.9 million, $14.4 million, $20.3 million and $4.7
million, respectively. These activities are funded primarily by deposit growth,
principal repayment of loans, and interest and dividend income from debt and
equity securities. Loan sales provide an additional source of liquidity,
totaling $6.0 million, $2.8 million, $3.4 million and $599,000 for the nine
months ended June 30, 1998 and the years ended September 30, 1997, 1996 and
1995, respectively.
We experienced a net increase in total deposits of $7.5 million, $6.1
million, $1.2 million, and $7.1 million for the nine months ended June 30, 1998
and the years ended September 30, 1997, 1996 and 1995, respectively. Deposit
flows are affected by the level of interest rates, the interest rates and
products offered by local competitors, and other factors.
We monitor our liquidity position on a daily basis. Excess short-term
liquidity is usually invested in overnight federal funds sold. In the event we
require funds beyond our ability to generate them internally, additional sources
of funds are available through the use of FHLB advances. At June 30, 1998, we
had $19.3 million outstanding in FHLB advances.
Loan commitments totaled $1.6 million at June 30, 1998, comprised of
$758,000 at variable rates and $810,000 at fixed rates. We anticipate that we
will have sufficient funds available to meet current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1998,
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totaled $27.2 million. Based upon this experience and our current pricing
strategy, we believe that a significant portion of such deposits will remain
with the Bank.
In December 1998, we plan to continue expanding our retail banking
franchise by opening a branch location. The acquisition and renovation of this
office is expected to cost approximately $600,000. Management anticipates it
will have sufficient funds available to meet its planned capital expenditures
throughout 1998.
At June 30, 1998, we exceeded all of our regulatory capital requirements
with a tangible capital level of $5.9 million, or 6.63% of adjusted assets,
which is above the required level of $1.3 million, or 1.5% and total risk-based
capital of $6.3 million, or 17.89% of adjusted assets, which is above the
required level of $2.8 million, or 8.00%. See "Regulatory Capital Compliance"
and "Regulation - Regulatory Capital Requirements."
Our most liquid assets are cash, federal funds sold and interest-bearing
demand accounts. The level of these assets are dependent on our operating,
financing, lending and investing activities during any given period. At June 30,
1998, cash, federal funds sold and interest-bearing demand accounts totaled $4.5
million, or 5.1% of total assets.
YEAR 2000
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Bank and its operations may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware, and equipment both within and outside the
Bank's direct control and with whom the Bank electronically or operationally
interfaces (e.g. third party vendors providing data processing, information
system management, maintenance of computer systems, and credit bureau
information) are likely to be affected. Furthermore, if computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations which rely on
the date field information, such as interest, payment or due dates and other
operating functions, will generate results which could be significantly
misstated, and the Bank could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
In addition, noninformation technology systems, such as equipment like
telephones, copiers and elevators may also contain embedded technology which
control their operation and which may be effected by the Year 2000 Problem. When
the Year 2000 arrives, systems, including some of those with embedded chips, may
not work properly because of the way they store date information. They may not
be able to deal with the date 01/01/00, and may not be able to deal with
operational 'cycles' such as 'do X every 100 days'. Thus, even noninformation
technology systems may affect the normal operations of the Bank upon the arrival
of the Year 2000.
Under certain circumstances, failure to adequately address the Year 2000
Problem could adversely affect the viability of the Bank's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Bank's products, services and competitive condition.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000 Problem, assess its potential impact on the operations
of the Bank, monitor the progress of third party software vendors in addressing
the matter, test changes provided by these vendors, and develop contingency
plans for any critical systems which are not effectively reprogrammed. A
committee of senior officers of the Bank has been formed to evaluate the effects
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that the upcoming Year 2000 could have on computer programs utilized by the
Bank. The Bank's plan is divided into the five phases: (1) awareness - define
the problem, obtain executive level support and develop an overall strategy.
This phase was completed in September, 1997; (2) assessment - identify all
systems and the criticality of the systems. This phase was completed in
September, 1997; (3) renovation - program enhancements, hardware and software
upgrades, system replacements, and vendor certifications. This phase is in
process and with a scheduled completion date of December, 1998; (4) validation -
test and verify system changes and coordinate with outside parties. This phase
is in process with a scheduled completion date of December, 1998; and (5)
implementation - components certified as year 2000 compliant and moved to
production. This phase is in process with a scheduled completion date of
December, 1998.
Third party vendors provide the majority of software used by the Bank. All
of the Bank's vendors are aware of the Year 2000 situation, and each has assured
the Bank that it is currently working to have its software compliant by
December, 1998, and testing for the critical applications began in April, 1998.
This will enable the Bank to devote substantial time to the testing of the
upgraded systems prior to the arrival of the millennium. The Bank utilizes the
service of a third party vendor to provide the software which is used to process
and maintain most mortgage and deposit customer-related accounts. This vendor
has provided the Company with a software version which has been certified to be
Year 2000 compliant. Testing by the Bank is underway to verify compliance for
its application and usage. The Bank presently believes that with modifications
to existing software and conversions to new software, the Year 2000 Problem will
be mitigated without causing a material adverse impact on the operations of the
Bank. However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Problem could have an impact on the operations
of the Bank.
The Bank carefully considers the Year 2000 readiness of its potential
commercial borrowers in the lending process. Commencing in September 1998, each
potential new commercial borrower was required to enter into a Year 2000
agreement with the Bank certifying that the borrower is or will shortly be Year
2000 compliant. Moreover, the failure to be Year 2000 compliant constitutes a
default under the terms of new loan agreements with commercial borrowers. In
addition, in April 1998, the Bank sent letters to all of its commercial
borrowers asking them to certify that they will be Year 2000 compliant by
December 31, 1998. Follow up letters have been sent to all commerical borrowers
who have failed to respond to the Bank's Year 2000 inquiries.
In addition, monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Stock Company and the Bank. Direct
costs include potential charges by third party software vendors for product
enhancements, costs involved in testing software products for year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. The Bank has spent approximately $20,500 on
Year 2000 related costs to date and estimates that it will spend an additional
$25,000 for Year 2000 compliance. Both direct and indirect costs of addressing
the Year 2000 Problem will be charged to earnings as incurred. The Bank does not
believe that such costs will have a material effect on results of operations.
However, there can be no guarantee that the systems of other companies on which
the Bank's systems rely will be timely converted, or that a failure to convert
by another company or a conversion that is incompatible with the Bank's systems,
would not have material adverse effect on the Bank. Although no independent
analysis of the Bank's potential exposure has been obtained, the Bank believes
it has no exposure to contingencies related to the Year 2000 Problem for the
products it has sold. The Bank's network consultant, EOS Systems, Inc., has
examined the hardware and software used by the Bank and has certified that such
hardware and software is Year 2000 compliant.
The costs of the project and the date on which the Bank plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Bank has not developed a contingency plan which would be implemented in the
unlikely event that it is not Year 2000 compliant. The Bank will continue to
closely monitor the progress of its Year 2000 compliance plan and will determine
by December 31, 1998 if the need for a contingency plan exists.
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IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying footnotes have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The assets and liabilities of the Bank are primarily monetary
in nature and changes in market interest rates have a greater impact on the
Bank's performance than do the effects of inflation.
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BUSINESS
THE STOCK COMPANY
Prior to the Reorganization, the Stock Company will not transact any
material business. Following the Reorganization, in addition to directing,
planning and coordinating the business activities of the Bank, the Stock Company
will invest the proceeds of the Offering which are retained by it. See "Use of
Proceeds." Upon consummation of the Reorganization, the Stock Company will have
no significant assets other than the shares of the Bank's capital stock acquired
in the Reorganization, the loan receivable held with respect to its loan to the
ESOP and that portion of the net proceeds of the Offering retained by it, and
will have no significant liabilities. Cash flow to the Stock Company will be
dependent upon investment earnings from the net proceeds retained by it,
payments on the ESOP loan and any dividends received from the Bank. Initially,
the Stock Company will neither own nor lease any property, but will instead use
the premises, equipment and furniture of the Bank. At the present time, the
Stock Company does not intend to employ any persons other than its officers (who
are not anticipated to be separately compensated by the Stock Company), but will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Stock Company expands its
business in the future. In the future, the Stock Company will consider using
some of the proceeds of the Offering retained by it to expand its operations in
its existing primary market and other nearby areas by acquiring other financial
institutions which could be merged with the Bank or operated as separate
subsidiaries. Presently, there are no agreements or understandings for expansion
of the Stock Company's operations.
THE BANK
The business of the Bank primarily consists of attracting savings deposits
from the general public and investing such deposits in mortgage loans secured by
single-family residential real estate, commercial real estate, commercial assets
and investment securities, including U.S. Government and Federal Agency
securities, asset- backed securities, FNMA, GNMA and FHLMC mortgaged-backed
securities and interest-earning deposits. The Bank's commercial and commercial
real estate borrowers are comprised of diverse small businesses, without a
particular concentration in any one industry. The Bank also makes consumer
loans, including home equity loans, automobile, loans on deposit accounts and
other consumer loans. The Bank offers both fixed-rate and adjustable-rate loans
and emphasizes the origination of residential real estate mortgage loans and
commercial loans with adjustable interest rates.
The Bank's principal sources of income are interest, dividends and fees on
loans and investments, and the Bank's principal expenses are interest paid on
deposit accounts, borrowings, and general operating expenses.
MARKET AREA
The Bank's office is located in Revere, Suffolk County, Massachusetts. The
City of Revere, containing approximately 39,000 residents, is located
approximately five miles from downtown Boston in the northern suburbs of Boston,
bounded by the towns of Chelsea, Everett, Malden and Lynn. The City of Revere is
easily accessible from downtown Boston via Route 1, Route 1A, Route 16 and other
state roads connecting the communities within the Logan Airport corridor
northeast of Boston. As an established metropolitan suburb, Revere consists
mostly of developed single- and multi-family properties within a network of
well-maintained neighborhoods.
The majority of the Bank's lending and deposit activity has historically
been in Revere. In recent years, the Bank's lending operations have expanded
beyond the Revere city limits to include other areas of the Boston metropolitan
region, including the cities of Chelsea, Everett, Malden and Saugus. These
cities contain an active and growing commercial business environment for
financial institutions. Logan International Airport is located in East Boston, a
portion of the city of Boston, which is adjacent to Revere and Chelsea. The Bank
has recently targeted the area surrounding Logan International Airport as a
source of potential business, and fully intends to increase activities in that
area. The Bank's commercial loan department has been largely responsible for
expanded business in this area and throughout Suffolk County.
54
<PAGE>
The economic base of the Bank's market area is diversified and includes a
multitude of small businesses including services, wholesale and retail trade,
government, air freight forwarding and other businesses servicing Logan Airport.
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
strengthened. However, unemployment rates for both Revere and Suffolk County
remain slightly above statewide averages.
BUSINESS STRATEGY
Historically, the primary focus of the Bank has been to provide financing
for single family housing in its market area of Revere, Massachusetts and
surrounding communities. Indeed, at September 30, 1995, over 96% of the Bank's
loan portfolio consisted of one- to four-family residential loans, and the Bank
had no commercial real estate or commercial loans in its portfolio. Beginning in
1996, the Bank began to make significant investments in the human and
technological resources necessary to create a platform for the future growth and
profitability of the Bank. While the Bank believes growth-oriented business
strategy is best for its long term success and viability, it has been and will
continue to be necessary for the Bank to increase investment in infrastructure,
product development, and technology enhancements. As evidenced by the Bank's
recent efficiency ratio increase, noninterest expenses have steadily increased
since 1995 and should continue to grow until the Bank has adequate resources in
place to offer an expanded range of service. Consequently, short-term net income
may remain flat. Long-term profitability, however, should improve as the Bank
realizes the benefits of diversified product lines and market share growth.
o Retail Banking and Customer Service. The Bank continues to focus on
expanding its residential lending and retail banking franchise and
increasing the number of households served within the Bank's market area.
For nearly 100 years, the Bank has served the needs of Revere and its
surrounding communities and remains the only bank headquartered in Revere.
The Bank's Board of Directors and its management are active in many
charitable organizations throughout Revere and the Bank's employees have
taken pride in providing hands on, personal service. The Bank views its
reputation as a service oriented institution which meets the needs of the
local community as one of its greatest assets. Given the increasing
consolidation in the financial services sector, the Bank believes that
expanding its market share for traditional community banking products will
enhance this reputation and provide inroads to new segments of the banking
markets.
o Small Business Banking. The Bank views its entry into the small business
banking market as a natural outgrowth of its traditional community banking
services. Since 1996, the Bank has made a major commitment to small
business commercial lending (involving commercial and industrial loans and
commercial real estate loans) as a means to increase the yield on its loan
portfolio and attract lower cost transaction deposit accounts. The Bank has
worked to develop a niche of making commercial loans to the small and
medium sized companies in a wide variety of industries located in Revere
and elsewhere in the greater Boston area. In particular, the Bank has
expanded its lending to the business community surrounding the Logan
International Airport which comprises a growing sector of the Revere and
Chelsea markets. The Bank offers these businesses a variety of traditional
loans products and commercial services administered by the Bank's
commercial loan department which are designed to give business owners
borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle
purchases and the refinancing of existing corporate debt. In addition, in
order to better serve the unique financing needs of its commercial
customers, the Bank also offers specialized products such as direct courier
pick up for deposits. The Bank has also recently applied to become an
approved lender of the Small Business Administration to better serve the
needs of local businesses. The Bank has staffed its commercial lending
department with the addition of a senior commercial loan officer with
considerable commercial lending expertise in the Boston area and has
developed a staff to support the commercial loan department. The Bank has
recently added a second commercial lending officer to the small business
banking area and will add additional qualified employees as market
conditions warrant.
o Branch Expansion. The Bank believes that a branch network is crucial to
increasing its market share in the traditional community banking and small
business banking arenas and that its lending and deposit
55
<PAGE>
gathering activities are presently limited by the fact that it operates
from only one location. The Bank has recently purchased its first branch
facility in Chelsea, Massachusetts in a stable and growing small business
market. This branch location will emphasize convenience for the Bank's
small business clients and be designed to augment the Bank's small business
lending activities. In the future, the Bank expects to fund the
construction and/or acquisition of one or more additional branch locations
either de novo, or by purchasing an existing deposit base and/or location
and to expand and renovate its main office to allow the Bank's
administrative functions to be performed in a single facility. Expansion
will facilitate greater services and increased loan originations within the
Bank's existing underwriting standards.
o Expanded Delivery Systems. The increased use of alternative delivery
channels has simplified and reduced the costs of financial transactions for
consumers, businesses and financial institutions. In addition to conducting
financial transactions at branch offices, customers are increasingly using
ATMs, online banking and online bill payment and electronic fund transfers
to communicate with financial services providers. The Bank has responded to
these market trends in several ways. First, since May 1997, the Bank has
offered its 24 hour telebanking product which provides its customers with
around the clock access to their accounts through the use of a touch tone
telephone. The Bank also has located an ATM at Logan Airport and is
currently in negotiations to open two additional ATMs in Revere and one ATM
in downtown Boston in the fall of 1998. Finally, the Bank plans to
introduce its home banking product which will give its customers access to
their accounts through the use of their personal computers in the first
quarter of 1999.
o Expansion of Product Lines. Regulatory changes and cross-sector
acquisitions have diminished the distinctions among various types of
financial institutions such as banks, insurance companies and securities
brokerage firms. Financial institutions today have the opportunity to
leverage their client base, expand their market share and compete for an
increased share of customers' financial services business by offering a
diverse range of products and services that formerly may have been offered
only by one particular type of financial institution. Recognizing this
trend, the Bank intends to broaden its product line in order to better
serve its customers, expand customer relations and diversify its income
stream. In the near term, the Bank is contemplating offering various
uninsured investment products, including fixed-rate and variable annuities
and mutual funds, through relationships with third party broker-dealers
and/or money managers that would service both retail and small business
customers needs for investment products. The Bank also plans to investigate
opportunities presented by affiliations with insurance agencies over the
longer term. The Bank's strategy is to become a full service provider of
financial services, enhancing the Bank's ability to attract and retain both
retail and commercial customers.
LENDING ACTIVITIES
General. The Bank originates loans through its office located in Revere,
Massachusetts. The principal lending activities of the Bank are the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential properties and the origination
of commercial loans secured by commercial real estate and commercial assets. To
a lesser extent, the Bank also originates consumer loans, including home equity
and loans on deposit accounts, construction loans and multifamily residential
real estate loans.
The Bank's ten largest borrowing relationship, outstanding as of June 30,
1998, ranged from $380,000 to $605,000.
56
<PAGE>
The following table sets forth the composition of the Bank's mortgage
and other loan portfolios in dollar amounts and percentages at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------------ ---------------- ---------------- ---------------- --------------- ---------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family .......$34,495 72.79% $ 32,928 79.11% $ 30,046 89.84% $ 20,630 95.91%$ 20,349 97.85%$ 21,825 98.02%
Commercial real estate .... 4,157 8.77 2,577 6.19 460 1.38 -- -- -- -- -- --
Construction and land ..... 1,518 3.2 815 1.96 1,075 3.21 174 0.81 80 0.38 88 0.4
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total mortgage loans .... 40,170 84.76 36,320 87.26 31,581 94.43 20,804 96.72 20,429 98.23 21,913 98.42
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial loans ............. 2,789 5.89 1,684 4.04 49 0.15 -- -- -- -- -- --
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Consumer loans:
Home equity lines ......... 3,301 6.96 2,761 6.63 1,303 3.9 364 1.69 30 0.14 -- --
Secured by deposit accounts 621 1.31 374 0.9 370 1.11 314 1.46 266 1.28 242 1.09
Auto loans ................ 425 0.90 413 0.99 121 0.36 -- -- -- -- -- --
Other consumer loans ...... 84 0.18 73 0.18 19 0.05 27 0.13 72 0.35 109 0.49
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total consumer loans .... 4,431 9.35 3,621 8.7 1,813 5.42 705 3.28 368 1.77 351 1.58
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loans receivable .. 47,390 100.00% 41,625 100.00% 33,443 100.00% 21,509 100.00% 20,797 100.00% 22,264 100.00%
====== ====== ====== ====== ====== ======
LESS:
Allowance for loan losses . (506) (377) (325) (206) (187) (67)
Deferred loan origination
fees, net ............... (59) (73) (72) (30) (31) (39)
-------- -------- -------- ------- -------
Loans, net ..............$46,825 $ 41,175 $ 33,046 $ 21,273 $20,579 $22,158
======== ======== ======== ======== ======= =======
</TABLE>
57
<PAGE>
One- to Four-Family Residential Real Estate Lending. The primary emphasis
of the Bank's lending activity is the origination of conventional mortgage loans
on one- to four-family residential dwellings located in the Bank's primary
market area. As of June 30, 1998, loans on one- to four-family residential
properties accounted for 72.8% of the Bank's total loan portfolio.
The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms as borrowers may refinance or prepay loans
at their option, without penalty. Conventional residential mortgage loans
granted by the Bank customarily contain "due-on-sale" clauses which permit the
Bank to accelerate the indebtedness of the loan upon transfer of ownership of
the mortgaged property.
The Bank makes conventional mortgage loans and uses standard Federal
National Mortgage Association ("FNMA") documents, to allow for the sale of
qualifying loans in the secondary mortgage market. The Bank lends up to a
maximum loan-to-value ratio on mortgage loans secured by owner-occupied
properties of 100% of the lesser of the appraised value or purchase price of the
property, with the condition that private mortgage insurance is required on
loans with a loan-to-value ratio in excess of 80%. To a lesser extent, the Bank
originates non-conforming loans which are tailored for its local community, but
which may not satisfy the various requirements imposed by FNMA. On a limited
basis the Bank offers special products, including mortgage loans with a 100%
loan-to-value ratio without private mortgage insurance to customers with
co-signers or who have excellent credit and income, for which the Bank receives
a rate premium over conventional loans.
The Bank offers adjustable-rate mortgage loans with terms of up to 30
years. Adjustable-rate loans offered by the Bank include loans which reprice
every one, three, five or seven years and provide for an interest rate which is
based on the interest rate paid on U.S. Treasury securities of a corresponding
term, plus a margin of up to 2.75%. The Bank currently offers adjustable-rate
loans with initial rates below those which would prevail under the foregoing
computations, based upon the Bank's determination of market factors and
competitive rates for adjustable-rate loans in its market area. For
adjustable-rate loans, borrowers are qualified at the initial rate.
The Bank's adjustable-rate mortgages include limits on increases or
decreases of the interest rate of the loan. The interest rate may increase or
decrease by 2.0% per year and 6.0% over the life of the loan for all of the
Bank's adjustable rate mortgages. The retention of adjustable-rate mortgage
loans in the Bank's loan portfolio helps reduce the Bank's exposure to
fluctuations in interest rates. However, there are unquantifiable credit risks
resulting from potential increased costs to the borrower as a result of the
repricing of adjustable-rate mortgage loans. During periods of rising interest
rates, the risk of default on adjustable-rate mortgage loans may increase due to
the upward adjustment of interest cost to the borrower.
During the year ended September 30, 1997, the Bank originated $1.9 million
in adjustable-rate mortgage loans and $5.5 million in fixed-rate mortgage loans.
Of the fixed-rate loans originated, the Bank sold $2.1 million of fixed-rate
loans and retained $3.4 million of fixed-rate loans based on the rate of the
loans. Approximately 38% of all loan originations during fiscal 1997 were
refinancings of loans already in the Bank's loan portfolio. At June 30, 1998,
the Bank's loan portfolio included $9.8 million in adjustable-rate one- to
four-family residential mortgage loans or 20.8% of the Bank's total loan
portfolio, and $24.8 million in fixed-rate one- to four-family residential
mortgage loans, or 52.4% of the Bank's total loan portfolio.
58
<PAGE>
Commercial Real Estate Loans. The Bank originates commercial real estate
loans to finance the purchase of real property, which generally consists of
developed real estate. In underwriting commercial real estate loans,
consideration is given to the property's historical cash flow, current and
projected occupancy, location and physical condition. At June 30, 1998, the
Bank's commercial real estate loan portfolio consisted of 24 loans, totaling
$4.2 million, or 8.8% of total loans. The Bank's largest loan is a commercial
real estate loan with an outstanding balance of $494,000 at June 30, 1998
secured by a commercial property located in downtown Boston. The Bank's
commercial real estate loan portfolio is diverse, and does not have any
significant loan concentration by type of property or borrower.
Commercial real estate lending entails additional risks compared with one-
to four-family residential lending. Because payments on loans secured by
commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate market or
the economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers and the payment
experience on such loans is typically dependent on the successful operation of a
real estate project and/or the collateral value of the commercial real estate
securing the loan. See " Risk Factors--Growth of the Bank's Commercial Loan and
Commercial Real Estate Loan Portfolio."
Commercial Loans. In the past two years, the Bank has made a major
commitment to small business commercial lending. The Bank has worked to develop
a niche of making commercial loans to small and medium sized businesses in a
wide variety of industries located in the Bank's market area and has recently
applied to become an approved lender of the Small Business Administration. Small
business loans are expected to comprise a growing portion of the Bank's loan
portfolio in the future. At June 30, 1998, the Bank's commercial loan portfolio
consisted of 58 loans, totaling $2.8 million, or 5.9% of total loans.
Unless otherwise structured as a mortgage on commercial real estate, such
loans generally are limited to terms of five years or less. Substantially all
such commercial loans have variable interest rates tied to the prime rate as
reported in the Wall Street Journal. Whenever possible, the Bank collateralizes
these loans with a lien on commercial real estate, or alternatively, with a lien
on business assets and equipment and the personal guarantees from principals of
the borrower.
The Bank offers commercial services administered by the Bank's commercial
loan department which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the
refinancing of existing corporate debt. In addition, the Bank has tailored
certain products and services (such as courier pick up of deposits) to better
serve the unique needs of local businesses. The Bank has staffed its commercial
lending department with the addition of a senior commercial loan officer with
considerable commercial lending expertise in the Boston area and has developed a
staff to support the commercial loan department. The Bank has recently added a
second commercial lending officer to the small business banking area and will
add additional qualified employees as market conditions warrant.
Commercial loans are generally considered to involve a higher degree of
risk than residential mortgage loans because the collateral may be in the form
of intangible assets and/or inventory subject to market obsolescence. Commercial
loans may also involve relatively large loan balances to single borrowers or
groups of related borrowers, with the repayment of such loans typically
dependent on the successful operation and income stream of the borrower. Such
risks can be significantly affected by economic conditions. In addition,
commercial business lending generally requires substantially greater oversight
efforts compared to residential real estate lending. The Bank utilizes the
services of an outside consultant to conduct quarterly on-site reviews of the
commercial loan portfolio to ensure adherence to underwriting standards and
policy requirements.
59
<PAGE>
Consumer Loans. The Bank's consumer loans consist of home equity loans,
loans secured by deposits, and other consumer loans, including automobile loans.
At June 30, 1998, the consumer loan portfolio totaled $4.4 million or 9.4% of
total loans. Consumer loans (other than home equity loans) generally are offered
for terms of up to five years at fixed interest rates and do not exceed $25,000
individually.
The Bank's home equity loans are secured by available equity based on the
appraised value of owner-occupied one- to four-family residential property. Home
equity loans will be made for up to 80% of the appraised value of the property
(less the amount of the first mortgage). Home equity loans are offered at
adjustable rates. The adjustable interest rate is prime minus 0.5% for the first
year and the prime rate as reported in the Wall Street Journal for the remaining
life of the loan. The Bank's home equity loans generally have a five-year draw
(renewable for up to an additional five years) with a ten year repayment period.
At June 30, 1998, the Bank had $3.3 million in home equity loans with unused
credit available to existing borrowers of $2.0 million.
The Bank makes loans secured by deposit accounts up to 90.0% of the amount
of the depositor's savings account balance. The interest rate on the loan is
2.5% higher than the rate being paid on passbook accounts and 2.0% higher than
the rate being paid on certificates of deposit. The Bank also makes other
consumer loans, which may or may not be secured. The terms of such loans vary
depending on the collateral.
The Bank makes loans for automobiles, both new and used, directly to the
borrowers. The loans are generally limited to 80% of the purchase price or the
retail value listed by the National Automobile Dealers Book. The terms of the
loans are determined by the age and condition of the collateral. The Bank
obtains title to the vehicle and collision insurance policies are required on
all these loans.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however, that
the Bank's delinquency rate on consumer loans will continue to remain low in the
future, or that the Bank will not incur future losses on these activities.
Construction Loans. The Bank engages in a limited amount of construction
lending usually for the construction of single family residences or commercial
real estate. Most are construction/permanent loans to the future occupants,
structured to become permanent loans upon the completion of construction. All
construction loans are secured by first liens on the property. Loan proceeds are
disbursed as construction progresses and inspections warrant. Loans involving
construction financing present a greater risk than loans for the purchase of
existing homes, since collateral values and construction costs can only be
estimated at the time the loan is approved. Due to the small amount of
construction loans in the Bank's portfolio, the risk in this area is limited.
Origination, Sale and Servicing of Loans. The Bank's lending activities are
conducted through its office in Revere, Massachusetts and will soon be conducted
through its branch in Chelsea, Massachusetts. The Bank's ability to originate
loans is dependent upon the relative customer demand for fixed-rate or
adjustable-rate mortgage loans, which is affected by the current and expected
future levels of interest rates. The Bank is a qualified seller/servicer for
FNMA and has applied to be an approved SBA lender. Historically, the Bank sells
certain of its fixed-rate loans to FNMA based on liquidity needs and prevailing
market conditions. All of the Bank's sales to FNMA have been made with servicing
retained on the loans. At June 30, 1998, the Bank was servicing $18.3 million in
loans for FNMA.
Originations for the nine months ended June 30, 1998, compared to the prior
period, have increased due to the addition of a commercial lending officer. Loan
sales also increased during the same period. In January 1998, the Bank has also
entered into a participation agreement with a local bank for a commercial real
estate loan for the development of 14 single family homes on a fourteen acre
subdivision in Saugus,
60
<PAGE>
Massachusetts. The following tables set forth information with respect to
originations, sales of loans and principal repayments during the periods
indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance, loans, net ........... $ 41,175 $ 33,046 $ 33,046 $ 21,273 $ 20,579
-------- -------- -------- -------- --------
Loans originated:
Mortgage loans:
One- to four-family .............. 11,869 4,521 6,843 18,385 3,402
Commercial real estate ........... 1,000 1,799 2,245 463 --
Construction and land ............ 885 519 1,047 511 718
-------- -------- -------- -------- --------
Total mortgage loans ........... 13,754 6,839 10,135 19,359 4,120
Commercial loans ................... 1,627 1,310 1,946 -- --
Consumer loans ..................... 3,538 1,392 2,329 965 537
-------- -------- -------- -------- --------
Total loans originated ......... 18,919 9,541 14,410 20,324 4,657
-------- -------- -------- -------- --------
Total ................................ 60,094 42,587 47,456 41,597 25,236
Principal repayments and other, net ..... (7,263) (1,461) (3,463) (5,110) (3,385)
Loan charge-offs, net ................... (46) -- (8) (29) 21
Sale of mortgage loans, principal balance (5,960) (2,209) (2,810) (3,412) (599)
-------- -------- -------- -------- --------
Ending balance, loans, net .............. $ 46,825 $ 38,917 $ 41,175 $ 33,046 $ 21,273
======== ======== ======== ======== ========
</TABLE>
61
<PAGE>
The following tables set forth the dollar amounts in each loan category at
June 30, 1998 and September 30, 1997 that are due after June 30, 1999 and
September 30, 1998, and whether such loans have fixed or adjustable interest
rates.
<TABLE>
<CAPTION>
DUE AFTER JUNE 30, 1999
---------------------------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family ........ $24,597 $ 122 $24,719
Commercial real estate .... 987 2,597 3,584
Construction and land ..... 811 382 1,193
------- ------- -------
Total mortgage loans .... 26,395 3,101 29,496
------- ------- -------
Commercial loans ............... 1,344 -- 1,344
------- ------- -------
Consumer loans:
Home equity lines ......... -- -- --
Secured by deposit accounts 117 -- 117
Auto loans ................ 445 -- 445
Other consumer loans ...... 5 -- 5
------- ------- -------
Total consumer loans .... 567 -- 567
------- ------- -------
Total loans ............. $28,306 $ 3,101 $31,407
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
----------------------------------------------------------------------
FIXED ADJUSTABLE TOTAL
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family ........ $23,882 $ 235 $24,117
Commercial real estate .... 915 1,436 2,351
Construction and land ..... 315 -- 315
------- ------- -------
Total mortgage loans .... 25,112 1,671 26,783
------- ------- -------
Commercial loans ............... 635 -- 635
------- ------- -------
Consumer loans:
Home equity lines ......... -- -- --
Secured by deposit accounts 352 -- 352
Auto loans ................ 428 -- 428
Other consumer loans ...... 36 -- 36
------- ------- -------
Total consumer loans .... 816 -- 816
------- ------- -------
Total loans ............. $26,563 $ 1,671 $28,234
======= ======= =======
</TABLE>
62
<PAGE>
Loan Commitments. The Bank generally makes loan commitments to borrowers
not exceeding 30 days. At June 30, 1998, the Bank had $1.6 million in loan
commitments outstanding, primarily for the origination of one- to four-family
residential real estate loans, commercial loans and commercial real estate
loans.
Loan Solicitation. Loan originations are derived from a number of sources,
including the Bank's existing customers, referrals, realtors, advertising and
"walk-in" customers at the Bank's office.
Loan Administration. Upon receipt of a loan application from a prospective
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. For all mortgage loans, an appraisal of real estate intended to secure
the proposed loan is obtained from an independent appraiser who has been
approved by the Bank's Board of Directors. Fire and casualty insurance are
required on all loans secured by improved real estate. Insurance on other
collateral is required unless waived by the Loan Approval Committee. The Board
of Directors of the Bank has the responsibility and authority for the general
supervision over the loan policies of the Bank. The Board has established
written lending policies for the Bank.
All residential and commercial real estate mortgages and commercial
business loans must be ratified by the Loan Approval Committee of the Bank's
Board of Directors. In addition, certain designated officers of the Bank have
authority to approve loans not exceeding specified levels, while the Loan
Approval Committee of the Board of Directors must approve loans in excess of (a)
$50,000 for commercial real estate loans; (b) $50,000 for commercial loans; (c)
loans over the current FNMA limit for residential mortgage loans; and (d)
$75,000 for consumer loans. All loans in excess of $250,000 must be ratified by
the Board of Directors as a whole.
Interest rates charged by the Bank on all loans are primarily determined by
competitive loan rates offered in its market area and interest rate costs of the
source of funding for the loan. The Bank generally charges an origination fee on
new mortgage loans. The origination fees, net of direct origination costs, are
deferred and amortized into income over the life of the loan. At June 30, 1998,
the amount of net deferred loan origination fees was $59,000.
63
<PAGE>
Loan Maturity and Repricing. The following tables show the maturity or
period to repricing of the Bank's loan portfolio at June 30, 1998 and September
30, 1997. Loans that have adjustable rates are shown as being due in the period
during which the interest rates are next subject to change. The table does not
include prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------------------------------------------------------------
MORTGAGE LOANS
---------------------------------------------------------------------------------
ONE- TO FOUR- COMMERCIAL CONSTRUCTION
FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER TOTAL
---------------------------------------------------------------------------------
Amount due: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less .................. $ 9,776 $ 573 $ 325 $ 1,445 $ 3,864 $ 15,983
-------- -------- -------- -------- -------- --------
After one year:
More than one year to three years . 72 452 90 99 290 1,003
More than three years to five years 476 2,008 85 763 230 3,562
More than five years to ten years . 2,240 204 -- 425 -- 2,869
More than ten years to twenty years 6,551 920 150 57 47 7,725
More than twenty years ............ 15,380 -- 868 -- -- 16,248
-------- -------- -------- -------- -------- --------
Total due after one year ........ 24,719 3,584 1,193 1,344 567 31,407
-------- -------- -------- -------- -------- --------
Total amount due ................ $ 34,495 $ 4,157 $ 1,518 $ 2,789 $ 4,431 47,390
======== ======== ======== ======== ======== ========
Less:
Allowance for loan losses ......... (506)
Deferred loan origination fees, net (59)
--------
Loans, net ............................. $ 46,825
========
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------------------------------------------------
MORTGAGE LOANS
---------------------------------------------------------------------------------
ONE- TO FOUR- COMMERCIAL CONSTRUCTION
FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER TOTAL
---------------------------------------------------------------------------------
Amount due: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
One year or less .................. $ 8,811 $ 226 $ 500 $ 1,049 $ 2,805 $ 13,391
-------- -------- -------- -------- -------- --------
After one year:
More than one year to three years . 69 374 -- 105 252 800
More than three years to five years 495 1,016 113 471 262 2,357
More than five years to ten years . 1,746 362 -- -- -- 2,108
More than ten years to twenty years 6,131 599 -- 59 48 6,837
More than twenty years ............ 15,676 -- 202 -- 254 16,132
-------- -------- -------- -------- -------- --------
Total due after one year ........ 24,117 2,351 315 635 816 28,234
-------- -------- -------- -------- -------- --------
Total amount due ................ $ 32,928 $ 2,577 $ 815 $ 1,684 $ 3,621 41,625
======== ======== ======== ======== ======== ========
Less:
Allowance for loan losses ......... (377)
Deferred loan origination fees, net (73)
--------
Loans, net ............................. $ 41,175
========
</TABLE>
65
<PAGE>
Non-Performing Assets, Asset Classification and Allowances for Losses.
Management and the Loan Approval Committee of the Board of Directors perform a
monthly review of all delinquent loans. Loans are placed on nonaccrual status
when loans are 90 days past due or, in the opinion of management, the collection
of principal and interest is doubtful. One of the primary tools used to manage
and control problem loans is the Bank's "Watch- List," a listing of all loans or
commitments that are considered to have characteristics that could result in
loss to the Bank if not properly supervised. The list is managed by the Loan
Approval Committee which meets periodically to discuss the status of the loans
on the Watch List and to add or delete loans from the list. At June 30, 1998,
the Bank had $38,000 in assets classified as special mention. There were none
classified as doubtful or loss and $144,000 in assets were designated as
substandard.
Real estate acquired by the Bank as a result of foreclosure is classified
as other real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its
fair value. Any required write-down of the loan to its fair value is charged to
the allowance for loan losses.
The following table set forth the Bank's non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
-------------- ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Mortgage loans:
One-to four-family ............. $142 $ -- $ 144 $ 28 $ 125 $ 190 $ 203
Commercial real estate ......... -- -- -- -- -- -- --
Construction and land .......... -- -- -- -- -- -- --
------ ----- ------ -------- ------- ----- -----
Total mortgage loans ......... 142 -- 144 28 125 190 203
------ ----- ------ -------- ------- ----- -----
Commercial loans ................. 124 -- -- -- -- -- --
------ ----- ------ -------- ------- ----- -----
Consumer loans:
Home equity lines .............. -- -- -- -- -- -- --
Security by deposit accounts ... -- -- -- -- -- -- --
Auto loans ..................... -- -- -- -- -- -- --
Other consumer loans ........... 3 -- 13 -- -- -- 1
------ ----- ------ -------- ------- ----- -----
Total consumer loans ......... 3 -- 13 -- -- -- 1
------ ----- ------ -------- ------- ----- -----
Total non-performing loans(1) 269 -- 157 28 125 190 204
Other real estate owned, net ......... -- -- -- -- -- 108 128
------ ----- ------ -------- ------- ----- -----
Total non-performing assets(2) $ 269 $ -- $ 157 $ 28 $ 125 $ 298 $ 332
====== ===== ====== ======== ======= ===== =====
Allowance for loan losses
as a percent of loans(3) ......... 1.07% 0.94% 0.91% 0.97% 0.96% 0.90% 0.30%
====== ===== ====== ======== ======= ===== =====
Allowance for loan losses as a percent
of non-performing loans(4) ....... 188.12% N/A 240.03% 1,159.67% 164.86% 98.33% 32.76%
====== ====== ======== ======= ===== =====
Non-performing loans as a percent
of loans(3)(4) ................... 0.57% 0.00% 0.38% 0.08% 0.58% 0.91% 0.92%
====== ==== ====== ======== ======= ===== ====
Non-performing assets as a percent
of total assets(2) ............... 0.30% 0.00% 0.18% 0.04% 0.18% 0.50% 0.65%
====== ==== ====== ======== ======= ===== =====
</TABLE>
- -------------
(1) Non-performing loans at June 30, 1998 includes non-accrual loans of
$145,000 and loans past due 90 days or more and still accruing of $124,000.
For all other periods presented, the non-performing loans consisted
entirely of non-accrual loans.
(2) Non-performing assets consist of non-performing loans and other real estate
owned.
(3) Loans are presented before allowance for loan losses and deferred loan
origination fees, net.
(4) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal.
66
<PAGE>
The following tables set forth delinquencies of the Bank's loan portfolio
by type of loan at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1998 AT SEPTEMBER 30, 1997
----------------------------------------- ------------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
-------------------- ------------------- ------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- ------- -------- ------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family...... 4 $ 231 1 $ 142 8 $ 565 1 $ 144
Commercial real estate.. --- --- --- --- 1 100 --- ---
Construction and land... --- --- --- --- --- --- --- ---
----- --- ---- ------ ---- ------ ----- ------
Total mortgage loans. 4 231 1 142 9 665 1 144
---- ----- ---- ------ ---- ------ ---- ------
Commercial loans.................. 1 13 2 124 --- --- --- ---
---- ----- ---- ------ ---- ------ ------ ------
Consumer loans:
Home equity loans....... 1 8 --- --- 3 84 --- ---
Secured by savings ---
accounts............ 3 11 --- --- 1 7 --- ---
Auto loans.............. 2 8 --- --- --- --- --- ---
Other consumer loans.... 6 5 3 3 3 8 2 13
---- ----- ---- ---- ---- ------ ---- ------
Total consumer loans. 12 32 3 3 7 99 2 13
----- ------ ---- ---- ---- ----- ---- -----
Total loans....................... 17 $ 276 6 $ 269 16 $ 764 3 $ 157
===== ====== ==== ====== ==== ====== ==== ======
Delinquent loans to loans, net.... 0.59% 0.57% 1.86% 0.38%
======= ====== ======= ======
<CAPTION>
AT SEPTEMBER 30, 1996 AT SEPTEMBER 30, 1995
-------------------------------------------------------------------- -----------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
--------------------------------- ----------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE LOANS BALANCE OF LOANS BALANCE
--------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family ..... 8 $477 1 $ 28 8 $330 2 $125
Commercial real estate . -- -- -- -- -- -- -- --
Construction and land .. -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total mortgage loans 8 477 1 28 8 330 2 125
---- ---- ---- ---- ---- ---- ---- ----
Commercial loans ................. -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Consumer loans:
Home equity loans ...... -- -- -- -- -- -- -- --
Secured by savings ..... --
accounts ........... 1 3 -- -- 2 6 -- --
Auto loans ............. -- -- -- -- -- -- -- --
Other consumer loans ... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total consumer loans 1 3 -- -- 2 6 -- --
---- ---- ---- ---- ---- ---- ---- ----
Total loans ...................... 9 $480 1 $ 28 10 $336 2 $125
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to loans, net ... 1.45% 0.08% 1.58% 0.58%
==== ==== ==== ====
</TABLE>
67
<PAGE>
During the year ended September 30, 1997, gross interest income of $12,000,
would have been recorded on loans accounted for on a nonaccrual basis if the
loans had been current throughout the period. Of this amount, $8,000 of interest
on such loans was included in income during the period. At June 30, 1998,
management was not aware of any loans not currently classified as nonaccrual, 90
days past due or restructured but which may be so classified in the near future
because of concerns over the borrower's ability to comply with repayment terms.
Federal regulations require each banking institution to classify its asset
quality on a regular basis. In addition, in connection with examinations of such
banking institutions, federal examiners have authority to identify problem
assets and, if appropriate, classify them. An asset is classified substandard if
it is determined to be inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. As a
general rule, the Bank will classify a loan as substandard if the Bank can no
longer rely on the borrower's income as the primary source for repayment of the
indebtedness and must look to secondary sources such as guarantors or
collateral. An asset is classified as doubtful if full collection is highly
questionable or improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future. The
regulations also provide for a special mention designation, described as assets
which do not currently expose a banking institution to a sufficient degree of
risk to warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require a banking institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as a
loss, a banking institution must either establish specific allowances for loan
losses in the amount of the portion of the asset classified as a loss, or charge
off such amount. Examiners may disagree with a banking institution's
classifications and amounts reserved. If a banking institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the Regional Director of the OTS.
In originating loans, the Bank recognizes that credit losses will occur and
that the risk of loss will vary with, among other things, the type of loan being
made, the creditworthiness of the borrower over the term of the loan, general
economic conditions and, in the case of a secured loan, the quality of the
security for the loan. It is management's policy to maintain an adequate general
allowance for loan losses based on, among other things, the Bank's and the
industry's historical loan loss experience, evaluation of economic conditions
and regular reviews of delinquencies and loan portfolio quality. Further, after
properties are acquired following loan defaults, additional losses may occur
with respect to such properties while the Bank is holding them for sale. The
Bank increases its allowances for loan losses and losses on other real estate
owned by charging provisions for losses against the Bank's income. Specific
reserves are also recognized against specific assets when management believes it
is warranted.
In the past few years, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of the institution by federal regulators.
Results of recent examinations indicate that these regulators may be applying
more conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established its existing allowances for loan losses in
accordance with GAAP there can be no assurance that regulators, in reviewing the
Bank's loan portfolio, will not request the Bank to increase its allowance for
loan losses, thereby negatively affecting the Bank's financial condition and
earnings. Alternately, there can be no assurance that increases in the Bank's
allowance for loan losses will occur.
68
<PAGE>
The following table sets forth activity in the Bank's allowance for
loan losses and other ratios at or for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR ENDED SEPTEMBER 30,
JUNE 30,
--------------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............ $ 377 $ 325 $ 325 $ 206 $ 187 $ 67 $161
----- ----- ----- ------ ----- ---- ----
Provision (benefit) for loan losses....... 175 45 60 148 (2) 144 155
----- ----- ----- ------ ----- ---- ----
Charge-offs:
Mortgage loans:
One-to four-family................... --- --- --- 16 --- 23 251
Commercial real estate............... --- --- --- --- --- --- ---
Construction and land................ --- --- --- --- --- --- ---
Commercial loans....................... --- --- --- --- --- --- ---
Consumer loans:
Home equity lines.................... --- --- --- --- --- --- ---
Secured by deposit accounts.......... --- --- --- --- --- --- ---
Auto loans........................... 40 --- --- --- --- --- ---
Other consumer loans................. 6 --- 8 13 --- 1 ---
--- ----- --- ------ ----- --- -----
Total charge-offs.................. 46 --- 8 29 --- 24 251
---- ----- --- ------ ----- ---- ----
Recoveries................................ --- --- --- --- 21 --- 2
----- ----- ----- ------ ----- ---- ---
Balance at end of period.................. $ 506 $ 370 $ 377 $ 325 $ 206 $187 $ 67
===== ===== ===== ====== ===== ==== ====
Ratio of net charge-offs to average loans
outstanding during the period(1)....... 0.14% 0.00% 0.02% 0.10% (0.10)% 0.11% 1.08%
==== ==== ===== ===== ===== ==== ====
Allowance for loan losses as a
percent of loans ...................... 1.07% 0.94% 0.91% 0.97% 0.96% 0.90% 0.3
===== ==== ==== ==== ==== ==== ===
Allowance for loan losses as a
percent of non-performing loans........ 188.12% N/A 240.03% 1,159.67% 164.86% 98.33% 32.76%
====== ====== ======== ====== ===== =====
</TABLE>
- --------------
(1) Ratio is annualized for the nine month periods.
69
<PAGE>
The following tables set forth the Bank's allowance for loan losses
allocated by loan category and the percent of loans in each category to total
loans at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
---------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One-to four-family ............ $208 41.11% 72.79% $201 53.32% 79.11%
Commercial real estate ....... 68 13.44 8.77 35 9.28 6.19
Construction and land ......... 6 1.19 3.20 -- -- 1.96
---- ------ ------ ---- ------ ------
Total mortgage .............. 282 55.74 84.76 236 62.60 87.26
Commercial ......................... 79 15.61 5.89 39 10.34 4.04
Consumer loans ..................... 7 1.38 9.35 5 1.33 8.70
Unallocated ........................ 138 27.27 -- 97 25.73 --
---- -------- ------ ---- ------ ------
Total allowance for loan losses $506 100.00% 100.00% $377 100.00% 100.00%
==== ======== ====== ==== ====== ======
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------------------
PERCENT OF
PERCENT OF LOANS IN
ALLOWANCE EACH
TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS
------------------------------------------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C>
One-to four-family ............ $178 54.77% 89.84%
Commercial real estate ....... 7 2.15 1.38
Construction and land ......... -- -- 3.21
---- ------ ------
Total mortgage .............. 185 56.92 94.43
Commercial ......................... 1 0.31 0.15
Consumer loans ..................... 2 0.62 5.42
Unallocated ........................ 137 42.15 --
---- ------ ------
Total allowance for loan losses $325 100.00% 100.00%
==== ====== ======
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1995 AT SEPTEMBER 30, 1994
--------------------------------- --------------------------------------
PERCENT OF PERCENT OF
PERCENT OF LOANS IN PERCENT OF LOANS IN
ALLOWANCE EACH ALLOWANCE EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
-------------------------------------------------------------------------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One-to four-family ....... $156 75.73% 95.91% $ 132 70.59% 97.85%
Commercial real estate .. -- -- -- -- -- --
Construction and land .... -- -- 0.81 -- -- 0.38
---- ------ ------ ---- ------ ------
Total mortgage ......... 156 75.73 96.72 132 70.59 98.23
Commercial .................... -- -- -- -- -- --
Consumer loans ................ -- -- 3.28 1 0.53 1.77
Unallocated ................... 50 24.27 -- 54 28.88 --
---- ------ ------ ---- ------ ------
Total allowance for loan
losses .............. $206 100.00% 100.00% $187 100.00% 100.00%
==== ====== ====== ==== ====== ======
<CAPTION>
AT SEPTEMBER 30, 1993
----------------------------------------------
PERCENT OF
PERCENT OF LOANS IN
ALLOWANCE EACH
TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS
----------------------------------------------
Mortgage loans:
<S> <C> <C> <C>
One-to four-family ....... $ 55 82.09% 98.02%
Commercial real estate .. -- -- --
Construction and land .... -- -- 0.40
---- ------ ------
Total mortgage ......... 55 82.09 98.42
Commercial .................... -- -- --
Consumer loans ................ 1 1.49 1.58
Unallocated ................... 11 16.42 --
---- ----- -----
Total allowance for loan
losses .............. $ 67 100.00% 100.00%
==== ====== ======
</TABLE>
71
<PAGE>
INVESTMENT ACTIVITIES
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net savings withdrawals and current borrowings. It
has generally been the Bank's policy to maintain a liquidity portfolio in excess
of regulatory requirements. At June 30, 1998, the Bank's liquidity ratio was
7.43%. Liquidity levels may be increased or decreased depending upon the yields
on investment alternatives, management's judgment as to the attractiveness of
the yields then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities.
Interest income from investments in various types of liquid assets provides
a significant source of revenue for the Bank. The Bank invests in U.S. Treasury
and Federal Agency securities, asset-backed securities and FNMA, GNMA and FHLMC
mortgage-backed securities. The balance of investment securities maintained by
the Bank in excess of regulatory requirements reflects management's historical
objective of maintaining liquidity at a level that assures the availability of
adequate funds, taking into account anticipated cash flows and available sources
of credit, for meeting withdrawal requests and loan commitments and making other
investments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" As part of its
business strategy, depending on market conditions, the Bank is restructuring its
balance sheet to increase the size of its loan portfolio relative to the
investment portfolio.
The Bank purchases securities through a primary dealer of U.S. Government
obligations or such other securities dealers authorized by the Board of
Directors and requires that the securities be delivered to a safekeeping agent
before the funds are transferred to the broker or dealer. The Bank purchases
investment securities pursuant to an investment policy established by the Board
of Directors.
Investment securities are recorded on the books of the Bank in accordance
with GAAP. The Bank does not purchase investment securities for trading.
Effective September 30, 1994, the Bank implemented SFAS No. 115. Available for
sale securities are reported at fair value with unrealized gains or losses
reported as a separate component of equity, net of tax effects. Held-to-maturity
securities are carried at amortized cost. Substantially all purchases of
investment securities conform to the Bank's interest rate risk policy.
72
<PAGE>
The following table sets forth activity in the Bank's mortgage-backed
securities held-to-maturity portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, SEPTEMBER 30,
------------------------ --------------------------------
1998 1997 1997 1996 1995
--------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance .................... $ 25,144 $ 24,945 $ 24,945 $ 23,085 $ 21,183
Purchases ............................ -- 2,962 2,962 4,950 3,494
Maturities ........................... (52) -- -- -- --
Principal repayments ................. (3,442) (1,772) (2,737) (3,054) (1,568)
Premium and discount amortization, net (15) (22) (26) (36) (24)
-------- -------- -------- --------- ---------
Ending balance ....................... $ 21,635 $ 26,113 $ 25,144 $ 24,945 $ 23,085
======== ======== ======== ========= =========
</TABLE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's securities at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ---------------------------------------------------------
1998 1997 1996 1995
----------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------------------------------------------------------------------------
(In thousands)
Held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities ......................... $ 6,499 $ 6,430 $ 9,202 $ 9,207 $ 8,500 $ 8,502 $12,552 $12,610
Mortgage-backed and mortgage-related securities 21,635 22,016 25,144 25,458 24,945 24,609 23,085 22,940
Asset-backed securities........................ 5,162 5,212 5,807 5,842 7,235 7,245 6,105 6,119
------- ------- ------- ------- ------- ------- ------- -------
Total held-to-maturity....................... 33,296 33,658 40,153 40,507 40,680 40,356 41,742 41,669
Available-for-sale(1) .............................. 24 849 24 636 24 441 24 312
------- ------- ------- ------- ------- ------- ------- -------
Total securities ............................ $33,320 $34,507 $40,177 $41,143 $40,704 $40,797 $41,766 $41,981
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(1) Consists of marketable equity securities.
73
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed and mortgage-related securities, all of which were
classified as held-to-maturity at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------------- ---------------------------
AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF
COST TOTAL(1) VALUE COST TOTAL(1) VALUE COST TOTAL(1)
--------- ---------- ------------------------------------- ---------- --------------------------
(Dollars in thousands)
Mortgage-backed and mortgage-
related securities
Fixed rate:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA .................... $14,203 65.65% $14,452 $15,851 63.04% $15,963 $ 13,910 55.76%
FHLMC ................... 191 0.88 201 238 0.95 250 300 1.20
------- ----- ------- ------- ----- ------- ------- ----------
Total fixed rate ...... 14,394 66.53 14,653 16,089 63.99 16,213 14,210 56.96
------- ----- ------- ------- ----- ------- ------- ----------
Adjustable rate:
GNMA .................... 6,451 29.82 6,565 7,910 31.46 8,085 9,282 37.21
FHLMC ................... 265 1.22 272 365 1.45 376 418 1.68
FNMA .................... 525 2.43 526 780 3.10 784 1,035 4.15
------- ----- ------- ------- ----- ------- ------- ----------
Total adjustable rate.. 7,241 33.47 7,363 9,055 36.01 9,245 10,735 43.04
------- ----- ------- ------- ----- ------- ------- ----------
Total mortgage-backed
and mortgage-related
securities .......... $21,635 100.00% $22,016 $25,144 100.00 $25,458 $24,945 100.00
======= ====== ======= ======= ====== ======= ======= ======
<CAPTION>
AT
SEPTEMBER 30, AT SEPTEMBER 30,
-------------------------------------------------
1996 1995
-------------------------------------------------
FAIR AMORTIZED PERCENT OF FAIR
VALUE COST TOTAL(1) VALUE
------------- ------------- --------------------
Mortgage-backed and mortgage-
related securities
Fixed rate:
<S> <C> <C> <C> <C>
GNMA .................... $13,489 $ 9,646 41.79% $ 9,385
FHLMC ................... 316 386 1.67 406
------- ------- --------- -------
Total fixed rate ...... 13,805 10,032 43.46 9,791
------- ------- --------- -------
Adjustable rate:
GNMA .................... 9,341 11,086 48.02 11,163
FHLMC ................... 427 601 2.60 611
FNMA .................... 1,036 1,366 5.92 1,375
------- ------- --------- -------
Total adjustable rate . 10,804 13,053 56.54 13,149
------- ------- --------- -------
Total mortgage-backed
and mortgage-related
securities .......... $24,609 $23,085 100.00% $22,940
======= ======= ====== =======
</TABLE>
- -----------------------
(1) Based on amortized cost.
74
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average rate of the Bank's mortgage-backed and
investment securities held-to-maturity at June 30, 1998, by remaining period to
contractual maturity. With respect to mortgage-backed securities, the entire
amount is reflected in the maturity period that includes the final security
payment date, and accordingly, no effect has been given to periodic repayments
or possible prepayments.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
---------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN TEN YEARS
---------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------------------------------------------------------------------------------------------
(In thousands)
Debt securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities(1) ........ $500 6.61% $ -- -- % $1,500 6.80% $ 4,500 7.02%
Mortgage-backed and mortgage-related
securities:
Fixed rate:
GNMA ........................ -- -- -- -- -- -- 14,203 7.28
FHLMC ....................... -- -- 31 7.88 90 8.30 70 10.46
Adjustable rate:
GNMA ........................ -- -- -- -- -- -- 6,451 7.05
FHLMC ....................... -- -- -- -- -- -- 265 7.06
FNMA ........................ 74 7.06 -- -- -- -- 451 6.90
Asset-backed securities ......... -- -- 527 9.39 262 8.17 4,372 6.94
------- ------- ------- -------
Total debt securities ....... $574 6.65% $ 558 9.27% $ 1,852 7.04% $30,312 7.16%
======= ======= ======= ======= ======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------
WEIGHTED
CARRYING AVERAGE
AMOUNT YIELD
-----------------------
<S> <C> <C>
Debt securities:
Investment securities(1) ........ $6,500 6.99%
Mortgage-backed and mortgage-related
securities:
Fixed rate:
GNMA ........................ 14,203 7.28
FHLMC ....................... 191 9.42
Adjustable rate:
GNMA ........................ 6,451 7.05
FHLMC ....................... 265 7.06
FNMA ........................ 525 6.90
Asset-backed securities ........... 5,161 7.01
--------
Total debt securities ....... $33,296 7.16%
======== =======
</TABLE>
- -----------
(1) Consists of U.S. Treasury and government agency obligations.
75
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from principal repayments and interest payments on loans and investments as well
as other sources arising from operations in the production of net earnings. Loan
repayments and interest payments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources, or
on a longer term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's primary
market area through the offering of a broad selection of deposit instruments,
including passbook savings, NOW accounts, demand deposits, money market accounts
and certificates of deposit. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
The Bank's policies are designed primarily to attract deposits from local
residents and businesses rather than to solicit deposits from areas outside its
primary market. The Bank does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by the Bank on a
periodic basis. Determination of rates and terms are predicated upon funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations.
The Bank has a significant amount of regular savings accounts which the
Bank believes constitute "core deposits." In addition, since September 30, 1995,
the Bank has attracted $2.3 million in no-cost demand deposit accounts,
resulting from the increase in commercial customers during this time period, and
$5.2 million in NOW accounts and Money Market accounts, resulting from increased
marketing and competitive fee structure. At June 30, 1998, such accounts
represented approximately 16.4% of the Bank's total deposits compared to 5.9% at
September 30, 1995.
76
<PAGE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize month-end balances.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------------------------------------
AT JUNE 30, 1998 1997 1996
----------------------------- --------------------------- ---------------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits................. $2,441 4.17% ---% $ 1,219 2.23% ---% $ 914 1.88% ---%
Now accounts.................... 4,191 7.15 1.05 3,443 6.55 1.02 2,041 4.19 1.13
Regular savings accounts........ 15,018 25.63 1.26 14,548 27.67 1.11 14,743 30.29 1.06
Money market accounts........... 1,555 2.65 3.10 739 1.40 3.11 212 0.44 2.83
------ ----- -------- ------- ------- ------
Total..................... 23,205 39.60 1.22 19,949 37.94 1.17 17,910 36.80 1.09
------ ----- -------- ------- ------- ------
Time deposits:(1)
6 months or less............ 3,973 6.78 4.98 3,612 6.87 4.73 4,561 9.37 4.91
Over 6 months through 12 months 13,759 23.48 5.30 12,026 22.87 5.20 12,569 25.82 5.66
Over 12 through 36 months... 15,713 26.81 5.91 15,168 28.84 6.09 11,934 24.52 6.15
Over 36 months.............. 1,952 3.33 6.64 1,828 3.48 6.67 1,699 3.49 6.66
------ ----- -------- ------- ------- ------
Total time deposits....... 35,397 60.40 5.61 32,634 62.06 5.64 30,763 63.20 5.79
------ ----- -------- ------- ------- ------
Total average deposits.... $58,602 100.00% 3.87% $52,583 100.00% 4.02% $48,673 100.00% 4.11%
====== ====== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
AT SEPTEMBER 30, 1995
-----------------------------
PERCENT OF
TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT DEPOSITS RATE
------------------------------
<S> <C> <C> <C>
Demand deposits................. $ 586 1.32% ---%
Now accounts.................... 1,707 3.85 1.64
Regular savings accounts........ 15,436 34.78 1.49
Money market accounts........... 6 0.01 3.30
--- ------
Total..................... 17,735 39.96 1.50
-------- -------
Time deposits:(1)
6 months or less............ 5,639 12.70 4.79
Over 6 months through 12 months 10,333 23.28 5.22
Over 12 through 36 months... 9,483 21.37 5.66
Over 36 months.............. 1,205 2.69 6.71
------- ------
Total time deposits....... 26,660 60.04 5.35
-------- -------
Total average deposits.... $ 44,395 100.00% 3.84
======== ======
</TABLE>
- --------------
(1) Based on remaining maturity of deposits.
For more information on the Bank's deposit accounts, see Note 6 of Notes
to Consolidated Financial Statements.
77
<PAGE>
The following table represents, by interest rate ranges, the amount of time
deposits outstanding at the dates indicated and the periods to maturity of the
certificates of deposit outstanding at June 30, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY AT JUNE 30, 1998
----------------------------------------------------------------
LESS THAN ONE TO FOUR TO
INTEREST RATE RANGE ONE YEAR THREE YEARS FIVE YEARS
- ---------------------------- ----------------- ---------------------- ----------------------
Time deposits: (In thousands)
<S> <C> <C> <C>
0 to 4.00%.............. $ 371 $ --- $ ---
4.01% to 5.00%.......... 10,680 141 ---
5.01% to 6.00%.......... 14,223 5,557 265
6.01% to 7.00%.......... 1,829 2,153 91
7.01% to 8.00%.......... 96 900 ---
8.01% to 9.00%.......... --- --- ---
Over 9.01%.............. --- --- ---
----- ----- -----
Total................. $ 27,199 $ 8,751 $ 356
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------
AT JUNE 30,
INTEREST RATE RANGE 1998 1997 1996 1995
- ---------------------------- ---------------------- ---------------------- ---------------------- -------------
Time deposits: (In thousands)
<S> <C> <C> <C> <C>
0 to 4.00%.............. $ 371 $ 187 $ 53 $ 702
4.01% to 5.00%.......... 10,821 9,912 11,515 4,434
5.01% to 6.00%.......... 20,045 17,698 12,255 12,665
6.01% to 7.00%.......... 4,073 2,420 2,802 6,938
7.01% to 8.00%.......... 996 4,501 4,516 5,560
8.01% to 9.00%.......... --- --- --- 152
Over 9.01%.............. --- --- --- ---
------- ------- ------- -------
Total................. $36,306 $34,718 $31,141 $30,451
======= ======= ======= =======
</TABLE>
78
<PAGE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
FOR THE NINE MONTHS -------------------------------------------
ENDED JUNE 30, 1998 1997 1996 1995
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Net deposits (withdrawals)........... $5,827 $4,000 $ (809) $5,438
Interest credited on deposit
accounts......................... 1,697 2,059 1,970 1,686
----- ----- ----- -----
Total increase in deposit
accounts......................... $7,524 $6,059 $1,161 $7,124
====== ====== ====== ======
</TABLE>
At June 30, 1998, the Bank had $9.6 million in jumbo certificates of
deposit (accounts in amounts over $100,000) maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AMOUNT RATE
--------------------------------------------
(Dollars in thousands)
Maturity Period:
<S> <C> <C>
Within three months............................. $ 2,277 5.54%
After three but within six months........... 894 5.57
After six but within twelve months.......... 3,084 5.46
After twelve months......................... 3,394 6.03
--------
Total $ 9,649 5.69%
========= ====
</TABLE>
79
<PAGE>
Borrowings. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB to supplement its supply of lendable funds and to meet liquidity
requirements. Due to recent lending activity and demand for liquidity, the Bank
has utilized this borrowing power, and has received advances from the FHLB.
Advances from the FHLB are secured by the Bank's mortgage loans and investment
securities. The Bank had FHLB advances of $19.3 million outstanding at June 30,
1998.
The FHLB functions as a central reserve bank providing credit for savings
institutions and certain other financial institutions. As a member, the Bank is
required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed by
the United States) provided certain standards related to creditworthiness have
been met.
Prior to 1997, the Bank supplemented deposits with borrowings in order to
grow its balance sheet. During such periods, the decision to leverage the Bank's
capital allowed it to earn wider spreads by investing borrowed funds in agency
securities than was possible if such funds were invested in single-family
residential mortgages. Upon its entry into the small business lending market in
1996, the Bank has used available liquidity to fund commercial loans with higher
spreads. In the nine months ended June 30, 1998, the FHLB called nine agency
bonds for $7.2 million and the Bank used such funds to pay down its borrowings.
The Bank may continue to match borrowings against investments after the Offering
is consummated.
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 NINE MONTHS AT OR FOR THE YEAR ENDED
ENDED JUNE 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1997 1996 1998
-------------------------- --------------------------
(Dollars in thousands)
FHLB of Boston advances:
<S> <C> <C> <C> <C> <C>
Average balance outstanding ........ $24,344 $26,137 $26,044 $17,648 $13,445
Maximum amount outstanding at any
month-end during the period ...... 25,019 26,958 26,958 23,007 14,553
Balance outstanding at end of period 19,284 26,868 25,104 22,712 13,818
Weighted average interest rate
during the period ................ 5.79% 5.84% 5.86% 5.94% 5.71%
Weighted average interest rate at
end of period .................... 5.45% 5.86% 5.84% 5.81% 5.94%
</TABLE>
COMPETITION
The Bank experiences competition both in attracting and retaining savings
deposits and in the making of mortgage, commercial and other loans. Direct
competition for savings deposits primarily comes from larger commercial banks
and other savings institutions located in or near the Bank's primary market area
which often have significantly greater financial and technological resources
than the Bank. Additional significant competition for savings deposits comes
from credit unions, money market funds and brokerage firms.
80
<PAGE>
With regard to lending competition in the local market area, the Bank
experiences the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real estate
lending as a line of business. In addition, the Bank competes with local and
regional mortgage companies, independent mortgage brokers and credit unions in
originating mortgage and non-mortgage loans. The primary factors in competing
for loans are interest rates and loan origination fees and the range of services
offered by the various financial institutions.
Competition from other financial institutions operating in the Bank's local
community includes a number of both large and small commercial banks and savings
institutions. As of June 30, 1998, the Bank's market share was approximately
14.0% of overall financial institution deposits in the City of Revere. The Bank
has experienced growth in deposits in recent years primarily due to an increased
emphasis on marketing products and services. However, competition remains high
in the marketplace.
PROPERTIES
The following table sets forth certain information at June 30, 1998
regarding the Bank's office facilities, which are owned by the Bank and certain
other information relating to its property at that date.
<TABLE>
<CAPTION>
YEAR COMPLETED SQUARE FOOTAGE BOOK VALUE
---------------------------------------------------------------
<S> <C> <C> <C>
Main Office: 310 Broadway
Revere, MA 1977 3,500 $449,000
</TABLE>
In addition to its main office, the Bank leases office space in an adjacent
building to house certain administrative personnel. The Bank also has a full
service ATM at Logan Airport. At June 30, 1998, the book value of the Bank's
computer equipment and other furniture, fixtures and equipment at its existing
offices totaled $760,000. For more information, see note 5 of the Notes to
Consolidated Financial Statements.
EMPLOYEES
At June 30, 1998, the Bank had 21 full-time and 8 part-time employees. None
of the Bank's employees is represented by a collective bargaining agreement.
Management of the Bank believes that it enjoys excellent relations with its
personnel.
LEGAL PROCEEDINGS
Although the Bank, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Bank, its directors or its officers is a party or to
which any of its property is subject.
SUBSIDIARY ACTIVITIES
The Bank's subsidiary, RFS Investment Corp., holds certain investments of
the Bank and is a tax- advantaged qualified "security corporation" under
Massachusetts law. The Bank's investment in its wholly-owned service
corporation, RFS Investment Corp., was $24.5 million at June 30, 1998.
81
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The following discussion is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Bank, Mutual Company or Stock Company. For federal income tax purposes, the Bank
reports its income on the basis of a taxable year ending September 30, using the
accrual method of accounting, and is subject to federal income taxation in the
same manner as other corporations with some exceptions, including particularly
the Bank's tax reserve for bad debts, discussed below. Following the
Reorganization, the Bank and Stock Company will constitute an affiliated group
of corporations and, therefore, will be eligible to report their income on a
consolidated basis. Because Mutual Company will own less than 80% of the Common
Stock, it will not be a member of such affiliated group and will report its
income on a separate return.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having an
adjusted tax basis of $500 million or less) is permitted to maintain a reserve
for bad debts with respect to "qualifying loans," which, in general, are loans
secured by certain interests in real property, and to make, within specified
formula limits, annual additions to the reserve which are deductible for
purposes of computing the Bank's taxable income. Pursuant to the Small Business
Job Protection Act of 1996, the bank is now recapturing (taking into income)
over a multi-year period a portion of the balance of its bad debt reserve as of
September 30, 1996. Since the bank has already provided a deferred tax liability
equal to the amount of such recapture, the recapture will not adversely impact
the bank's financial condition or results of operations.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's "base year reserve," i.e., it reserve as of
September 30, 1988, to the extent thereof and then from its supplemental reserve
for losses on loans, and an amount based on the amount distributed will be
included in the Bank's taxable income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute non-dividend distributions and, therefore, will not be
included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by the
tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations approximately one and one-half times the
non-dividend distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code"), imposes a tax ("AMT") on alternative minimum taxable
income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, the Bank's AMTI is increased by an amount equal to 75% of the
amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired, under
current Administration proposals, such tax will be retroactively reinstated for
taxable years beginning after December 31, 1996 and before January 2008.
82
<PAGE>
Elimination of Dividends; Dividends Received Deduction. The Stock Company
may exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. Because, following completion of
the Reorganization, Mutual Company will not be a member of such affiliated
group, it will not qualify for such 100% dividends exclusion, but will be
entitled to deduct 80% of the dividends it receives from Stock Company so long
as it owns more than 20% of the Common Stock.
STATE 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 11.32% of federal taxable
income, adjusted for certain items. It is anticipated that this rate will be
gradually reduced over the next few years so that the Bank's tax rate will
become 10.5% by March 31, 2000. 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, carryforwards and
carrybacks of net operating losses are not allowed. As a "financial institution"
under Massachusetts law, the Company will be subject to an annual Massachusetts
excise (income) tax equal to 10.50% of its pre-tax income.
The Bank's active subsidiary, RFS Investments Corp., was established solely
for the purpose of acquiring and holding investments which are permissible for
banks to hold under Massachusetts law. RFS Investments Corporation is classified
with the Massachusetts Department of Revenue as a "security corporation" under
Massachusetts law, qualifying it to take advantage of the low 1.32% income tax
rate on gross income applicable to companies that are so classified.
83
<PAGE>
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination, and supervision
by the OTS, as its chartering agency. The Bank's savings deposit accounts are
insured up to applicable limits by the FDIC, and the Bank is a member of the
FHLB of Boston. The Bank must file reports with the OTS concerning its
activities and financial condition, and it must obtain regulatory approvals
prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS conduct periodic
examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors.
The OTS has significant discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. Any change in such policies, whether by the
OTS or the Congress, could have a material adverse impact on the Mutual Company,
the Stock Company or the Bank.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and it does not purport to be a comprehensive description of all such
statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATIONS
Business Activities. The Bank derives its lending and investment powers
from the Home Owners' Loan Act, as amended (the "HOLA"), and the regulations of
the OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by non-residential real estate property;
(c) a limit of 20% of an association's assets on the aggregate amount of
commercial loans, with the amount of commercial loans in excess of 10% of assets
being limited to small business loans; (d) a limit of 35% of an association's
assets on the aggregate amount of consumer loans and acquisitions of certain
debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in
excess of the specific limitations of the HOLA); and (f) a limit of the greater
of 5% of assets or an association's capital on certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
Loans to One Borrower. Under the HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. Additional amounts may be
lent, not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily-marketable collateral. Such
collateral is defined to include certain debt and equity securities and bullion,
but generally does not include real estate. At June 30, 1998, the Bank's
regulatory limit on loans to one borrower was $883,000. As a result of the
offering, the Bank's regulatory limit on loans to one borrower will increase to
$1.3 million (at the midpoint of the current valuation range). At June 30, 1998,
the Bank's largest aggregate amount of loans
84
<PAGE>
to one borrower was $604,608, and the second largest borrower had an aggregate
balance of $585,752. The Bank is in compliance with all applicable limitations
on loans to one borrower.
QTL Test. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, an association's total
assets less the sum of (a) specified liquid assets up to 20% of total assets,
(b) goodwill and other intangible assets, and (c) the value of property used to
conduct the association's business. "Qualified thrift investments" includes
various types of loans made for residential and housing purposes, investments
related to such purposes, including certain mortgage-backed and related
securities, and loans for personal, family, household and certain other purposes
up to a limit of 20% of an association's portfolio assets. Recent legislation
broadened the scope of "qualified thrift investments" to include 100% of an
institution's credit card loans, education loans, and small business loans. A
savings association may also satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code of 1986.
At June 30, 1998, the Bank maintained 89.54% of its portfolio assets in
qualified thrift investments. The Bank had also met the QTL test in each of the
prior 12 months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any Federal Home Loan
Bank and (d) establishing any new branch office in a location not permissible
for a national bank in the association's home state. In addition, within one
year of the date that a savings association ceases to meet the QTL test, any
company controlling the association would have to register under, and become
subject to the requirements of, the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from a Federal Home Loan Bank. A savings association
that has failed the QTL test may requalify under the QTL test and be free of
such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets and a risk-based
capital ratio requirement of 8% of core and supplementary capital to total
risk-weighted assets. The OTS and the federal banking regulators have proposed
amendments to their minimum capital regulations to provide that the minimum
leverage capital ratio for a depository institution that has been assigned the
highest composite rating of 1 under the Uniform Financial Institutions Ratings
System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution. In determining compliance with the risk-based capital requirement,
a savings association must compute its risk-weighted assets by multiplying its
assets and certain off-balance sheet items by risk-weights, which range from 0%
for cash and obligations issued by the United States Government or its agencies
to 100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles (other than certain mortgage
servicing rights) and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
85
<PAGE>
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative and other perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and the allowance for loan and lease losses. The
allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has promulgated a regulation that requires a savings association
with "above normal" interest rate risk, when determining compliance with its
risk-based capital requirement, to hold additional capital to account for its
"above normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2%, multiplied by the
estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating compliance with its
risk-based capital requirement. Any required deduction for interest rate risk
becomes effective on the last day of the third quarter following the reporting
date of the association's financial data on which the interest rate risk was
computed. The regulations authorize the Director of the OTS to waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred the implementation of the interest rate risk component in
the computation of an institution's risk-based capital requirements. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions. At June 30, 1998, the Bank was not required to maintain any
additional risk-based capital under this rule.
At June 30, 1998, the Bank met each of its capital requirements.
The table below presents the Bank's regulatory capital as compared to the
OTS regulatory capital requirements at June 30, 1998.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER-PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
--------------------------- ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
As of June 30, 1998 (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets).... $6,332 17.89% $2,831 >=8.0% $3,539 >=10.0%
Core Capital (to Adjusted Tangible Assets). 5,889 6.63 3,555 >=4.0 4,443 >=5.0
Tangible Capital (to Tangible Assets)...... 5,889 6.63 1,333 >=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets)... 5,889 16.64 N/A N/A 2,124 >=6.0
</TABLE>
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A reconciliation between the Bank's regulatory capital and GAAP capital at
June 30, 1998 is presented below.
<TABLE>
<S> <C>
Equity........................................................ $ 6,374,214
Less: Unrealized holding gain on securities
available-for-sale, net of taxes (485,503)
-------------
Tangible/core capital......................................... 5,888,711
Plus: Allowance for loan losses............................... 443,000
-------------
Total risk based capital...................................... $ 6,331,711
=============
</TABLE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by a savings association, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. At least 30-days written notice must be given to the
OTS of a proposed capital distribution by a savings association, and capital
distributions in excess of specified earnings or by certain institutions are
subject to approval by the OTS. An association that has capital in excess of all
fully phased-in regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, may, after prior notice but without the approval of the OTS, make
capital distributions during a calendar year equal to the greater of (a) 100% of
its net earnings to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above. See "-- Prompt
Corrective Regulatory Action." The OTS has proposed amendments of its capital
distribution regulations to reduce regulatory burdens on savings associations.
If adopted as proposed, certain savings associations will be permitted to pay
capital distributions within the amounts described above for Tier 1 institutions
without notice to, or the approval of, the OTS. However, a savings association
subsidiary of a savings and loan holding company, such as the Bank after the
Reorganization, will continue to have to file a notice unless the specific
capital distribution requires an application.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, certain bankers' acceptances,
specified United States Government, state and federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. The Bank's average liquidity ratio
for the month ended June 30, 1998 was 9.78% which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the
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savings association's total assets, including consolidated subsidiaries, as
reported in the association's latest quarterly Thrift Financial Report. During
January and July 1998, the Bank paid assessments of $14,272 and $14,911,
respectively.
The OTS has proposed amendments to its regulations that are intended to
assess savings associations on a more equitable basis. The proposed regulations
would base the assessment for an individual savings associaton on three
components: the size of the association, on which the basic assessment would be
based; the associaton's supervisory condition, which would result in percentage
increases for any savings institution with a composite rating of 3, 4 or 5 in
its most recent safety and soundness examination; and the complexity of the
association's operations, which would result in percentage increases for a
savings association that managed over $1 billion in trust assets, serviced for
others loans aggregating more than $1 billion, or had certain off-balance sheet
assets aggregating more than $1 billion. In order to avoid a disproportionate
impact on the smaller savings institutions, the OTS is proposing to permit the
portion of the assessment based on assets size either under the current
regulations or under the amended regulations. Management believes that, assuming
the proposed regulations are adopted as proposed, any change in its rate of OTS
assessments will not be material.
Branching. Subject to certain limitations, the HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such branches is
available (a) in states that expressly authorize branches of savings
associations located in another state or (b) to an association that qualifies as
a "domestic building and loan association" under the Internal Revenue Code of
1986, which imposes qualification requirements similar to those for a "qualified
thrift lender" under the HOLA. See "-- QTL Test." The authority for a federal
savings association to establish an interstate branch network would facilitate a
geographic diversification of the association's activities. This authority under
the HOLA and the OTS regulations preempts any state law purporting to regulate
branching by federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings association 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 OTS, in connection with its examination of a savings association,
to assess the association'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 association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
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 assessment 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. The amended CRA
regulations also clarify how an institution's CRA performance would be
considered in the application process.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In
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general, an affiliate of the Bank is any company that controls the Bank or any
other company that is controlled by a company that controls the Bank, excluding
the Bank's subsidiaries other than those that are insured depository
institutions. The OTS regulations prohibit a savings association including any
of its subsidiaries (a) from lending to any of its affiliates that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act and (b) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with non-affiliated
companies. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to non-affiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% shareholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (a) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's Board of Directors.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser or accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1 million per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship, or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by
FDICIA and the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Community Development Act"), the OTS and the federal bank regulatory
agencies have adopted, effective August 9, 1995, a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation,
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credit underwriting, interest rate exposure, asset growth, asset quality,
earnings, and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify and
manage the risks and exposures specified in the guidelines. The guidelines
prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director, or principal stockholder. In addition, the OTS adopted regulations
that authorize, but do not require, the OTS to order an institution that has
been given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the OTS may seek to enforce such
order in judicial proceedings and to impose civil money penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of financing
the construction of improvements on real estate. The OTS regulations require
each savings association to establish and maintain written internal real estate
lending standards that are consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its real
estate lending activities. The standards also must be consistent with
accompanying OTS guidelines, which include loan-to-value ratios for the
different types of real estate loans. Associations are also permitted to make a
limited amount of loans that do not conform to the proposed loan-to-value
limitations so long as such exceptions are reviewed and justified appropriately.
The guidelines also describe the procedures to be followed for loans that would
be exceptions to the loan-to-value standards.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain, and is authorized to take
other, supervisory actions against undercapitalized savings associations. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating under the Uniform Financial Institutions Rating System). A savings
association that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating under the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A savings
association that has a total risk-based capital of less than 6.0% or a Tier 1
risk-based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association
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receives notice that it is within any of the three undercapitalized categories.
The OTS is required to monitor closely the condition of an undercapitalized
association and to restrict the asset growth, acquisitions, branching, and new
lines of business of such an association. Significantly undercapitalized
associations are subject to restrictions on compensation of senior executive
officers; such an association may not, without OTS consent, pay any bonus or
provide compensation to any senior executive officer at a rate exceeding the
officer's average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 months preceding the month when the association
became undercapitalized. A significantly undercapitalized association may also
be subject, among other things, supervisory orders to change the composition of
its Board of Directors or senior management, additional restrictions on
transactions with affiliates, restrictions on acceptance of deposits from
correspondent associations, further restrictions on asset growth, restrictions
on rates paid on deposits, direction to terminate or reduce activities deemed
risky, and any further operational restriction deemed necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for
an association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90- day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF, and the
Bank pays its deposit insurance assessments to the SAIF. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (the "BIF"), which primarily
insures the deposits of banks and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the 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. The three capital categories consist of (a) well capitalized,
(b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an
institution to 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 that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the regulation, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates currently range from 0.0% of deposits for an institution in the
highest category (i.e., well-capitalized and financially sound, with no more
than a few minor weaknesses) to 0.27%
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of deposits for an institution in the lowest category (i.e., undercapitalized
and substantial supervisory concern). The FDIC is authorized to raise the
assessment rates as necessary to maintain the required reserve ratio of 1.25%.
As a result of the Deposit Insurance Funds Act of 1996 (the "Funds Act"), both
the BIF and the SAIF currently satisfy the reserve ratio requirement. If the
FDIC determines that assessment rates should be increased, institutions in all
risk categories could be affected. The FDIC has exercised this authority several
times in the past and could raise insurance assessment rates in the future. If
such action is taken by the FDIC, it could have an adverse effect on the
earnings of the Bank.
The Funds Act also amended the FDIA to expand the assessment base for the
payments on the FICO bonds. Beginning January 1, 1997, the assessment base for
the FICO bonds included the deposits of both BIF- and SAIF-insured institutions.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on July 1, 1998 was 0.0122% for BIF-assessable deposits and
0.0610% for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and abolition of separate charters for
banks and thrifts and to report the Secretary's conclusions and findings to the
Congress. The Secretary of the Treasury recommended to the Congress that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. However, the current version of bank modernization legislation, The
Financial Services Act of 1998, H.R. 10, which was passed by the U.S. House of
Representatives in May 1998 and is currently being considered by the U.S.
Senate, does not require thrift institutions to convert to bank charter.
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 Home Loan Bank System. The Bank is a member of the FHLB of Boston,
which is one of the regional Federal Home Loan Banks composing the Federal Home
Loan Bank System. Each Federal Home Loan Bank provides a central credit facility
primarily for its member institutions. The Bank, as a member of the FHLB of
Boston, is required to acquire and hold shares of capital stock in the FHLB of
Boston in an amount at least equal to the greater of 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 of Boston. The Bank was in compliance with this requirement with
an investment in the capital stock of the FHLB of Boston at June 30, 1998, of
$1.5 million. Any advances from a Federal Home Loan Bank must be secured by
specified types of collateral, and all long-term advances may be obtained only
for the purpose of providing funds for residential housing finance.
The Federal Home Loan Banks 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 earnings that the
Federal Home Loan Banks can pay as dividends to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. The FHLB of Boston paid dividends on the Bank's
capital stock of $91,000, $60,000 and $53,000 during the years ended September
30,
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1997, 1996 and 1995, respectively. If dividends were reduced, or interest on
future Federal Home Loan Bank advances increased, the Bank's net interest income
would likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA and
the FRB's regulations pursuant to which depository institutions may be required
to maintain noninterest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained in the amount of 3% of
the aggregate of transaction accounts up to $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. Federal Home Loan Bank System
members are also authorized to borrow from the Federal Reserve "discount
window," but FRB regulations require such institutions to exhaust all Federal
Home Loan Bank sources before borrowing from a Federal Reserve Bank.
REGULATION OF THE HOLDING COMPANY
General. The Mutual Company and the Stock Company are holding companies
chartered pursuant to Section 10(o) of the HOLA. As such, the Mutual Company and
the Stock Company are registered with and subject to OTS examination and
supervision as well as certain reporting requirements. In addition, the OTS has
enforcement authority over the Mutual Company and the Stock Company and any of
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 financial safety, soundness, or stability of a subsidiary
savings institution. Unlike bank holding companies, federal mutual holding
companies are not subject to any regulatory capital requirements or to
supervision by the Federal Reserve System.
Restrictions Applicable to Activities of Mutual Holding Companies. Pursuant
to Section 10(o) of the HOLA, a mutual holding company, such as the Mutual
Company, and a federally chartered mid-tier holding company such as the Stock
Company may engage only in the following activities: (i) investing in the stock
of a savings institution; (ii) acquiring a mutual association through the merger
of such association into a savings institution subsidiary of such holding
company or an interim savings institution subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings institution; (iv) investing in a corporation the
capital stock of which is available for purchase by a savings institution under
federal law or under the law of any state where the subsidiary savings
institution or associations have their home offices; (v) furnishing or
performing management services for a savings institution subsidiary of such
holding company; (vi) holding, managing, or liquidating assets owned or acquired
from a savings institution subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings institution subsidiary of such company;
(viii) acting as trustee under a deed of trust; (ix) any other activity (a) that
the FRB, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the BHC Act, unless the Director of the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies, or (b) in which multiple savings and loan holding companies were
authorized by regulation to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such holding company
is approved by the Director of the OTS. If a mutual holding company acquires or
merges with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only
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invest in assets and engage in activities listed above, and it has a period of
two years to cease any non-conforming activities and divest any non-conforming
investments.
Restrictions Applicable to All Savings and Loan Holding Companies. The HOLA
prohibits a savings and loan holding company, including the Stock Company and
the Mutual Company, directly or indirectly, from acquiring (i) control (as
defined under HOLA) of another savings institution (or a holding company parent
thereof) without prior OTS approval; (ii) more than 5% of the voting shares of
another savings institution (or holding company parent thereof) that is not a
subsidiary, subject to certain exceptions; (iii) through merger, consolidation,
or purchase of assets, another savings institution or a holding company thereof,
or acquiring all or substantially all of the assets of such institution (or a
holding company thereof) without prior OTS approval; or (iv) control of any
depository institution not insured by the FDIC (except through a merger with and
into the holding company's savings institution subsidiary that is approved by
the OTS).
A savings and loan holding company may not acquire as a separate subsidiary
an insured institution that has a principal office outside of the state where
the principal office of its subsidiary institution is located, except (i) in the
case of certain emergency acquisitions (as defined under HOLA) approved by the
FDIC; (ii) if such holding company controls a savings institution subsidiary
that operated a home or branch office in such additional state as of March 5,
1987, or (iii) if the laws of the state in which the savings institution to be
acquired is located specifically authorize a savings institution chartered by
that state to be acquired by a savings institution chartered by the state where
the acquiring savings institution or savings and loan holding company is located
or by a holding company that controls such a state chartered association. The
conditions imposed upon interstate acquisitions by those states that have
enacted authorizing legislation vary. Some states impose conditions of
reciprocity, which have the effect of requiring that the laws of both the state
in which the acquiring holding company is located (as determined by the location
of its subsidiary savings institution) and the state in which the association to
be acquired is located, have each enacted legislation allowing its savings
institutions to be acquired by out-of-state holding companies on the condition
that the laws of the other state authorize such transactions on terms no more
restrictive than those imposed on the acquirer by the state of the target
association. Some of these states also impose regional limitations, which
restrict such acquisitions to states within a defined geographic region. Other
states allow full nationwide banking without any condition of reciprocity. Some
states do not authorize interstate acquisitions of savings institutions. In
evaluating an application by a holding company to acquire a savings institution,
the OTS must consider the financial and managerial resources and future
prospects of the company and savings institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community, and competitive factors.
If the savings institution subsidiary of a federal mutual holding company
fails to meet the QTL test set forth in Section 10(m) of the HOLA and
regulations of the OTS, the holding company must register with the FRB as a bank
holding company under the BHC Act within one year of the savings institution's
failure to so qualify.
FEDERAL SECURITIES LAWS
The Common Stock to be issue in the Offering will be registered with the
SEC under the Exchange Act. The Stock Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
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MANAGEMENT
The Board of Directors of the Bank is divided into three groups, each of
which contains approximately one-third of the Board. The directors are elected
for staggered three-year terms, or until their successors are elected and
qualified. One group of directors, consisting of Messrs. Todisco, Verrengia, and
Mattuchio has a term of office expiring at the first annual meeting of
stockholders; a second group, consisting of Messrs. McCarthy, Becker, and
O'Brien, has a term of office expiring at the second annual meeting of
stockholders; and a third group, consisting of Messrs. Bommer, Conte, and
Charles has a term of office expiring at the third annual meeting of
stockholders.
DIRECTORS
The following table sets forth certain information regarding the Board of
Directors of the Bank in its mutual form who will initially serve on the Board
of Directors of the Bank in its stock form and on the Board of Directors of the
Stock Company.
<TABLE>
<CAPTION>
CURRENT
DIRECTOR TERM
DIRECTORS AGE(1) POSITION SINCE EXPIRES
- ----------- ------- -------- -------- --------
<S> <C> <C> <C>
Ernest F. Becker....................... 68 Vice-Chairman 1977 2001
and Director
Arno P. Bommer......................... 71 Chairman of the 1955 2001
Board and Director
Theodore E. Charles.................... 55 Director 1997 2000
Anthony R. Conte....................... 50 Director 1988 2001
Carmen R. Mattuchio.................... 60 Director 1994 1999
James J. McCarthy...................... 37 President, Chief Executive 1989 2000
Officer and Director
J. Michael O'Brien..................... 45 Director 1997 2000
Angelo A. Todisco...................... 69 Director 1980 1999
John J. Verrengia...................... 42 Director 1994 1999
</TABLE>
- -------------
(1) At July 1, 1998.
BIOGRAPHICAL INFORMATION
The following information relates to the directors and executive officers
of the Bank. Unless otherwise indicated, each director and executive officer has
held his current occupation for the last five years.
Ernest F. Becker has been a director of the Bank since 1977. Mr. Becker, a
licensed engineer, served as Chief Engineer, Vice President and President of
Whitmore Company, an engineering company located in Revere, Massachusetts, from
1952 until his retirement in 1996.
Arno P. Bommer has served on the Board of Directors of the Bank since 1955.
He was elected to the position of Chairman of the Bank's Board of Directors in
1978. Mr. Bommer is a consultant to both the Massachusetts Dental Service
Corporation and the Division of Medical Assistance of the Commonwealth of
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Massachusetts. He is also a partner in Fanuiel Associates, which provides dental
office reviews throughout the Commonwealth of Massachusetts. Mr. Bommer is a
also a licensed dentist and had a private practice in Revere, Massachusetts
before his retirement in 1996.
Theodore E. Charles has been a director of the Bank since 1996. Mr. Charles
is the Chairman of the Board and Chief Executive Officer of Investors Capital
Holdings which is located in Lynnfield, Massachusetts. As Chairman and Chief
Executive Officer of Investors Capital Holdings, Mr. Charles is responsible for
supervising the brokerage and investment services provided by its affiliates,
Investors Capital Corporation, a brokerage concern registered with the National
Association of Securities Dealers and Eastern Point Advisors, registered
investment advisors.
Anthony R. Conte was elected to the Bank's Board of Directors in 1988. Mr.
Conte has been a practicing attorney since 1974. He is presently the Regional
Solicitor for the U.S. Department of the Interior, Northeast Region.
Carmen R. Mattuchio has served on the Board of Directors of the Bank since
1994. Mr. Mattuchio is the owner of Burnett & Moynihan, Inc., a building
materials supplier, located in Revere, Massachusetts. Mr. Mattuchio has been
self-employed by Burnett & Moynihan for the past 20 years.
James J. McCarthy joined the bank in 1985 and has served as President and
Chief Executive Officer of the Bank since 1989. He has also served as a director
of the Bank since 1989. Prior to joining the Bank, Mr. McCarthy, a CPA, was
employed by the predecessor to Ernst & Young, Boston, Massachusetts, serving in
a variety of audit functions. Mr. McCarthy has also been employed by Pell Rudman
& Company, a Broker Dealer/Investment Advisor firm as a consultant with respect
to accounting and reporting to the NASD. Mr. McCarthy is on the Board of
Directors of the Massachusetts Bankers Association and is involved in many local
Revere charities and business organizations including the Revere Chamber of
Commerce, Revere Rotary and the Revere Partnership for Economic Development. Mr.
McCarthy also served as the Executive Committee Chairman of the Massachusetts
Thrift Fund for Economic Development until its dissolution in 1997.
J. Michael O'Brien has been a director of the Bank since 1997. He is the
President, Chief Executive Officer and a principal of Eagle Air Freight, a
domestic air freight provider, founded in 1981 and based in Chelsea,
Massachusetts. Mr. O'Brien is also the trustee and a principal of O'Brien Realty
Trust. O'Brien Realty Trust owns and leases warehouse and commercial office
space in Chelsea, Massachusetts.
Angelo A. Todisco was elected to the Board of Directors of the Bank in
1980. Mr. Todisco is a retired licensed public adjuster and serves as President
of DePiano & Todisco Adjusters, Inc. which appraises damages to residential and
commercial properties on behalf of its clients in connection with the settlement
of insurance claims.
John J. Verrengia has served on the Board of Directors of the Bank since
1994. Mr. Verrengia is a certified public accountant and is currently
self-employed as principal accountant of John J. Verrengia, CPA, a professional
corporation. Mr. Verrengia is also a registered investment advisor and provides
financial and investment advice to clients through Anchor Investments, a
consulting firm which he founded in 1992.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Anthony J. Patti, age 43, has been the Executive Vice President and Chief
Financial Officer of the Bank since 1992. He is responsible for the financial,
lending operations, information systems customer service and marketing functions
of the Bank on a day-to-day basis. Prior to joining the Bank, Mr. Patti served
as an
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Operations Specialist for the Resolution Trust Corporation. Mr. Patti has also
been employed by Home Owners Savings Bank, F.S.B., located in Boston,
Massachusetts where he served as a First Vice President and Controller and by
Andover Savings Bank, Andover, Massachusetts, where he served as Comptroller.
Judith E. Tenaglia, age 46, has been employed by the Bank for 21 years and
has been Treasurer of the Bank since 1991. Prior to becoming the Bank's
Treasurer, Ms. Tenaglia worked in the customer service department of the Bank.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Bank meets on a monthly basis and may have
additional special meetings upon request of the Chairman of the Board. During
the fiscal year ended September 30, 1997, the Board of Directors met 12 times.
No current director attended fewer than 75% of the total number of Board
meetings and no fewer than 75% of the total number of committee meetings of
which such director was a member.
The Board's Nominating Committee consists of Messrs. Bommer, McCarthy and
Becker, with Director Bommer serving as the Chairman of this Committee. This
Committee nominates individuals for election to the Bank's Board of Directors.
The Committee met three times during the fiscal year ended September 30, 1997.
The Board's Compensation Committee consists of Messrs. Becker, Charles,
McCarthy and Bommer and is chaired by Director Becker. The Compensation
Committee provides advice and recommendations to the Board in areas of employee
salaries and directors' compensation. This Committee met five times during the
fiscal year ended September 30, 1997.
The Audit Committee function is carried out by the entire Board of
Directors and is responsible for reviewing a number of periodic management
reports. It also reviews the annual audit and audit report prepared by the
independent accountants and recommends the appointment of the accountants.
The Executive Committee, under certain circumstances and to the extent
permitted by law, can exercise all powers of the Board of Directors when the
Board is not in session. The Executive Committee held eleven meetings in fiscal
1997. The present members of the Executive Committee are Messrs. Bommer
(Chairman), Becker and McCarthy.
It is anticipated that after the Reorganization, the Board of Directors of
the Bank in its stock form and/or the Board of Directors of the Stock Company
will establish committees which initially are identical in responsibilities and
composition to the committees of the Board of Directors of the Bank in its
mutual form.
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DIRECTORS' COMPENSATION
Fee Arrangements. Members of the Board of Directors of the Bank receive a
fee of $275 for attendance at each of the twelve regularly scheduled meetings of
the Board of Directors with the Chairman and Vice- Chairman receiving $300 for
each meeting attended. The directors also receive fees ranging from $25 to $50
per month for each committee meeting attended. The aggregate amount of
directors' fees paid during fiscal 1997 totaled $19,750 and the aggregate amount
of committee fees totaled $4,125. It is anticipated that members of the Board of
Directors of the Stock Company will not receive compensation for their services
on such Board but will participate in the Option and Restricted Stock Programs
expected to be implemented by the Stock Company for directors, officers,
executives and key employees following the completion of the Reorganization and
Offering.
EXECUTIVE COMPENSATION
Compensation Decisions. Decisions regarding the compensation of the Stock
Company's executives will be determined by the members of the Compensation
Committee to be established by the Board of Directors of the Stock Company
following the Reorganization. However, because directors employed by the Stock
Company who are appointed to serve on the Compensation Committee will not be
permitted to make decisions with respect to the compensation and benefits
payable to executives of the Stock Company, no interlocks will exist between
members of the Compensation Committee and the employees of the Stock Company.
Cash Compensation. The following table sets forth the cash compensation
paid by the Bank for services rendered in all capacities during the fiscal year
ended September 30, 1997 to the Chief Executive Officer of the Bank and all
other executive officers of the Bank who received compensation in excess of
$100,000 (each, a "Named Executive Officer") during such fiscal year.
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
- ----------------------------------------------------------------------------------------------------------===---------
OTHER ANNUAL LONG-TERM ALL OTHER
NAME AND FISCAL COMPENSATION INCENTIVE PLAN COMPENSATION
PRINCIPAL YEAR SALARY ($) BONUS ($) ($)(2) PAYOUT (3) ($)(4)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James J. McCarthy, 1997 112,013 4,039 -- -- 4,750
President and Chief
Executive Officer
Anthony J. Patti, 1997 92,474 3,400 -- -- 4,750
Executive Vice President
and Chief Financial
Officer
</TABLE>
- --------------------
(1) Under Annual Compensation, the column titled "Salary" includes the Named
Executive Officer's base salary including all payroll deductions for health
insurance under the Bank's health insurance plan and pre-tax contributions
to the Bank's 401(k) Plan.
(2) For the fiscal year ended September 30, 1997, there were no: (a) perquisites
with an aggregate value for each Named Executive Officer in excess of the
lesser of $50,000 or 10% of the total of the individual's 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; or (d) preferential discounts on
stock.
(3) During the fiscal year ended September 30, 1997, the Bank did not maintain
any stock option, restricted stock or other long-term incentive compensation
plans.
(4) Reflects matching contributions made by the Bank under the 401(k) Plan.
EMPLOYMENT AGREEMENTS
Effective upon the Reorganization, the Bank, subject to non-objection from
the OTS, intends to enter into separate Employment Agreements with each of Mr.
McCarthy, Mr. Patti and Ms. Tenaglia ("Senior Executive(s)"). The Employment
Agreements will provide for initial terms of three years, in the case of Messrs.
McCarthy and Patti and two years in the case of Ms. Tenaglia. Commencing on the
first anniversary of the effective date of each Employment Agreement, and
continuing on each anniversary date thereafter, the Senior Executive's Agreement
may be extended, after review by the Bank's Board of Directors, for an
additional one-year period, so that the remaining term will be three years, in
the case of Messrs. McCarthy and Patti and two years, in the case of Ms.
Tenaglia. If the Senior Executive's Employment Agreement is not renewed, the
Agreement will expire in accordance with its terms. The current base salaries
for Mr. McCarthy, Mr. Patti and Ms. Tenaglia are $156,800, $110,000, and
$60,000, respectively. The Employment Agreements provide for each Senior
Executive's base salary to be reviewed annually and it is anticipated that each
Senior Executive's base salary will be increased on the basis of his or her job
performance and the overall performance of the Bank. In addition to base salary,
each Employment Agreement provides for, among other things, participation in
stock, retirement and welfare benefit plans and eligibility for fringe benefits
applicable to executive personnel such as fees for club and organization
membership deemed appropriate by the Bank and the Senior Executive. The
Agreements provide for the termination of the Senior Executive by the Bank for
"cause" as defined in the Agreement at any time during the term. In the event
the Bank terminates a Senior Executive's employment for reasons other than for
"cause," or in the event of the Executive's resignation from the Bank upon (i)
failure to re-appoint, elect or re-elect the executive to his or her current
offices; (ii) a material change in the Senior Executive's functions, duties or
responsibilities, or relocation of the Senior Executive's principal place of
employment by more than 30 miles; (iii) a "change in control" of the Bank (as
defined below)
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such as its liquidation or dissolution; or (iv) a breach of the agreement by the
Bank, the Senior Executive, or in the event of death, his or her beneficiary
would be entitled to a lump sum cash payment in an amount equal to the remaining
base salary due to the Senior Executive at the time of termination that would
have been payable during the remaining term of the Executive's Employment
Agreement. In addition, the Employment Agreement for Mr. McCarthy provides for
him to receive, as additional severance, the highest cash bonus and the
additional contributions or benefits that he would have earned or accrued under
any employee benefit plans of the Bank or the Stock Company during the remaining
unexpired term of his Employment Agreement. As additional severance, all of the
Employment Agreements provide for the Bank to continue the Senior Executive's
life, health, dental and disability coverage for the remaining term of the
Executive's Employment Agreement.
The Bank's Employment Agreements will have restrictions on the aggregate
dollar amount of compensation and benefits payable to a Senior Executive in the
event of an employment termination following a "change in control" of the Bank.
In general, for purposes of the Employment Agreements and the plans maintained
by the Bank, a "change in control" will be deemed to occur when a person or
group of persons acting in concert acquires beneficial ownership of 25% or more
of any class of equity security, such as Common Stock of the Bank, or in the
event of a tender offer, exchange offer, merger or other form of business
combination, sale of assets or contested election of directors which results in
a "change in control" of the majority of the Board of Directors of the Bank.
If the total cash and benefits paid to a Senior Executive under an
Employment Agreement together with payments under other benefit plans following
a "change in control" constitutes an "excess parachute payment" under section
280G of the Internal Revenue Code of 1986 (the "Code"), the compensation payable
to the Senior Executive would be reduced (but not below zero) to avoid the
assessment of excise taxes on such excess parachute payments.
BENEFITS
Pension Plan. The Bank maintains a tax-qualified defined benefit plan
through the Financial Institutions Retirement Fund ("Pension Plan"). An employee
of the Bank who has attained age 21 and completed at least one year of service
with the Bank will be eligible to participate and accrue benefits under the
Plan. The Pension Plan provides an annual pension benefit for each participant,
including the Named Executive Officers, equal to 2.25% of the participant's
"average annual salary" multiplied by the participant's years of benefit
service, up to a maximum of 30 years. The Pension Plan defines "average annual
salary" to mean the average of a participant's salary over a five year period of
employment with the Bank during which the participant's salary was the highest.
A participant will become fully vested in the benefits that have accrued for him
under the Pension Plan after completion of five years of service with the Bank.
The Pension Plan provides for benefits to be paid in a straight life or joint
and survivor annuity; however, optional forms of benefits payment, such as lump
sum distributions, are also available under the Plan.
The Bank makes annual contributions to the Pension Plan in an amount
necessary to satisfy the actuarially determined minimum funding requirements of
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). The assets of the Pension Plan are held in a separate trust
established by the Financial Institutions Retirement Fund.
Pension Plan Table. The following table sets forth the estimated annual
benefits payable under the Pension Plan upon a participant's normal retirement
at age 65, expressed in the form of a single life annuity and for the average
annual salary and years of credited service specified therein. The annual
benefits shown in the table assume the participant would receive his retirement
benefits under the Pension Plan in the form of a straight life annuity, upon
normal retirement, at age 65. The benefits provided under the Pension Plan are
not
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integrated with federal Social Security retirement benefits. Pursuant to the
terms of the Pension Plan, no more than a maximum of 30 years of service may be
recognized for benefit accrual purposes.
<TABLE>
<CAPTION>
YEARS OF SERVICE AND BENEFIT PAYABLE AT RETIREMENT
AVERAGE -------------------------------------------------------
ANNUAL SALARY 15 20 25 30
------------- ---- ---- ---- ---
<S> <C> <C> <C> <C>
$ 50,000 $ 16,900 $ 22,500 $ 28,100 $ 33,800
$ 75,000 $ 25,300 $ 33,800 $ 42,200 $ 50,600
$100,000 $ 33,800 $ 45,000 $ 56,300 $ 67,500
$125,000 $ 42,200 $ 56,300 $ 70,300 $ 84,400
$150,000 $ 50,600 $ 67,500 $ 84,400 $ 101,300
</TABLE>
As of June 30, 1998, Mr. McCarthy had 11 years and 5 months of credited
service and Mr. Patti had 5 years and 3 months of credited service for benefit
accrual purposes under the Pension Plan.
401(k) Plan. The Bank also maintains a tax-qualified 401(k) defined
contribution plan through the Financial Institutions Thrift Fund ("401(k)
Plan"). Generally, any employee of the Bank who has attained age 21 and
completed at least one year of service will be eligible to participate in the
401(k) Plan and make pre-tax deferrals from 1% to 15% of his annual
compensation, subject to limitations of the Code (for 1997, the annual limit was
$9,500; this limit was increased to $10,000 for 1998). The Bank makes matching
contributions of 50%, up to a maximum of 10% of the participant's salary each
year. Employees are always 100% fully vested in their pre-tax deferrals and
matching contributions made by the Bank.
In connection with the Reorganization, the Bank also intends to amend the
401(k) Plan to permit employer matching contributions to be made in shares of
Common Stock or cash, at the discretion of the Bank. In addition, the Bank
intends to amend the 401(k) Plan to establish an employer stock fund in order to
allow participants to invest their 401(k) Plan account balances in shares of
Common Stock in addition to the other investment alternatives available under
the 401(k) Plan. The assets of the employer stock fund will be held by an
independent corporate trustee to be appointed for the 401(k) Plan and allocated
to the accounts of individual participants. Participants will control the
exercise of voting and tender rights relating to the shares of Common Stock held
in their accounts in the 401(k) Plan. The Common Stock held by the 401(k) Plan
employer stock fund may be newly issued or treasury shares acquired from the
Stock Company or outstanding shares purchased in the open market or in privately
negotiated transactions.
Employee Stock Ownership Plan and Trust. The Stock Company intends to
implement a tax-qualified employee stock ownership plan ("ESOP") in connection
with the Reorganization. Employees with at least one year of employment with the
Bank and who have attained age 21 will be eligible to participate. As part of
the Reorganization, the ESOP intends to borrow funds from the Stock Company and
to use those funds to purchase a number of shares equal to up to 8% of the
Common Stock to be sold in the Offering. Collateral for the loan will be the
Common Stock purchased by the ESOP. The loan will be repaid principally from the
Bank's
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contributions to the ESOP over a period of not less than ten years. It is
anticipated that the interest rate for the loan will be 8%.
Shares purchased by the ESOP will be held in a suspense account pending
allocation among eligible participants on an annual basis as the loan is repaid.
The ESOP will provide for the shares held in the suspense account to be released
in an amount proportional to the repayment of the ESOP loan and will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Participants in the ESOP will receive credit for service prior to
the effective date of the ESOP. A participant will become 100% vested in his
benefits after five years of service with the Bank or upon normal retirement (as
defined in the ESOP), disability or death. A participant who terminates
employment for reasons other than death, retirement, or disability prior to
completing five years of service with the Bank will forfeit his ESOP benefits.
Benefits will be payable in the form of Common Stock and/or cash upon death,
retirement, disability or separation from service. The Bank's contributions to
the ESOP will be subject to the loan terms and federal income tax law limits,
and, therefore, the aggregate dollar amount of the benefits payable under the
ESOP cannot be estimated at this time.
In connection with the establishment of the ESOP, the Stock Company will
establish a committee of nonemployee directors to administer the ESOP; it will
also appoint an independent corporate trustee for the ESOP trust. The ESOP
trustee, subject to its fiduciary duty, will be required to vote all allocated
shares held in the ESOP in accordance with the instructions of participating
employees. Under the ESOP, nondirected shares, and shares held in the suspense
account, will be voted in a manner calculated to most accurately reflect the
instructions the ESOP trustee has received from participants regarding the
allocated stock so long as such vote is in accordance with the provisions of
ERISA.
In addition to the provisions described above, the ESOP will also provide
for certain actions to occur upon a "change in control" of the Stock Company or
the Bank. The ESOP will provide that, if such "change in control" occurs, the
ESOP trustee will be directed to sell the shares of Common Stock held in the
ESOP's suspense account and to use the proceeds to repay the outstanding ESOP
loan. Following this action, the ESOP will provide for each eligible participant
to receive a final allocation of the shares of Common Stock, or the proceeds
received from the sale of such Stock, held in the ESOP's trust. Once the final
allocation of shares has been completed, the ESOP will provide for the automatic
termination of the plan to occur and for final distributions of account balances
to be made to participants and beneficiaries. Upon such "change in control," all
ESOP participants would automatically become 100% vested in their ESOP account
balances.
Benefit Restoration Plan. In connection with the Reorganization, the Stock
Company also intends to adopt the Benefit Restoration Plan of RFS Bancorp, Inc.
("BRP"). This Plan will provide eligible employees with the benefits that would
otherwise be due to them as participants in the Pension Plan, the 401(k) Plan
and the ESOP if such benefits were not limited under the Code.
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The Stock Company intends to establish an irrevocable "grantor trust" to
hold the assets of the BRP. This trust would be funded with contributions of the
Stock Company to be made from time to time for the purpose of providing the
benefits under the BRP. The assets of the trust are considered to be part of the
general assets of the Stock Company and will be subject to the claims of its
general creditors. Earnings on the trust's assets will be taxable to the Stock
Company.
Stock Option Plan. At a meeting of the Stock Company's shareholders to be
held no earlier than six months after the completion of the Offering, the Board
of Directors intends to submit for shareholder approval stock option plans for
directors, officers and employees of the Bank and of the Stock Company
(collectively, the "Stock Option Plan"). If approved by the shareholders, Common
Stock in an aggregate amount equal to 10% of the shares sold in the Offering
would be reserved for issuance by the Stock Company upon the exercise of the
stock options granted under the Stock Option Plan. Ten percent of the shares
issued in the Offering would amount to 29,962 shares, 35,250 shares, 40,537
shares and 46,618 shares at the minimum, midpoint, maximum and adjusted maximum
of the Offering Range, respectively. No options would be granted under the Stock
Option Plan until the date on which shareholder approval is received.
It is anticipated that options would be granted for terms of 10 years (in
the case of incentive options) or 10 years and one day (in the case of
nonqualified options). The exercise price of the options granted under the Stock
Option Plan will be equal to the fair market value of the shares on the date the
stock options are granted. If the Stock Option Plan is adopted within one year
following the Offering, options will become exercisable at a rate of 20% at the
end of each 12 months of service with the Stock Company, commencing after the
date of grant, subject to early vesting in the event of death or disability.
Options granted under the Stock Option Plan, if adopted more than 12 months
after the Offering, would also become 100% vested upon normal retirement or a
change in control of the Bank or the Stock Company. Under OTS rules, if the
Stock Option Plan is adopted within the first 12 months after the Offering, no
individual officer can receive more that 25% of the awards under the plan, no
outside director can receive more than 5% of the awards under the plan, and all
outside directors as a group can receive no more than 30% of the awards under
the plan in the aggregate.
The Stock Option Plan will be administered by a Committee of nonemployee
members of the Stock Company's Board. In general, options granted under the
Stock Option Plan to employees may be "incentive stock options" which permit
certain beneficial tax treatment by the employee but would result in no tax
deduction for the Stock Company. Nonqualified stock options may also be granted
under the Stock Option Plan and this type of option award will be the only kind
of award available for grant to non-employee directors. In the event an option
recipient terminates his employment or service as an employee or director, the
options would terminate during certain specified periods.
Restricted Stock Program. At a meeting of the Company's shareholders to be
held no earlier than six months after the completion of the Offering, the Board
of Directors also intends to submit restricted stock award programs for the
benefit of directors, officers and employees of the Stock Company and the Bank
(collectively, the "Restricted Stock Program") for shareholder approval. The
Restricted Stock Program will provide eligible directors, officers and employees
of the Stock Company or the Bank with an ownership interest in the Stock Company
in a manner designed to encourage them to continue their service with the Bank
or the Stock Company. The Stock Company will contribute funds to the Restricted
Stock Program from time to time to enable it to acquire an aggregate amount of
Common Stock equal to up to 4% of the shares of Common Stock sold in the
Offering, either directly from treasury or open market purchases. Four percent
of the shares issued in the Offering would amount to 11,985 shares, 14,100
shares, 16,215 shares and 18,647 shares at the minimum, midpoint, maximum and
adjusted maximum of the Offering Range, respectively. In the event that
additional authorized but unissued shares are acquired by the Restricted Stock
Program after the Offering, the interests of existing shareholders would be
diluted. The executive officers and directors will be awarded
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Common Stock under the Restricted Stock Program without having to pay cash
for the shares. No awards under the Restricted Stock Program would be made until
the date the Restricted Stock Program is approved by the Stock Company's
shareholders.
Awards under the Restricted Stock Program would be non-transferable and
non-assignable. If the Restricted Stock Program is adopted within one year
following the Offering, shares subject to an award would vest at the rate of 20%
per year. Awards would be adjusted for capital changes such as stock dividends
and stock splits. However, the Restricted Stock Program is also expected to
provide for awards to be 100% vested upon termination of an award holder's
employment or service due to death or disability, and if the Restricted Stock
Program is adopted more than 12 months after the Offering, the Program would
provide for awards to be 100% vested upon an award holder's normal retirement or
a change in control of the Bank or Stock Company. If the individual's employment
or service were to terminate for other reasons, the award recipient would
forfeit any non-vested award. If an award holder's employment or service is
terminated for cause (as would be defined in the Restricted Stock Program),
shares not already delivered under the Program would be forfeited. Under OTS
rules, if the Restricted Stock Program is adopted within the first 12 months
after the Offering, no individual officer can receive more than 25% of the
awards under the Program and no outside director can receive more than 30% of
the awards under the Program in the aggregate.
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THE REORGANIZATION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED THE PLAN OF REORGANIZATION
AND STOCK ISSUANCE PLAN SUBJECT TO THE APPROVAL OF THE OTS AND THE MEMBERS OF
THE BANK ENTITLED TO VOTE THEREON AND THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. OTS APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
EITHER THE PLAN OF REORGANIZATION OR THE STOCK ISSUANCE PLAN BY THE OTS.
GENERAL
The Bank's Board of Directors unanimously adopted the Plan and the OTS has
approved the Plan. Pursuant to the Plan, the Bank will reorganize into what is
called a "two-tier" mutual holding company structure. It is a two-tier structure
because it will have two levels of holding companies--a "mid-tier" stock holding
company and a "top-tier" mutual holding company. Under the terms of the Plan (i)
the Bank will form the Stock Company as a federal corporation; (ii) the Bank
will form the Mutual Company as a federal mutual holding company; (iii) the Bank
will reorganize into the capital stock form of organization and issue 100% of
the Bank's to-be outstanding common stock to the Stock Company; and (iv) the
Stock Company will issue shares of Common Stock to the public and the Mutual
Company. The number of shares of Common Stock sold to the public pursuant to
this Prospectus will be equal to 47% of the shares issued in the Reorganization,
and the number of shares issued to the Mutual Company will be equal to 53% of
the shares issued in the Reorganization. All of these steps are referred to in
this Prospectus as the "Reorganization," and the sale of 47% of the Common Stock
pursuant to this Prospectus is referred to as the "Offering." The two-tiered
mutual holding company structure is most easily understood by considering the
following diagram:
[GRAPHIC OMITTED]
It is anticipated that, pursuant to the Stock Issuance Plan, the Offering
will be consummated immediately following the Reorganization; however, the Bank
anticipates that it will consummate the Reorganization even if the Offering is
not completed immediately thereafter. For additional information concerning the
Offering, see "The Offering."
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For purposes of this discussion, references to the Stock Bank refer to the
Bank in the post-reorganization stock form. References to the Bank shall include
Revere Federal Savings in its current mutual form or in its post-reorganization
stock form, as indicated by the context.
PURPOSES OF THE REORGANIZATION
The Board of Directors of the Bank has determined that the Reorganization
is in the best interest of the Bank and its members, and has several business
purposes for effecting the proposed Reorganization.
Formation of the Stock Company as a subsidiary of the Mutual Company will
permit the Stock Company to issue Common Stock, which is a source of capital not
available to mutual savings banks. At the same time, the Bank's mutual form of
ownership will be preserved in the Mutual Company, and the Mutual Company, as a
mutual corporation, will control at least a majority of the Common Stock of the
Stock Company so long as the Mutual Company remains in existence. The
Reorganization will enable the Bank to achieve the benefits of a stock company
without a loss of control that often follows standard conversions from mutual to
stock form. Sales of locally based, independent savings institutions to larger,
regional financial institutions following such mutual to stock conversions can
result in closed branches, fewer choices for consumers, employee layoffs and the
loss of community support for and involvement by a financial institution. The
Bank is committed to being an independent, community-oriented institution, and
the Board of Directors believes that the Mutual Company structure is best suited
for this purpose. The Mutual Company structure also will give the Stock Company
flexibility to issue its Common Stock at various times and in varying amounts as
market conditions permit, rather than in a single stock offering. The
Reorganization will not foreclose the opportunity for the Mutual Company to
convert from mutual to stock form of organization in the future.
The Reorganization will also give the Bank greater flexibility to structure
and finance the expansion of our operations, including the potential acquisition
of other financial institutions, and to diversify into other financial services.
The holding company form of organization is expected to provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions, as well as other companies. Although we have no current
arrangements, understandings or agreements regarding any such opportunities, the
Stock Company will be in a position after the Reorganization, subject to
regulatory limitations and the Stock Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable us to better manage our capital by giving us broader investment
opportunities through the holding company structure, and enable the Stock
Company to distribute capital to its stockholders in the form of dividends and
stock repurchases. Because only a minority of the Common Stock will be offered
for sale in the Offering, the Bank's current mutual form of ownership and its
ability to remain an independent savings bank and to provide community-oriented
financial services will be preserved through the mutual holding company
structure.
Contemporaneously with or immediately following the Reorganization, the
Stock Company expects to offer for sale up to 47% of its Common Stock in an
Offering at an aggregate price determined by an independent appraisal. The sale
of Common Stock will provide the Bank with new equity capital, which will
support future deposit growth and expanded operations. The ability to sell
Common Stock also will enable the Bank to increase capital in response to the
changing capital requirements of the federal banking agencies. While the Bank
currently meets or exceeds all regulatory capital requirements, the Board of
Directors believes that it is desirable for the Bank to increase its capital
position in view of the increasingly competitive and changing market and
regulatory conditions in which the Bank operates. The sale of Common Stock at
appropriate times, coupled with the accumulation of earnings (net of dividends)
from year to year, represents
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a means for the orderly preservation and expansion of the Bank's capital base,
and allows flexibility to respond to sudden and unanticipated capital needs. The
investment of the net proceeds of a stock offering also will provide additional
income to enhance further the Bank's future capital position.
The ability of the Stock Company to issue Common Stock also will enable
the Stock Company in the future to establish stock benefit plans for management
and employees, including incentive stock option plans, stock award plans and
employee stock ownership plans.
The formation of the Stock Company also will allow the Stock Company to
borrow funds, on a secured and unsecured basis, and to issue debt to the public
or in a private placement. The proceeds of any such borrowings or debt issuance
may be contributed to the Bank as core capital for regulatory capital purposes.
The Bank has not made a determination to borrow funds or issue debt at the
present time, and there can be no assurance when, if ever, any such borrowing or
debt issuance would occur, or whether it would be consummated on terms
satisfactory to the Stock Company.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the Mutual Company structure, which include: the
inability of the Bank to raise voting stock in excess of 49% of its estimated
pro forma market value so long as the Mutual Company remains in existence; the
more limited liquidity of the Common Stock, as compared to a standard
conversion; and the inability of stockholders other than the Holding Company to
obtain a majority ownership of the Bank which may result in the perpetuation of
the existing management and Board of Directors of the Bank. The Mutual Company
will be able to elect all members of the Board of Directors of the Bank, and
will be able to control the outcome of all matters presented to the stockholders
of the Bank for resolution by vote, except for matters which by regulation must
be approved by a majority of the Minority Stockholders, including certain
matters relating to stock compensation plans and certain votes regarding a
conversion to stock form by the Mutual Company. No assurance can be given that
the Mutual Company will not take action adverse to the interests of the Minority
Stockholders. For example, the Mutual Company could revise the dividend policy,
prevent the sale of control of the Bank, or defeat a candidate for the Board of
Directors of the Bank or other proposal put forth by the Minority Stockholders.
EFFECTS OF THE REORGANIZATION
General. After the Reorganization, the Bank will be authorized to exercise
any and all powers, rights and privileges of, and shall be subject to all
limitations applicable to, capital stock savings banks under federal law. The
initial Board of Directors of the Stock Company will be the existing Board of
Directors of the Bank. Thereafter, the holders of shares of the Stock Company's
voting stock will elect approximately one-third of the Stock Company's Board of
Directors annually. It is expected that present management of the Bank will
continue as the management of the Stock Company following the Reorganization.
The Reorganization will have no effect on the Bank's present business of
accepting deposits and investing its funds in loans and other investments
permitted by law. The Reorganization will not result in any change in the
existing services provided to depositors and borrowers, or in its existing
offices, management and staff. As is the case prior to the Reorganization, the
Bank after the Reorganization is completed will be subject to regulation,
supervision and examination by the OTS.
Accounts and Loans. Upon the effective date of the Reorganization, the
voting, ownership and liquidation rights of members of the Bank will become the
rights of members of the Mutual Company, subject to the conditions specified
below. Each deposit account in the Bank at the effective date will become a
deposit account in the Bank in the same amount and upon the same terms and
conditions, except that the
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holder of each such deposit account will have ownership and membership rights
with respect to the Mutual Company rather than the Bank for so long as such
holder maintains a deposit account with the Bank. All insured deposit accounts
of the Bank will continue to be federally insured up to the legal maximum by the
FDIC in the same manner as deposit accounts existing in the Bank immediately
prior to the Reorganization. Any new deposit accounts established with the Bank
after the Reorganization will create membership and liquidation rights in the
Mutual Company and will be federally insured up to the legal maximum by the
FDIC. All loans and other borrowings from the Bank shall retain the same status
with the Bank after the Reorganization as they had with the Bank immediately
prior to the Reorganization.
Voting Rights. As a federally chartered mutual savings bank, the Bank has
no authority to issue capital stock and, thus, no stockholders. Control of the
Bank in its mutual form is vested in the Board of Directors of the Bank,
one-third of the members of which are elected each year by the members of the
Bank. After the Reorganization, the members of the Board of Directors of the
Bank will become the members of the Board of Directors of the Stock Company and
will continue to be elected in staggered, three year terms. The affairs of the
Bank will be directed by its Board of Directors and all voting rights as to the
Bank will be vested exclusively in the holders of its outstanding voting stock.
Following the Reorganization, the Stock Company will have the power to
issue shares of Common Stock to persons other than the Mutual Company. However,
so long as the Mutual Company is in existence, the Mutual Company will be
required to own more than a majority of the Common Stock of the Stock Company.
By virtue of its majority ownership interest, the Mutual Company generally will
be able to elect all members of the Board of Directors of the Bank and generally
will be able to control the outcome of most matters presented to the
stockholders of the Bank for resolution by vote, excluding certain matters
related to stock compensation plans and certain votes regarding a conversion to
stock form by the Mutual Company.
As a federally chartered mutual holding company, the Mutual Company will
have no authorized capital stock and, thus, no stockholders. Holders of deposit
accounts in and borrowers of the Bank will become members of the Mutual Company
entitled to vote on all questions requiring action by the members of the Mutual
Company including, without limitation, election of directors of the Mutual
Company. In addition, all persons who become depositors of the Bank following
the Reorganization will have membership rights with respect to the Mutual
Company. Borrowers will not receive membership rights in connection with any new
borrowings made after the Reorganization.
Liquidation Rights. In the unlikely event of a voluntary or involuntary
liquidation, dissolution or winding-up of the Bank in its present mutual form
prior to the Reorganization, holders of deposit accounts in the Bank would be
entitled, pro rata to the value of their accounts, to distribution of any assets
of the Bank remaining after the claims of such depositors (to the extent of
their deposit balances) and all other creditors are satisfied. Following the
Reorganization, the holders of the Common Stock would be entitled to any assets
remaining upon a liquidation, dissolution or winding-up of the Bank and, except
through their liquidation interests in the Mutual Company, discussed below,
holders of deposit accounts in the Bank would have no interest in any such
assets.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up of the Mutual Company following consummation of the Reorganization,
holders of deposit accounts in the Bank would be entitled, pro rata to the value
of their accounts, to distribution of any assets of the Mutual Company remaining
after the claims of all creditors of the Holding Company are satisfied. The
Mutual Company will establish, upon the completion of the Reorganization, a
special "liquidation account" for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to the net worth of the
Mutual Company as of that date. Each Eligible Account Holder and Supplemental
Eligible Account
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Holder, if he were to continue to maintain his deposit account at the Bank,
would be entitled, on a complete liquidation of the Mutual Company after the
Reorganization, to an interest in the liquidation account. Each Eligible Account
Holder and Supplemental Eligible Account Holder would have an initial interest
in such liquidation account for each deposit account, including regular
accounts, transaction accounts such as NOW accounts, money market deposit
accounts, and certificates of deposit, with a balance of $50 or more held in the
Bank on December 31, 1996 (with respect to an Eligible Account Holder) and
September 30, 1998 (with respect to a Supplemental Eligible Account Holder)
("Qualifying Deposit"). Each Eligible Account Holder and Supplemental Eligible
Account Holder will have a pro rata interest in the total liquidation account
for each of his deposit accounts based on the proportion that the balance of
such person's Qualifying Deposits on the Eligibility Record Date or Supplemental
Eligibility Record Date, respectively, bore to the total amount of all
Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders in the Bank. For deposit accounts in existence at both dates
separate subaccounts shall be determined on the basis of the Qualifying Deposits
in such deposit accounts on each such record date.
If, however, on any annual closing date of the Bank, commencing October 1,
1998, the amount in any deposit account is less than the amount in such deposit
account on December 31, 1996 (with respect to an Eligible Account Holder) and
September 30, 1998 (with respect to a Supplemental Eligible Account Holder) or
any other annual closing date, then the 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 closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Stockholders of the Bank will have no liquidation or other rights with
respect to the Holding Company in their capacities as such.
There currently are no plans to liquidate the Bank or the Mutual Company in
the future.
Subscription and Preemptive Rights. Under OTS regulations, depositors of
the Bank are entitled to priority subscription rights to purchase shares of
capital stock of the Mutual Company in the event that the Mutual Company fully
converts from mutual to stock form subsequent to the Reorganization. Holders of
the capital stock of the Stock Company shall not be entitled to preemptive
rights with respect to any shares of the Stock Company which may be issued.
FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION
In the following discussion, "Mutual Bank" refers to the Bank before the
Reorganization and "Stock Bank" refers to the Bank after the Reorganization. The
Reorganization will be effected as follows:]
(i) Mutual Bank will organize Mutual Company, which will initially be
organized in stock form and initially exist as Mutual Bank's wholly-owned
subsidiary.
(ii) Mutual Company will organize two wholly-owned subsidiaries, one of
which will be Stock Company, and the other of which will be an interim stock
savings bank ("Interim").
(iii) The following events will occur simultaneously pursuant to the Plan:
(A) Mutual Bank will exchange its charter for a federal stock savings bank
charter and thereby become Stock Bank (the "Conversion"); (B) Interim will merge
with and into Stock Bank with Stock Bank surviving; (C) Mutual Company will
cancel its stock and exchange its charter for a federal mutual holding company
charter and thereby become a mutual holding company the members of which (the
"Mutual Company Members") will be the former depositors in and borrowers of
Mutual Bank immediately prior to these transactions ("Mutual Bank Members"). As
a mutual entity, Mutual Company will not have any authorized capital stock. As a
result
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of the merger and charter exchanges, Stock Bank will become a wholly-owned
subsidiary of Mutual Company, and the Mutual Company Members will hold interests
in Mutual Company comparable to the interests they previously held in Mutual
Bank.
(iv) Mutual Company will then contribute all of the stock of Stock Bank to
Stock Company.
As a result of these transactions, Stock Bank will be a wholly-owned
subsidiary of Stock Company and Stock Company will be a wholly-owned subsidiary
of Mutual Company. In substance, upon the Conversion, the Mutual Bank Members
will constructively receive the stock of Stock Bank and will then exchange such
stock for membership interests in Mutual Company (the "Exchange"). The
Conversion is intended to be a tax-free reorganization under section
368(a)(1)(F) of the Internal Revenue Code of 1986 (the "Code"), and the Exchange
is intended to be a tax-tree exchange under Code section 351.
Under the Plan of Reorganization, consummation of the Reorganization is
conditioned on prior receipt by the Bank of (i) either an Internal Revenue
Service ruling or an opinion of counsel or tax advisor with respect to the
federal income tax consequences of the Reorganization, and (ii) an opinion of
counsel or tax advisor with respect to the Massachusetts tax consequences of the
Reorganization. Unlike private letter rulings,opinions of counsel are not
binding on the Internal Revenue Service or the State of Massachusetts, and
either agency could disagree with such opinions. In the event of such
disagreement, there can be no assurance that the Bank or the depositors would
prevail in a judicial proceeding. The Bank has not applied for an Internal
Revenue Service ruling, but will receive such an opinion of Thacher Proffitt &
Wood, based upon certain facts, representations and assumptions set forth in
such opinion that are consistent with the state of facts existing at the
effective time of the Reorganization. As regards to the Conversion, Thacher
Proffitt & Wood intends to issue an opinion that: (i) the Conversion will
constitute a reorganization under section 368(a)(1)(F) of the Code, and that the
Bank (in either its status as Mutual Bank or Stock Bank) will recognize no gain
or loss as a result of the Reorganization; (ii) the basis of each asset of
Mutual Bank held by Stock Bank immediately after the Conversion will be the same
as Mutual Bank's basis for such asset immediately prior to the Conversion; (iii)
the holding period of each asset of Mutual Bank held by Stock Bank immediately
after the Conversion will include the period during which such asset was held by
Mutual Bank prior to the Conversion; (iv) for purposes of Code section 381(b),
Stock Bank will be treated as if there had been no reorganization and,
accordingly, the taxable year of the Mutual Bank will not end on the effective
date of the Reorganization and the tax attributes of Mutual Bank (subject to
application of Code sections 381, 382, and 384), including Mutual Bank's bad
debt reserves and earnings and profits, will be taken into account by Stock Bank
as if the Reorganization had not occurred; (v) Mutual Bank Members will
recognize no gain or loss upon their constructive receipt of shares of Stock
Bank common stock solely in exchange for their interest (i.e., liquidation and
voting rights) in Mutual Bank; (vi) a Mutual Bank Member's basis in the shares
of Stock Bank common stock constructively received in the Conversion will be the
same as the basis of the Mutual Bank interest constructively surrendered in
exchange therefor; (vii) a Mutual Bank member's holding period for the shares of
Stock Bank common stock constructively received in the Conversion will include
the holding period of the Mutual Bank interest constructively surrendered in
exchange therefor; and (viii) no gain or loss will be recognized by depositors
of Mutual Bank upon the issuance to them of deposits in Stock Bank in the same
dollar amount as their deposits in Mutual Bank. As regards the Exchange, Thacher
Proffitt & Wood intends to issue an opinion that: (i) the Exchange will qualify
as an exchange of property for stock under Code section 351; (ii) the
shareholders of Stock Bank (the former Mutual Bank Members) will recognize no
gain or loss upon the transfer to Mutual Company of the shares of Stock Bank
common stock they constructively received in the Conversion in exchange for
interests (i.e., liquidation and voting rights) in Mutual Company; (iii) the
basis of the interest in Mutual Company received by each shareholder of Stock
Bnak in exchange for such shareholder's shares of Stock Bank common stock will
be equal to the basis of such shares of Stock Bank common stock; (iv) the
holding period of the interest in Mutual Company received
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by each shareholder of Stock Bank will, as of the date of the Exchange, be the
same as the holding period of the shares of Stock Bank common stock transferred
in exchange therefor, provided such shares of Stock Bank common stock were held
as a capital asset on the date of the Exchange; (v) Mutual Company will
recognize no gain or loss upon its receipt from the shareholders of Stock Bank
of shares of Stock Bank common stock in exchange for interests in Mutual
Company; (vi) Mutual Company's basis for each share of Stock Bank common stock
received from a shareholder of Stock Bank in exchange for an interest in Mutual
Company will be the equal to the basis of such share of common stock in the
hands of such Stock Bank shareholder; and (vii) Mutual Company's holding period
for each share of Stock Bank common stock received from a shareholder of Stock
Bank in exchange for an interest in Mutual Company will, as the date of the
Exchange, be the same as the holding period of such shares in the hands of such
Stock Bank shareholder. Thacher Proffitt & Wood also intends to opine that (i)
no gain or loss will be recognized by Stcok Company upon the sale of Common
Stock in the Offering; (ii) 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 Common Stock
in the Offering, provided that the amount to be paid for such shares is equal to
the fair market value of such shares; and (iii) the basis to the shareholders of
shares of Common Stock purchased in pursuant to such subscription rights will be
the amount paid therefor and the holding period for such shares will begin on
the date on which such subscription rights are exercised.
Shatswell, MacLeod & Company, P.C., intends to opine, subject to the
limitations and qualifications in its opinion, that, for purposes of the
Massachusetts corporate income tax, the Massachusetts income tax on savings
banks and the Massachusetts individual income tax, the Reorganization will not
be taxable transactions to the Bank (in either its status as Bank or Stock
Bank), the Stock Company, the Mutual Company, the stockholders of the Stock
Company or the depositors of the Bank.
Certain portions of both the federal and the state and local, if any, tax
opinions are based upon the letter of RP Financial that subscription rights
issued in connection with the Reorganization will have no value. In the letter
of RP Financial, which letter is not binding on the Service, the subscription
rights do not have any value, based on the fact that such rights are acquired by
the recipients without cost, are non-transferable and of short duration, and
afford the recipients the right only to purchase the common stock of the Stock
Bank 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 such common stock. If
the subscription rights granted to Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members are deemed to have an ascertainable
value, such parties may realize taxable income upon the receipt or exercise of
the subscription rights in an amount equal to such value and the Mutual Company
may recognize gain on such distribution. Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are encouraged to consult with their
own tax advisor as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
ACCOUNTING CONSEQUENCES
The Reorganization will be accounted for at historical cost in a manner
similar to pooling of interest accounting in accordance with GAAP. Accordingly,
the carrying value of the Bank's assets, liabilities and equity will be
unaffected by the Reorganization and will be reflected in the Stock Company's
financial statements based on their historical amounts.
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CONDITIONS TO THE REORGANIZATION
Consummation of the Reorganization is subject to the receipt of all
requisite regulatory approvals, including various approvals of the OTS. No
assurance can be given that all regulatory approvals will be received. Receipt
of such approvals from the OTS will not constitute a recommendation or
endorsement of the Plan of Reorganization or the Offering by the OTS.
Consummation of the Reorganization also is subject to approval by a majority of
the total votes of the members to be cast at the Special Meeting, as well as the
receipt of rulings by the Service and/or opinions of counsel with respect to the
tax consequences of the Reorganization. See "--Federal and State Tax
Consequences of the Reorganization."
STOCK COMPENSATION PLANS
The Board of Directors of the Stock Company intends to adopt and seek
shareholder approval of one or more stock benefit plans for its employees,
officers and directors, including an ESOP, restricted stock programs and stock
option plans which will be authorized to purchase Common Stock, award Common
Stock and grant options for Common Stock. Specifically, the Board of Directors
of the Stock Company intends to establish the ESOP and authorize the ESOP and
any other tax-qualified employee stock benefit plans to purchase in the
aggregate up to 10% of the Common Stock issued in the Offering, as well as up to
8% of the Common Stock issued by the Mutual Company (excluding any shares of the
Stock Company exchanged for shares of the Holding Company) in the event of its
conversion to stock form in a Conversion Transaction. In addition, no sooner
than six months after the Reorganization, the Board of Directors of the Stock
Company intends to seek shareholder approval to award shares of Common Stock
pursuant to the Stock Programs, in an amount up to 4% of the number of shares of
Common Stock sold in the Offering. No sooner than six months after the
Reorganization, the Board of Directors of the Stock Company intends to seek
shareholder approval to grant stock options for a number of shares equal to up
to 10% of the Common Stock sold in the Offering.
No shares shall be issued pursuant to the Restricted Stock Programs unless
such plans shall have been presented to and approved by shareholders of the
Stock Company (excluding the Mutual Company), and no options shall be awarded
under the stock option plans described in this paragraph unless such stock
option plan shall have been presented to and approved by the Stock Company's
shareholders (excluding the Mutual Company). The exercise price of the options
permitted thereby shall be the fair value on the date such options are granted.
Shares sold to the ESOP or awarded pursuant to the Restricted Stock Programs,
and shares issued upon exercise of options, may be authorized but unissued
shares of the Stock Company's Common Stock, or shares of Common Stock purchased
by the Stock Company or such plan on the open market. See "Management of the
Bank --Benefits --Employee Stock Ownership Plan and Trust."
AMENDMENT OR TERMINATION OF THE PLAN OF REORGANIZATION
If necessary or desirable, the terms of the Plan of Reorganization may be
amended by a majority vote of the Bank's Board of Directors, at any time prior
to submission of the Plan of Reorganization and proxy materials to the members.
At any time after submission of the Plan of Reorganization and proxy materials
to the members, the Plan of Reorganization may be amended by a majority vote of
the Board of Directors only with the concurrence of the OTS. The Plan of
Reorganization may be terminated by a majority vote of the Board of Directors at
any time prior to the earlier of approval of the Plan of Reorganization by the
OTS and the date of the Special Meeting, and at any time thereafter with the
concurrence of the OTS. In its discretion, the Board of Directors may modify or
terminate the Plan of Reorganization upon the order of the regulatory
authorities or to conform to new mandatory regulations of the OTS, without an
affirmative resolicitation of proxies or another meeting of the members only if
the OTS concurs that such resolicitation is not required;
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however, any material amendment of the terms of the Plan of Reorganization that
relates to the Reorganization which occurs after the Special Meeting shall
require an affirmative resolicitation of members.
The Plan of Reorganization shall be terminated if the Reorganization is not
completed within 24 months from the date upon which the members of the Bank
approve the Plan of Reorganization, and may not be extended by the Bank or the
OTS.
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THE OFFERING
GENERAL
Concurrently with the Reorganization, the Stock Company is offering shares
of Common Stock to persons other than the Mutual Company. The Stock Company is
offering between a minimum of 299,625 shares and an anticipated maximum of
403,375 shares of Common Stock in the Offering (subject to adjustment to up to
466,181 shares in the event the estimated pro forma market value of the Bank has
increased at the conclusion of the Offering), which will expire at 12:00 noon,
Eastern time, on December 10 unless extended by the Stock Company. A minimum
purchase of 25 shares of Common Stock (minimum investment of $250) is required.
The Offering will expire at 12:00 noon Eastern time, on December 10, unless
extended. Subscription funds may be held by the Bank for up to 45 days after the
last day of the Subscription Offering in order to consummate the Reorganization
and Offering and thus, unless waived by the Bank, all orders will be irrevocable
until February 17, 1999. In addition, the Reorganization and Offering may not be
consummated until the Bank receives approval from the OTS. Consummation of the
Reorganization and Offering will be delayed, and resolicitation will be
required, in the event the OTS does not issue a letter of approval within 45
days after the last day of the Subscription Offering, or in the event the OTS
requires a material change to the Subscription and Community Offerings prior to
the issuance of its approval. Thus, in the event the Reorganization and Offering
is not consummated by February 17, 1999, subscribers will have the right to
modify or rescind their subscriptions and to have their subscription funds
returned with interest.
The Bank may cancel the Offering at any time, and orders for Common Stock
which have been submitted prior thereto are subject to cancellation under such
circumstances.
The OTS is expected to approve the Plan of Reorganization which is also
subject to the approval of the Bank's Members and the satisfaction of certain
other conditions. However, there is no assurance that OTS approval will be
obtained and if obtained OTS approval does not constitute a recommendation of
the Plan of Reorganization by the OTS. If OTS approval is not obtained, all
funds received will be promptly returned with interest at the Bank's passbook
rate and all withdrawal authorizations will be cancelled.
CONDUCT OF THE OFFERING
Subject to the limitations of the Stock Issuance Plan, shares of Common
Stock are being offered in descending order of priority in the Subscription
Offering to: (i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Members. Any shares of Common Stock
that are not subscribed for in the Subscription Offering may be offered for sale
in a Community Offering commencing concurrently with the commencement of the
Subscription Offering and/or a Syndicated Community Offering.
The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates" or "acting in concert." All
such determinations are in the sole discretion of the Bank, and may be based on
whatever evidence the Bank chooses to use in making any such determination.
SUBSCRIPTION OFFERING
Non-transferable subscription rights to subscribe for the purchase of
Common Stock have been granted under the Stock Issuance Plan to the following
persons:
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PRIORITY (1): ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
shall be given the opportunity to purchase up to the lesser
of $150,000 or 5.0% of the shares of Common Stock offered
in the Offering; provided that the Stock Company may, in
its sole discretion and without further notice to or
solicitation of subscribers or other prospective
purchasers, increase such maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering or
decrease such maximum purchase limitation to 0.5% of the
maximum number of shares offered in the Offering, subject
to the overall purchase limitation set forth below. If
there are insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will be
allocated to Eligible Account Holders so as to permit each
such subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation
equal to the lesser of 100 shares or the number of shares
subscribed for. Thereafter, unallocated shares will be
allocated to remaining subscribing Eligible Account Holders
whose subscriptions remain unfilled in the same proportion
that each such subscriber's qualifying deposit bears to the
total amount of qualifying deposits of all subscribing
Eligible Account Holders, in each case on December 31,
1996, whose subscriptions remain unfilled. To ensure proper
allocation of stock, each Eligible Account Holder must list
on his subscription Order Form all accounts in which he had
an ownership interest as of the Eligibility Record Date.
PRIORITY (2): THE STOCK COMPANY'S TAX-QUALIFIED EMPLOYEE STOCK BENEFIT
PLANS. The tax- qualified employee stock benefit plans, if
any, shall be given the opportunity to purchase in the
aggregate up to 10% of the Common Stock issued in the
Offering. It is expected that the ESOP will purchase up to
8% of the Common Stock issued in the Offering. In the event
of an oversubscription in the Offering, the ESOP will have
a priority right to fill its subscription, in whole or in
part, or subscriptions for shares by the ESOP may be
satisfied, in whole or in part, out of authorized but
unissued shares of the Stock Company subject to the maximum
purchase limitations applicable to the ESOP and set forth
below, or may be satisfied, in whole or in part, through
open market purchases by the ESOP subsequent to the closing
of the Offering.
PRIORITY (3): SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares remaining after satisfaction of
subscriptions by Eligible Account Holders and the ESOP and
other tax-qualified employee stock benefit plans, if any,
each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to the lesser of $150,000 or
5.0% of the shares of Common Stock offered in the Offering;
provided that the Bank may, in its sole discretion and
without further notice to or solicitation of subscribers or
other prospective purchasers, increase such maximum
purchase limitation to 5% of the maximum number of shares
offered in the Offering or decrease such maximum purchase
limitation to 0.5% of the maximum number of shares offered
in the Offering subject to the overall purchase limitations
set forth below. In the event Supplemental Eligible Account
Holders subscribe for a number of shares which, when added
to the shares subscribed for by Eligible Account Holders
and the ESOP and other tax-qualified employee stock benefit
plans, if any, is in excess of the total number of shares
offered in the Offering, the shares of Common Stock will be
allocated among subscribing Supplemental Eligible Account
Holders first so as to permit each subscribing Supplemental
Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser
of 100
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shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated to each subscribing
Supplemental Eligible Account Holder whose subscription
remains unfilled in the same proportion that such
subscriber's qualifying deposits bear to the total amount
of qualifying deposits of all subscribing Supplemental
Eligible Account Holders, in each case on September 30,
1998, whose subscriptions remain unfilled. To ensure proper
allocation of stock each Supplemental Eligible Account
Holder must list on his subscription Order Form all
accounts and loans in which he had an ownership interest as
of the Supplemental Eligibility Record Date.
PRIORITY (4): OTHER MEMBERS. To the extent that there are sufficient
shares remaining after satisfaction of all subscriptions by
the Eligible Account Holders, the tax-qualified employee
stock benefit plans, and Supplemental Eligible Account
Holders, each Other Member shall have the opportunity to
purchase up to the lesser of $150,000 or 5.0% of the shares
of Common Stock offered in the Offering; provided that the
Bank may, in its sole discretion and without further notice
to or solicitation of, subscribers or other prospective
purchasers, increase such maximum purchase limitation to 5%
of the maximum number of shares offered in the Offering or
decrease such maximum purchase limitation to 0.5% of the
maximum number of shares offered in the Offering, subject
to the overall purchase limitations set forth below. In the
event Other Members subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account
Holders, the tax-qualified employee stock benefit plans and
Supplemental Eligible Account Holders, is in excess of the
total number of shares offered in the Offering, the
subscriptions of such Other Members will be allocated among
subscribing Other Members on a pro rata basis based on the
size of such Other Members' orders. To ensure proper
allocation of stock each Other Member must list on his
subscription Order Form all accounts in which he had an
ownership interest as of the Voting Record Date.
COMMUNITY OFFERING
Any shares that remain available for purchase after satisfaction of all
subscriptions in the Subscription Offering may be offered for sale in a
Community Offering shares to certain members of the general public with
preference given to residents of Revere, Massachusetts, subject to the right of
the Bank in its sole discretion to accept or reject any such orders, in whole or
in part, either at the time of receipt of the order, or as soon as practicable
following the completion of the Offering. Such persons, together with associates
of and persons acting in concert with such persons may purchase up to the lesser
of $150,000 or 5.0% of the shares of Common Stock offered in the Community
Offering.
In the event of an oversubscription for shares in the Community Offering,
shares may, at the sole discretion of the Bank, be allocated (to the extent
shares remain available) so that each such person may receive 1,000 shares, and
thereafter, on a pro rata basis to such persons based on the amount of their
respective subscriptions.
The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
Revere, Massachusetts (the "Community"), has an intent to remain within the
Community for a period of time, and manifests the genuineness of that intent by
establishing an ongoing physical presence within the Community together with an
indication that such presence within the Community is something other than
merely transitory in nature. To the extent the person
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is a corporation or other business entity, the principal place of business or
headquarters shall be in the Community. To the extent a person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, the circumstances of
the trustee shall be examined for purposes of this definition. The Bank may
utilize deposit or loan records or such other evidence provided to it to make a
determination as to whether a person is a resident. In all cases, however, such
a determination shall be in the sole discretion of the Bank.
The Bank, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the Common Stock in states in
which the offers and sales comply with such state securities laws. However, no
person will be offered or allowed to purchase any Common Stock under the Stock
Issuance Plan if he resides in a foreign country or in a state of the United
States with respect to which any of the following apply: (i) a small number of
persons otherwise eligible to purchase shares under the Stock Issuance Plan
reside in such state or foreign country; (ii) the offer or sale of shares of
Common Stock to such persons would require the Bank or its employees to
register, under the securities laws of such state or foreign country, as a
broker or dealer or to register or otherwise qualify its securities for sale in
such state or foreign country; or (iii) such registration or qualification would
be impracticable for reasons of cost or otherwise.
The Board of Directors has the right to reject any order submitted by a
person whose representations the Board of Directors believes to be false or who
it otherwise believes, either alone or acting in concert with others, is
violating, evading, circumventing, or intends to violate, evade or circumvent
the terms and conditions of the Stock Issuance Plan.
SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or
Community Offering may be offered for sale to the general public by a selling
group (the "Selling Group") of broker-dealers ("Selected Dealers") to be managed
by Trident in a Syndicated Community Offering, subject to terms, conditions and
procedures as may be determined by the Bank in a manner that is intended to
achieve the widest distribution of the Common Stock subject to the rights of the
Stock Company to accept or reject in whole or in part all subscriptions in the
Syndicated Community Offering. The Bank may, in its sole discretion and without
further notice to or solicitation of subscribers or other purchasers, increase
such maximum purchase limitation to 5% of the maximum number of shares offered
in the Offering or decrease such maximum purchase limitation to 1% of the
maximum number of shares offered in the Offering subject to the overall purchase
limitations set forth below. However, the shares purchased in the Subscription
or Community Offering by any person together with an associate or group of
persons acting in concert shall be counted toward meeting the maximum purchase
limitations set forth below. Provided that the Subscription Offering has
commenced, the Bank may commence the Syndicated Community Offering at any time.
MARKETING AND SELLING COMMISSIONS
Directors and executive officers of the Bank, subject to any state
securities law limitations, may contact prospective investors personally, by
telephone and/or by individual mailings. Other employees of the Bank may
participate in the Offering in ministerial and clerical capacities. Directors
and executive officers of the Bank will not receive any additional compensation
for their efforts in connection with the Offering but may be reimbursed for
reasonable expenses, if any, incurred by them in connection with selling shares.
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The directors, officers and employees of the Bank who will be involved in
the Offering are expected to be exempt from the requirement to register with the
Securities and Exchange Commission ("SEC") as broker-dealers within the meaning
of Rule 3a4-1 under the Exchange Act. Such persons will qualify under the safe
harbor provisions of that rule on the basis of paragraphs (a)(4)(ii) and/or
(iii), i.e., management of the Bank expects that such persons either (i) will
perform substantial duties for the Bank in its business, will not otherwise be
broker-dealers and are not expected to participate in another offering in the
next 12 months or (ii) will limit their activities to preparing written
communications, responding to customer inquiries and/or performing ministerial
and clerical functions.
A stock information center will be established at the Bank's executive
office in Revere, Massachusetts (the "Stock Information Center") to assist in
answering questions concerning the Offering. Employees at the Bank's office will
take orders and forward them to the Stock Information Center, inform prospective
purchasers to direct their questions to the Stock Information Center and will
provide such persons with the telephone number of the Center. Completed stock
orders will be accepted by the Stock Information Center located at the Bank's
executive office.
To assist in the marketing of the Common Stock, the Bank has retained
Trident, which is a registered broker-dealer with the National Association of
Securities Dealers, Inc. (the "NASD"). For Trident's services, the Bank will pay
to it the following compensation: (i) a management fee of 0.5% of the total
dollar amount of stock sold in the offering in connection with specified
advisory and administrative services; and (ii) a commission equal to 2.0% of the
dollar amount of Common Stock sold in the Offering without the assistance of
selected dealers, provided that no such fee shall be payable in connection with
the sale of Common Stock to officers and directors (including members of their
immediate families), and employee benefit plans of the Bank. The Bank also has
agreed to reimburse Trident for its reasonable out-of-pocket expenses of up to
$18,000 (excluding reimbursable legal fees and expenses). The Bank has also
agreed to pay all other expenses of the offering including but not limited to
its attorneys' fees, National Association of Securities Dealers ("NASD") filing
fees, and fees of either Trident's attorneys or other attorneys relating to any
required state securities laws filings, transfer agent charges, telephone
charges, air freight, rental equipment, supplies, fees relating to auditing and
accounting and costs of printing all documents necessary in connection with
therewith.
The Bank has agreed to indemnify Trident, and its directors, officers,
employees and controlling persons, against liabilities and expenses arising out
of or based on any untrue or alleged untrue statement of a material fact or the
omission or alleged omission of a material fact required to be stated or
necessary to make not misleading any statement contained herein or in any other
document or communication utilized by the Bank in connection with the Offering,
and Trident similarly has agreed to indemnify the Bank and its directors,
officers, employees and controlling persons, with respect to material
misstatements or omissions relating to material specifically provided by Trident
for inclusion in the Prospectus.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Pursuant to OTS regulations, the aggregate price at which shares of Common
Stock are sold in the Offering shall be based on a pro forma valuation of the
aggregate market value of the total amount of Common Stock to be outstanding
upon completion thereof, as determined by an independent valuation. The Bank has
retained RP Financial to make such a valuation. RP Financial is a financial
consulting firm experienced in the appraisal of savings institutions. RP
Financial will receive a fee of $20,000 for its
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appraisal, including subsequent updates, plus its reasonable out-of-pocket
expenses incurred in connection with the appraisal, not to exceed $5,000 unless
approved by the Bank. In addition, RP Financial will receive $7,500 for services
in connection with the preparation of the Bank's business plan. The Bank has
agreed to indemnify RP Financial under certain circumstances against liabilities
and expenses arising out of or based on any misstatement or untrue statement of
a material fact contained in the information supplied by the Bank to RP
Financial, except where RP Financial is determined to have been negligent or
engaged in willful misconduct in the preparation of its appraisal.
The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Financial Statements of
the Bank. RP Financial also considered the following factors, among others: the
present and projected operating results and financial condition of the Bank and
the economic and demographic conditions in the Bank's existing market areas;
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 and savings and loan holding companies;
the impact of the Offering on the Bank's equity and earnings potential; the
Bank's proposed dividend policy; the trading market for securities of comparable
institutions and general conditions in the markets for such securities; the
effects of the minority ownership represented by the Common Stock to be issued
in the Offering; the liquidity of the Common Stock after the Offering; as well
as the marketability of the Common Stock. In preparing the Independent
Valuation, RP Financial relied upon and assumed the accuracy and completeness of
financial and statistical information provided by the Bank. RP Financial did not
independently verify the financial statements and other information provided by
the Bank, or independently value their assets and liabilities.
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing such shares. RP
Financial did not independently verify the Financial Statements and other
information provided by the Bank, nor did RP Financial value independently the
assets or liabilities of the Bank. The valuation 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 valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing such
shares in the Offering will thereafter be able to sell such shares at prices at
or above the Purchase Price or in the range of the foregoing valuation of the
pro forma market value thereof.
On the basis of the foregoing, RP Financial advised the Bank that, in its
opinion, the estimated aggregate pro forma market value of the Common Stock to
be outstanding upon completion of the Reorganization and the Offering was $7.50
million at November 4, 1998. Based on such Independent Valuation, and taking
into account that the Bank must be a majority-owned subsidiary of the Mutual
Company as long as the Mutual Company is in mutual form, the Stock Company is
offering a minimum of 299,625 shares and an anticipated maximum of 405,375
shares of Common Stock in the Offering at $10.00 per share. Based on the
Independent Valuation, the 299,625 and 405,375 shares to be sold in the Offering
represent 47.0% of the total amount of Common Stock to be outstanding upon
completion of the Offering. The Bank is prohibited from issuing shares of Common
Stock which would exceed a 49.9% Minority Ownership Interest.
In the event of a change in the Independent Valuation immediately prior to
consummation of the Offering, the Bank may adjust the Minority Ownership
Interest by increasing or decreasing the total number of shares of Common Stock
to be issued to the Mutual Company in the Reorganization and/or the number of
shares of Common Stock to be issued in the Offering. Increases or decreases in
the number of shares of Common Stock to be issued in the Reorganization and the
Offering as a result of a change in the Independent
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Valuation would be subject to applicable limitations on purchases of Common
Stock and, unless otherwise permitted by the Bank or required by the OTS, no
resolicitation of persons who ordered Common Stock in the Offering will be made
and such persons will not be permitted to modify or cancel their orders unless
the Independent Valuation changes to less than $6.4 million or greater than $9.9
million. If the Independent Valuation is increased to reflect changes in the
estimated pro forma value of the Bank and the number of shares of Common Stock
to be issued in the Offering is not adjusted, the number of shares issued to the
Holding Company will increase to reflect the final Independent Valuation and the
Minority Ownership Interest will decrease. Conversely, a decrease in the
Independent Valuation under such circumstances will result in a decrease in the
number of shares issued to the Holding Company and an increase in the Minority
Ownership Interest.
In the event of an increase in the Independent Valuation up to $9.2 million
immediately prior to consummation of the Offering, the Bank may, in its
discretion, choose to increase the number of shares of Common Stock issued in
the Offering to up to 466,181 shares without offering persons who subscribed for
shares an opportunity to increase, decrease or rescind their orders. If the
Independent Valuation increases to $9.2 million, the total number of shares of
Common Stock issued and outstanding, including shares issued to the Mutual
Company, upon consummation of the Offering would be 991,874. Under such
circumstances, if the Bank chose to increase the number of shares of Common
Stock offered in the Offering to 466,181 shares, the 466,181 shares would
represent a 47.0% Minority Ownership Interest. The final Minority Ownership
Interest percentage will be determined as follows: (i) the numerator will be the
product of (x) the number of shares of Common Stock sold in the Offering and (y)
the Purchase Price ($10.00 per share); and (ii) the denominator shall be the
final Independent Valuation of the estimated pro forma market value of the Bank
immediately upon conclusion of the Offering as determined by RP Financial.
No sale of Common Stock may be consummated unless, prior to such
consummation, the Independent Appraiser confirms to the Bank and to the OTS
that, to the best knowledge of the Independent Appraiser, nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
the Independent Appraiser to conclude that the aggregate price of the Common
Stock sold in the Offering is incompatible with its estimate of the aggregate
consolidated pro forma market value of the total amount of Common Stock to be
outstanding upon completion of the Offering. If such confirmation is not
received, the Bank may extend, modify or cancel the Offering, or take such other
action as the OTS may permit.
Copies of the Independent Valuation are on file and available for
inspection at the executive offices of the Bank, located at 310 Broadway,
Revere, Massachusetts 02151, at the Northeast Regional Office of the OTS,
located at 10 Exhange Place, 18th Floor, Jersey City, N.J. 07302 and at the main
office of the OTS, located at 1700 G Street, N.W., Washington, D.C. 20552. The
Independent Valuation is not intended, and must not be construed as, a
recommendation of any kind as to the advisability of purchasing shares of Common
Stock.
LIMITATIONS ON PURCHASES OF COMMON STOCK
Purchases of Common Stock in the Offering will be subject to the following
purchase limitations:
a) The aggregate amount of outstanding Common Stock of the Stock Company
owned or controlled by persons other than the Mutual Company at the
close of the Offering shall be less than 50% of the Stock Company's
total outstanding Common Stock.
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b) No person, associate thereof, or group of persons acting in concert, may
purchase more than the lesser of $150,000 or 5.0% of the shares of
Common Stock offered in the Offering to persons other than the Mutual
Company, except that: (i) the Stock Company may, in its sole discretion
and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to 5%
of the number of shares offered in the Offering; (ii) tax-qualified
employee stock benefit plans may purchase up to 8% of the shares offered
in the Offering; and (iii) for purposes of this paragraph (b), shares to
be held by the tax-qualified employee stock benefit plan and
attributable to a person shall not be aggregated with other shares
purchased directly by or otherwise attributable to such person.
c) The aggregate amount of Common Stock acquired in the Offering by any
non-tax-qualified employee stock benefit plan or executive officer or
director of the Stock Company and his or her associates, exclusive of
any Common Stock acquired by such non-tax-qualified employee stock
benefit plan or executive officer or director and his or her associates
in the secondary market, shall not exceed 34% of the outstanding shares
of Common Stock held by persons other than the Mutual Company at the
close of the Offering. In calculating the number of shares held by an
executive officer or director or associate under the provisions of this
paragraph, shares of Common Stock held by any tax-qualified employee
stock benefit plan of the Stock Bank that are attributable to such
person shall not be counted.
(d) The Board of Directors has the right to reject any order submitted by a
person whose representations the Board of Directors believes to be false
or who it otherwise believes, either alone or acting in concert with
others, is violating, evading or circumventing, or intends to violate,
evade or circumvent the terms and conditions of the Stock Issuance Plan.
In the event of an increase in the total number of shares offered in the
Offering due to an increase in Independent Valuation of up to 15% (the "Adjusted
Maximum"), the additional shares will be allocated in the following order or
priority in accordance with the Plan: (i) to fill the ESOP's subscription of 8%
of the Adjusted Maximum number of shares; (ii) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfulfilled subscriptions
of Eligible Account Holders exclusive of the Adjusted Maximum; (iii) in the
event that there is an oversubscription by Supplemental Eligible Account
Holders, to fill unfulfilled subscriptions of Supplemental Eligible Account
Holders exclusive of the Adjusted Maximum; (iv) in the event that there is an
oversubscription by Other Members, to fill unfulfilled subscriptions of Other
Members exclusive of the Adjusted Maximum; and (v) to fill unfulfilled
subscriptions in the Community Offering to the extent possible exclusive of the
Adjusted Maximum.
For purposes of the foregoing limitations, the term "person" means any
corporation, partnership, trust, unincorporated association or any other entity
or a natural person and the term "associate," when used to indicate a
relationship with any person, means (i) a corporation or organization (other
than the Bank or the Holding Company) of which such person is a director,
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; (iii) any relative or
spouse of such person, or any relative of such spouse, who has the same home as
such person or who is a director or officer of the Bank or a director or officer
of the Mutual Company; and (iv) any person acting in concert with any of the
persons or entities specified in clauses (i) through (iii).
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By purchasing shares in the Offering, each person will be deemed to confirm
that such purchase does not conflict with the purchase limitations set forth
above. Under the Stock Issuance Plan, the Stock Company shall have the right to
take any action as it may, in its sole discretion, deem necessary, appropriate
or advisable in order to monitor and enforce the terms, conditions, limitations
and restrictions contained in the Stock Issuance Plan and the terms, conditions
and representations contained in the accompanying Order Form, including, but not
limited to, the absolute right (subject only to any necessary regulatory
approvals or concurrence) to delay, terminate or refuse to consummate any sale
of Common Stock which it believes might violate, or is designed to, or is any
part of a plan to, violate, evade or circumvent such terms, conditions,
limitations, restrictions and representations. Any such action shall be final,
conclusive and binding on all persons and the Bank shall be free from any
liability to any person on account of any such action.
ORDERS FOR COMMON STOCK
In order to purchase shares of Common Stock in the Offering, an Order Form
with the required payment for each share subscribed must be received by the Bank
by 12:00 noon, Eastern time, on December 10, 1998 Order Forms which are not
received by the Bank by such time or are executed defectively or are received
without full payment will not be accepted except as discussed below. An executed
Order Form once received by the Bank may not be modified, amended or rescinded
without the consent of the Bank. Each person ordering shares is required to
represent that he or she is purchasing such shares for his or her own account
and that they have not borrowed funds from the Bank to purchase the shares. The
Bank has the right to extend the Offering, as discussed under "-- Expiration
Date" below, or to waive or permit correction of incomplete or improperly
executed forms, but does not represent that it will do so.
Payment for Common Stock will be permitted to be made in any of the
following manners: (i) by check, bank draft or money order; (ii) or such
purchaser may pay for the shares subscribed for by authorizing the Bank to make
a withdrawal from the purchaser's passbook, money market or certificate account
at the Bank in an amount equal to the purchase price of such shares. Such
authorized withdrawal, whether from a savings, passbook or certificate account,
shall be without penalty as to premature withdrawal; (iii) if the authorized
withdrawal is from a certificate account ,and the remaining balance does not
meet the applicable minimum balance requirements, the certificate may, at the
Bank's discretion, be canceled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook rate or be returned to
the depositor. Funds for which a withdrawal is authorized will remain in the
purchaser's account but may not be used by the purchaser until the Common Stock
has been sold or the 45-day period (or such longer period as may be approved by
the applicable regulatory authorities) following the Stock Offering has expired,
whichever occurs first. Thereafter, the withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the purchase price per share. Interest will continue to be earned on
any amounts authorized for withdrawal until such withdrawal is given effect. If
for any reason the Stock offering is not consummated, all payments made by
subscribers in the Stock Offering will be refunded to them with interest. In
case of amounts authorized for withdrawal from deposit accounts, refunds will be
made by canceling the authorization for withdrawal. Wire transfers as
payment for common stock will not be permitted or accepted as proper payment.
No Order Form is binding until accepted by the Stock Company following
expiration of the Offering. Pursuant to the terms of the Stock Issuance Plan,
the Bank may, in its sole discretion, reject any order in whole or in part
without liability to the prospective purchaser.
EXCEPT AS OTHERWISE SET FORTH HEREIN, AN EXECUTED ORDER FORM, ONCE RECEIVED BY
THE BANK, MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE
BANK.
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EXPIRATION DATE
The Subscription Offering will terminate at 12:00 noon, Eastern time, on
December 10, 1998 unless extended by the Bank to January 3, 1999. It is
anticipated that in the event of a Syndicated Community Offering, the Community
Offering would be terminated. The Community Offering or any Syndicated Community
Offering must be completed within 45 days after the close of the Subscription
Offering, or no later than February 17, 1999 (the "Expiration Date"), unless
extended by the Bank with the approval of the OTS. If the Offering is not
completed by February 17, 1999 all funds received will be returned promptly with
interest at the Bank's rate on passbook savings accounts and all withdrawal
authorizations will be cancelled or, if OTS approval of an extension of such
period has been obtained, all persons who ordered Common Stock in the Offering
may be given the right to increase, decrease or rescind their orders.
RESTRICTIONS ON AGREEMENTS OR UNDERSTANDING REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING
Prior to the completion of the Reorganization and Offering, no member of
the Bank may transfer or enter into an agreement or understanding to transfer
the legal or beneficial ownership of the shares of Common Stock to be purchased
by such person in the Offering. Each depositor who submits an Order Form will be
required to certify that the purchase of Common Stock by such person is solely
for the purchaser's own account and there is no agreement or understanding
regarding the sale or transfer of such shares. The Bank and the Stock Company
intend to pursue any and all legal and equitable remedies in the event it
becomes aware of any such agreement or understanding, and will not honor orders
reasonably believed by the Bank to involve such an agreement or understanding.
CONDITIONS TO THE OFFERING
Consummation of the Offering is subject to: (i) consummation of the
Reorganization, which requires, without limitation, the receipt of various
approvals from the OTS, the approval of the Bank's members and the receipt of
rulings and/or opinions of the Service or counsel as to the tax consequences of
the Reorganization, (ii) the receipt of all required federal approvals for the
issuance of Common Stock in the Offering, including without limitation the
approval of the OTS, and (iii) the sale of a minimum of 299,625 shares of Common
Stock. In the event that conditions (i) and (ii) are not satisfied prior to
completion of the Offering, all funds received will be promptly returned with
interest at the Bank's passbook rate and all withdrawal authorizations will be
cancelled. In the event that condition (iii) is not met, i.e., if the minimum
amount of stock is not sold during the Subscription Offering, the Bank may
conduct a Community Offering and/or a Syndicated Community Offering.
Subscription funds may be held by the Bank for up to 45 days after the last day
of the Subscription Offering in order to consummate the Reorganization and
Offering. Thereafter, if the minimum is still not met, and no extension has been
granted to complete the Offering, then all funds received would be refunded with
interest and all withdrawal authorizations will be cancelled.
STOCK CERTIFICATES
Certificates representing shares issued in the Offering will be mailed to
the persons entitled thereto as soon as possible following consummation of the
Offering. Any certificates returned as undelivered will be held by the Stock
Company until claimed by the persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for the Common
Stock are available and delivered to the purchasers after the Offering,
purchasers may not be able to sell the shares of Common Stock for which they
subscribe.
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<PAGE>
REQUIREMENTS FOLLOWING THE OFFERING FOR REGISTRATION, MARKET MAKING, ETC.
We anticipate that there will be a limited market for the Common Stock sold
in the Offering, and purchasers must be prepared to hold the Common Stock for an
indefinite period of time. The Stock Company shall register its Common Stock
with the SEC pursuant to the Exchange Act, and shall undertake not to deregister
such Common Stock for a period of three years thereafter.
Pursuant to OTS regulations, if the Bank has more than 100 holders of the
Common Stock at the close of the Offering, the Bank shall use its best efforts
to (i) encourage and assist a market maker to establish and maintain a market
for the Common Stock and (ii) list the Common Stock on a national or regional
securities exchange or to have quotations for that class of stock disseminated
on the Nasdaq quotation system. No assurance can be given, however, that the
Bank's stock will be quoted on the Nasdaq stock market or that an active and
liquid market for the Common Stock will develop. We anticipate that the Bank's
Common Stock will be quoted and traded on the OTC Bulletin Board. Trident has
advised the Bank that, upon completion of the Offering, it intends to make a
market in the Common Stock. See "Market for the Common Stock."
RESTRICTIONS ON TRANSACTIONS IN COMMON STOCK BY MANAGEMENT
Under OTS regulations, for a period of three years following the Offering,
directors and officers of the Stock Company and their associates may not
purchase, without the prior written approval of the OTS, any Common Stock except
from a broker-dealer registered with the SEC. This prohibition shall not apply,
however, to (i) a negotiated transaction arrived at by direct negotiation
between buyer and seller and involving more than 1.0% of the outstanding Common
Stock and (ii) purchases of Common Stock made by and held by any tax-qualified
or non-tax-qualified employee stock benefit plan which may be attributable to
directors and officers of the Bank and their associates.
Common Stock purchased by executive officers, directors and their
associates in the Offering may not be resold for a period of at least one year
following the date of purchase, except in the case of death of the executive
officer or director or associate. Therefore, the shares of Common Stock issued
by the Bank to such persons shall bear a legend restricting sales for one year
following their purchase.
The above-described restrictions on transactions in the Common Stock shall
be in addition to any restrictions that may be imposed by federal and state
securities laws, such as the insider reporting and trading rules promulgated
pursuant to the Exchange Act.
RESTRICTIONS ON FINANCING
The Stock Company will not offer or sell any of the Common Stock proposed
to be issued in the Offering to any person whose purchase would be financed by
funds loaned, directly or indirectly, to the person by the Bank or any of its
affiliates.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE BANK
GENERAL
The Plan of Reorganization provides for the reorganization of the Bank from
a federally chartered mutual savings bank into the Mutual Holding Company form
pursuant to the laws of the United States of
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<PAGE>
America, and the regulations of the OTS and, in connection therewith, provides
for a new Federal Stock Charter ("Charter") and Bylaws to be adopted by members
of the Bank.
The following discussion is a general summary of the OTS regulations and
other regulatory restrictions on the acquisition of the Common Stock. In
addition, the following discussion generally summarizes certain provisions of
the Charter and Bylaws of the Bank and the Stock Company and certain regulatory
provisions that may be deemed to have a potential "anti-takeover" effect.
FEDERAL LAW
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings institution unless the OTS has been given 60 days prior
written notice. The HOLA provides that no company may acquire "control" of a
savings institution without the prior approval of the OTS. Any company that
acquires such control becomes a federal savings bank or a savings and loan
holding company subject to registration, examination and regulation by the OTS.
Pursuant to the federal regulations, control of a savings institution is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock, or
of more than 25% of any class of stock, of a savings institution where certain
enumerated "control factors" are also present in the acquisition. The OTS may
prohibit an acquisition of control if (i) it would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the institution, or (iii) the
competence, experience or integrity of the acquiring person indicates that it
would not be in the interest of the depositors or of the public to permit the
acquisition of control by such person. The foregoing restrictions do not apply
to the acquisition of a savings institution's capital stock by one or more
tax-qualified employee stock benefit plans, 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 savings institution.
OTS regulations governing standard conversions generally prohibit any
person from acquiring or making an offer to acquire, directly or indirectly,
beneficial ownership of more than 10% of the stock of any converted savings
institution without OTS approval. Although the Bank believes that these
restrictions in the standard conversion regulations of the OTS will be
applicable to the Bank, to the Bank's knowledge the OTS has not issued any
formal precedent to this effect.
MUTUAL COMPANY STRUCTURE
The Mutual Company structure could restrict the ability of stockholders of
the Bank to effect a change of control of management because the Mutual Company,
as long as it remains in the mutual form of organization, will control a
majority of the voting stock of the Stock Company. The Mutual Company will be
controlled by its Board of Directors, which will initially consist of the same
persons who are members of the Board of Directors of the Bank and the Stock
Company. The Mutual Company will be able to elect all members of the Board of
Directors of the Stock Company, and as a general matter, will be able to control
the outcome of all matters presented to the stockholders of the Stock Company
for resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Company, acting through its Board of Directors, will be
able to prevent any challenge to the ownership or control of the Stock Company
by Minority Stockholders. Accordingly, a change in control of the Stock Company
and the Bank cannot occur unless the Mutual Company first converts to the stock
form of organization. Although OTS regulations and
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<PAGE>
policy and the Plan of Reorganization permit the Mutual Company to convert from
the mutual to the capital stock form of organization, the Board of Directors has
no current plan to do so.
THE STOCK COMPANY'S CHARTER AND BYLAWS
General. The following discussion is a general summary of the OTS
regulations and other regulatory restrictions on the acquisition of the common
stock and certain provisions of the Stock Company Charter and Bylaws relating to
stock ownership that might have a potential "anti-takeover" effect. The
following description of certain provisions of the Charter and Bylaws of the
Stock Company is necessarily general, and reference should be made in each case
to the Charter and Bylaws of the Bank, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
Classified Board of Directors. The Stock Company's Charter provides that
the Board of Directors of the Stock Company is required to be divided into three
classes as nearly equal in number as possible. The members of each class shall
be elected for a term of three years and until their successors are elected and
qualified. One class shall be elected by ballot annually. A classified Board of
Directors promotes continuity and stability of management of the Stock Company
but makes it more difficult for stockholders to change a majority of the
directors because it generally takes at least two annual elections of directors
for this to occur.
Limitation on Voting Rights. Section 8 of the Charter of the Bank provides
that, for a period of five years from the effective date of the Reorganization,
no person, except the Stock Company in forming a Holding Company or a
tax-qualified employee stock benefit program, shall directly or indirectly
acquire the beneficial ownership of more than 10% of any class of an equity
security of the Stock Company other than shares held by the Mutual Company. In
the event shares are acquired in violation of Section 8, 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.
Prohibition of Cumulative Voting. The absence of cumulative voting rights
for the election of directors for a period of five years from the effective date
of the Reorganization effectively means that the holders of a majority of the
shares voted at a meeting of stockholders may, if they so choose, elect all
directors elected at the meeting, thus precluding a Minority Stockholder from
obtaining representation on the Board of Directors unless the Minority
Stockholder is able to obtain the support of a majority.
Authorized but Unissued Shares of Capital Stock. Following the Offering,
the Stock Company will have authorized but unissued shares of preferred stock
and common stock. See "Description of Capital Stock." Although such shares could
be used by the Board of Directors of the Stock Company to render more difficult
or to discourage an attempt to obtain control of the Stock Company by means of a
merger, tender offer, proxy contest or otherwise, it is anticipated that such
uses will be unlikely given the Mutual Company must own a majority of the Common
Stock.
Ownership of Common Stock by Management. Directors and officers are
expected to purchase up to 90,700 shares of Common Stock in the Offering and are
expected to control the voting of 22.3% of the shares of Common Stock sold in
the Offering (at the maximum of the Offering Range), and may control the voting
of approximately 8% of the shares of common stock issued in the Offering through
the ESOP established in connection with the Offering (assuming that an
allocation has not been made under the ESOP). Under the terms of the ESOP, the
unallocated shares will be voted by the independent trustees for the ESOP
generally in the same proportion as the instructions received by the trustee
from participants voting their allocated shares. In addition, current officers
and directors of the Stock Company will also be officers and
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<PAGE>
directors of the Mutual Company which, after the Reorganization and Offering,
will own 47.0% of the total number of shares outstanding at the minimum and
maximum of the Offering Range.
Certain provisions of the Stock Company's Stock Option Plans and other
benefit plans provide for benefits and cash payments in the event of a change in
control of the Stock Company. The plans provide for accelerated vesting in the
event of a change in control. These provisions may have the effect of increasing
the cost of, and thereby discouraging, a future attempt to take over the Stock
Company, and thus generally may serve to perpetuate current management. The
Stock Option Plans and Restricted Stock Programs will be subject to approval by
the Minority Stockholders.
Indemnification. The Stock Company's Bylaws provide that it shall indemnify
every person who acts on behalf of the Stock Company, or serves as a director or
officer of the Stock Company, provided that such person acted in good faith and
in a manner he or she reasonably believed to be in, and not opposed to, the best
interest of the Stock Company, and with respect to any criminal proceeding such
person had no reason to believe his or her conduct was unlawful. The Bylaws also
provide that such indemnification shall be to the fullest extent permitted under
federal law.
127
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the Reorganization, the Stock Company will be
authorized to issue 5,000,000 shares of Common Stock, par value $0.01 per share,
and 1,000,000 shares of serial preferred stock, no par value per share. The
consideration for the issuance of the shares shall be cash, tangible or
intangible property, labor or services actually performed for the Stock Company,
or any combination of the foregoing, and shall be paid in full before their
issuance and shall not be less than the par value. Upon payment of the purchase
price for the Common Stock, all such shares will be fully-paid, duly issued and
non-assessable. Subject to the approval required by any governing law, rule or
regulation, the Board of Directors is authorized to approve the issuance of
shares up to the amount authorized in the Charter of the Stock Company from time
to time without the approval of the Stock Company's stockholders. Under OTS
regulations, a majority of the issued and outstanding voting stock of the Stock
Company must be held at all times by the Mutual Company. THE COMMON STOCK OF THE
STOCK COMPANY WILL REPRESENT NON-WITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF
AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY.
COMMON STOCK
Voting Rights. The holders of Common Stock shall possess exclusive voting
rights in the Stock Company. Each holder of shares of Common Stock shall be
entitled to one vote for each share held by such holder, except that for a
period of five years from the completion of the Reorganization, the Charter
eliminates voting rights with respect to those shares that are beneficially
owned by any person, other than the Mutual Company, in excess of 10% of the
Common Stock then outstanding. Also, for a period of five years from the
completion of the Reorganization, stockholders will not be permitted to cumulate
their votes in the election of directors. See "Certain Restrictions on
Acquisition of the Bank--The Bank's Charter and Bylaws--Limitation on Voting
Rights."
Dividends. 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 payment of dividends, the full
amount of dividends and of sinking fund, retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in preference
to the Common Stock, then dividends may be paid on the Common Stock and on any
class or series of stock entitled to participate therewith as to dividends out
of any assets legally available for the payment of dividends.
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Stock Company, the holders of the Common Stock (and the holders of any class
or series of stock entitled to participate with the Common Stock in the
distribution of assets) shall be entitled to receive, in cash or in kind, the
assets of the Stock Company available for distribution remaining after: (i)
payment or provision for payment of the Stock Company's debts and liabilities;
(ii) distributions or provisions for distributions in settlement of any
liquidation account; and (iii) distributions or provisions for distributions to
holders of any class or series of stock having preference over the Common Stock
in the liquidation, dissolution, or winding up of the Stock Company. 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.
Preemptive Rights; Redemption. Holders of Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock that
may be issued. Therefore, the Board of Directors may sell shares of capital
stock of the Bank without first offering such shares to existing stockholders of
the
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<PAGE>
Stock Company. The Common Stock is not subject to call for redemption, and the
outstanding shares of Common Stock when issued and upon receipt by the Stock
Company of the full purchase price therefor will be fully paid and
non-assessable.
SERIAL PREFERRED STOCK
None of the 1,000,000 authorized shares of serial preferred stock of the
Stock Company will be issued in the Offering. Upon consummation of the
Reorganization, the Board of Directors of the Stock Company will be authorized,
without stockholder approval, to issue preferred stock and to fix and state
voting powers, designations, preferences or other special rights of such shares.
The preferred stock may be issued in distinctly designated series and may be
convertible into Common Stock. If and when issued, the serial preferred stock
may rank senior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full, limited or no voting rights.
Accordingly, the issuance of preferred stock could adversely affect the voting
and other rights of holders of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of the Bank and its subsidiary, as of
September 30, 1997 and 1996, and for each of the years in the three-year period
ended September 30, 1997, have been included herein in reliance upon the report,
appearing elsewhere herein, of Shatswell, MacLeod & Company, P.C., independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and Stock Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Reorganization and its
letter with respect to subscription rights.
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<PAGE>
LEGAL AND TAX MATTERS
Thacher Proffitt & Wood, Washington, D.C., special counsel to the Bank and
the Stock Company, will pass on the legality of the Common Stock and the federal
income tax consequences of the Reorganization. Massachusetts state tax
consequences of the Reorganization will be passed upon for the Bank by
Shatswell, MacLeod & Company, P.C. Certain legal matters will be passed upon for
Trident Securities, Inc., by Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C.
ADDITIONAL INFORMATION
The Stock Company has filed with the SEC a registration statement under the
Securities Act, with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, NW, Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The registration statement, including all exhibits
thereto, is available for inspection at this website. The statements contained
herein as to the contents of any contract or other document filed as an exhibit
to the registration statement are, of necessity, brief descriptions thereof and
are not necessary complete but do contain all material information regarding
such documents. Each such statement is qualified by reference to such contract
or document.
In connection with the Offering, the Stock Company will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act; and , upon such
registration, the Stock Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Stock Company has undertaken that it
will not terminate such registration for a period of at least three years
following the Reorganization.
The Bank has filed with the OTS a Notice of Mutual Company Reorganization
on Form MHC-1 and an Application for Approval of a Minority Stock Issuance on
Form MHC-2 (the "Applications"). Pursuant to the rules and regulations of the
OTS, this Prospectus omits certain information contained in the Applications.
The Applications may be examined at the principal office of the OTS, 1700 G
Street, NW, Washington, D.C. 20552 and at the office of the Regional Director of
the Northeast Regional Office of the OTS located at 10 Exchange Place, 18th
Floor, Jersey City, NJ 07302. The Plan of Reorganization, Stock Issuance Plan,
Charter and Bylaws of the Bank, the Stock Company and the Mutual Company may be
obtained without charge by contacting the Bank's Corporate Secretary at (781)
284-7777. Copies of the Independent Valuation are available for inspection at
the Bank's main office, 310 Broadway, Revere, Massachusetts 02151.
A copy of the certificate of the incorporation and bylaws of the Stock
Company are available without charge from the Bank.
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<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheet as of June 30, 1998 (unaudited) and the
Consolidated Balance Sheets as of September 30, 1997 and 1996 F-3
Consolidated Statements of Income for the nine months ended June 30, 1998 and
1997 (unaudited), the Consolidated Income Statement for the year ended
September 30, 1997, and the restated Consolidated Income Statements for the
years ended September 30, 1996 and 1995 40
Consolidated Statement of Changes in Equity for the nine months ended June 30,
1998 (unaudited), the Consolidated Statement of Changes in Equity for the year
ended September 30, 1997, and the restated Consolidated Statements of Changes
in Equity for the years ended September 30, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the nine months ended June 30, 1998
and 1997 (unaudited), the Consolidated Statement of Cash Flows for the year
ended September 30, 1997, and the restated Consolidated Statements of Cash
Flows for the years ended September 30, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
- ------------------
The financial statements for RFS Bancorp, Inc. have been omitted because RFS
Bancorp, Inc. has not yet issued any stock, has no liabilities, and has not
conducted any business other than of an organizational nature.
All schedules have been omitted either because they are not required, not
applicable, or are included in the Notes to Consolidated Financial Statements.
F-1
<PAGE>
[LETTERHEAD]
The Board of Directors
Revere Federal Savings and Loan Association
Revere, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Revere Federal
Savings and Loan Association and Subsidiary as of September 30, 1997 and 1996
and the related consolidated statements of income, changes in equity and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Revere
Federal Savings and Loan Association and Subsidiary as of September 30, 1997 and
1996 and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended September 30, 1997, in
conformity with generally accepted accounting principles.
The consolidated statements of income, changes in equity and cash flows for the
years ended September 30, 1996 and 1995 are restatements of previously issued
consolidated financial statements. The restatements were necessary to correct an
error in the consolidated financial statements originally issued. The correction
is described in the consolidated statements of changes in equity and Note 12.
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
-------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
October 17, 1997, except for Note 14,
as to which the date is January 21, 1998
F-2
<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS (unaudited)
Cash and due from banks $ 789,612 $ 558,622 $ 344,032
Interest bearing demand deposits with other banks 798,968 27,641 61,301
Federal funds sold 2,909,032 1,245,359 384,756
------------- ------------- --------------
Cash and cash equivalents 4,497,612 1,831,622 790,089
Investments in available-for-sale securities (at fair value) 849,564 636,380 440,708
Investments in held-to-maturity securities (fair values of
$33,657,615 as of June 30, 1998 (unaudited), $40,507,431
as of September 30, 1997 and $40,356,382 as of
September 30, 1996) 33,296,332 40,153,278 40,679,723
Federal Home Loan Bank stock, at cost 1,517,000 1,405,400 1,405,400
Loans, net 46,825,441 41,175,133 33,046,105
Premises and equipment, net of depreciation and amortization 972,325 951,887 860,428
Accrued interest receivable 640,200 702,142 564,158
Other assets 181,801 64,169 111,412
-------------- --------------- --------------
Total assets $88,780,275 $86,920,011 $77,898,023
=========== =========== ===========
LIABILITIES AND EQUITY
Demand deposits $ 3,801,140 $ 1,983,174 $ 1,043,553
NOW accounts and MMDA deposits 6,517,118 4,592,525 2,781,533
Savings Deposits 16,351,520 14,158,572 14,427,426
Time deposits 36,306,065 34,718,003 31,140,845
------------ ------------ ------------
Total deposits 62,975,843 55,452,274 49,393,357
Advances from Federal Home Loan Bank of Boston 19,284,394 25,104,420 22,711,955
Other liabilities 145,824 324,090 345,511
-------------- -------------- --------------
Total liabilities 82,406,061 80,880,784 72,450,823
------------ ------------ ------------
Commitments and contingencies
Equity:
Retained earnings 5,888,711 5,680,732 5,204,330
Net unrealized holding gain on available-for-sale
securities, net of taxes 485,503 358,495 242,870
-------------- -------------- --------------
Total equity 6,374,214 6,039,227 5,447,200
------------- ------------- -------------
Total liabilities and equity $88,780,275 $86,920,011 $77,898,023
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Holding Gain on
Retained Available-for-
Earnings Sale Securities Total
-------- --------------- -----
<S> <C> <C> <C>
Balance, September 30, 1994 $4,568,578 $250,663 $4,819,241
Net income, as previously reported 354,374 354,374
Restatement to correct for overaccrual of
FDIC insurance 186,971 186,971
------------ ------------
Net income, as restated 541,345 541,345
Net change in unrealized holding gain on
available-for-sale securities (83,287) (83,287)
----------------- ---------- ------------
Balance, September 30, 1995, as restated 5,109,923 167,376 5,277,299
Net income, as previously reported 281,378 281,378
Restatement to reflect reversal of
overaccrual of FDIC insurance in
fiscal year ending September 30, 1995 (186,971) (186,971)
----------- -----------
Net income, as restated 94,407 94,407
Net change in unrealized holding gain on
available-for-sale securities 75,494 75,494
------------------ ---------- -------------
Balance, September 30, 1996 5,204,330 242,870 5,447,200
Net income 476,402 476,402
Net change in unrealized holding gain on
available-for-sale securities 115,625 115,625
------------------ --------- ------------
Balance, September 30, 1997 5,680,732 358,495 6,039,227
Net income 207,979 207,979
Net change in unrealized holding gain on
available-for-sale securities 127,008 127,008
------------------ --------- ------------
Balance, June 30, 1998 (unaudited) $5,888,711 $485,503 $6,374,214
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30, For the Years Ended September 30,
-------------------------------------------------------------------------
1998 1997 1997 1996 1995
-------------------------------------------------------------------------
(unaudited) (As Restated)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 207,979 $ 366,913 $ 476,402 $ 94,407 $ 541,345
Adjustments to reconcile net income to net
cash provided by operating activities:
Security gain from sale of available-
for-sale security (294,531)
(Gain) loss on sales of loans, net 13,055 (3,988) 13,778 12,878 (3,080)
Amortization, net of accretion of securities 25,648 50,133 70,247 132,045 27,046
Forfeited deposit on fixed assets 1,000
Depreciation and amortization 112,846 93,787 126,211 121,791 113,500
Provision (benefit) for loan losses 174,500 45,000 60,000 148,500 (2,000)
Deferred tax expense (benefit) (60,801) (4,723) 7,141 10,959 (164,637)
Increase (decrease) in taxes payable (138,258) 299,640 340,347 (318,177) 39,311
(Increase) decrease in interest receivable 61,942 (107,233) (137,984) (71,816) (98,860)
Increase (decrease) in interest payable (1,828) (4) 848 (158,427) (26,224)
Increase (decrease) in accrued expenses (72,618) (339,045) (359,865) 249,568 121,556
(Increase) decrease in prepaid expenses (87,549) 4,360 22,218 (19,326) 5,159
Decrease in other assets 6,271 14,450 36,801 17,245 19,277
Increase (decrease) in other liabilities (27,291) (91,409) (89,939) 103,937 (2,550)
Change in deferred loan origination fees, net (14,482) (1,995) 212 43,213 (1,546)
-------------------------------------------------------------------
Net cash provided by operating activities 199,414 325,886 567,417 366,797 273,766
-------------------------------------------------------------------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (111,600) (627,700) (99,000)
Proceeds from sales of other real estate owned 3,100
Recoveries of previously charged off loans 21,241
Proceeds from sales of available-for-sale securities 317,577
Purchases of held-to-maturity securities (5,499,960) (11,315,230) (11,315,230) (8,591,714) (17,153,534)
Proceeds from maturities of held-to-maturity
securities 12,331,258 8,639,671 11,771,428 9,521,918 10,650,302
Net increase in loans (11,770,533) (8,100,763) (10,999,729) (15,388,342) (1,206,762)
Proceeds from sales of loans 5,947,152 2,191,216 2,796,711 3,411,133 602,245
Capital expenditures (133,284) (174,339) (230,446) (96,842) (239,412)
-------------------------------------------------------------------
Net cash provided by (used in) investing
activities 763,033 (8,759,445) (7,977,266) (11,771,547) (7,104,243)
-------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
savings and NOW accounts 5,935,507 2,891,644 2,481,759 706,647 (883,633)
Net increase in time deposits 1,588,062 2,459,549 3,577,158 454,594 8,007,203
Advances from FHLB 12,500,000 26,300,000 31,100,000 12,871,000 7,911,283
Repayments of advances from FHLB (18,320,026) (22,143,692) (28,707,535) (3,976,703) (7,576,116)
-------------------------------------------------------------------
Net cash provided by financing activities 1,703,543 9,507,501 8,451,382 10,055,538 7,458,737
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,665,990 1,073,942 1,041,533 (1,349,212) 628,260
Cash and cash equivalents at beginning of period 1,831,622 790,089 790,089 2,139,301 1,511,041
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,497,612 $ 1,864,031 $ 1,831,622 $ 790,089 $2,139,301
===================================================================
</TABLE>
F-5
<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30, For the Years Ended September 30,
-------------------------------------------------------------------------
1998 1997 1997 1996 1995
-------------------------------------------------------------------------
(unaudited) (As Restated)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Interest paid $2,753,245 $2,654,908 $3,584,473 $3,176,369 $2,480,210
Income taxes (received) paid 324,038 (86,683) (60,243) 332,797 396,423
Loans originated from sales of other real
estate owned 104,500
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended June 30, 1998 and 1997 (unaudited)
and the Years Ended September 30, 1997, 1996 and 1995
NOTE 1 - NATURE OF OPERATIONS
Revere Federal Savings and Loan Association (Association) is a federally
chartered mutual savings and loan association which was incorporated in 1901 and
is headquartered in Revere, Massachusetts. The Association is engaged
principally in the business of attracting deposits from the general public and
investing those deposits in residential and real estate loans, and in consumer
and small business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Association and Subsidiary conform
to generally accepted accounting principles and predominant practices within the
savings institution industry. The consolidated financial statements were
prepared using the accrual method of accounting. The significant accounting
policies are summarized below to assist the reader in better understanding the
consolidated financial statements and other data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Association and its wholly-owned subsidiary, RFS Investment
Corporation. RFS Investment Corporation, an inactive security
corporation, was established solely for the purpose of acquiring and
holding investments which are permissible for banks to hold under
Massachusetts law. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
The data presented for the nine months ended June 30, 1998 and 1997
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
nine months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ended September 30,
1998.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks and federal funds sold.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
F-7
<PAGE>
At the time of purchase the Association classifies debt and equity
securities into one of three categories: held-to-maturity,
available-for-sale, or trading. In general, securities may be
classified as held-to-maturity only if the Association has the positive
intent and ability to hold them to maturity. Trading securities are
defined as those bought and held principally for the purpose of selling
them in the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the balance sheet. Unrealized holding gains and losses are
not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding principal
balances reduced by amounts due to borrowers on unadvanced loans, any
charge-offs, the allowance for loan losses and any deferred fees or
costs on originated loans, or unamortized premiums or discounts on
purchased loans.
Interest on loans is accrued on outstanding balances on a simple
interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Association is amortizing these amounts
over the contractual life of the related loans using the interest
method.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations
and is decreased by loan losses, net of recoveries. The allowance for
loan losses is established through a provision for loan losses based on
management's evaluation of the risks inherent in its loan portfolio and
the general economy. The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses on loans
which are deemed probable and estimable based on information currently
known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and
industry trends.
F-8
<PAGE>
As of October 1, 1995, the Association adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118. According to SFAS No. 114 a
loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Statement
requires that impaired loans be measured on a loan by loan basis by
either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's observable market price,
or the fair value of the collateral if the loan is collateral
dependent.
The Statement is applicable to all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Association
considers its residential real estate loans and consumer loans that are
not individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Association
applies SFAS No. 114 on a loan-by-loan basis. The Association does not
apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a loan
is not generally accrued when the loan becomes ninety or more days
overdue. The Association may place a loan on nonaccrual status but not
classify it as impaired, if (i) it is probable that the Association
will collect all amounts due in accordance with the contractual terms
of the loan or (ii) the loan is an individually insignificant
residential mortgage loan or consumer loan. Impaired loans are
charged-off when management believes that the collectibility of the
loan's principal is remote. Substantially all of the Association's
loans that have been identified as impaired have been measured by the
fair value of existing collateral.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the asset.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets, subsequent writedowns and gains or losses recognized upon sale
are included in other expense.
Beginning on October 1, 1995, in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," the Association classifies loans as in-substance
repossessed or foreclosed if the Association receives physical
possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place.
F-9
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Association
disclose estimated fair value for its financial instruments. Fair value
methods and assumptions used by the Association in estimating its fair
value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and federal funds sold approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair
value.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificate accounts are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on certificate accounts.
Federal Home Loan Bank Advances: Fair values for FHLB advances are
estimated using a discounted cash flow technique that applies interest
rates currently being offered on advances to a schedule of aggregated
expected monthly maturities on FHLB advances.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
INCOME TAXES:
The Association recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Association's assets and liabilities at
enacted tax rates expected to be in effect when the amounts related to
such temporary differences are realized or settled.
F-10
<PAGE>
NOTE 3 - SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Holding Fair
Basis Gains Value
----- ----- -----
<S> <C> <C> <C>
Available-for-sale securities (1):
June 30, 1998 (unaudited):
Marketable equity securities $23,870 $825,694 $849,564
======= ======== ========
September 30, 1997:
Marketable equity securities $23,870 $612,510 $636,380
======= ======== ========
September 30, 1996:
Marketable equity securities $23,870 $416,838 $440,708
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-maturity securities:
June 30, 1998 (unaudited):
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 6,499,468 $ 9,088 $ 78,236 $ 6,430,320
Mortgage-backed securities 21,635,342 432,626 52,344 22,015,624
Asset-backed securities 5,161,522 50,149 5,211,671
------------- ----------- -------- -------------
$33,296,332 $491,863 $130,580 $33,657,615
=========== ======== ======== ===========
September 30, 1997:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 9,202,078 $ 14,829 $ 10,155 $ 9,206,752
Mortgage-backed securities 25,144,248 452,634 138,681 25,458,201
Asset-backed securities 5,806,952 35,526 5,842,478
------------- ----------- -------- -------------
$40,153,278 $502,989 $148,836 $40,507,431
=========== ======== ======== ===========
September 30, 1996:
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies $ 8,499,901 $ 26,815 $ 24,556 $ 8,502,160
Mortgage-backed securities 24,945,208 285,785 622,377 24,608,616
Asset-backed securities 7,234,614 10,992 7,245,606
------------- ----------- -------- -------------
$40,679,723 $323,592 $646,933 $40,356,382
=========== ======== ======== ===========
</TABLE>
(1) Marketable equity securities consists of common stock issued by
government-sponsored agencies.
Mortgage-backed securities are issued by GNMA, FHLMC or Fannie Mae, and are
backed by fixed-rate mortgages. Asset-backed securities are SBA loan pools.
F-11
<PAGE>
The scheduled maturities of held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
Amortized
Cost Fair
Basis Value
----- -----
<S> <C> <C>
June 30, 1998 (unaudited):
Debt securities other than mortgage-backed and asset-backed securities:
Due within one year $ 499,507 $ 503,595
Due after five years through ten years 1,500,000 1,492,340
Due after ten years 4,499,961 4,434,385
Mortgage-backed securities 21,635,342 22,015,624
Asset-backed securities 5,161,522 5,211,671
------------- -------------
$33,296,332 $33,657,615
=========== ===========
September 30, 1997:
Debt securities other than mortgage-backed and asset-backed securities:
Due within one year $ 999,997 $ 1,000,080
Due after one year through five years 2,999,035 3,005,465
Due after five years through ten years 1,900,000 1,902,386
Due after ten years 3,303,046 3,298,821
Mortgage-backed securities 25,284,110 25,458,201
Asset-backed securities 5,667,090 5,842,478
------------- -------------
$40,153,278 $40,507,431
=========== ===========
</TABLE>
For the nine months ended June 30, 1998 and 1997, there were no sales of
available-for-sale securities. For the years ended September 30, 1997 and 1996,
there were no sales of available-for-sale securities. For the year ended
September 30, 1995, proceeds from the sale of an available-for-sale security
amounted to $317,577. The gross realized gain on the sale amounted to $294,531.
During the nine months ended June 30, 1998 and 1997 no held-to-maturity
securities were sold or transferred. During the years ended September 30, 1997,
1996 and 1995 no held-to-maturity securities were sold or transferred.
The Association had an investment in security, with an aggregate amortized cost
basis and fair value which exceeded 10% of equity as of June 30, 1998
(unaudited) and September 30, 1997 as follows:
<TABLE>
<CAPTION>
Description Amortized Cost Basis Fair Value
----------- -------------------- ----------
<S> <C> <C> <C>
June 30, 1998 (unaudited) FHLMC Stock $23,046 $847,134
September 30, 1997 FHLMC Stock $23,046 $634,500
</TABLE>
Investment securities pledged as of June 30, 1998, September 30, 1997 and 1996
amounted to $7,618,935 (unaudited), $6,155,162 and $2,500,000, respectively. The
securities were pledged to secure certain time deposits, $100,000 and over,
received from customers.
F-12
<PAGE>
NOTE 4 - LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------
June 30, 1998 1997 1996
----------------------------------------------
(unaudited)
<S> <C> <C> <C>
Mortgage loans:
One to-four family $34,495,102 $32,927,514 $30,046,234
Commercial real estate 4,157,223 2,577,312 460,416
Construction and land 1,517,507 814,963 1,075,368
------------- -------------- -------------
Total mortgage loans 40,169,832 36,319,789 31,582,018
------------ ------------ ------------
Commercial loans 2,789,098 1,684,387 48,852
------------- ------------- ---------------
Consumer loans:
Home equity lines 3,301,418 2,760,863 1,303,039
Secured by deposit accounts 621,108 373,686 369,632
Auto loans 424,739 413,193 121,419
Other consumer loans 83,726 72,978 18,550
--------------- --------------- ---------------
Total consumer loans 4,430,991 3,620,720 1,812,640
------------- ------------- -------------
Total loans receivable 47,389,921 41,624,896 33,443,510
Allowance for loan losses (506,053) (376,854) (324,708)
Deferred loan origination fees, net (58,427) (72,909) (72,697)
-------------- --------------- ---------------
Net loans $46,825,441 $41,175,133 $33,046,105
=========== =========== ===========
</TABLE>
Certain directors and executive officers of the Association were customers of
the Association during the nine months ended June 30, 1998. Total loans to such
persons and their companies amounted to $47,088 (unaudited) as of June 30, 1998.
During the nine months ended June 30, 1998 total payments amounted to $19,362
(unaudited) and principal advances amounted to $0 (unaudited). Certain directors
and executive officers of the Association were customers of the Association
during the year ended September 30, 1997. Total loans to such persons and their
companies amounted to $66,450 as of September 30, 1997. During the year ended
September 30, 1997 total payments amounted to $27,534 and principal advances
amounted to $43,020. Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years
Ended June 30, Ended September 30,
--------------------------------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $376,854 $324,708 $324,708 $206,073 $186,832
Loans charged off (45,301) (7,854) (29,865)
Provision (benefit) for loan losses 174,500 45,000 60,000 148,500 (2,000)
Recoveries of previously charged off loans 21,241
------- ------ ------ ------- ------
Balance at end of period $506,053 $369,708 $376,854 $324,708 $206,073
======== ======== ======== ======== ========
</TABLE>
During the nine months ended June 30, 1998 (unaudited), the Association had no
loans that met the definition of an impaired loan in Statement of Financial
Accounting Standards No. 114. There were no impaired loans outstanding as of
June 30, 1998 (unaudited). During the years ended September 30, 1997 and 1996,
the Association had no loans that met the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114. There were no impaired
loans outstanding as of September 30, 1997 and 1996.
F-13
<PAGE>
For the nine months ended June 30, 1998 and the fiscal years ended September 30,
1997 and 1996, the amount of interest income that was recognized on nonaccrual
loans was $4,936 (unaudited), $7,861 and $1,857, respectively. For the nine
months ended June 30, 1998 and the fiscal years ended September 30, 1997 and
1996, the amount of additional interest income that would have been recognized
on nonaccrual loans if such loans had continued to perform in accordance with
their contractual terms was $5,919 (unaudited), $4,370 and $1,080, respectively.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," (SFAS No. 122), became effective for the Association on
October 1, 1996. SFAS No. 122 was superseded by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," (SFAS No. 125) effective
for transfers and servicing occuring after December 31, 1996. In the nine months
ending June 30, 1998 the Association sold mortgage loans totaling approximately
$5,960,000 (unaudited) and retained the servicing rights. In the fiscal year
ending September 30, 1997 the Association sold mortgage loans totaling
approximately $2,810,000 and retained the servicing rights. The fair value of
those rights under SFAS No. 122 and SFAS No. 125 is not material and has not
been recognized in the financial statements for the nine months ended June 30,
1998 (unaudited) or the year ended September 30, 1997.
NOTE 5 - PREMISES AND EQUIPMENT, NET OF DEPRECIATION AND AMORTIZATION
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
September 30, Estimated
------------------------------- Useful
June 30, 1998 1997 1996 Life
------------- -------------- -------------- ---------
(unaudited)
<S> <C> <C> <C>
Land $ 170,000 $ 170,000 $ 66,000
Buildings 448,932 448,932 448,932 50 years
Furniture and equipment 759,536 626,251 524,356 3-5 years
Renovations 389,309 389,309 389,309 3-20 years
------------ ------------ ------------
1,767,777 1,634,492 1,428,597
Accumulated depreciation and amortization (795,452) (682,605) (568,169)
------------ ------------ ------------
$ 972,325 $ 951,887 $ 860,428
=========== =========== ===========
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $9,649,571 (unaudited),
$10,115,066 and $7,188,950 as of June 30, 1998, September 30, 1997 and 1996,
respectively. Deposits greater than $100,000 are not federally insured.
For time deposits as of June 30, 1998, the aggregate amount of maturities for
each of the following five years ended after June 30, and thereafter are:
(unaudited)
1999 $27,199,508
2000 6,994,822
2001 1,755,708
2002 182,763
2003 173,264
--------------
$36,306,065
==============
F-14
<PAGE>
For time deposits as of September 30, 1997, the aggregate amount of maturities
for each of the following five years ended after September 30, 1997 and
thereafter are:
1998 $25,825,666
1999 7,578,170
2000 1,034,830
2001 171,796
2002 107,541
--------------
$34,718,003
==============
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
The components of these borrowings are as follows as of June 30, 1998:
<TABLE>
<CAPTION>
Maturity Date Rate Principal
------------- ---- ---------
(unaudited)
<S> <C> <C>
July 10, 1998 5.75% $ 800,000
September 24, 2003, amortizing 5.36 2,937,061
November 3, 2003, amortizing 5.64 1,214,219
June 2, 2005, amortizing 6.64 3,833,114
January 8, 2008 4.99 7,500,000
June 25, 2008 5.01 3,000,000
-------------
$19,284,394
=============
</TABLE>
Maturities of advances from the Federal Home Loan Bank of Boston for the five
years ending after June 30, 1998 and thereafter are summarized as follows:
1999 $ 1,851,447
2000 1,214,306
2001 1,290,109
2002 1,368,450
2003 1,454,678
Thereafter 12,105,404
------------
$ 19,284,394
=============
The components of these borrowings are as follows as of September 30, 1997:
Maturity Date Rate Principal
--------------------------------- ----- ------------
October 23, 1997 5.71% $ 1,500,000
November 21, 1997 5.89 500,000
December 29, 1997 5.36 2,000,000
January 14, 1998 5.62 1,000,000
January 21, 1998 5.62 3,000,000
April 27, 1998 6.07 2,000,000
June 26, 1998 5.87 5,500,000
July 10, 1998 5.75 800,000
September 24, 2003, amortizing 5.36 3,299,482
November 3, 2003, amortizing 5.64 1,357,410
June 2, 2005, amortizing 6.64 4,147,528
-------------
$25,104,420
=============
F-15
<PAGE>
Maturities of advances from the Federal Home Loan Bank of Boston for the five
fiscal years ending after September 30, 1997 and thereafter are summarized as
follows:
1998 $17,400,270
1999 1,167,941
2000 1,237,860
2001 1,317,010
2002 1,397,191
Thereafter 2,584,148
-------------
$25,104,420
=============
Amortizing advances are being repaid in equal monthly installments and are being
amortizied from the date of the advance to the maturity date in a direct
reduction basis.
Advances are secured by the Association's stock in that institution, its
residential real estate mortgage portfolio and the remaining U.S. government and
agencies obligation not otherwise pledged.
NOTE 8 - INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Years
Ended June 30, Ended September 30,
-----------------------------------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ---------- -------
(unaudited) (As Restated)
<S> <C> <C> <C> <C> <C>
Current:
Federal $157,600 $196,701 $259,454 $ (1,378) $413,264
State 28,180 16,256 20,650 15,998 22,470
---------- ---------- ---------- -------- ----------
185,780 212,957 280,104 14,620 435,734
--------- --------- --------- -------- ---------
Deferred:
Federal (46,263) (3,434) 2,545 46,073 (156,143)
State (14,538) (1,289) 4,596 (35,114) (8,494)
---------- ----------- ----------- -------- -----------
(60,801) (4,723) 7,141 10,959 (164,637)
---------- ----------- ----------- -------- ---------
Total income tax expense $124,979 $208,234 $287,245 $25,579 $271,097
======== ======== ======== ======= ========
</TABLE>
The following reconciles the income tax provision from the statutory rate to the
amount reported in the consolidated statements of income:
<TABLE>
<CAPTION>
For the Nine Months For the Years
Ended June 30, Ended September 30,
---------------------------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
% of % of % of % of % of
Income Income Income Income Income
------ ------ ------ ------ ------
(unaudited) (As Restated)
<S> <C> <C> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Dividends received deduction (.4) (.2) (.2) (1.4) (.3)
Unallowable expenses and other adjustments 1.2 .7 1.7 .3 (1.7)
State tax, net of federal tax benefit 2.7 1.7 2.1 (11.6) 1.3
----- ----- ----- ---- -----
37.5% 36.2% 37.6% 21.3% 33.3%
===== ===== ===== ===== =====
</TABLE>
F-16
<PAGE>
The Association had gross deferred tax assets and gross deferred tax liabilities
as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
June 30, 1998 1997 1996
------------- ----------- --------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $184,690 $121,358 $111,558
Loan origination fees 63,632 63,404 62,445
Estimated expenses 7,159 28,245 45,373
Investment writedown 1,526 1,526
Depreciation 21,257 7,560 9,627
Accrued pension expense 9,888 2,488
----------- ----------- ---------
Gross deferred tax assets 286,626 224,581 230,529
--------- --------- ---------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities (340,191) (254,015) (173,968)
Deferred loan costs (34,538) (33,295) (32,102)
---------- ---------- -----------
Gross deferred tax liabilities (374,729) (287,310) (206,070)
--------- --------- ---------
Net deferred tax asset (liability) $ (88,103) $ (62,729) $ 24,459
========= ========= =========
</TABLE>
Deferred tax assets as of June 30, 1998 (unaudited), September 30, 1997 and 1996
have not been reduced by a valuation allowance because management believes that
it is more likely than not that the full amount of deferred tax assets will be
realized.
As of June 30, 1998 (unaudited) and September 30, 1997, the Association had no
operating loss and tax credit carryovers for tax purposes.
In prior years, the Association was allowed a special tax-basis bad debt
deduction under certain provisions of the Internal Revenue Code. As a result,
retained earnings of the Association as of June 30, 1998 and September 30, 1997
includes approximately $1,111,595 (unaudited) and $1,111,595 for which federal
and state income taxes have not been provided. Under the provisions of recent
federal income tax legislation, if the Association no longer qualifies as a bank
as defined in certain provision of the Internal Revenue Code, this amount will
be subject to recapture in taxable income ratably over six (6) years, subject to
a combined federal and state tax rate of approximately 41%.
NOTE 9 - FINANCIAL INSTRUMENTS
The Association is 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 originate loans. The
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Association has in particular
classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented by
the contractual amounts of those instruments. The Association uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
F-17
<PAGE>
Commitments to originate loans are agreements to lend to a customer provided
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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income-producing properties.
Standby letters of credit are conditional commitments issued by the Association
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------
June 30, 1998 1997 1996
------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
Commitments to originate loans* $1,588,193 $3,786,000 $ 979,500
Unadvanced funds on construction loans 1,343,126 225,231 397,049
Unadvanced funds on home equity lines of credit 2,002,461 2,002,521 1,130,415
Unadvanced funds on commercial lines of credit 295,017
Standby letters of credit 50,000 50,000
------------- ------------- -----------
$5,278,797 $6,063,752 $ 2,506,964
========== ========== ===========
</TABLE>
* The range of rates for fixed rate loans included within commitments to
originate loans were 6.375% to 10.50% (unaudited), 6.875% to 8.50%, and 7.25% to
9.25% as of June 30, 1998, September 30, 1997 and 1996, respectively. The range
of terms for these fixed rate loans was four (unaudited) years to thirty
(unaudited) years, fifteen years to thirty years and fifteen years to thirty
years as of June 30, 1998, September 30, 1997 and 1996, respectively.
The estimated fair values of the Association's financial instruments, all of
which are held or issued for purposes other than trading, are as follows:
June 30, 1998
--------------------------------
Carrying
Amount Fair Value
------ ----------
Financial assets: (unaudited)
Cash and cash equivalents $ 4,497,612 $4,497,612
Available-for-sale securities 849,564 849,564
Held-to-maturity securities 33,296,332 33,657,615
Federal Home Loan Bank stock 1,517,000 1,517,000
Loans, net 46,825,441 48,172,000
Accrued interest receivable 640,200 640,200
Financial liabilities:
Deposits 62,975,843 63,228,000
Federal Home Loan Bank advances 19,284,394 19,254,000
F-18
<PAGE>
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,831,622 $ 1,831,622 $ 790,089 $ 790,089
Available-for-sale securities 636,380 636,380 440,708 440,708
Held-to-maturity securities 40,153,278 40,507,431 40,679,723 40,356,400
Federal Home Loan Bank stock 1,405,400 1,405,400 1,405,400 1,405,000
Loans, net 41,175,133 41,753,000 33,046,105 32,968,000
Accrued interest receivable 702,142 702,142 564,158 564,158
Financial liabilities:
Deposits 55,452,274 55,785,000 49,393,357 49,793,000
Federal Home Loan Bank advances 25,104,420 25,035,000 22,711,955 22,436,000
</TABLE>
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The Association has no derivative financial instruments subject to the
provisions of SFAS No. 119, "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments."
NOTE 10 - PENSION PLAN
The Association is a member of a multi employer comprehensive retirement program
sponsored by Financial Institutions Retirement Fund. The defined benefit pension
plan is a non-contributory plan available to each employee meeting service and
age requirements. Employees are eligible to participate in the Retirement Plan
after the completion of 12 consecutive months of employment with the Association
and the attainment of age 21. Hourly paid employees are excluded from
participation in the Plan. The Association matches employee contributions to the
401(k) plan at 50% of member's contribution up to 10% of their W-2 salary. The
expenses for the defined benefit and contribution plans are $20,445 (unaudited)
and $20,700 (unaudited), respectively, for the nine months ended June 30, 1998,
$23,816 (unaudited) and $18,817 (unaudited), respectively for the nine months
ended June 30, 1997 and $30,226 and $25,367, respectively for the year ended
September 30, 1997, $1,800 and $20,885, respectively for the year ended
September 30, 1996 and $1,800 and $21,894, respectively for the year ended
September 30, 1995.
NOTE 11 - REGULATORY MATTERS
The Association 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 Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), of Tier 1 capital (as defined) to adjusted
total assets (as defined) and Tangible capital (as defined) to Tangible assets
(as defined). Management believes, as of June 30, 1998 (unaudited) and September
30, 1997, that the Association meets all capital adequacy requirements to which
it is subject.
F-19
<PAGE>
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Association must maintain minimum total risk-based, Tier 1 risk-based, Tier
1 and Tangible capital ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
association's category.
The Association's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
Actual
------------------
Amount Ratio
------ -----
(Dollar Amounts in Thousands)
<S> <C> <C>
As of June 30, 1998 (unaudited):
Total Capital (to Risk Weighted Assets) $6,332 17.89%
Core Capital (to Adjusted Tangible Assets) 5,889 6.63
Tangible Capital (to Tangible Assets) 5,889 6.63
Tier 1 Capital (to Risk Weighted Assets) 5,889 16.64
As of September 30, 1997:
Total Capital (to Risk Weighted Assets) 6,035 21.33
Core Capital (to Adjusted Tangible Assets) 5,681 6.54
Tangible Capital (to Tangible Assets) 5,681 6.54
Tier 1 Capital (to Risk Weighted Assets) 5,681 20.08
As of September 30, 1996:
Total Capital (to Risk Weighted Assets) 5,490 24.03
Core Capital (to Adjusted Tangible Assets) 5,204 6.69
Tangible Capital (to Tangible Assets) 5,204 6.69
Tier 1 Capital (to Risk Weighted Assets) 5,204 22.78
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes: Action Provisions:
------------------ ----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
As of June 30, 1998 (unaudited):
Total Capital (to Risk Weighted Assets) $2,831 greater than or equal to 8.0% $3,539 greater than or equal to 10.0%
Core Capital (to Adjusted Tangible Assets) 3,555 greater than or equal to 4.0 4,443 greater than or equal to 5.0
Tangible Capital (to Tangible Assets) 1,333 greater than or equal to 1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) N/A N/A 2,124 greater than or equal to 6.0
As of September 30, 1997:
Total Capital (to Risk Weighted Assets) 2,263 greater than or equal to 8.0 2,829 greater than or equal to 10.0
Core Capital (to Adjusted Tangible Assets) 3,477 greater than or equal to 4.0 4,346 greater than or equal to 5.0
Tangible Capital (to Tangible Assets) 1,304 greater than or equal to 1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) N/A N/A 1,697 greater than or equal to 6.0
As of September 30, 1996:
Total Capital (to Risk Weighted Assets) 1,827 greater than or equal to 8.0 2,284 greater than or equal to 10.0
Core Capital (to Adjusted Tangible Assets) 3,111 greater than or equal to 4.0 3,889 greater than or equal to 5.0
Tangible Capital (to Tangible Assets) 1,167 greater than or equal to 1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) N/A N/A 1,371 greater than or equal to 6.0
</TABLE>
The following provides a reconciliation of the Association's equity to
regulatory capital:
<TABLE>
<CAPTION>
September 30,
June 30, -----------------------------
1998 1997 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Equity $6,374,214 $6,039,227 $5,447,200
Less: Unrealized holding gain on securities
available-for-sale, net of taxes (485,503) (358,495) (242,870)
------------ ------------ ------------
Tangible/core capital 5,888,711 5,680,732 5,204,330
Plus: Allowance for loan losses 443,000 354,000 286,000
------------ ------------ ------------
Total risk based capital $6,331,711 $6,034,732 $5,490,330
========== ========== ==========
</TABLE>
F-20
<PAGE>
NOTE 12 - PRIOR PERIOD ADJUSTMENTS
The Association has restated its previously issued 1996 and 1995 financial
statements to reflect an adjustment related to an overaccrual of FDIC insurance
in fiscal year September 30, 1995.
Previously reported retained earnings as of September 30, 1995 has been
increased by $186,971 and previously reported results of operations have been
changed as follows:
Year Ended September 30,
------------------------
1996 1995
---- ----
Income before income taxes:
As previously reported $ 409,244 $ 523,184
As restated 119,986 812,442
Net income:
As previously reported 281,378 354,374
As restated 94,407 541,345
Retained earnings:
As previously reported 5,204,330 4,922,952
As restated N/A 5,109,923
NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located within the
state. There are no concentrations of credit to borrowers that have similar
economic characteristics. The majority of the Association's loan portfolio is
comprised of loans collateralized by real estate located in the state of
Massachusetts.
NOTE 14 - PLAN OF REORGANIZATION
On January 21, 1998 the Board of Directors of the Association approved a Plan of
Reorganization from Mutual Savings Association to Mutual Holding and Stock
Issuance (the "Plan") under which the Association will be reorganized from a
federally chartered mutual savings association into a mutual holding company
(the "MHC") under the laws of the United States of America and the regulations
of the Office of Thrift Supervision (the "O.T.S."). As part of the
reorganization and the Plan, the Association will convert to a federal stock
savings Association (the "Stock Association") and will establish a federal
corporation (the "Holding Company"). The Holding Company will be a
majority-owned subsidiary of the MHC and the Stock Association will be a
wholly-owned subsidiary of the Holding Company. Concurrently with the
reorganization, the Holding Company intends to offer for sale up to 49.9% of its
common stock to qualifying depositors and the tax-qualifying employee plans of
the Association, with any remaining shares offered to the public in a community
offering.
As a part of the Offering, the Association will establish a liquidation account
in an amount equal to the Minority Ownership Interest multiplied by the net
worth of the Association as of the date of the latest consolidated balance sheet
appearing in the final prospectus. The liquidation account will be maintained
for the benefit of eligible account holders and supplemental eligible account
holders who maintain their accounts at the Association after the Offering. The
liquidation account will be reduced annually to the extent that such account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive balances for accounts then held.
The costs associated with Reorganization will be deferred and will be deducted
from the proceeds upon the sale and issuance of stock. In the event the
Reorganization is not consummated, costs incurred will be charged to expense. At
June 30, 1998 there was $80,322 (unaudited) in deferred conversion costs.
The Plan is subject to the approval of the O.T.S. and the majority of depositors
and borrowers entitled to vote.
After reorganization, the Holding Company will not be able to declare or pay a
cash dividend on, or repurchase any of its common stock, if the effect thereof
would cause the regulatory capital of the Association to be reduced below the
amount required under O.T.S. rules and regulations.
NOTE 15 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
F-21
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by RFS Bancorp, Inc., or Revere Federal Savings. This prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of Common Stock offered hereby to any person in
any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
[Logo]
RFS BANCORP, INC.
(Proposed Holding Company for
Revere Federal Savings)
UP TO 466,181 SHARES
COMMON STOCK
($.01 PAR VALUE PER SHARE)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
November 12, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until December 15, 1998 or 25 days after the commencement of the
offering of Common Stock, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
================================================================================
